Federal Judge Transfers Kalshi Preemption Lawsuit to State Court

State Court Decision Gives Massachusetts Advantage

This ruling is widely seen as a major advantage for Massachusetts in its effort to stop Kalshi from offering contracts on sporting events within the state.

The decision opens a new path for state attorneys general to pursue legal action against prediction markets. Legal experts previously noted that federal judges might favor Kalshi’s arguments. These arguments center on the idea that federal law preempts state law. However, state-level judges are generally viewed as more likely to support the positions of state authorities. The state court will now decide if Kalshi’s contracts violate state gambling laws.

Massachusetts Attorney General Andrea Campbell originally sued Kalshi in the Suffolk County court in September. She argued that the prediction market was operating without the proper license and was violating state laws by allowing clients to wager on sports game outcomes.

Rejection of Kalshi’s Federal Argument

Kalshi had contested the state lawsuit, arguing the matter belonged in federal court. The firm claimed that the Commodity Exchange Act (CEA), a federal law, preempted state jurisdiction. Kalshi is a CFTC-registered exchange. It argued that this registration means only the federal Commodity Futures Trading Commission (CFTC) has authority over its operations.

U.S. District Judge Richard G. Stearns rejected Kalshi’s argument that states were “completely preempted” from jurisdiction. Judge Stearns found that Kalshi’s argument did not meet the true definition of complete preemption. Complete preemption occurs when Congress clearly intended to create an exclusive federal cause of action. This moves a state claim to federal court.

Instead, the judge characterized Kalshi’s argument as a “plain vanilla federal preemption defense.” Kalshi only argued that state sports betting laws were preempted when enforced against a CFTC-registered market. Judge Stearns stressed that this type of limited defense does not qualify for complete preemption. The ruling keeps the case in the state court system.

Context of the Broader Prediction Market Battle

The transfer to state court is the latest in a series of mixed court results for prediction markets, following some initial wins for Kalshi.

Kalshi had previously sued the states of Nevada, New Jersey, and Maryland in federal court. The firm secured injunctions in the first two states, allowing it to continue operating there. However, recent court decisions have been less favorable:

• Maryland: In July, the U.S. District Court for the District of Maryland denied an injunction for Kalshi. This decision prevents the firm from continuing to offer sports contracts in that state, though the state agreed not to enforce the ban pending Kalshi’s appeal.
• Crypto.com: Earlier in the same month, the same judge who granted Kalshi the injunction in Nevada denied a similar request from the Crypto.com platform.

The core legal fight centers on whether the activities of prediction markets are subject to federal derivatives rules or to state gambling laws. The Massachusetts case will now proceed under the state-level legal framework.