Nevada Judge Rules Against Kalshi: What It Means
If you thought the pace of news in prediction markets would slow down because of Thanksgiving week: LOL.
Since I published this morning’s newsletter, a federal judge in the US District Court in Nevada has dissolved a preliminary injunction that it had earlier granted to Kalshi in a case about the legality of sports event contracts.
Let’s get you up to speed if you’re fuzzy on the details up to now:
Nevada officials sent a cease-and-desist letter to Kalshi (and other prediction markets) saying that they were offering sports betting without a license in the state.
Kalshi (and others) sued the state in federal court, asking the court to stop any potential enforcement of state law, saying prediction markets operate legally under federal law.
Kalshi initially won a preliminary injunction against the state.
Crypto.com also sued Nevada, but it lost its bid for a preliminary injunction. That led to Crypto.com pulling its sports event contracts in the state.
After that ruling, Nevada asked the judge to dissolve the preliminary injunction he granted to Kalshi.
Now you’re almost caught up.
Here is the order:
Kalshi has made an emergency motion to stay that ruling pending an appeal.
A potential ruling on that emergency motion is pending.
More from Judge Gordon in the order to dissolve the injunction:
I must also consider, as part of the public interest, the interests of the gaming industry in this state. Licensed gaming companies have invested millions of dollars to comply with state regulations only to supposedly find out that they could have just become CFTC-registered exchanges to offer sports gambling nationwide for anyone over the age of 18 without complying with Nevada’s gaming regulatory regime or paying taxes in this state. If Kalshi’s view is adopted, there is a not-insignificant chance that the regulated entities in this state will abandon their current model and become DCMs, unleashing even more unregulated gambling and devastating the Nevada economy and related tax revenues. Indeed, recently, two of the “largest sports betting operators in the U.S., FanDuel and DraftKings, agreed . . . to not seek licensing in Nevada in order to focus efforts on launching prediction markets in other states.”
The traditional police powers of the states, which are considerable and longstanding, particularly in this state which has led the nation in gaming regulation and enforcement for decades, weigh heavily against Kalshi’s harms. As I mentioned in my Crypto order, had Congress intended to upset the balance between state and federal gaming regulation and turn CFTC-designated markets into nationwide casinos for anyone over the age of 18 with no comparable federal regulator, it surely would have made that intent more explicit.
I therefore find that the balance of hardships does not tip sharply in Kalshi’s favor. Rather, the balance of hardships and the public interest weigh in favor of the defendants and of dissolving the preliminary injunction.
If you want to know more about the order, here are the always valuable insights that Andrew Kim, a partner at Goodwin Law, provided to me. Read Andrew and become smarter:
“Judge Gordon doubles down on the ruling that he reached in the Crypto.com case. Not only does he stick with his prior conclusion that ‘occurrence’ doesn’t mean ‘outcome,’ he dives into whether Kalshi’s contracts are ‘associated with a potential financial, economic, or commercial consequence.’ His decision is the first to attempt a serious analysis of what that phrase means.
It’s a thoughtful decision, but by no means bulletproof. Judge Gordon is clearly troubled by the fact that the prediction markets’ interpretation of the word ‘swap’ means you can trade on almost anything. He’s said that over and over again — and he’s letting his heartburn about the reach of the law shape his interpretation of it.
To me, the latest Kalshi decision suffers from the same problem as the Crypto.com decision: It reads like an outcome-driven decision that’s vulnerable to reversal.
Consider the following: Judge Gordon gives us a number of reasons why the definition of ‘swap’ shouldn’t be read broadly, but he doesn’t engage with the text of the statute itself. What does ‘associated with’ mean? He says it means ‘the event or contingency is itself *inherently* joined or connected with a potential financial, economic, or commercial consequences,’ but where is he getting ‘inherently’ from? If you look up the word ‘associated’ in the dictionary (no joke, statutory interpretation starts with dictionaries), it’s a broadly defined concept — joining together, a relationship, a connection. There’s no requirement that the relationship or connection be direct or ‘inherent.’
Or, consider the fact that Judge Gordon mentions the legal principle of, ‘I know it when I see it.’ ‘I know it when I see it’ is a pithy turn of phrase, but it’s no way to interpret a statute.
Judge Gordon also doesn’t explain why it’s right to paint all contracts with the same brush. He was skeptical about certain ‘prop bets’ having ‘inherent’ financial or economic consequences, but what about contracts for tentpole events? This is why I’ve long said the swaps question is a trap — because it doesn’t neatly resolve the preemption question at the heart of all of these prediction markets cases.
The Ninth Circuit will eventually weigh in on whether Judge Gordon is right. The question is how much of a fight there’ll be to get there. It’s possible Nevada will want to be aggressive in enforcing its laws — Kalshi’s just filed a motion for a stay pending appeal, in which it claims that Nevada ‘intend[s] to initiate a criminal prosecution.’ A concurrent state enforcement action could make things incredibly messy and complicated; a stay would maintain the status quo by putting the dissolution on pause.”
So what’s next?
We wait to hear from the district court on the emergency motion. Kalshi and the state do not agree on what should happen next, according to a “Joint Notice Concerning Non-Enforcement Pending Appeal” filed with the court. From that document:
“Kalshi and State Defendants have met and conferred but have not been able to reach an agreement that would obviate the need for a stay or injunction pending appeal if this Court dissolves the preliminary injunction.”
Kalshi said it would ask for a stay (see above). The state will oppose that. Again from the notice:
“State Defendants’ Position: State Defendants will oppose any motion for a stay pending appeal filed by Kalshi, as it would grant Kalshi the relief the Court would be denying in dissolving the preliminary injunction. However, until State Defendants see the order issued by the Court on the motion to dissolve the preliminary injunction, they cannot fully brief that issue."
“State Defendants suggested reasonable options to Kalshi to avoid the possibility of enforcement pending appeal, including the same option accepted by their competitor, Crypto.com. On Friday, November 21, Kalshi summarily rejected all of the proposed options. Kalshi then requested that State Defendants agree to forgo all enforcement while Kalshi’s forthcoming motion for an stay pending appeal is pending. State Defendants advised Kalshi that they still are considering that issue, as they have had only one business day to discuss the issue with counsel.”
A possible outcome could be Nevada attempting to enforce its cease-and-desist order, either before the motion to stay is considered or if the motion is denied. From Kalshi’s emergency motion:
“Defendants have nonetheless made clear that, with the PI dissolved, they intend to bring criminal or civil enforcement proceedings against Kalshi in state court unless the Dissolution Order is stayed pending appeal.”
And later: “Kalshi is thus left with the prospect of imminent criminal prosecution in Nevada state court. Such a prosecution, especially when the issue is subject to appeal in multiple Circuits, would result in chaos. It would lead to parallel state and federal proceedings addressing the exact same legal questions; raise the possibility of conflicting state and federal decisions as to the same parties; effectively nullify Kalshi’s pre-enforcement challenge under Ex parte Young; unnecessarily tax the resources of both state and federal courts; constrain Kalshi’s conduct outside of Nevada, even in jurisdictions where other courts have deemed Kalshi’s conduct lawful; and subject Kalshi to the extensive and irreparable harms attendant to defending itself from the accusation of criminal wrongdoing. These circumstances make this a quintessential case warranting a stay pending appeal.
More from the emergency motion: “A stay is warranted given the irreparable harm Kalshi will face without one. Defendants have demanded that Kalshi employ geofencing technology to stop offering sports and election contracts in Nevada. They have suggested, as an alternative arrangement pending appeal, an agreement whereby Kalshi would stop offering those event contracts to Nevada residents — even those located outside of Nevada — but not to residents of other states — even those located in Nevada. Each option is untenable for Kalshi. Each would require Kalshi to take down election contracts that the District Court for the District of Columbia found could permissibly be traded nationwide, and each would require Kalshi to close current open positions, exposing Kalshi to severe financial and reputational harm.”
Either way, the issue is heading to appellate court. The question is if Kalshi will still be operating in Nevada during that appeal.
Also earlier today, I reported that Polymarket got approval from the Commodity Futures Trading Commission to work with futures commission merchants, which is a pretty big deal!
