In a recent ruling, a federal judge in Arizona has halted the state's attempt to bring criminal charges against Kalshi, a prediction market provider, at least for the time being. This decision comes in response to a motion filed by the Commodity Futures Trading Commission.
District Judge Michael Liburdi ruled that Arizona cannot proceed with an arraignment of Kalshi, which was scheduled for April 13, after the state announced plans to file 20 criminal charges against the company for allegedly violating Arizona law by offering betting products. The judge's ruling stated that the Commodity Futures Trading Commission has demonstrated a strong likelihood of succeeding in its claim that Arizona's gambling laws are preempted by federal law. As a result, Arizona's pursuit of state action could potentially violate the Supremacy Clause, leading the judge to grant a temporary restraining order for a period of two weeks. The judge noted that a pending motion for a preliminary injunction could further extend this order.
In his ruling, Judge Liburdi ordered that Arizona be temporarily restrained from enforcing its gambling laws in any criminal or civil enforcement actions related to contracts listed on Commodity Futures Trading Commission-regulated markets. The Commodity Futures Trading Commission Chairman, Michael Selig, expressed appreciation for the judge's decision, stating that Arizona's use of state criminal law against companies complying with federal law sets a dangerous precedent.
The Commodity Futures Trading Commission has argued that prediction markets, also known as event contracts, fall under its supervision as swaps, and thus are subject to federal law, which preempts state law. This viewpoint has yielded mixed results in court, with state courts often siding with states, while federal courts have produced varying outcomes.
The Third Circuit Court of Appeals recently ruled that prediction markets are subject to Commodity Futures Trading Commission rules, while the Ninth Circuit Court of Appeals declined to intervene in a Nevada state court's decision to block Kalshi. Judge Liburdi's decision to block Arizona's state action against Kalshi came two days after he denied Kalshi's motion for a preliminary injunction against the state, although the parties had argued on different grounds.