Roth’s dissent raises questions about the congressional intent behind the Dodd-Frank reforms and a potential challenge to state-regulated gambling.
The US Third Circuit Court of Appeals handed Kalshi a significant victory by ruling 2-1 to uphold a preliminary injunction barring New Jersey from enforcing its state gambling laws against the company. The win is the most significant to date in the battle over whether federal regulations governing prediction markets supersede state gambling laws.
In her dissent, Judge Jane Richards Roth argued Congress never intended for the Commodity Futures Trading Commission (CFTC) to infringe on state’s rights to regulate gambling when it amendended the Commodity Exchange Act (CEA) in 2010.
Roth wrote:
When Congress gave the CFTC jurisdiction over swaps, there was no ‘clear and manifest purpose’ for federal law to supersede states’ ‘historic police powers’ over gambling regulation. After all, the CFTC has no expertise in the sports gaming industry. If Congress wanted the CFTC to serve as a kind of national sports gaming commission, it would not have stated its intention ‘in so cryptic a fashion.’”
Exchange Signals Congressional Intent
Roth cited an exchange in the congressional record between Sen. Dianne Feinstein and Sen. Blanche Lincoln regarding the CEA’s Dodd-Frank amendments.
During the exchange, Lincoln said Congress charged the CFTC with using the CEA’s Special Rule to prevent contracts “contrary to the public interest.” Through that amendment, Congress granted the CFTC authority and seeming expectation to block contracts concerning gaming, terrorism, assassination, and war. Indeed, it’s the only statutory provision that references gaming in the CEA.
Lincoln told Feinstein:
The Commission needs the power to, and should, prevent derivatives contracts that are contrary to the public interest because they exist predominantly to enable gambling through supposed ‘event contracts.’’It would be quite easy to construct an ‘event contract’ around sporting events such as the Super Bowl, the Kentucky Derby, and Masters Golf Tournament. These types of contracts would not serve any real commercial purpose. Rather, they would be used solely for gambling.”
On X, NPR’s Bobby Allyn called the record “a rare glimpse of lawmaker intent.”
Is State-Regulated Gambling at Risk?
Roth’s dissent suggests state-level gambling regulation could be in jeopardy if federal regulations are ultimately found to preempt state laws.
Following New Jersey’s argument, Roth wrote that Kalshi’s definition of swaps would likely encompass “virtually every kind of wager.”
After all, even a bet over the outcome of a friendly neighborhood ping pong match may have a ‘potential financial . . . consequence’ because one of the bettors would reap a financial reward based on the match’s outcome.”
Roth noted that trading swaps outside of DCMs is illegal under federal law. Therefore, were the court to take the definition of swaps to its logical extreme, anyone engaging in gambling outside of a DCM would be committing a felony. Congress could not have intended for such a “rationality-defying” outcome, Roth said.
“Of course, if Kalshi is correct that its products are not gambling, then discussion about the states’ preeminent role in regulating gambling is moot,” Roth added.
It is difficult, however, to take Kalshi’s argument at face value when its marketing materials, such as [Instagram posts], routinely refer to its products as ‘sports betting’ … Basic abductive reasoning tells us that if it looks like gambling, talks like gambling, and calls itself gambling, it’s gambling.”
Dissent Stokes Strong Industry Response
Roth’s dissent elicited swift reactions from opposite corners.
On X, Sporttrade founder and CEO Alex Kane countered Roth’s “incorrect” take. Kane — whose company’s application to transition from a state-regulated sports betting exchange to a federally-regulated prediction market is pending — argued that should the CFTC prevail and prediction markets be allowed to continued offering sports event contracts, state-level sportsbooks will still be able to thrive.
The dissent represents the viewpoint that if the CFTC is successful in defending its exclusive jurisdiction over ECs traded on exchanges somehow means the end of state gaming regulators and online sportsbooks and casinos. The dissent is incorrect. Both state regulated sportsbooks and federally regulated exchanges will continue to grow and serve two different purposes.”
Kane’s X followers responded with pushback and support.
Responsible gambling lobbyist and former journalist Jessica Welman said she’d had several conversations indicating Roth may be right.
FWIW, I have spoken with several people with law degrees and experience who have said the end of state-regulated gambling is a very real possibility from this case.”
Kane asked Wellman, if that’s true, why hasn’t the CFTC brought an enforcement action against any state-regulated sportsbook. The agency isn’t trying to exert jurisdiction over state-regulated sportsbooks, only over nationwide exchanges.
Straight to the Point’s Steve Ruddock popped up to say that the position may be temporary.
Isn’t trying to exert jurisdiction over state-regulated sportsbooks *yet. That’s the word everyone leaves out of these debates.”
In retort, Kane suggested that given the state’s “incredibly anti-consumer and anti-innovation regulatory regime,” a federal approach might be better.
Wellman then countered, “And who are we going to put in charge of the casinos?”
Ruling May Have Little Effect on Final Battle
Significance of Kashi’s latest win aside, this preliminary ruling may not reflect much on the court’s final say.
As explained by Holland & Knight Law, the Third Circuit only found a “reasonable likelihood of success.”
And as Daniel Wallach noted on X, the decision set off a 14-day countdown for New Jersey to request an en banc hearing. While “rarely granted, [the] split ruling gives it a chance,” the gaming lawyer explained.
Further, as Ruddock wrote in his April 7 newsletter, the ruling is “not a destination.” Rather, he said, it’s “just another stop on the way to the Supreme Court.”
Ruddock also cautioned against counting on any particular outcome. He noted that states had a 14-2 win-loss record before this latest ruling and likened it to New Jersey’s historic sports-betting battle.
One very important thing to keep in mind as prediction market court rulings come in (and there are going to be dozens more) is that New Jersey lost every court decision leading up to SCOTUS. Basically, don’t get too caught up on these rulings, in either direction.”
Inaction Alone ‘Cannot Preempt State Law’
It’s possible that an en banc panel or the Supreme Court could rule, as Roth did, that Dodd-Frank undermines Kalshi’s claims.
Regarding the Special Rule, Roth wrote:
Kalshi asserts that its sports-event contracts comply with this regulation because the CFTC has not taken any action against its contracts. The Majority similarly notes that “the CFTC has chosen not to enforce its regulation against the type of sports-related event contracts at issue here.” Kalshi and the Majority overlook that agency inaction alone cannot preempt state law, especially not when that inaction constitutes a failure to “adhere to its own rules and regulations.”
Accordingly, neither the CFTC’s failure to enforce its own regulation nor nonexistent rules governing event contracts are sufficient to coat Kalshi’s self-certified gaming contracts with a sheen of legality.”
Because of those failures, Roth dissented.
“For these reasons, I would hold that Kalshi cannot demonstrate a reasonable likelihood of success on the merits on its preemption claims. I therefore respectfully dissent.”
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