The pendulum in the legal battle over sports prediction markets continues to swing in favor of state-based gambling regulation, as a Connecticut judge denied Kalshi and Coinbase’s respective motions for preliminary injunction in separate rulings on Monday.
U.S. District Judge Vernon Oliver wrote in an Aug. 10 order that Kalshi is not entitled to temporary relief from Connecticut’s attempts to shut down its operations for two key reasons:
- Sports event contracts are not covered under the Commodity Exchange Act (CEA)
- Even if they were, Connecticut’s gambling laws would not be superseded by the CEA and the Commodity Futures Trading Commission’s federal authority
“Kalshi characterizes its sports-related event contracts in various ways, but at bottom, they are sports wagers,” wrote Oliver.
“The Court declines to conclude either that these sports wagers are properly categorized as swaps and fall under the CFTC’s authority, or that Congress clearly displaced Connecticut’s traditional authority to regulate sports wagering and vested that authority in the CFTC, an agency that has not historically regulated sports wagering and has not exercised meaningful oversight over Kalshi’s sports event contracts.”
Kalshi takes hit after initial Connecticut reprieve
Kalshi sued Connecticut Attorney General William Tong and the Connecticut Department of Consumer Protection (DCP) last December the day after the DCP’s Gaming Division sent cease-and-desist orders to the company, as well as Crypto.com and Robinhood. Coinbase also sued Connecticut, as well as two other states, around the same time.
Those letters not only accused the platforms of offering a sports betting equivalent without a license, but also of flouting the state’s minimum legal gambling age of 21 and its ban on wagering on Connecticut college sports teams.
As it has in other states, Kalshi asserted that the CEA preempts state gaming laws and that the CFTC has the exclusive jurisdiction to regulate event contracts.
Kalshi gained an initial delay in Connecticut, as Oliver ordered the DCP to refrain from any enforcement action against the company until the court had ample time to consider the firm’s request for a preliminary injunction, allowing the platform to keep offering sports in the state in the meantime. The court held an oral arguments hearing in the case back in February.
Kalshi argument failed on these two points
Six months after that hearing, Vernon denied the platform’s request for a preliminary injunction.
“Here, the merits of the case center on whether (1) Kalshi’s sports-event contracts constitute ‘swaps’ within the meaning of the CEA, and, if so, (2) whether Connecticut gambling laws are preempted by federal law as applied to Kalshi’s sports-event contracts,” he wrote. “Kalshi has not demonstrated that it is likely to succeed on the merits on either of these issues.”
Vernon noted that the term “event contract” is not actually defined by either the CEA or any regulations issued by the CFTC. He determined that as Kalshi’s contracts depend on the outcome of a sporting event or things that happen within a game, not on the occurence of the underlying event itself, they cannot be considered swaps.
The judge also wrote that as sports event contracts are not associated with potential financial, economic, or commercial consequences, they cannot be deemed swaps under the CEA.
Vernon added his view that “Congress did not intend the statute to occupy the field of state regulation at issue here.” Elsewhere in the ruling, he suggested that no good reason has been offered for why Kalshi could not seek out a state gaming license pursuant to Connecticut gambling law.
Sports, casino contracts should be treated the same
Vernon also wrote that Kalshi itself suggested that it would not offer casino-style contracts, such as whether a blackjack player wins a hand, as “it would be very difficult to argue that that’s not gaming” and because that would be a transaction “that has implications for the people in the transaction, but no extrinsic implications for people outside of the transaction.”
Sports should be subject to the same rationale, the judge wrote.
“Kalshi has offered ‘no principled reason’ for why a ‘combo on both the Giants and Broncos winning,’ which is a type of contract Kalshi does offer, is meaningfully different,” Vernon determined.
The Connecticut judge also used an argument that judges in other states have referenced in recent rulings.
“If the Court were to accept that sports-event contracts are, indeed, swaps, and [the CEA] put such contracts under CFTC’s exclusive jurisdiction, but [the CEA] requires swaps to be listed on DCMs, ‘then state-regulated sportsbooks, casinos, or licensed online gaming providers would be violating federal law by offering them outside of a CEA exchange’,” he opined.
CT judge points to other state rulings
Vernon repeatedly referred to other court decisions that have gone against Kalshi since the Connecticut lawsuit was first filed, an apparent indication that other judges are watching closely.
To that point, the Connecticut decision follows the general pattern in recent months, wherein either Kalshi has lost an attempt to obtain a preliminary injunction or state authorities have been granted temporary relief against the operator:
Since late June, Kalshi has suffered court losses in states including:
Rulings in Michigan and Nevada gave Kalshi a deadline of Aug. 12 to geoblock access to its sports contracts in each of those states. Coinbase suffered a similar rejection in Michigan just last week.
Meanwhile, the Court of Appeals for the Sixth Circuit heard oral arguments in a combined consideration of the opposing federal court decisions involving Kalshi in Ohio and Tennessee. During that hearing, Judge Eric Clay stated that “there is no express statement” in the CEA suggesting that gaming regulation should be transferred from the state to the federal government.
