On January 20, Kalshi suffered its first state court loss in the battle to make prediction markets available across the country. The Suffolk County Superior Court of Massachusetts granted the Attorney General’s motion for a preliminary injunction, barring Kalshi from offering sports event contracts without a state license, effective January 23 at noon. While prediction markets have lost in court before, this decision is significant because Kalshi can’t immediately appeal to a federal court, and the court’s opinion illustrates how a preemption analysis can change when viewed within the context of state regulation.
The Massachusetts Attorney General made headlines in September of last year when it preemptively filed suit against Kalshi in state court for offering sports wagering without a license. To date, it is one of two state regulators to have done so, whereas in most other states (Nevada, New Jersey, Maryland, Ohio, New York, Connecticut, Illinois, Michigan, and Tennessee) the regulators have been sued by prediction markets in federal court, often after issuing a cease and desist letter. From the complaint’s first paragraph, the Attorney General framed gaming regulation as being among states’ “core police powers,” especially since the Supreme Court overturned the Professional and Amateur Sports Protection Act in 2018. From within this context, the Attorney General introduced Kalshi’s event contracts as constituting “wagers” under state law, and directly compared the platform’s interface to traditional sports betting websites.
In Massachusetts, Kalshi initially removed the case from state to federal court on the basis of federal question jurisdiction, but the case was remanded back to state court. In the order to remand, the District of Massachusetts explained that because Kalshi argued that the Commodity Exchange Act (“CEA”) preempts a limited subset of sports gambling (sports event contracts), rather than the state’s general police powers to regulate sports gambling, Kalshi must show “clear Congressional intent” to displace state sports gambling regulation.
The Suffolk County Superior Court’s decision largely followed the Attorney General’s arguments, ruling that Massachusetts was likely to succeed on the merits because Kalshi did not establish that Congress intended to strip states of their authority to regulate gambling by preempting the entire field of state regulation when it passed the CEA. Relying heavily on the District of Maryland’s decision from last year, which denied Kalshi’s motion for injunctive relief, the Superior Court determined that the CEA granted the Commodity Futures Trading Commission (“CFTC”) exclusive jurisdiction over derivative markets, but importantly, not state gambling powers. The CEA’s Special Rule, express preemption provision, and savings clauses all indicated to the Superior Court that Congress did not intend to displace all state laws that would otherwise apply to transactions within scope of the CEA.
The Court also cited the District of Nevada’s decision to dissolve injunctive relief previously granted to Kalshi, in which the court held that it was “absurd to think that Congress intended for DCMs to turn into nationwide gambling venues… to the exclusion of state regulation and with no comparable federal regulator without ever mentioning that was the goal.” The Superior Court also disposed of Kalshi’s conflict preemption arguments because Massachusetts’ licensing requirement “neither displaces federal derivatives regulations or enforcement efforts, nor frustrates Congress’s purpose in consolidating regulatory power in the CFTC.” Any appeal by Kalshi must be heard by Massachusetts’ state appellate courts, though Kalshi could also apply for direct appellate review with the state Supreme Judicial Court.
This latest decision shows that the question of who sues first may be a determinative one. Filing first allows a prediction market to control the narrative and position the dispute around federal preemption. But when a state regulator strikes first, the focus shifts to state gambling regulation, which when compared to a prediction’s market platform’s design and aggressive advertising claims, may turn the tide in favor of the regulators. This order marks the third jurisdiction (Maryland, Nevada, and now Massachusetts) where courts have initially ruled in favor of state gaming regulators. Until federal Courts of Appeal weigh in, companies seeking to offer event contracts should exercise caution, especially as state regulators including Massachusetts and Nevada begin to test their authority in state court.