A federal judge has ruled that Kalshi’s lawsuit against the state of Massachusetts must be heard in a state court, not a federal court, in a decision that appears to give Massachusetts a major advantage in its attempt to force Kalshi to stop offering sports event contracts in the state.
The decision from the U.S. District Court for the District of Massachusetts to have the Superior Court for Suffolk County — a state-level court — hear the case was announced Tuesday and cannot be appealed.
It opens up a new playing field in the battle between Kalshi and states, and may potentially encourage other state attorneys general to file state-level lawsuits against prediction markets.
Massachusetts AG sued Kalshi last month
Massachusetts Attorney General Andrea Campbell sued Kalshi in the Superior Court for Suffolk County in September, becoming the first state attorney general to do so. However, Kalshi challenged the decision, arguing that the case should be heard in front of a federal court. Kalshi had previously sued the states of Nevada, New Jersey, and Maryland in federal court, winning injunctions in the first two states.
Massachusetts — like the states Kalshi has sued in federal court — argues that the prediction market violates state gambling laws by allowing customers to stake money on the outcome of sports games without obtaining a gambling licenses or adhering to requirements for gambling operators. Kalshi argues that state gambling laws don’t apply, as it says the federal Commodity Exchange Act preempts state laws and means that only the Commodity Futures Trading Commission (CFTC) has jurisdiction over its operations.
As the disagreement between the two parties concerns whether federal law supersedes state law, legal experts have said that federal judges are more likely to be sympathetic to Kalshi’s argument, and state-level judges more likely to side with the states.
‘Complete preemption’ argument rejected
Kalshi’s argument to have the case heard in federal court was that states were “completely preempted” from exercising jurisdiction over contracts offered by a CFTC-registered exchange.
Judges generally understand that this doctrine of complete preemption applies in cases where Congress has specifically set out a cause of action — that is, a system where parties can sue in federal court for violations of the law. It must also have intended this cause of action to be the only way to sue for breaches of the law in question.
However, the judge in this case, Richard G. Stearns, said Kalshi’s argument did not fit the true definition of complete preemption, as it only argued that sports betting laws were preempted if a state tried to enforce them against a CFTC-registered designated contract market such as Kalshi, rather than in all circumstances.
“Kalshi does not contend that the federal Commodity Exchange Act (CEA) completely preempts the state’s traditional police power to regulate sports gambling within its borders,” he wrote. “It argues only that the CEA precludes regulation of the specific subset of sports gambling that Kalshi offers — wagering on designated contract markets. This is a plain vanilla federal preemption defense, not a claim of complete preemption.
“The distinction matters. Complete preemption arises in instances where ‘Congress so strongly intended an exclusive federal cause of action that what a plaintiff calls a state law claim is to be recharacterized as a federal claim.’”
Latest courtroom blow to prediction markets
After a series of early wins for Kalshi, the decision is the latest in a string of wins for states against prediction markets.
In July, the U.S. District Court for the District of Maryland denied Kalshi an injunction that would have allowed it to keep offering sports contracts in the state, though the state agreed not to enforce its ban on the contracts until Kalshi’s appeal is heard.
Earlier this month, the same judge that granted Kalshi an injunction to keep its contracts up in Nevada denied a similar injunction to Crypto.com. Crypto.com says it will take those contracts down next week, in what would be the first instance of a prediction market ban actually being enforced.
