In a significant development, a federal judge has intervened to stop Arizona from pressing criminal charges against prediction market operator Kalshi, at least for the time being, in response to a motion filed by the Commodity Futures Trading Commission. District Judge Michael Liburdi of the District of Arizona made the ruling on Friday, stating that Arizona cannot proceed with the scheduled arraignment of Kalshi on Monday, April 13. This decision comes after Arizona announced plans to file 20 criminal charges against Kalshi last month, alleging that the company's offerings violated state law. The judge's ruling was based on the finding that the Commodity Futures Trading Commission is likely to succeed in its claim that Arizona's gambling laws are preempted by federal law, specifically the Commodity Exchange Act.
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. Additionally, there is a pending motion for a preliminary injunction that, if granted, would extend the temporary restraining order.
The judge explicitly stated that defendants are temporarily restrained from enforcing Arizona's gambling laws in any criminal or civil enforcement actions related to contracts listed on Commodity Futures Trading Commission-regulated markets. This decision has been welcomed by CFTC Chair Michael Selig, who emphasized that Arizona's attempt to use 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 that its role takes precedence over state law.
However, the outcomes of similar cases in state courts have been mixed, with some courts siding with the states. In contrast, federal courts have shown varying results, with the Third Circuit Court of Appeals recently ruling that prediction markets are subject to Commodity Futures Trading Commission rule. The Ninth Circuit Court of Appeals has declined to intervene in a similar case in Nevada but is scheduled to hold a hearing on a consolidated case soon. Judge Liburdi's decision to block Arizona's action against Kalshi came two days after he denied Kalshi's own motion for a preliminary injunction against the state, albeit on different grounds.