A panel of judges in the U.S. Court of Appeals for the Sixth Circuit heard oral arguments from representatives of Kalshi and the states of Ohio and Tennessee on Thursday after split decisions in federal courts about whether the company should be allowed to offer sports prediction markets in the states.
No decision was made, but counsel for both Kalshi and the states laid out their rationale in one of the most significant battlegrounds in the federal vs. state regulatory argument that underpins court cases across the country.
A different appellate court, the Third Circuit, ruled in Kalshi’s favor in April in a case regarding New Jersey. If the Sixth Circuit rules in favor of the states, it would create a circuit split that could hasten the timeline for the issue advancing to the Supreme Court.
Judge challenges Kalshi counsel interpretations
Kalshi counsel Will Havemann, a partner at Milbank, referenced the Third Circuit decision in the first sentence of his argument. He went on to state that virtually every marker “confirms that Congress intended to prevent the total chaos that would result from subjecting nationwide derivatives exchanges to 50 different states” and cited several Supreme Court statements that support the notion that when a federal agency has exclusive jurisdiction, it preempts state law.
Judge Eric L. Clay countered that Kalshi is attempting to make a black-and-white issue out of something that remains a shade of gray.
“There is a savings clause in the statute saying that it’s not intended to disturb the regulatory status otherwise,” Judge Clay noted. “So, we’re still in the realm of interpretation.”
Clay also jumped on a concession made by Havemann that Kalshi does not dispute that the Commodity Exchange Act (CEA) preserves some state authority. “Well, then you have the problem that regulation of gambling is ordinarily a state responsibility,” said the judge “… There’s no express statement in the statute that Congress has said that licensure regarding gaming should be transferred from the state to the federal government. That just doesn’t exist.”
As for the big-picture issue of whether sports event contracts fall under the CEA’s definition of swaps, Havemann contended that they do, in part because there is no categorical argument that sports events do not have potential commercial, financial, or economic consequences. However, Judge Clay stressed that the question has not been answered, and noted that Kalshi is asking the judges to make a definitive determination against the backdrop that sports gaming and gambling in general are state-regulated functions.
At one point during Havemann’s argument, Judge Clay described Kalshi’s counsel’s stance on state regulators and policymakers as “disparaging.”
“You’re making a policy-based argument that things come out badly when they fall within the purview of state regulators,” he added. “I’m not sure I’m following the argument that all things are better if they come from the federal government.”
Havemann replied that it’s not his or Kalshi’s opinion. “It’s not me saying it respectfully, Your Honor; it’s Congress.”
‘Kalshi is engaged in classic parimutuel wagering’
Ohio Solicitor General Mathura Sridharan argued that if Kalshi is right that sports trades are CEA-defined swaps, “that means all sports bets since about 2010 had to have happened on federally regulated exchanges, and we all missed it — the states that have been regulating sports bets throughout history and the Supreme Court.”
However, she argued that Kalshi is objectively wrong due to what she called “a fundamental mismatch in financial reality” linked to the CEA. While traditional markets and derivatives attract speculation, she posited, Kalshi starts with speculation and builds a market around that.
“That critical mismatch explains why nothing in Kalshi’s arguments quite fits the Commodity Exchange Act; because the act concerns itself with financial instruments that are imbued with the requisite financial, economic, and commercial consequences … The mismatch pervades every aspect of Kalshi’s argument today, all the way through all of the preemption arguments that don’t quite fit.”
The law, Sridharan said, “doesn’t care how a sports bet is traded”, whether it’s against the house or peer-to-peer or parimutuel style. “What the Commodity Exchange Act asks is, ‘is this a sports bet?’ It cares about the product identity.”
Tennessee attorneys echo Ohio
Aaron Bernard from the Tennessee Attorney General’s Office built upon that argument, telling the judges that “Kalshi is engaged in classic parimutuel wagering,” the kind that has existed for hundreds of years.
“Dodd-Frank did a lot to restructure financial markets, but it did not put the elephant of nationwide sports gambling into the mousehole of the generic Dodd-Frank swap definition,” he added. “… It’s just pure speculation on whether or not there’ll be three or four corner kicks in a soccer game or whether an individual player will have three or four assists in the second half of an NBA game. This is not associated with any financial consequence directly, and it’s way well outside of the financial risk context that Dodd-Frank is aimed at.”
Meanwhile, Bernard also argued that if sports falls under the Special Rule of the Dodd-Frank Act, which prohibits gaming contracts, the company is not only in violation of state gaming laws but also federal law.
“And if the federal law regime says these contracts shall not be listed for trading, and the state regime says these contracts that are bets are unlawful, then there’s no preemption at all. Both regimes point in the same direction, which is to say, ‘do not do this.’”
Which court decisions led to Kalshi Sixth Circuit appeals?
The Sixth Circuit hearing came after two opposing federal court decisions in the space of less than three weeks in late February and early March.
Tennessee judge sided with Kalshi …
Judge Aleta Trauger of the Nashville Division of the U.S. District Court for the Middle District of Tennessee granted Kalshi a preliminary injunction against Tennessee officials on Feb. 19 and dismissed the Tennessee Sports Wagering Council (SWC) from the case.
Trauger agreed with Kalshi’s assertion that its sports event contracts fall under the definition of “swaps” in line with the Commodity Exchange Act (CEA). She wrote that Kalshi is likely to succeed on the merits of the case, in part because “conflict preemption applies”. She also determined that Kalshi met its burden to show a likelihood of “irreparable injury” if it were not granted a preliminary injunction.
“Unlike traditional sportsbooks, Kalshi operates an exchange on which gamblers bet against each other, rather than the house,” Trauger wrote. “Thus, Kalshi does not set the odds (they are determined by the market), is not a party to the bets (the two people on either end of the bet are), and has no interest in who wins (Kalshi makes money by charging fees for each trade).”
… before Ohio judge backed state authorities
Seventeen days later, U.S. District Court for the Southern District of Ohio Chief Judge Sarah Morrison denied Kalshi a preliminary injunction against Ohio officials.
In stark contrast to Trauger, Morrison found that sports event contracts do not qualify as swaps and that Kalshi failed to clearly show that it was entitled to “extraordinary” preliminary injunctive relief.
She also wrote that there is no evidence that Congress meant for the CEA to pre-empt state gambling laws. “In fact, all available evidence points to the contrary,” she added.
Morrison wrote that if Kalshi’s claim that sports event contracts constitute swaps because they are contracts for payment based on outcomes of sporting events were held to be true, all sports bets would be forced onto CFTC-registered exchanges like Kalshi and state-regulated sportsbooks would go out of business.
“In the absence of congressional intent to effect such a sea change, that result is absurd,” she opined. She also noted that the impact on tribes’ authority to regulate gaming on tribal land under the Indian Gaming Regulatory Act (IGRA) would be “seismic.”
In April, the Sixth Circuit judges rejected Kalshi’s emergency request for an injunction against Ohio while the appeal process plays out.
Meanwhile, as well as that federal court appeal in Ohio, Kalshi sued the Ohio Casino Control Commission (OCCC) in state court in June after the OCCC announced its intention to fine the company $5m.
