Why New Jersey's Case Against Kalshi Is Stronger Than Nevada's
This is a guest post that features opinions and analysis from Andrew Kim, a litigator at Goodwin Law, republished from LinkedIn.
Kalshi may regret bringing the fight to New Jersey.
The state filed its response to Kalshi’s preliminary injunction motion — and it delivers quite a punch. New Jersey’s brief persuasively argues that, even in the sandbox of the Commodity Exchange Act, there’s room for state regulators to play.
You can read the brief yourself below:
In case you’re playing catch-up or need a brief summary of what’s going on:
New Jersey is one of several states that has told Kalshi to stop offering sports event contracts, arguing that it’s illegal sports betting in a cease-and-desist letter.
Kalshi filed a lawsuit in federal court in response, asking for the court to stop New Jersey from enforcing the initial cease-and-desist.
Nevada’s argument in defending against Kalshi’s lawsuit featured less persuasive arguments; Kalshi has already won a preliminary injunction there.
The breakdown of NJ’s brief
New Jersey starts with the fundamentals. First, the presumption against preemption: when possible, federal laws shouldn’t shove aside state laws, especially in areas that are traditionally regulated by the states, like gaming and gambling. Field preemption, like the kind for which Kalshi is advocating, is “rare.”
Next, the Commodity Futures Trading Commission’s “exclusive jurisdiction.” New Jersey calls into question whether sports-related event contracts like Kalshi’s are “swaps” at all. A swap, New Jersey notes, has to be “dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event … with a potential, financial, economic, or commercial consequence.” This is meant for things like “crop yield” or “corporate asset purchases." The Lakers beating the Timberwolves doesn't have an "economic consequence." (OK, New Jersey didn't say that second part.)
Still on “exclusive jurisdiction.” After attacking whether Kalshi’s contracts are “swaps” at all, New Jersey points out that the exclusive jurisdiction provision doesn’t do what Kalshi says it does. The CFTC’s jurisdiction is exclusive as to other federal agencies like the SEC; it’s not intended to knock out state law. It asks: why would the CEA have provisions protecting state jurisdiction if Congress wanted the CFTC to displace the states?
On to the Special Rule. New Jersey points out that one category of contracts subject to the Special Rule is “activity that is unlawful under any Federal or State law.” This shows that “Congress wanted state laws to apply when those laws apply to event contracts.” (I think this is New Jersey’s weakest argument—as Kalshi might point out, the problem here is that the contract is arguably unlawful, not the underlying event.)
Ah, the old "expressio unius" chestnut. New Jersey points out that the CEA actually has a limited preemption provision for state gaming laws—just not for the contracts here. Congress could have preempted state gaming laws for contracts covered by the Special Rule, but didn’t.
“Kalshi’s conflict-preemption claim is even weaker.” Ouch. How I read New Jersey’s conflict-preemption arguments: “What, exactly, are the conflicts again?” New Jersey asks. “State gaming laws and the CEA are trying to do the same thing: ensure financial integrity, and protect all market participants. Why is licensing such a problem? Sure, you won’t be able to trade on some college ball and other limited contracts, but that’s not a conflict.”
Questions remain
My overall takeaway: Kalshi’s got a lot of work to do, but the fight's not over. Here are the questions/issues I have after reading New Jersey’s brief:
A lot of New Jersey’s arguments turn on the notion that states can determine that activity is “unlawful.” But does a contract “involve activity that is unlawful” when the contract itself is unlawful under state law? If so, doesn’t that give states a lot of power to just ban certain kinds of event contracts outright?
In general, where does the overlap between the CFTC and state regulators end? If I’m a judge, I’m looking for clear borders, and I’m not sure New Jersey’s given them to me.
I have a hard time with New Jersey’s response to the “two masters” problem. Maybe New Jersey’s right, and there’s no field preemption here. Fine. But I wonder if New Jersey’s brief (deliberately) undersells the conflict between the CEA and sports wagering laws. (And remember, the CFTC may — or may not — be able to promulgate rules that end up conflicting with state law.) I anticipate that Kalshi will emphasize those conflicts -- it’s already pointed out the discrepancy in trading age vs. gambling age.
I have a feeling we’re going to be debating what constitutes “economic consequences” are for a good long while…
Andrew is a litigator at Goodwin Law and is an expert on issues relating to appellate litigation, federal-court practice, federal administrative law, and gaming and gambling law. He represents clients before the U.S. Supreme Court, federal and state courts of appeals, and regulatory bodies, including state gaming commissions, state attorneys general, the CFPB, and the SEC. Andrew also advises clients in the gaming and gambling space, particularly on emerging legal issues, like what we're seeing with prediction markets now. If you're interested in a deep-dive on the legal issues surrounding prediction markets, follow him on LinkedIn.
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