A federal judge in Nevada recently granted a preliminary injunction to Kalshi, which operates a derivatives exchange and prediction market and which some states believe is subject to sports betting regulations. The development could foreshadow an eventual U.S. Supreme Court showdown that scrutinizes how and when states can use sports betting prohibitions to restrict the broader gaming market.
In an order issued on April 9, U.S. District Judge Andrew P. Gordon blocked the Nevada Gaming Commission from enforcing state laws on grounds they are preempted by the Commodity Exchange Act of 1936 (CEA). The CEA is a federal law that has been amended several times over the last 89 years. Most relevantly here, the CEA grants the Commodity Futures Trading Commission (CFTC)–an independent federal agency that oversees U.S. derivatives markets–with exclusive jurisdiction to regulate commodities and futures on designated exchanges.
In 2020, the CFTC authorized Kalshi to offer what are called “congressional control contracts,” which, as Gordon explained, ask about a specific “event,” such as which political party will control the House or Senate on a specific date in the future or whether Federal Reserve chair Jerome Powell will be “out” of his position at some point during a time period. Buyers who make the correct prediction receive a dollar per contract purchased, while those who get it wrong receive nothing in return.
To be clear, Kalshi is neither a party to these contracts nor sets contractual prices. Instead, Kalshi functions as an exchange that facilitates transactions, which in turn enables the market to operate and organically establish applicable prices. Kalshi holds the funds “until the specified event occurs” and then distributes those funds according to the contract. Kalshi prohibits various professionals from participating on grounds of conflicts of interest. They include members of Congress, congressional staff and polling organizations.
In a separate and ongoing litigation, Kalshi sued the CFTC in 2023 after the agency tried to block the company from listing congressional control contracts. The CEA authorizes the CFTC to review event contracts if they involve, among other topics, terrorism, war, assassination, gaming and activities that are unlawful under state laws. The CFTC reasoned Kalshi’s contracts are problematic for several reasons, including because they constitute “gaming” in the sense that they contemplate betting on elections, many states ban betting on elections and they might “threaten election integrity” by skewing incentives for voters. Kalshi argued the CFTC reached its decision in violation of administrative law. The company obtained an injunction from a federal judge against CFTC and the matter is still being litigated.
In January, Kalshi began offering sports-based event contracts in addition to election-based contracts. The sports-based event contracts contemplate such questions as who will be “pro men’s basketball champion,” with “Boston” and “Oklahoma City” as listed options. Another question asks, “Will there be an African F1 Grand Prix Announced this year?” Kalshi contends the CFTC allows it to offer these contracts.
Last month, the Nevada Gaming Commission sent Kalshi a cease-and-desist letter saying that, under Nevada law, event-based contracts require a sports pool operations license and failure to obtain such a license constitutes a felony offense. The commission notes that Nevada law defines a sports pool as “the business of accepting wagers on sporting events or other events by any system or method of wagering.” The commission insists that an election counts as an “other event.”
The relevant legal question is whether Nevada can enforce its state law against Kalshi when Kalshi is, at least for now, complying with federal law.
Gordon concluded Nevada must stand down for the time being.
The judge reasoned that “at this point in time, federal law allows Kalshi to offer both sports and election-based event contracts on its exchange.” That is important, Gordon explained, given the Supremacy Clause of the U.S. Constitution. The clause, found in Article VI, Clause 2, establishes that federal statutes are the “supreme law of the land” and generally, trump state laws so long as those state laws do not reflect powers constitutionally reserved to the states. To further that point, Gordon cites a U.S. Supreme Court ruling that stands for the proposition “state laws that conflict with federal law are without effect.”
Congress thus has the authority to preempt state laws through explicit wording, meaning a federal statute that, by its own terms, preempts state law. Preemption can also arise when a state law conflicts with federal law.
Gordon reasoned that the “plain and unambiguous language” of the CEA grants CFTC “exclusive jurisdiction” over Kalshi’s contracts. The CEA does preserve state authority over “exchanges and transactions” involving sports or election event contracts that fall outside CFTC’s exclusive jurisdiction, but that’s not at issue with Kalshi.
Gordon further surmised that even if Kalshi’s sports contracts count as “gaming” under state law, that doesn’t create an entry point for Nevada. That regulation is instead handled by the CFTC, which has so far let Kalshi offer those contracts.
The judge also deemed counterproductive Nevada’s argument that because other states have sent Kalshi cease-and-desist letters, the company’s practices should be viewed with suspicion. As Sportico has detailed, New Jersey has attempted to regulate Kalshi, which has challenged the Garden State in court.
“That [argument],” Gordon wrote, “merely highlights the problem of allowing the States to regulate a national exchange.” He underscored that permitting each state to regulate could lead to conflicting rules by state and conflicts with the CFTC, too. “Preventing the difficulties that would create is the reason Congress granted the CFTC exclusive jurisdiction over CFTC-designated exchanges,” Gordon concluded.
Gordon also noted that Kalshi is “proceeding at its own risk and creating its own harms.” To that point, the judge underscored the CFTC might ultimately prevail against Kalshi in federal court or try to stop Kalshi from offering sports event contracts. But Gordon stressed those matters are not for Nevada–or, by implication, other states–to decide. States and other interested parties can “take” their worries “up with the CFTC and Congress” but those “policy issues are beyond the jurisdiction of this court,” the judge wrote.
Expect to see additional legal challenges over Kalshi’s contracts. The matter could eventually emerge as a question for the U.S. Supreme Court, particularly if the justices deem conflicts among states’ approaches to Kalshi as giving rise to market uncertainty and legal confusion. The Court exhibited a willingness to weigh in on betting in 2018. In Murphy v. NCAA, the Court ruled it was unconstitutional for Congress to compel states to deny sports betting when there was no accompanying federal standard. Perhaps the justices will once again weigh in as the interplay between federal and state laws emerges as a crucial issue with Kalshi and, more broadly, predictions markets.
