Court Denies CFTC's Bid to Block Wisconsin Enforcement Against Prediction Markets
Commentary by Steven Lofchie
In United States of America v. State of Wisconsin, the U.S. District Court for the Eastern District of Wisconsin denied a motion by the United States and the CFTC for a preliminary injunction that would have barred Wisconsin from enforcing its gambling statutes against companies offering sports-related event contracts (see prior coverage).
The court held that the CFTC did not demonstrate that sports-related event contracts qualify as "swaps" under CEA Section 1a ("Definitions"). The court found that Congress intended the term to capture financial-industry products rather than everyday sporting outcomes.
The court rejected the CFTC's express, field, and conflict preemption arguments. The court concluded that the CEA Section 2 ("Jurisdiction of Commission") grant of "exclusive jurisdiction" distinguishes the CFTC from other federal agencies rather than preempting state gambling law, and that CFTC Rule 38.151 ("Access requirements") does not require regulated exchanges to offer identical products in every state.
In a separate ruling favoring the federal government, the court denied Wisconsin's motions to dismiss for lack of standing and to transfer venue. The court held that the federal government need not show the type of particularized injury required of private litigants, and that its allegation that state enforcement undermines the national public interest in regulated derivatives markets was sufficient to confer standing.
The court also denied motions to intervene filed by KalshiEX LLC, Crypto.com's derivatives affiliate, and the American Gaming Association, finding that the CFTC and the state adequately represented those parties' interests.
Commentary
Notably, the Court expressed the view that event contracts on sporting events were not the type of contract that Congress intended to be regulated as swaps subject to the CFTC's exclusive jurisdiction.
On the other side of the debate, in issuing an injunction in favor of the CFTC, a District Court based in Minnesota took the view that swaps on at least some sports contracts were intended to be regulated by the CFTC. As an example, that Court cited a contract as to which team would sign LeBron James, as that would influence which team would win the NBA title, an event that such District Court indicted would have economic consequence and thus as to which the CFTC should have "exclusive jurisdiction." (Does that mean that only CFTC-regulated exchanges may provide for [contracts] [bets] on which team will win a league title in any sport?). See Federal Court Enjoins Minnesota Enforcement Against Prediction Markets. Yet even that Court acknowledged that some of the contracts offered on prediction markets were likely illegal.
At some point, Congress has to step in. The CFTC may be in a difficult position, where, in the absence of Congressional action, it has to rule on its own jurisdiction in an area where the law is not clear. It would be the better course of action for the CFTC to acknowledge the need for Congressional action, rather than treating its broad reading of its own jurisdiction as beyond question.
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The United States and the CFTC sued Wisconsin to block the enforcement of the state's gambling laws against five CFTC-regulated prediction market platforms.