On Thursday, the U.S. Court of Appeals for the Sixth Circuit hosted oral arguments involving Kalshi and representatives from Ohio and Tennessee. This discussion follows recent split decisions in federal courts regarding Kalshi's ability to offer sports prediction markets in these states.
While a ruling has yet to be announced, both sides provided their arguments, highlighting the ongoing federal versus state regulatory debates that have important implications nationwide.
Earlier this year, the Third Circuit had sided with Kalshi in a ruling concerning New Jersey. Should the Sixth Circuit lean towards the states, it could create a conflicting circuit decision, potentially accelerating the matter’s progression to the Supreme Court.
During the proceedings, Kalshi's counsel Will Havemann from Milbank cited the Third Circuit ruling early on, asserting that the intent of Congress was clear: to prevent disorder that would stem from subjecting national derivatives exchanges to the varied laws of 50 states. He referenced Supreme Court statements that suggest federal agencies, when granted exclusive jurisdiction, can preempt state laws.
However, Judge Eric L. Clay challenged this view, suggesting Kalshi's argument simplifies a complex issue. He pointed out a savings clause in the statute indicating its intention not to disrupt the existing regulatory frameworks.
Judge Clay pressed on a concession from Havemann that acknowledged some remaining state authority under the Commodity Exchange Act (CEA). "Regulation of gambling is ordinarily a state responsibility," he remarked, indicating that there’s no clear directive within the statute supporting a transfer of gaming licensure from state to federal levels.
In a deeper exploration of whether sports event contracts qualify as "swaps" under the CEA, Havemann maintained that they do have financial implications. Judge Clay, however, highlighted that this question remains unresolved, emphasizing the state-regulated nature of sports betting and gambling.
At one point, Judge Clay reflected on Havemann’s critical remarks about state regulators, calling them disparaging. He questioned the assumption that federal oversight would necessarily improve outcomes compared to state regulation. Havemann clarified that the stance was based on interpretations of congressional intent, not personal opinion.
In a counterargument, Ohio Solicitor General Mathura Sridharan posited that if Kalshi's assertion were accurate, all sports trades since 2010 would need to have occurred on federally regulated exchanges, which contradicts the long history of state regulation. She expressed concern that Kalshi’s approach misaligns with the financial realities encompassed by the CEA.
Sridharan argued that the CEA does not concern itself with how sports bets are traded, but rather focuses on the identity of the product itself.
In support of this view, Aaron Bernard from the Tennessee Attorney General's Office stressed that Kalshi is essentially engaging in traditional parimutuel wagering. He asserted that while Dodd-Frank reshaped financial markets, it didn’t integrate sports gambling under its broader swap definitions, suggesting that Kalshi's operations do not connect directly to the financial principles outlined in the Dodd-Frank Act.
He concluded that if sports betting falls under the Dodd-Frank Special Rule, Kalshi would be violating both state and federal laws, providing a unified direction from both legal frameworks: prohibiting its operations.
The Sixth Circuit hearing is a sequel to divisive federal rulings earlier in the year. Notably, on February 19, Judge Aleta Trauger from the Middle District of Tennessee had ruled in favor of Kalshi, granting a preliminary injunction against Tennessee officials.
Trauger agreed that Kalshi's contracts could be classified as swaps under the CEA, indicating that the company stood a good chance in the case.
Contrasting that decision, U.S. District Court for the Southern District of Ohio Chief Judge Sarah Morrison, 17 days later, denied Kalshi’s request for a preliminary injunction against Ohio, asserting that the company had not satisfactorily proven its claims regarding the swap status of its contracts.
Morrison suggested that acknowledging Kalshi's viewpoint would create an untenable scenario for state-regulated sportsbooks and severely impact tribes’ abilities to oversee gaming under the Indian Gaming Regulatory Act.
In April, the Sixth Circuit also denied Kalshi's request for an emergency injunction against Ohio during the appeal. Meanwhile, Kalshi is pursuing a separate lawsuit against the Ohio Casino Control Commission in state court due to a $5 million fine imposed by the commission.
