Kalshi v. CFTC Challenges Contracts on Political Events
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Kalshi v. CFTC Challenges Contracts on Political Events

Brownstein Client Alert, Jan. 24, 2025

On Jan. 17, 2025, the United States Court of Appeals for the District of Columbia (D.C. Circuit) heard oral argument in KalshiEx v. CFTC. At issue is KalshiEx LLC’s (Kalshi) ability to list political event contracts for trading. Previously, the Commodity Futures Trading Commission (CFTC) issued an order disapproving of Kalshi’s attempts to offer such contracts.

Kalshi challenged that order, arguing that the CFTC misread and misapplied the Commodity Exchange Act (CEA) in its denial. The lower court agreed and granted Kalshi’s motion for summary judgment on Sept. 6, 2024. The court found that the CFTC exceeded its statutory authority under the CEA and, specifically, that Kalshi’s political events contracts did not involve either unlawful activity or gaming. The CFTC appealed to the D.C. Circuit.

At oral argument on Jan. 17, the D.C. Circuit expressed concern with different aspects of both arguments, but particular discomfort with the CFTC’s expansive view of its authority. The D.C. Circuit’s ultimate decision will impact the future of event contracts—including sports-based contracts, which Kalshi recently announced it would offer. The sports betting industry should carefully analyze the court’s ultimate decision to identify any new opportunities or challenges it presents.

 

Background

Event contracts are derivative contracts with payoffs based on the occurrence of a specified event. Often, event contracts are used to hedge the risk of a specified event. For example, a new beachfront homeowner might purchase an event contract predicting that a major hurricane will impact the area in an attempt to hedge the investment. If the storm does not hit, the homeowner will continue to collect rental revenue. If it does, the homeowner can offset the loss of rental income with the earnings from the event contract.

The CEA delegates to the CFTC the authority to regulate event contracts and their markets. Markets can list new events contracts for trading by self-certifying with the CFTC that the event contract complies with all CEA and regulatory requirements. A 2010 amendment to the CEA included a “Special Rule” allowing the CFTC to review and potentially prohibit certain event contracts if they fall within certain categories.

The Special Rule allows the CFTC to review event contracts that “involve”: (1) “activity that is unlawful under any Federal or State law,” (2) “terrorism,” (3) “assassination,” (4) “war,” (5) “gaming,” or (6) “other similar activity ... determined by rule or regulation, to be contrary to the public interest.” The CEA does not offer definitions for “involve,” “unlawful” or “gaming”—the three terms upon which the Kalshi case largely turns.

On June 12, 2023, Kalshi self-certified that its planned event contracts complied with applicable federal statutory and regulatory requirements. Later, in a 3-2 vote, the CFTC determined that the political event contracts involved gaming and unlawful activity and prohibited them. Kalshi challenged the CFTC’s order.

The district court concluded that the political event contracts did not “involve” either gaming or unlawful activity—thus, the CFTC had no authority to prohibit them. The court reasoned that an event contract only “involves” an enumerated activity (like gaming) when the contract’s underlying event relates to or involves that activity. For example, in the underlying event (control of Congress) relates to politics, elections and Congress, but not to any underlying gaming or unlawful activity. The CFTC appealed to the D.C. Circuit.

 

Briefing Before the D.C. Circuit

The D.C. Circuit Court of Appeals was presented with two statutory issues. First, do event contracts contingent on election outcomes “involve ... activity that is unlawful under any Federal or State law”? Second, do those same election-based event contracts “involve ... gaming” for the purposes of the CEA? If the answer to either question is yes, the court will hold that the CEA authorizes the CFTC to prohibit the contracts. If not, Kalshi will have a ruling clarifying its right to offer politically contingent event contracts.

In its briefing below and on appeal, the CFTC argued that “involves” relates not only to the underlying predicate event, but to the entire occurrence. For example, under the CFTC’s view, an event contract’s underlying event need not necessarily “involve” a game to be prohibited. If the listing and the trading of the contract itself constitute gaming, that is enough to trigger the CFTC’s Special Rule.

The CFTC has made a similar argument on the definition of “gaming” and “unlawful.” The CFTC argues that “gaming” does not necessarily require a game. That is, “gaming” can refer to the act of wagering funds on the outcome of an event—regardless of whether that event is a sports game or an election. As for the term “unlawful,” the CFTC contends that various election integrity laws across the country make wagering funds on election results “unlawful,” which triggers CFTC authority under the CEA.

Kalshi counters by arguing that an event contract “involves” one of the enumerated activities when the underlying event constitutes or involves that activity. In other words, “involves” can only define the underlying event, not the entire occurrence or transaction; calling the act of listing and trading the event contract “gaming” is not enough.

As for “gaming,” Kalshi argues that the Special Rule refers to playing games or playing games for stakes; anything untethered to a game is excluded. Kalshi offered examples of underlying events that would be considered “games,” including the Kentucky Derby, the Super Bowl or The Masters golf tournament. Kalshi adopts similar reasoning on the term “unlawful.” Unless the underlying event “involves” “unlawful” activity, the Special Rule does not apply. Kalshi’s logic proceeds as follows: elections are not unlawful, thus their status as an underlying event is not, either, meaning the CFTC has no authority to prohibit the contracts.

 

Oral Argument

During oral argument, the D.C. Circuit appeared to have issues with the arguments from both sides. In particular, the court took significant issue with the CFTC’s interpretation of “involving” and “gaming.” That is because, under the CFTC’s interpretation, an event contract involves gaming when funds are wagered on the outcome of an underlying event. The trouble is that that would sweep up nearly every conceivable event contract.

But while the court indicated discomfort with the CFTC’s arguments regarding the text, they indicated similar discomfort with Kalshi’s arguments in light of the CEA’s underlying purpose. Under the court’s reasoning, the CEA was enacted to prevent event contract markets from becoming functional casinos. And the court seemed to think Kalshi’s contracts (regarding congressional control) may turn Kalshi into just that.

Kalshi’s argument on the term “gaming” did appear persuasive among the judges. Kalshi argued that the broader definition of gaming reaches too far (it sweeps up every event contract imaginable), while the narrower definition of gaming fails to reach Kalshi at all (it pertains only to games). Moreover, specifically regarding sports-based contracts, Kalshi’s lawyers repeated their assertion that sports betting constitutes “gaming” because “[a] football game is a game.” As always, litigation is unpredictable, but the court’s receptiveness to Kalshi’s textual arguments is a strong indicator the court may ultimately side with the appellees.

 

Future Implications

Kalshi v. CFTC is likely to have important implications for event contracts markets.

Election-based event contracts. A Kalshi victory before the D.C. Circuit will likely cement the permissibility of elections-based event contracts. Alternatively, a CFTC victory would halt the entire election prediction market—barring review by the Supreme Court, a regulatory change at the CFTC or statutory revisions by Congress.

Sports-based event contracts. The D.C. Circuit will have the opportunity to determine the meaning of the words “involve” and “gaming.” The court’s decision may produce significant, though not conclusive, case law on the legality of sports-based event contracts. Importantly, a Kalshi win before the D.C. Circuit would not necessarily empower Kalshi and other markets to begin listing sports-based contracts. As was previously mentioned, Kalshi’s brief and oral argument before the D.C. Circuit actually listed the Super Bowl as an example of “gaming,” meaning the CFTC would have the authority to prohibit contracts on the game. The D.C. Circuit, though, may adopt an even narrower definition of “gaming” that would allow event contracts on sports games so long as the games themselves are not gambling contests (like a hand of poker).

 

Looking Ahead

The D.C. Circuit’s eventual opinion will need to be carefully reviewed to determine the broader implications of the decision on event contracts generally. At a minimum, the court’s decision will provide important clues regarding the direction of future challenges, including those related to sports-based event contracts. One market has already listed sports-based event contracts online—promoting quick review by the CFTC. The Kalshi case looms large over that review. If the D.C. Circuit indicates a willingness to define “gaming” narrowly, the CFTC may be left with little authority to prevent the contracts.

On Jan. 23, 2025, Kalshi followed suit and announced it would list sports-based contracts for the Super Bowl and Conference Championship games. Kalshi self-certified these contracts despite their legal arguments before the D.C. Circuit where they argued sports-based contracts do constitute gaming. How the CFTC and D.C. Circuit react to that sudden change remains to be seen.

Additionally, the D.C. Circuit’s opinion will likely impact the CFTC’s rulemaking and adjudicatory actions moving forward. A favorable decision could empower the CFTC to further expand its interpretation of “gaming,” including in forthcoming regulations. A Kalshi victory would dampen any expansive regulatory change.

Brownstein is uniquely positioned to analyze the D.C. Circuit’s decision and counsel clients on how to best navigate new opportunities or challenges arising from the decision.


THIS DOCUMENT IS INTENDED TO PROVIDE YOU WITH GENERAL INFORMATION REGARDING THE ARGUMENTS IN THE KALSHIEX V. CFTC CASE. THE CONTENTS OF THIS DOCUMENT ARE NOT INTENDED TO PROVIDE SPECIFIC LEGAL ADVICE. IF YOU HAVE ANY QUESTIONS ABOUT THE CONTENTS OF THIS DOCUMENT OR IF YOU NEED LEGAL ADVICE AS TO AN ISSUE, PLEASE CONTACT THE ATTORNEYS LISTED OR YOUR REGULAR BROWNSTEIN HYATT FARBER SCHRECK, LLP ATTORNEY. THIS COMMUNICATION MAY BE CONSIDERED ADVERTISING IN SOME JURISDICTIONS.

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