In a significant development, a federal judge has intervened to stop Arizona from pressing criminal charges against Kalshi, a prediction market provider, at least for the time being. This move comes in response to a request from the Commodity Futures Trading Commission. District Judge Michael Liburdi of the District of Arizona ruled on Friday that Arizona cannot proceed with an arraignment of Kalshi scheduled for Monday, April 13.
The state had announced plans to file 20 criminal charges against Kalshi last month, alleging that the company's offerings violated Arizona law. 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Trading Commission has demonstrated a strong likelihood of succeeding in its claim that Arizona's gambling laws are superseded by the Commodity Exchange Act.
Allowing Arizona to proceed with its state action could potentially violate the Supremacy Clause, according to the judge, who granted a temporary restraining order for a period of two weeks. The judge also noted that a pending motion for a preliminary injunction could further extend the temporary restraining order if granted. The ruling effectively restrains Arizona from enforcing its gambling laws in any criminal or civil enforcement actions related to contracts listed on Commodity Futures Trading Commission-regulated markets. In response to the decision, CFTC Chair Michael Selig expressed appreciation, 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 been arguing 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 and federal courts producing different outcomes. The Third Circuit Court of Appeals recently ruled that prediction markets are subject to Commodity Futures Trading Commission rule, 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 grant the Commodity Futures Trading Commission's motion to block Arizona's action against Kalshi came two days after he denied Kalshi's own motion for a preliminary injunction against the state, with the parties arguing on different grounds.