FEDERAL VS STATE REGULATION
The Maryland ruling sets up a potential circuit split as to the preemption issue. While Maryland (Fourth Circuit) ruled in favor of the regulators, district courts in New Jersey (Third Circuit) and Nevada (Ninth Circuit) determined that Kalshi was likely to succeed on the merits of its preemption claim. New Jersey regulators already appealed the ruling to the Third Circuit, where oral arguments are expected to be held in early September. The outcomes of the eventual rulings may not be as divergent as they appear at this stage, however. It is not uncommon to win the injunction and go on to lose the case and vice versa. In Nevada and New Jersey, the courts may have simply decided they did not want to adversely impact a commercial operation based on arguments that appeared to be weak, but that would also likely take years to fully resolve. Also, by the time the court in Maryland started its deliberations, more and more states were crying foul, and the commercial and tribal operators were bringing forward their own arguments against a potentially disruptive competitor. Meanwhile, Kalshi continued its activities and grew rapidly to two million customers. Given the money involved, the media coverage, and uncertainty surrounding prediction markets, a court was always going to take a step back at some point and take time to review what is going on in the marketplace. Maryland’s position reflects just that. Big Picture While the micro issues of compatibility between CFTC regulation, state laws and the Indian Gaming Regulatory Act (IGRA) are going to be resolved, the macro issue will be decided on a more fundamental question: is this sports betting, and if so, what should we do about it? That is not to say that Kalshi’s position is frivolous and dead on arrival, particularly in light of the litigation that let to IGRA and considering the current political climate. But, there is an undeniable body of law beginning with the Interstate Horse Racing Act and carrying through IGRA, the Unlawful Internet Gaming Enforcement Act and the Wire Act that stands for the basic proposition that the power to determine what is and
what is not gambling within a particular jurisdiction falls to the individual states. The US Supreme Court, should the case end up there, leans heavily towards a federalist approach and favors state sovereignty as to health, safety, and welfare decisions within their own borders. They are unlikely to accept the Kalshi argument as that would, in effect, create a deregulated federal gambling market imposed on each individual state regardless of their gambling laws. Additionally, the Supreme Court tends to avoid ruling on the merits of cases that are not fully developed in the lower courts. As such, the Supreme Courts’ involvement will likely be minimal unless and until the district and appellate circuit courts develop full records to review. But, depending on the outcome in the lower courts, it is within the realm of possibility that this Court issues an opinion favorable to the states. In the alternative, a situation could develop where one of the circuit courts takes the lead and gives a quick opinion that the others adopt the reasoning of to avoid any circuit splits. Such decisions could then be taken to the Supreme Court where, depending on the adopted position, it could simply issue a denial of certiorari and render the circuit court level ruling as the law of the land. None of this is going to happen quickly: it will likely take two or more years to reach any meaningful point across the full scope of the Kalshi litigation. Meanwhile, more and more organizations are going to be drawn into discussions as to which side of the argument to align with from a business perspective, creating both opportunities for consultation and litigation support that will be a boon for IMGL lawyers. Twist in the Tail In many industry sectors or jurisdictions, this level of regulatory uncertainty could kill a company like Kalshi, and potential investors are certainly going to be undertaking thorough due diligence reviews of their fundraising memos. However, while the constant litigation may be a distraction,
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IMGL MAGAZINE | SEPTEMBER 2025
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