The U.S. Court of Appeals for the Ninth Circuit on Friday denied Kalshi‘s appeal against the state of Nevada, handing the prediction markets operator a second federal circuit loss in three tries.
Kalshi saw a temporary restraining order in the Silver State dissolved in November, leading to its Ninth Circuit appeal. That court voted unanimously, 3-0, to deny Kalshi’s ask to keep injunctive relief from state gaming authorities banning sports event contracts.
The Ninth Circuit takes direct aim at the Third Circuit opinion that favors Kalshi’s view throughout Nelson’s ruling. The decision presents the greatest challenge to date of Kalshi’s claim that it cannot geofence individual states that ban its offerings within their borders.
Here are 10 of the most revealing passages from District Court Judge Ryan Nelson‘s 50-page decision:
Don’t fence me in (actually, please do)
A core tenet of Kalshi’s contention holds that it cannot satisfy state geofencing orders and federal requirements to offer uniform access to its product throughout the country.
In one paragraph, Nelson eviscerates that claim and clears a fascinating trail for other states to explore in their efforts to block prediction markets operators.
“Kalshi’s argument offers a false, all-or-nothing proposition. Kalshi contends that if Nevada’s enforcement action against it continues, it would no longer be able to offer sports event contracts in Nevada and, as a result, Kalshi would be arguably violating the CEA’s ‘impartial access’ requirement. But it does not explain why not offering sports events contracts in Nevada would run afoul of § 38.151(b). Moreover, ‘regulated entities’ in Nevada use ‘geofencing.’ Kalshi could do the same; it just refuses to do so and instead seeks a competitive advantage over its competitors. Additionally, the district court considered this argument extensively and found no evidence that Kalshi would violate the CEA and thus be subject to adverse action from the CFTC if it complied with Nevada gaming laws.”
And while we’re on the subject of state authority on gambling …
States enforcing sports betting law stay winning
Nelson quickly lasers in on a dividing line in most Kalshi court losses to date: states that enforce existing laws related to sports betting and gambling are within their lane to challenge sports event contracts as violations of those statutes.
“Nevada is not attacking the CFTC’s action or inaction but pursuing enforcement of its own state law about what qualifies as a bet or wager, not what the CFTC considers a swap.”
Swapping an ‘event’ for an ‘occurrence’
Wading through hundreds of pages of legal filings in prediction markets cases often requires using a dictionary like a sword to cut through thicket.
As in other cases, defining the words “event” and “occurrence” is central to determining whether Kalshi’s sports markets involve swaps. Here, the judge calls upon copious sports references from Western teams to separate the two words, working against the operator’s arguments.
“This is, in part, where the confusion lies because an event could be described as an occurrence. But even conflating these terms, we do not refer to whether the Dodgers win the World Series, or how many touchdowns Fernando Mendoza might throw in a game, or how many points BYU Football will win by as an ‘event.’ That is because while the word ‘event’ can be defined as ‘occurrence,’ that definition may not always correspond to its ordinary public meaning.”
And speaking of swaps …
‘House’ of cards in Kalshi argument?
Kalshi’s case in courts of both law and public opinion consistently rests upon the company positioning itself as an exchange rather than a traditional gambling “house”.
Nelson, however, carves an interesting gully: that distinction makes no difference to the central question of whether what the operator offers are swaps or bets.
“Additionally, Kalshi’s attempts to distinguish its sports event contracts from sportsbooks betting are unpersuasive. Kalshi argues that ‘[u]nlike a traditional casino or ‘house,’ Kalshi’s DCM is not counterparty to any trade, does not set betting odds, does not profit when its customers lose, and has no incentives to favor itself at customers’ expense.’
“These are distinctions without differences. Most importantly, none of those distinctions have any connection to the statutory definition of ‘swap.’ That (Caesars) or MGM are ‘market makers,’ while Kalshi supposedly is not, is not relevant to the CEA’s definition of ‘swap’ or of the ordinary meaning of ‘bet’ or ‘wager.'”
What I meant to say was …
Prediction markets cases across America also debate what Congress intended to create when it passed the Dodd-Frank Act, the legislation that Kalshi and other operators wield as legal defense. (Of course, Chris Dodd himself already weighed in on the matter outside of court.)
On at least four occasions, Nelson pointedly opines that Congress never sought to appoint the CFTC as the nation’s gambling regulator.
- “Congress has spoken on gambling repeatedly, deliberately, and specifically. See, e.g., the Professional and Amateur Sports Protection Act, the Indian Gaming Regulatory Act, and the Wire Act, It is difficult, then, to conclude that Congress intended to upend its decades of careful regulation of gambling based on broad definitions of the words used in a Wall Street Reform Bill.“
- “… the stakes are high when it comes to gambling regulation. Thus, it is implausible that Congress intended to allow the CFTC to engage in the national regulation of gambling based on expansive definitions of the words ‘event’ and ‘associated with’ in a Wall Street reform bill.
- “Congress did not take a wrecking ball to all sports gambling regulations built up over decades by federal, state, and tribal governments when it amended the CEA to add the definition of swap we are considering today.”
- “The change in Kalshi’s arguments reflects its new business strategy—offering sports event contracts—and the reality that this strategy generates substantial and significant revenue. But this business strategy does not affect our duty ‘to say what the law is.’ The Dodd-Frank Wall Street Reform Act cannot be read as a direct (or indirect) regulation of sports gambling, and the CFTC is not a national gambling regulator.”
So everyone else is doing it wrong?
Nelson dives deeper into the ‘swap’ definition that creates the most glaring difference between the Third and Ninth Circuit opinions. Here, the judge treads a now-familiar path by pointing out that Kalshi’s attempts to classify sports bets as swaps reaches so far as to criminalize sports betting as most know it.
“If the CEA’s definition of swap is read broadly to encompass Kalshi’s sports event contracts, as Kalshi urges, then it can also be read to encompass other sports bets such that anyone who places an off-DCM sports bet that fits within § 1a(47)(A)(ii)’s definition of a swap would be violating the CEA. If there is not a difference under the CEA’s swap definition between sports betting on Kalshi and sports betting in (Caesars) Sportsbook, then every person placing a sports bet at (Caesars) Sportsbook (or anywhere else for that matter) is violating the CEA.
The Special Rule did not give the CFTC any more preemptive authority over gaming than it gave the CFTC authority over terrorism or assassination and the other underlying ‘excluded commodities.’
As discussed, under any reasonable interpretation, Kalshi’s sports event contracts relate to gaming. If these are not ‘gaming’ contracts, then the Special Rule has no relevance.”
For stronger context about the excluded commodities section, take a look at what a former CFTC general counsel said Friday:
If it looks like a duck, it’s gambling
Nelson further boils down the interpretation of sports event contracts as gaming by citing the company’s ill-fated reference to itself as sports betting.
“Kalshi’s sports event contracts have the hallmarks of sports betting. Indeed, Kalshi advertised itself as ‘the first app for legal sports betting in all 50 states.’ And sports betting is a quintessential form of gambling.”
You know that I know that you know
While extensive research on the subject could prove exhaustive, it appears a reasonable contention to say that William Shakespeare is not an oft-quoted legal scholar at the Supreme Court.
Nelson challenges that postulate through the Bard’s most-famous work.
“The crucial context that leads us to resist the broadest possible reading is that Kalshi has a gambling problem. Kalshi describes and markets its sports event contracts offered on its DCM as ‘legal sports betting.’ Yet it argues that sports bets and sports event contracts are different. But this argument strains credulity.
“Thus, for Kalshi to deny that its sports event contracts are sports bets under a reasonable person’s understanding is disingenuous. That Kalshi’s sports event contracts are, in reality, sports bets is not just an ‘I know it when I see it’ issue. Rather, everyone, including Kalshi, knows it when they see it. The substance of the sports event contracts offered on Kalshi’s DCM is sports gambling, regardless of whether Kalshi calls them swaps. Just as ‘[t]hat which we call a rose by any other name would smell as sweet,’ WILLIAM SHAKESPEARE, ROMEO AND JULIET act 2, sc. 2, placing sports bets, even when called by another name, is still gambling.”
There’s no business like Risky Business
Kalshi and Polymarket often refer to their product as a way for companies to mitigate risk, despite the fact that 80% of their volume comes from sports event contracts.
Nelson extends farther to say that the call actually is coming from inside the house.
“As Nevada points out, Kalshi’s sports event contracts do not help institutions or investors hedge against risk; they create risk, largely for ordinary consumers, where none previously existed.”
A word of compromise from Judge Lee
Judge Kenneth Lee adds a brief concurrence to Nelson’s writing, offering what reads as a potential compromise in how sports might fit into swaps.
“Given that sports gambling is a multibillion-dollar industry historically regulated by states and Indian tribes, it would seem odd to read abstract terms such as ‘event’ and ‘financial, economic, or commercial consequence’ as upending this longstanding regulatory regime.
“One statutory provision, however, gives me pause. The Special Rule provision says that the “Commission may determine that [certain contracts or swaps] are contrary to the public interest if ‘they involve . . . gaming.’ The statute thus appears to give the CFTC discretion whether to ban altogether gaming contracts. Put another way, the statute does not seem to categorically bar all gaming contracts, despite the text and contextual clues suggesting otherwise. So perhaps some unique sports events can be part of a swap trade if they meet the statutory requirements.”
