Federal Court Allows NY State Enforcement Against Prediction Market
Commentary by Steven Lofchie
The U.S. District Court for the Southern District of New York denied KalshiEX LLC's motion for an emergency injunction pending appeal that would have barred the New York State Gaming Commission from enforcing state gambling laws against the prediction-market operator.
Judge Analisa Torres ruled that Kalshi failed to meet the heightened standard for an injunction pending appeal, which under Agudath Israel of America v. Cuomo requires a "strong" likelihood of success on the merits. The court noted that Kalshi's request effectively sought to reinstate the same relief already denied in the court's July 7 preliminary injunction order (see prior coverage), calling such a reversal "drastic" and requiring "circumstances of unusual magnitude."
On the merits, the court rejected Kalshi's argument that a recent CFTC order and proposed rulemaking on Commodity Exchange Act preemption of state gambling laws changed the analysis. Citing Loper Bright Enterprises v. Raimondo, the court stated it must exercise independent judgment on statutory interpretation and reaffirmed its prior holding that the CEA does not preempt all state gambling laws with respect to event contracts on designated contract markets.
The court also found Kalshi's claimed harms remained "largely monetary" and insufficient to show irreparable harm. The court noted that the Sixth Circuit previously denied a similar emergency injunction request from Kalshi in a separate case, KalshiEX LLC v. Schuler.
Finally, the court determined that the balance of equities and public interest favored the defendants, citing the state's asserted harms from halting enforcement of its gaming regulations. The court denied both the request for an injunction pending appeal and the request for short-term administrative relief.
Commentary
The regulators are repeating with respect to election contracts the same mistake they made with respect to digital assets. Rather than admit the need for legislative action, and press for it, the CFTC is pushing forward as if there is no uncertainty.
It's just not obvious that the Dodd-Frank Congress intended to do away with State gambling laws. It is also apparent that the courts are significantly divided on the issue. Further, there are legitimate public policy concerns with respect to the safe harbor because of exchange listing of products that would otherwise be subject to State gambling laws.
There is some irony to this particular case in that the judge issuing the decision against the CFTC, Analisa Torres, is the same judge who previously refused to defer to the federal regulators and who rejected the arguments of the SEC that cryptocurrencies were inherently securities. Perhaps the same principled positions that made her a hero previously will make her a villain now.