Three Takeaways From Oral Arguments In Kalshi v. New Jersey Appeal
Things didn’t go well for New Jersey, but the fight’s far from over.
Wednesday’s argument in the Kalshi v. New Jersey appeal had everything you’d want in a court argument: half a minute on how to pronounce “Kalshi,” hypothetical law clerks “trading” on judges playing ping pong, and, of course, the Commodity Exchange Act.
Coming out of the courtroom, my initial sense was that Kalshi had the better of the argument. Let’s walk through why.
1. New Jersey swung for the fences. It may strike out.
If you’ve read the play-by-play or listened to the oral argument, you may well think, “Why did New Jersey start with whether the contracts are swaps, which is Kalshi’s stronger issue?” New Jersey had good reasons for arguing the case the way it did. In fact, it may not have had much of a choice.
First, a quick refresher on the legal arguments.
*collective groan*
Kalshi says New Jersey’s gaming laws are “preempted,” or trumped by federal law, because of the Commodity Exchange Act, which provides the CFTC with “exclusive jurisdiction” over “swaps.” As part of that argument, Kalshi says Congress cleared the “field” of states regulating trade on designated contract markets, and that the “field” is left to the CFTC alone. Kalshi also contends that (1) applying state gaming law to CFTC-regulated event contracts interferes too much with federal regulation of futures markets, and (2) for prediction markets, it’s impossible to follow both the CFTC’s rules and the sports-wagering rules set by state gaming regulators across the country.
New Jersey says Kalshi’s contracts aren’t swaps, and that, even if they are, the Commodity Exchange Act doesn’t preempt state gaming law because (1) Congress didn’t clearly say so, and nothing in the Act suggests that it wanted to do so, (2) there isn’t a “field” that’s been cleared by the Act’s coverage of swaps, (3) Congress didn’t even really want sports event contracts, so state regulation of those contracts won’t ruin futures markets, and (4) prediction markets offering sports event contracts can and should get sports betting licenses.
Before oral argument, New Jersey had a decision to make. Do you stand by the case as you’ve argued it on paper, or do you ride the Maryland win into court, and focus primarily on the fact that Congress didn’t clearly indicate that it wanted to set state gaming laws aside?
While it’s tempting to say the latter, that probably wouldn’t have been a smart move for the State. Because New Jersey’s made the swaps argument in its briefs, focusing only on preemption would have signaled to the Third Circuit a loss of confidence in half of New Jersey’s case. Even if it’s a long shot to convince the court that Kalshi’s contracts aren’t swaps, it’s one worth taking at that point, because it would knock out Kalshi’s entire case without having to wade into a difficult preemption question.
But it is a longshot nonetheless. I’ve previously described the swaps issue as a “trap” — for both sides. Here, by being the first to argue about swaps, New Jersey was the first to walk into that trap. Chief Judge Chagares quickly signaled that New Jersey’s swaps argument might be too big of a swing (starting at 2:38 of the recording):
CHIEF JUDGE CHAGARES: It seems that the definition of swaps is actually quite broad. And I understand you point out some things that seem undesirable to your side, but … For instance, I noticed in your brief you – I don't know if it's a suggestion or a limitation, but you suggest something should be inherently financial, economic, whatever, but that's not in the statute. Are we obliged to apply what the elected branches have gotten us here? And to the extent any fix is necessary, and we're not saying it is, isn't that for the elected branches to deal with and not us?
STEPHEN EHRLICH (counsel for New Jersey): Yes. I think a few responses to that, Your Honor. I think we are both looking at the text. On our side, we're looking at the words, especially associated with. Associated with, joined, or connected to. We give the example in our brief. Lung cancer is associated with…
CHIEF JUDGE CHAGARES: It's not only that. It's associated with a potential financial, economic, or commercial consequence. That's pretty broad.
STEPHEN EHRLICH: Yes, I agree it's broad, and it's because Congress was trying to sweep in various things as part of the Dodd-Frank reforms. They couldn't foresee exactly what would become a swap, but it's not unlimited. I think this is similar to the sort of …
CHIEF JUDGE CHAGARES: That's true. Maybe they didn't foresee this. It's a very interesting business model, and maybe they didn't foresee it. But again, isn't that for the elected branches to deal with?
STEPHEN EHRLICH: It is, but I think what they've done here is not what Kalshi has said they've done. The reason we know that: we have the associated with language, as I pointed out in our example in our brief, lung cancer is associated with smoking. Things can rise and fall together. We have the context of the statute itself. The other clauses, the other sub clauses, we're focused on sub clause two. That's mainly what the parties have been arguing about. The other sub clauses are all about a link to a financial instrument or measure. That's what we would say applies here too. It's something is associated with something when it has a link to the financial instrument or measure. We used inherently financial as sort of the shorthand, but that's really –
CHIEF JUDGE CHAGARES: Oh, that's limiting though.
Here’s what Chief Judge Chagares may have been thinking by focusing on the breadth of the word “swap.” The definition of a swap is:
Except as provided in subparagraph (B), the term “swap” means any agreement, contract, or transaction–
…
(ii) that provides for any purchase, sale, payment, or delivery (other than a dividend on an equity security) 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;
7 U.S.C. § 1a(47). New Jersey says “associated with” means “rises and falls together.” But that may be requiring too much of a connection. Federal courts generally think of “association” as a broad concept, as Chief Judge Chagares signaled in his questioning. And, as the judge noted, the statute also says “potential financial, economic, or commercial consequence,” which likewise seems to suggest that the “association” doesn’t need to be a particularly strong one — and that the underlying event doesn’t have to be “inherently financial,” as New Jersey claims.
Consider, for example, a sports event contract on whether more than four yellow cards will be given to players on a particular side during a Premier League match. Each individual yellow card doesn’t really have a “financial, economic, or commercial consequence.” (Let’s ignore player fines.) But the accumulation of yellow cards could have a “financial, economic, or commercial consequence”: if the club gets to six — just two above the contract threshold — it might face a £25,000 fine. Is that “association” enough to satisfy the definition of a swap?
2. Two of the judges are probably leaning toward Kalshi’s position, although they may not go as far as Kalshi would like.
Trying to predict the outcome of a case can be a fool’s errand, especially in a difficult case like this one. That said, if you’re going by the questions that the lawyers received at argument, the wind seems to be at Kalshi’s back. Look at some of the questions/comments that New Jersey’s lawyer got:
JUDGE PORTER (6:17): Why do you say nothing and everything? We're talking about transactions only on the DCMs, right? Not all sports gambling.
(My read: “Aren’t you making more of this than it really is?”)
…
CHIEF JUDGE CHAGARES (11:14): Well, but there are other conflicts too. I mean, you have to be over 18 in New Jersey. It can't deal with collegiate betting in any way, and other things too, but go ahead.
(My read: Kalshi’s conflict preemption arguments seem to have stuck with Chief Judge Chagares. More on that below.)
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JUDGE PORTER (12:50): Just given the posture of the case on the preliminary injunction on the first prong, they don't have to show that they're likely to win, right? Just that they have a significantly better than negligible argument. Are you saying that the position is not significantly better than negligible?
(My read: “It’s not a particularly high bar for Kalshi to get an injunction. Are you suggesting that Kalshi hasn’t even cleared that?”)
Compare that to some of the questions/comments that Kalshi’s lawyer received:
CHIEF JUDGE CHAGARES (20:17): You've argued alternatively. Which do you think is the more appropriate analysis? Conflict or field?
(My interpretation: “When we’re writing this opinion, how should we approach this?”)
…
CHIEF JUDGE CHAGARES (23:18): Well, it does have to impact economics, right?
WILL HAVEMANN (counsel for Kalshi): Right.
CHIEF JUDGE CHAGARES: Okay. That wouldn't. You pointed out the Super Bowl. That's going to have the Eagles win the Super Bowl or the Steelers, for that matter. That's going to impact folks economically. Just how granular do you need to get? I've seen the website, and there's a lot of really very specific things.
(My read: “We’ve got to draw some lines here. How far do you need the line to go?”)
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CHIEF JUDGE CHAGARES (28:46): Your friend mentioned a couple of other congressional acts. He didn't say it specifically, but it was in the brief. Indian Gaming Regulatory Act, and the other one, Unlawful Internet Gambling Enforcement Act, and that support his position. Maybe you could just reply to that.
(My read: “Let’s make sure we cover all the bases here.”)
Now, it wasn’t all softballs for Kalshi. There were two issues on which it got some mild pushback.
The first is, as you might expect, on swaps. Judge Porter seemed particularly interested in the overlap between sports event contracts and sports bets — and whether it’s possible to draw a clear line between swaps and bets. He asked both sides questions about where to draw the line.
JUDGE PORTER (to MR. EHRLICH) (7:34): There's no examples of sports betting that are not swaps?
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JUDGE PORTER (to MR. HAVEMANN) (16:24): Let me ask you a question similar to what I asked your friend. What kinds of sports betting are available outside the designated contract market?
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JUDGE PORTER (to MR. HAVEMANN) (22:30): What are some kinds of sports betting that would not fall within your definition of swap?
Chief Judge Chagares asked a related line-drawing question — at what point is there no longer an association with a “potential financial, economic, or commercial consequence”? (See the discussion at 23:18 mentioned above.) Kalshi’s lawyer responded:
WILL HAVEMANN: I think that there are probably certain player props that would not have sufficient economic consequences to fit within the definition.
I don’t know where the judges will end up drawing the line, or if they’ll have to draw a line at all, given the preliminary state of the case. But the issue’s clearly on their minds.
The second issue is one that caught me a little off guard: which preemption framework is the right one to use, and is field preemption the right fit here? Recall that Chief Judge Chagares asked Kalshi:
CHIEF JUDGE CHAGARES (20:17): You've argued alternatively. Which do you think is the more appropriate analysis? Conflict or field?
Both he and Judge Porter had substantive questions about field preemption, which the Supreme Court has described as “rare.” If you’re asking yourself, “which field are they talking about?”, you’re not the only one.
CHIEF JUDGE CHAGARES (to MR. EHRLICH) (12:25): What is the field anyway, if it's field preemption?
STEPHEN EHRLICH: I’m sorry, Your Honor?
CHIEF JUDGE CHAGARES: What is the field?
STEPHEN EHRLICH: I think you'd have to ask Kalshi that. We don't think there is a field.
….
JUDGE PORTER (to MR. HAVEMANN) (19:49): In the brief, you invoked field preemption and conflict preemption. What's the scope of the field that you're arguing?
WILL HAVEMANN: The field that Congress has preempted is the field of regulating trading on federally designated contract markets. We think that that's actually -- although the 7th Circuit couched its decision in conflict preemption terms, and we cite a case that says these categories are not rigidly distinct, we understand the 7th Circuit case…
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CHIEF JUDGE CHAGARES (25:45): Back to field preemption, and let me talk about that just for a minute. It seems that you agree with your friends on the other side that the CEA does not preempt some state common law fraud claims. I'm just wondering, how then can field preemption occur? Maybe I have it wrong. Doesn't Congress have to have left no room at all for state regulation?
WILL HAVEMANN: The key, Your Honor, is in how to define the preempted field. Because the field that is preempted is not all derivatives transactions or not everything that touches a derivatives transaction, the field is instead the regulation of trading on a DCM. I think that what courts immediately recognized, and then there were subsequent amendments to the CEA that codified that recognition, is that when you are applying a state law fraud claim to fraud that happens to happen on a DCM, then you're not really regulating futures trading on a DCM. You’re regulating fraud that happens to happen there. It’s not a direct regulation.
The district judges that have sided with Kalshi up until this point seemed to have embraced field preemption more than conflict preemption. Judges Chagares and Porter seem to be doing the opposite: they appear to be more skeptical about field preemption.
Framing the “field” is tricky. Is it that the “field of DCMs” — if you build it, they will come? — is preempted? Or is it that the field of state gaming and gambling law is preempted to the extent that it seeks to regulate activity on designated contract markets? Maybe that’s a distinction without a difference, but it’s clearly on two of the judges’ minds.
On the other hand, Chief Judge Chagares seemed to understand conflict preemption just fine — particularly Kalshi’s argument that you can’t comply with both the Commodity Exchange Act and state licensing requirements.
CHIEF JUDGE CHAGARES (to MR. EHRLICH) (10:16): There's a lot of discussion in the briefs as well about conflict preemption as well.
STEPHEN EHRLICH: Yes. And we agree-- excuse me, Your Honor. We agree that conflict preemption is something that can apply in the appropriate case. It just doesn't apply here because federal law is prohibiting the same thing as state law. In those circumstances, there's almost never going to be conflict preemption. Kalshi itself admits, and we quote this in page 49 of our opening briefs, their DC Circuit brief where they say Congress did not want sports betting to be conducted on derivative markets. We agree.
Congress said that essentially in the special rule. It gave some discretion to the CFTC. The CFTC has an implementing regulation, says the company shall not list. What they're doing is illegal under federal law. It's illegal under our state law, and there's not going to be a conflict in that circumstance. I will say they can do what they want as long as they get a license in New Jersey. That's all they have to do is comply with our New Jersey …
CHIEF JUDGE CHAGARES: Well, but there are other conflicts too. I mean, you have to be over 18 in New Jersey. You can't deal with collegiate betting in any way, and other things too, but go ahead.
STEPHEN EHRLICH: Certain collegiate games, but yes.
CHIEF JUDGE CHAGARES: It's in the Constitution.
Why does this matter for Kalshi? Kalshi has three roads to winning here: field preemption, obstacle preemption, and impossibility preemption. Obstacle preemption is the idea that regulation of prediction markets by both state gaming regulators and the CFTC would interfere too much with the purpose and objectives of the Commodity Exchange Act. Impossibility preemption is the notion that prediction markets can’t comply with the rules of both the CFTC and the states — and that one has to give.
If Kalshi were to win on field preemption — and maybe even obstacle preemption — there’s a solid basis for concluding that no state gaming law should apply. But if the court is leaning toward impossibility preemption, that may be trickier. The scope of Kalshi’s ultimate win may come down to an assessment of which rules and requirements actually conflict — “state law is nullified to the extent that it actually conflicts with federal law.” It would still be a win for Kalshi, but maybe not as satisfying as field preemption, which would provide Kalshi with the most sweeping win.
3. This isn’t the end, in more ways than one.
Regardless of who wins this part of Kalshi’s case against New Jersey, I highly doubt the case ends here. As I’ve noted before, the loser can go to the Supreme Court. Before it does, it can also ask the three-judge panel or the entire 13-judge Third Circuit (the “en banc” court) to “rehear” (reconsider) the appeal — which further complicates the big picture and timing.
But it’s not just about the big picture. Remember: this appeal is about a preliminary injunction order. Maybe the judges here punt on certain legal issues. Think back to Judge Porter’s comment that the legal standard is “significantly better than negligible.” Maybe the court simply concludes that Kalshi’s arguments are good enough for now. They could decide, for example, that Kalshi was able to show that at least some of its contracts are swaps, but leave open whether all of its contracts are swaps. Or perhaps the court leaves open the question of how much conflict there is between federal law and state law.
The three judges on this panel don’t strike me as the type to shy away from difficult questions. New Jersey and Kalshi may well get clear, clean, sweeping answers to the questions they’ve raised. But it’s also possible that the panel delivers a decision that doesn’t satisfy either side fully and leaves work for Judge Kiel to do in the district court.
Either way, we have a long road ahead of us.
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