Wallach: Kalshi Nevada Victory Will Likely Be Short-Lived

Last week, the prediction betting market Kalshi claimed a small win in court against the state of Nevada.

The company can continue operating in Nevada for the time being, a federal court ruled in its favor.

From FrontOfficeSports: 

U.S. District Court Judge Andrew P. Gordon issued a minute order Tuesday that granted, in part, Kalshi’s motion for a temporary retraining order and preliminary injunction.

The judge also denied the Nevada Gaming Commission’s counterclaims, which sought an immediate temporary restraining order and preliminary injunction that would have prohibited Kalshi from continuing to offer sports event contracts in Nevada.

A written ruling with more detail will come later, but the decision means Kalshi can continue operating its sports event contracts in Nevada while the case gets litigated—at least for now.

“Today, the Federal Court in Nevada granted Kalshi’s preliminary injunction and blocked the State from trying to prevent Kalshi from offering prediction markets,” a Kalshi spokesperson told Front Office Sports. “We are grateful for the court’s careful attention to this matter and recognition of Kalshi’s status as a CFTC-regulated exchange. On to the next step.”

Acclaimed gaming attorney Daniel Wallach believes the victory will be short-lived however. 

Wallach wrote in his Tuesday Forbes piece that the Commodity Exchange Act (CEA) was amended in 2010 to create a “special rule”,  for event-based contracts, as was noted in the recent court order pertaining to Kalshi.   

Under this special rule, exchanges such as Kalshi can “self-certify” their event contracts and begin offering them for trading immediately without CFTC approval. But, under the special rule, the CFTC can review and prohibit certain event contracts if it determines that those contracts are contrary to the public interest for any one of six listed reasons, such as when they involve “activity that is unlawful under any Federal or State law” or “gaming.”

From Wallach:

The “special rule” created by the 2010 CEA amendment is at the crux of the Nevada and New Jersey lawsuits. Based on Kalshi’s “self-certification” of its ‘sports-based’ event contracts and the absence of any action taken by the CFTC to prevent Kalshi from offering such contracts, the court declared that “at this point in time, federal law allows Kalshi to offer . . . sports . . . contracts on its exchange.”

According to the court’s reasoning, Section 2’s “exclusive jurisdiction” language reflects Congress’ intent “to occupy the field of regulating CFTC-regulated exchanges and the transactions conducted on those exchanges.” Because Kalshi is a CFTC-regulated exchange and was following the 2010 special rule for its ‘sports-based’ event contracts, the Nevada federal court ruled that Kalshi is subject to the CFTC’s exclusive jurisdiction under the CEA and that, as a consequence, all state gambling laws are “field preempted.” As such, Nevada’s gaming regulators “have no jurisdiction to decide that Kalshi’s conduct violates state law where, at least at present, those activities are legal under federal law,” the court added.

The notion that Congress had already vested a federal agency with exclusive jurisdiction to regulate sports wagering on a federally-regulated commodities exchange – and did so prior to the commencement of the PASPA litigation in 2012 – would certainly have been welcome (if not shocking) news to the professional sports leagues, the NCAA and U.S. Department of Justice, which were on the losing side of Murphy v. NCAA because there was no federal statutory regime in place to regulate sports wagering; just a prohibition (i.e., PASPA) directed at state governments. They might have won the Murphy case if only they had known about the CFTC’s exclusive jurisdiction to regulate sports-related event contracts on commodities exchanges.

That premise is as ridiculous as it sounds. Even Kalshi recognizes that – or at least it did in a prior litigation with the CFTC – when it asserted in an appellate brief filed with the D.C. Circuit that “Congress did not want sports betting to be conducted on a derivatives exchange.”

Looking ahead to a possible appellate treatment of this issue, it is worth noting that the D.C. Circuit observed that the CFTC would be “ill-suited” to investigate “suspected manipulation” of political event contract markets given its “historic mission and mandate.” The need to safeguard event integrity is even more pronounced with sporting events, which have a well-chronicled history of match-fixing.

Wallach goes on to claim that Kalshi is in violation of the federal Wire Act, which prohibits anyone “engaged in the business of betting or wagering” from “knowingly us[ing] a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers . . . on any sporting event or contest[.]” 18 U.S.C. § 1084(a).

Wallach explains:

Kalshi’s sports-related event contracts fall squarely within the Wire Act’s prohibitions. First, its exchange is “available to users nationwide.” As Kalshi’s Head of Markets, Xavier Sottile, explained in a court declaration, “[t]raders on either side of a contract are often from different states given that Kashi does not distinguish between the geographic location of traders.”

Despite using the word “bet” in its promotional materials, Kalshi insists that it is not offering a gambling product. Instead, Kalshi describes itself as a “financial exchange” where “traders enter into contracts with other traders,” as opposed to betting “against the house” (as typically occurs with a casino or sports book). But that is a distinction without a difference, as “peer-to-peer exchanges” are included within many state sports wagering regimes. One such exchange, Sporttrade, holds gaming licenses from several states, including New Jersey.

The Wire Act does not distinguish between bookmakers and exchanges. In United States v. Corrar, a Georgia federal district court explained that “if Congress sought only to criminalize bookmaking, “being engaged in the business of betting or wagering” – the actual language used in the Wire Act – “would simply read ‘receives bets or wagers.’” The inclusion of the word “business” in front of “betting or wagering” connotes a broader scope of activities, the court added, since no business is comprised of “a single job,” but, rather, entails a “division of labor.”