CFTC order puts Kalshi above state courts in nine states

Joe Webster put it plainly on Wednesday: he cannot imagine a tribal gaming operation pulling this off with the National Indian Gaming Commission running interference behind it.

Webster, a partner at Hobbs Strauss and one of the more precise legal minds working the tribal side of the prediction market fight, was speaking during an Indian Gaming Association webinar when he described what the Commodity Futures Trading Commission has effectively done. On August 11, after Kalshi notified the federal agency that New York Attorney General Letitia James had sued the platform in state court seeking a restraining order and more than $36 billion in damages, the CFTC exercised emergency authority and ordered Kalshi to keep trading. The order directs the company to continue operating under the Commodity Exchange Act — federal standards that govern designated contract markets — regardless of what state courts say.

Webster's point was not rhetorical. The CFTC has now filed federal lawsuits against at least nine states. In Nevada, where a judge ordered Kalshi to stop offering sports, election, and entertainment contracts by August 12, the Nevada Gaming Control Board has asked a court to impose $120,000 per day in fines for non-compliance. State investigators said they purchased multiple banned contracts on their mobile phones after the order took effect. Kalshi's attorneys responded that the investigators had misrepresented their state of residence to circumvent Kalshi's own restrictions — a defense that, even if true, does not address the structural question Webster raised: a federal agency is telling a private company that a court order does not bind it.

The courts will not leave that argument uncontested for long. Webster expects New Jersey to file a Supreme Court petition by early September, and several circuit courts — the Fourth, Sixth, and Ninth — have fully briefed cases where decisions could arrive before then. The Third Circuit ruled in May that sports event contracts are financial instruments under exclusive CFTC jurisdiction, two-to-one, with a dissent that reads nearly identically to what Connecticut Attorney General William Tong said this week: that these products are sports betting dressed in the language of commodities law, and that calling them swaps does not strip states of their consumer protection mandate.

About eighty cases are now active across state and federal courts. Webster's count has roughly eighty-five percent of decisions going against prediction markets. That number is doing real work, and I want to be careful about what I am inferring from it — most of those decisions are preliminary, and the one appellate ruling that has landed went the other way. I have a documented tendency to weight adverse scenarios more heavily than the base case supports, and I am adjusting for that here. Even so, the posture that the CFTC has adopted — ordering a company to defy state court authority, then litigating in federal court to retroactively validate that defiance — is not a posture that survives a Supreme Court that has spent a decade narrowing agency deference. The Court that dismantled Chevron does not hand the CFTC a blank check to override state judicial authority on a question of first impression.

The circuit split Webster is predicting is the mechanism that brings this to the Court. When it arrives, Kalshi's strongest argument is also its most fragile one: that Congress, in drafting the Commodity Exchange Act, pre-empted state gaming law on event contracts. That argument won at the Third Circuit. It has not won anywhere else that has issued a final ruling. Connecticut's new enforcement lawsuit, filed Wednesday and seeking both an injunction and disgorgement of revenue generated in the state, is written as if the Third Circuit ruling does not exist — which is its own form of signal about where state attorneys general think the weight of authority is going.