Kalshi’s Nevada Court Win May Be Short-Lived Due To Federal Wire Act Ban On Sports Betting

Congress isn’t shy when it comes to setting a clear federal policy on the divisive subject of sports gambling. In every instance, it has done so explicitly – starting with the Wire Act of 1961, which prohibits the interstate transmission of wagering information related to any “sporting event of contest” (a ban which is still in effect), and further exemplified by the Professional and Amateur Sports Protection Act of 1992, which, until its demise in 2018, prohibited state-authorized sports wagering. The Third Circuit referred to these laws as exemplifying a “federal policy of disfavoring sports-gambling.”

Sports gambling is also specifically addressed in a number of other federal statutes, including the Sports Bribery Act, the Wagering Paraphernalia Act, and the Federal Wagering Tax Act.

When Congress wants to address sports gambling, it barges in through the front door.

Indeed, as the 1991 Senate Judiciary Committee Report preceding PASPA’s passage proclaimed, “Sports gambling is a national problem.” Expressing concern “about the potential effect of legalized sports gambling on America’s youth” – and noting that of the “approximately 8 million compulsive gamblers in America, 1 million of them are under 20″ – the Judiciary Committee cautioned that “governments should not be in the business of encouraging people, especially young people, to gamble.”

An “Implied” Federal Regulation Of Sports Wagering?

So, you can only imagine my utter surprise to find out that more than 15 years ago – when PASPA was still in effect (and so, too, was the Wire Act) – Congress silently approved wagering on sporting events in all 50 states for any U.S. resident 18 years of age and older (which is the minimum age for trading in Kalshi’s ‘sports-based’ event contracts).

But that’s the upshot of last week’s Nevada federal court order finding that Congress preempted Nevada’s entire sports gambling regime by implication when it vested the Commodity Futures Trading Commission (CFTC) with “exclusive jurisdiction” under Section 2 of the Commodity Exchange Act (CEA) over all contracts traded on CFTC-designated exchanges. As the court noted, the CEA was amended in 2010 to create a “special rule” for event-based contracts (such as Kalshi’s sports-based offerings). Under this special rule, a designated contract maker (DCM) such as Kalshi can “self-certify” their event contracts and begin offering them for trading immediately without CFTC approval. But, under the special rule, the CFTC can review and prohibit certain event contracts if it determines that those contracts are “contrary to the public interest” for any one of six listed reasons, such as when they involve “activity that is unlawful under any Federal or State law” or “gaming.”

The “special rule” created by the 2010 CEA amendment is at the crux of the Nevada and New Jersey lawsuits. Based on Kalshi’s “self-certification” of its ‘sports-based’ event contracts and the absence of any action taken by the CFTC to prevent Kalshi from offering such contracts, the court declared that “at this point in time, federal law allows Kalshi to offer . . . sports . . . contracts on its exchange.”

According to the court’s reasoning, Section 2’s “exclusive jurisdiction” language reflects Congress’ intent “to occupy the field of regulating CFTC-regulated exchanges and the transactions conducted on those exchanges.” Because Kalshi is a CFTC-regulated exchange and was traveling under the 2010 special rule for its ‘sports-based’ event contracts, the Nevada court ruled that Kalshi is subject to the CFTC’s exclusive jurisdiction under the CEA and that, as a consequence, all state gambling laws are “field preempted.” As a result, the Nevada court entered a preliminary injunction in Kalshi’s favor, finding that Nevada’s gaming regulators “have no jurisdiction to decide that Kalshi’s conduct violates state law where, at least at present, those activities are legal under federal law.”

The notion that Congress had already vested a federal agency with exclusive jurisdiction to regulate sports wagering on a federally-regulated commodities exchange – and did so prior to the commencement of the PASPA litigation in 2012 – would certainly have been welcome (if not shocking) news to the professional sports leagues, the NCAA and U.S. Department of Justice, which were on the losing side of Murphy v. NCAA because there was no federal statutory regime in place to regulate sports wagering; just a blanket prohibition (i.e., PASPA) directed at state governments. They might have won the Murphy case if only they had known about the CFTC’s exclusive jurisdiction to regulate sports-related event contracts on commodities exchanges.

That premise is as ridiculous as it sounds. Even Kalshi recognizes that – or at least it did in a prior litigation with the CFTC – when it asserted in an appellate brief filed with the D.C. Circuit that “Congress did not want sports betting to be conducted on a derivatives exchange.”

Looking ahead to a possible appellate treatment of this issue, it is worth noting that the D.C. Circuit observed that the CFTC would be “ill-suited” to investigate “suspected manipulation” of political event contract markets given its “historic mission and mandate.” The need to safeguard event integrity is even more pronounced with sporting events, which have a well-chronicled history of match-fixing. However, as Major League Baseball pointed out in a recent letter to the CFTC, “those protections are lacking” with ‘sports-based’ event contract markets:

For example, MLB is not aware of anything that would require exchanges and brokers to notify leagues of potential threats to game integrity, cooperate with league investigations into player, umpire, or employee misconduct, or share data for integrity purposes. MLB has been advised that some exchanges and brokers take the position that they are not even permitted to share information with MLB under current CFTC regulations.

If we’ve learned anything from over 60 years of federal policymaking on sports gambling, it’s that when Congress acts in this area, it does so explicitly (and usually with great fanfare) – as evidenced by the Wire Act and PASPA – such that it borders on the absurd to think that Congress would ever green-light federally regulated sports wagering solely by implication and have it overseen by an agency which lacks the requisite subject-matter expertise, especially after devoting more than a half-century of federal policymaking to disfavoring that activity.

But, Wait, What About The Wire Act?

But there’s an even bigger problem – Kalshi’s ‘sports-outcome’ event contracts (or whatever other euphemism you prefer) are probably not even legal under federal law. Ever hear of the Wire Act?

And therein lies the rub. The Court equated “legal under federal law” (with the qualifier “at this point in time”) solely with regard to whether the procedural mechanics of the special rule were followed. The court did not undertake any analysis of whether Kalshi’s sports-based contracts were legal under other federal laws, such as the Wire Act.

And why didn’t the Nevada court address something as obvious as the Wire Act?

Because, incredibly, the Nevada Attorney General never raised it. (That’s one unfortunate by-product of a state’s decision to keep federal court litigation in-house instead of farming it out to a law firm with experience handling complex federal legal issues. Do you really believe New Jersey would have prevailed in Murphy v. NCAA without the creative lawyering by Ted Olson and his team at Gibson Dunn?).

The Wire Act prohibits anyone “engaged in the business of betting or wagering” from “knowingly using a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers . . . on any sporting event or contest.”

The federal courts of appeal have uniformly held that the Wire Act applies to sports gambling activity over the Internet. For example, in New Hampshire Lottery Commission v. Barr, the First Circuit held that “the prohibitions of section 1084(a) apply to the interstate transmissions of wire communications relating to any ‘sporting event or contest.’”

Kalshi’s sports-related event contracts – which offer “traders” the ability to enter into contracts to decide, for example, “who will win a sporting event” – are clearly “bets or wagers” for purposes of the Wire Act. Under federal law, a “bet or wager” encompasses the “staking or risking by any person of something of value upon the outcome of a sporting event.” By Kalshi’s own admission, its sports-related event contracts “involve the outcome of sporting events.”

The interstate nature of these transactions is beyond dispute. As the Nevada court highlighted in its order, Kalshi’s exchange “is available to users nationwide.” Putting an even finer point on it, Kalshi’s Head of Markets, Xavier Sottile, stated in a declaration that “traders on either side of a contract are often from different states given that Kashi does not distinguish between the geographic location of traders.”

Despite using the word “bet” in its promotional materials, Kalshi insists that it is not offering a gambling product. Instead, Kalshi describes itself as a “financial exchange” where “traders enter into contracts with other traders,” as opposed to betting “against the house” (as typically occurs with a casino or sports book). But that is a distinction without a difference, as “peer-to-peer exchanges” are included within many state sports wagering regimes. One such exchange, Sporttrade, even holds gaming licenses from several states, including New Jersey.

The Wire Act does not distinguish between bookmakers and exchanges. In United States v. Corrar, a Georgia federal district court explained that “if Congress sought only to criminalize bookmaking, “being engaged in the business of betting or wagering” – the actual language used in the Wire Act – “would simply read ‘receives bets or wagers.’” The inclusion of the word “business” in front of “betting or wagering” connotes a broader scope of activities, the court added, since no business is comprised of “a single job,” but, rather, entails a “division of labor.” Using the film industry as an analogy, the court made the following observation:

Insisting that “the business of betting and wagering” is conducted solely by those individuals who actually accept bets is like saying that “the business of movie making” is conducted solely by camera men. Yet, actors, directors, and producers clearly have important roles in the film industry.

The Corrar court also pointed to United States v. Cohen as an example of a successful Wire Act prosecution where the defendant was not the actual bookmaker personally accepting bets or wagers, but, instead, was a middleman “farming out the actual receipt of bets to others.”

CFTC Rule 40.11(a)(1)’s Blanket Prohibition

But that’s not at all. Nevada also inexplicably omitted the low-hanging fruit of Rule 40.11, adopted by the CFTC in 2011. Rule 40.11(a)(1) places a blanket prohibition on any event contract that “involves, relates to, or references” any of the following: “terrorism,” “assassination,” “war,” “gaming,” or “an activity that is unlawful under any State or Federal law.

As explained by acting CFTC Chair Caroline Pham:

In promulgating Rule 40.11(a)(1) pursuant to Section 5c(c)(5)(C), the Commission determined than an event contract that “involves, relates to, or references” terrorism, assassination, war, gaming, or illegal activity is prohibited because it is contrary to the public interest. There is no further public interest test in Rule 40(11)(a)(1).

Kalshi seems to agree with that premise. In a prior federal court lawsuit against the CFTC – which is still on appeal – Kalshi affirmatively represented to the D.C. Circuit that “if trading a contract violated a ‘federal’ law, that instrument would be banned regardless of the Special Rule. Congress did not authorize public-interest review of already-illegal instruments.” (emphasis in original)

This should have been the opening line in every document that Nevada authorities filed with the court. It’s a prior admission by Kalshi that any event contract involving activity which violates “federal law” is by definition “contrary to the public interest,” and, therefore, prohibited under Rule 40.11(a)(1).

The “federal law” violation would be the Wire Act.

In addition, Rule 40.11(a)(1) prohibits event contracts involving “gaming.”

With Kalshi already on record as equating “gaming” with sports betting, it might be game over.

Talk about a missed opportunity. Two of them, in fact.

But all is not lost.

Nevada Can Still Raise These Issues

There is still an opportunity for Nevada to inject these overlooked federal issues into the case. It is important to remember that Nevada has yet to file its official response to the complaint. That is not due until April 23rd. Further, the court is holding a status hearing on April 30th.

Remember, the court did not close the door on reconsidering its prior ruling, stating only “at this point in time, federal law allows Kalshi to offer . . . sports . . . contracts on its exchange.”

So, there’s still time for Nevada to rescue victory from the jaws of defeat.

In its upcoming answer (or motion to dismiss), Nevada can assert that Kalshi’s sports-based event contracts “involve” or “relate to” activity that is barred by federal law (i.e., the Wire Act) and indisputably involve “gaming” (i.e., wagering on sporting events), rendering them a nullity under Rule 40.11(a)(1)’s blanket prohibition, which, in turn, would avoid the preemptive effect of the CEA.

Along the same lines, Nevada can also argue that the very existence of the Wire Act – along with PASPA (which was still in effect when the special rule was enacted in 2010) – belies any suggestion that Congress intended to “field preempt” the sports gambling regimes of every state when it vested the CFTC with “exclusive jurisdiction” over trading on CFTC-regulated exchanges where such activity would have contravened the longstanding federal policy against sports betting. And this is also where Nevada can use Kalshi’s own prior judicial admissions against it, such as its blanket statement to the D.C. Circuit that “Congress did not want sports betting to be conducted on derivatives markets.”

And there’s nothing stopping Nevada from raising these same issues in a brand-new motion for a preliminary injunction (along with a request that the prior injunction order be vacated), potentially clearing the way for Nevada to immediately enforce its gaming laws against Kalshi.