Massachusetts Court Says Prediction Market Subject to State Gambling Regulation
Commentary by Steven Lofchie
A Massachusetts Superior Court judge issued a preliminary injunction preventing prediction market operator KalshiEX, LLC from offering sports-related event contracts to customers in the state without a gambling license.
In its Decision and Order, the Court required Kalshi to cease offering contracts on sporting events—such as predicting game winners or player performance—unless it complies with state sports wagering licensing requirements. The Court recognized that Kalshi operates a federally registered exchange for "event contracts" overseen by the CFTC. The company contended that state licensure would cause "chaos" and disrupt federal oversight, asserting that its federal registration shielded it from state gambling regulations.
The Court rejected the company's assertion that federal law preempted state regulation. The Court held that the Commonwealth was likely to succeed on the merits and determined that federal commodities law does not preempt the state's historic police powers to regulate gambling. The Court also found that Congress did not intend to displace state gaming laws when amending the Commodity Exchange Act, noting the statute allows regulators to consider state law illegality. Further, the Court decided there was no conflict preventing the company from complying with both federal and state regulations, finding that requiring a license serves the public interest by ensuring consumer protection and fair competition.
The Court granted the Commonwealth's request for a preliminary injunction and denied Kalshi's motion to dismiss the case, requiring the company to obtain a license to operate in Massachusetts.
Commentary
This is an interesting decision. Although it is a loss by Kalshi, it is by no means a total loss.
CEA Section 5c(c)(5)(C) provides that the CFTC may determine that event contracts are impermissible if they involve, among other things, (i) an "activity that is unlawful under any Federal or State law"; or (ii) "gaming." Certain of the prior decisions have largely focused on whether the activity constituted gaming and might be per se unlawful.
In this ruling, the Court takes a different tack. The Court assumes that the sports events contracts are gaming but does not assume that the contracts are illegal on that basis. Rather, the Court says that the State of Massachusetts permits, but extensively regulates gaming (or, to be more plain English, gambling on sports), and therefore, a gambling business operating in the State that does not comply with Massachusetts law involves an "activity that is unlawful under any Federal or State law."
The Court then turns to the scope of Federal preemption of State law under the CEA. CEA Section 2(a)(i) provides the CFTC with "exclusive jurisdiction" over CFTC-regulated contracts. However, this exclusive jurisdiction is subject to limits provided for in the Wall Street Transparency and Accountability Act of 2010 (better known as Dodd-Frank). According to the Court, the language in CEA Section 5c, quoted above, that respects State law is a carve-out from the CFTC's exclusive jurisdiction. In sum, Kalshi's offering of its gambling contracts in Massachusetts is subject to the exclusive jurisdiction of the CFTC only if the contracts are not of a type that is unlawful under Massachusetts law; i.e., only if they comply with Massachusetts gambling law.
This decision is well reasoned based on the statutory language (even if others may conclude that "exclusive jurisdiction" should be read more broadly). It also pays reasonable deference to State law in a way that will be appealing to many legislators, including members of Congress, without killing the events contract/futures business.