In a recent ruling, a federal judge in Arizona has blocked the state from pursuing criminal charges against prediction market provider Kalshi, at least for the time being, in response to a request from the Commodity Futures Trading Commission. District Judge Michael Liburdi's decision, handed down on Friday, prevents Arizona from proceeding with an arraignment of Kalshi that was set for Monday, April 13. This comes after Arizona announced last month that it would be filing 20 criminal charges against Kalshi for allegedly offering betting products that violate state 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 preempted by federal law, specifically the Commodity Exchange Act.
By allowing Arizona to proceed with its state action, the judge noted that it could potentially violate the Supremacy Clause, leading to the issuance of a temporary restraining order for a period of two weeks. Additionally, a pending motion for a preliminary injunction could further extend this order.
The CFTC has welcomed the judge's decision, with Chair Michael Selig stating that Arizona's use of state criminal law against companies complying with federal law sets a concerning precedent and that the court's order sends a clear message against intimidation tactics to circumvent federal law. The CFTC has argued that prediction markets, also known as event contracts, fall under its supervision as swaps, and thus are subject to federal regulation that preempts state law.
This viewpoint has yielded mixed results in court, with state courts often siding with states and federal courts producing varying outcomes. Most recently, the Third Circuit Court of Appeals ruled that prediction markets are indeed subject to CFTC regulation, while also noting that it is up to the CFTC's discretion to decide whether to block providers from offering sports-related products.
The Ninth Circuit Court of Appeals has declined to intervene in a similar case in Nevada but is set to hold a hearing on a consolidated case, allowing providers and other parties to present their arguments. Judge Liburdi's decision to grant the CFTC's motion to block Arizona's action against Kalshi came just two days after he denied Kalshi's own motion for a preliminary injunction against the state, albeit on different grounds.