Massachusetts top court appears open to state ban on Kalshi sports betting

By Nate Raymond

BOSTON, May 4 (Reuters) - Prediction-markets operator Kalshi on Monday faced a skeptical slate of justices on Massachusetts' highest court, which appeared poised to uphold regulators' authority to ban it from offering sports-events contracts in the state.

A lawyer for Kalshi told the Massachusetts Supreme Judicial Court that only the U.S. Commodity Futures Trading Commission can regulate its business, and asked the panel to overturn an injunction that would bar it from allowing users to place financial bets on football, baseball and other sporting events without a gaming license.

“This is fundamentally a federal regulatory issue," said Grant Mainland, Kalshi's lawyer.

But a majority of the seven-justice court repeatedly questioned Mainland about how Kalshi's offerings differed from traditional sportsbooks that would be subject to state policing powers.

"In what way do they differentiate from what would colloquially be known as a bet," Justice Gabrielle Wolohojian asked.

The arguments came in one of the major battlefronts in a nationwide legal fight over the ability of ​state gaming regulators to police the activity of the multi-billion dollar prediction market industry, which has exploded in growth.

Kalshi and companies like it allow users to place trades ​and profit from predictions on events such as sports and elections. States argue that firms like Kalshi are operating without required state licenses in ​violation of gaming laws, including bans on wagers by those under 21.

Massachusetts' Democratic Attorney General Andrea Joy Campbell had sued Kalshi in September, and convinced a trial court judge in February to issue a preliminary injunction that would bar the New York-based company from continuing to offer sports events contracts in the state.

The injunction has been on hold pending Kalshi's appeal. Should it take effect, Massachusetts would become the second state to implement a court-ordered ban on Kalshi offering events contracts, following Nevada.

Mainland argued that the state has no role to play in regulating Kalshi, a CFTC-registered designated contract market whose sports-events contracts qualify as "swaps," a type of derivative contract that the CFTC gained the exclusive ability to oversee when Congress enacted the Dodd-Frank Act of 2010.

He noted that the 3rd U.S. Circuit Court of Appeals agreed with its position on the CFTC's authority in April, preventing New Jersey gaming regulators from pursuing an enforcement action against Kalshi. The CFTC filed an amicus brief supporting Kalshi's appeal in Massachusetts as well.

But Justice Scott Kafker expressed doubt that Congress meant to eliminate states' ability to regulate sports wagering when it moved to reform how swaps were regulated through Dodd-Frank, a law enacted in the wake of the 2008 financial crisis.

Kafker said that given that gambling has historically been the domain of states to regulate, Congress would have been expected to speak clearly if it had intended to eliminate the state's ability to regulate a company like Kalshi, whose platform provides "a way to bet on a game.”

"If you want to gamble on a game, this is one way to do it," Kafker said.

Massachusetts Assistant Attorney General Gerard Cedrone told the justices that to accept Kalshi's arguments would usher in a "sea change" in gaming regulation.

"It would be blocking out state regulation of what is in all respects a sports bet," he said.

The case is Commonwealth of Massachusetts v. KalshiEX LLC, Massachusetts Supreme Judicial Court, No. SJC-13906.

For the state: Gerard Cedrone of the Massachusetts Office of the Attorney General

For Kalshi: Grant Mainland of Milbank