Federal judge squashes Kalshi bid to block prediction market regulation by Iowa

If Congress intended to preempt state gambling laws when it enacted the Commodity Exchange Act, it should have been clear about that preemption, the judge wrote.DES MOINES, Iowa (CN) — A federal judge in Des Moines Tuesday denied a bid by prediction market platform Kalshi for a preliminary injunction barring Iowa from regulating the company’s operations under the state’s gambling laws.Kalshi, a derivatives exchange and prediction market platform where participants predict and then bet on the outcomes of future events with payouts determined by the outcome of the predicted event, characterizes its exchange as operating in the same way as any other federally regulated derivatives market where individuals can buy and sell contracts at changing prices, often to hedge risk.Although the state of Iowa has not acted to regulate Kalshi under the state’s gambling statutes, Kalshi got the impression from a meeting with Attorney General Brenna Bird’s staff that the state was likely to do so. Thus, Kalshi filed a pre-enforcement suit against Iowa in U.S. District Court for the Southern District of Iowa in March seeking to block Iowa from taking such action, saying federal law preempts Iowa laws that might apply to Kalshi.U.S. District Judge Stephen Locher denied Kalshi’s injunction motion Tuesday, saying the company is unlikely to succeed on the merits of its argument that any state gambling regulation is expressly preempted by the federal statute that created the U.S. Commodity Futures Trading Commission (CFTC), which regulates predictions markets.Kalshi’s preemption argument is based on what it says is the statute’s “express preemption clause,” but Locher challenged that reading, saying Kalshi is asking him to preempt the application of state gambling laws that are within the state’s police powers. And, he said, if Congress intended to preempt state gambling laws when it enacted and amended the Commodity Exchange Act, it should have been clear about that preemption.The text of the Commodity Exchange Act “does not meet the mark,” the judge wrote. “The CFTC’s “exclusive jurisdiction” extends only to the regulation of ‘swaps or contracts of sale of a commodity for future delivery.’”A swap is defined, in part, in the statute as an agreement, contract, or transaction that provides for purchase, sale, payment or delivery that is dependent on the “occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.”That definition of swap does not include any specific reference to sports betting, Locher wrote.“In context, it is easy to conclude that the word ‘event’ or ‘occurrence’ covers events in financial or asset markets like changes in interest rates or grain prices,” Locher wrote. “It is harder to conclude that Congress intended for ‘event’ or ‘occurrence’ to encompass the outcome of a sporting event. In general parlance, one would not describe, say, the Minnesota Vikings winning a football game as an ‘occurrence’ or ‘event.’ Instead, the game itself would be the ‘occurrence’ or ‘event,’ with the final score being the ‘result’ or ‘outcome.’”The exclusive jurisdiction provision of the statute creating the Commodity Futures Trading Commission cited by Kalshi was “arguably not designed to be preemptive at all, but rather simply to identify the CFTC as the lead federal**regulator” over certain contract markets, opposed to agencies like the U.S. Securities and Exchange Commission, Locher wrote.Beyond the federal preemption arguments, Locher dismissed other factors Kalshi cited in support of its argument for an injunction.“Even if those factors were considered, however, the result would not change. Kalshi should have known all along that its sports-related event contracts might be interpreted by state regulators as sports gambling; indeed, the company has characterized itself in an advertisement as ‘the first app for legal sports betting in all 50 states,’” Locher, a Joe Biden appointee wrote.“Nonetheless, Kalshi charged ahead with its business without, apparently, making any effort to learn whether the Iowa Attorney General or [the Iowa Racing and Gaming Commission] viewed the company’s sports-related event contracts as illegal gambling," Locher continued. “To the extent it would be expensive in these circumstances for Kalshi to deploy new technology or change aspects of its business to ensure compliance with Iowa law, this is a problem of the company’s own making. It should have proceeded with greater caution.”Neither Kalshi nor the Iowa Attorney General’s Office responded to requests for comment Tuesday.Subscribe to our free newslettersOur weekly newsletter Closing Arguments offers the latest about ongoing trials, major litigation and rulings in courthouses around the U.S. and the world, while the monthly Under the Lights dishes the legal dirt from Hollywood, sports, Big Tech and the arts.Additional Reads