In a significant development, a federal judge has intervened to prevent Arizona from pressing criminal charges against Kalshi, a prediction market provider, 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 ruled on Friday that Arizona cannot proceed with the scheduled arraignment of Kalshi, which was set for Monday, April 13. This decision comes after Arizona announced last month that it would be filing 20 criminal charges against Kalshi for allegedly offering betting products that violate 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 preempted by the Commodity Exchange Act. Furthermore, the judge noted that Arizona's pursuit of state action could potentially violate the Supremacy Clause, leading to the issuance of a temporary restraining order for a period of two weeks. It is worth noting that a pending motion for a preliminary injunction, if granted, would extend the temporary restraining order. According to Paradigm senior regulatory counsel Stefan Schropp, the judge's ruling temporarily restrains and enjoins Arizona from enforcing its gambling laws in any criminal or civil enforcement actions related to contracts listed on Commodity Futures Trading Commission-regulated designated contract markets.
In a statement released on Friday, Commodity Futures Trading Commission Chair Michael Selig expressed appreciation for the judge's decision, emphasizing that Arizona's attempt to use state criminal law against companies that comply with federal law sets a dangerous precedent. The Commodity Futures Trading Commission has argued that prediction markets, also known as event contracts, are swaps subject to the agency's supervision and that its role preempts state law.
This view has yielded mixed results in court, with state courts often siding with states and federal courts producing different outcomes. For instance, 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 granted the Commodity Futures Trading Commission's motion to block Arizona's state action against Kalshi just two days after denying Kalshi's own motion for a preliminary injunction against the state, albeit on different grounds.