Texas argues state sovereignty in federal betting case hearing

Texas hearing puts state sovereignty argument on trial as Kalshi offers a deal

Robert DeNault walked into the Texas Senate Committee on State Affairs on September 16 and offered the legislature a choice it has been careful not to frame as one. Advertising limits. Risk disclosures. Protections for younger users. In exchange: no ban, no lawsuit, no attempt to treat Kalshi's sports event contracts as illegal gambling under Texas law. DeNault, Kalshi's head of enforcement and legal counsel, was proposing a regulatory accommodation to a body that has twice declined to authorise sports betting and whose committee chair, Senator Bryan Hughes, directed the hearing to examine what he called "the exploitation of federal law to circumvent Texas gambling prohibitions."

The American Gaming Association sent a different message. Tres York, the AGA's vice president, told the committee that Texas should sue prediction market operators in state court and apply existing gambling statutes directly to sports event contracts. York cited a record he said showed states had prevailed in the majority of relevant state and federal rulings. The framing was deliberate: this is not novel territory, it is settled enough to litigate.

Both men were right about something. DeNault is correct that a state ban, even a well-drafted one, creates an offshore migration problem. When a regulated product is prohibited without a federal parallel prohibition, the users do not disappear — they find platforms outside the jurisdiction, outside consumer protection rules, outside any enforcement reach Texas retains. That argument has been made in every sports betting legalisation debate for a decade and it has generally proved accurate.

York is correct that the legal landscape is not as settled as Kalshi's federal registration implies. The Ninth Circuit's recent ruling that sports prediction contracts constitute gambling under state law created a circuit split that the CLARITY Act was meant to resolve — and the CLARITY Act is dead. Without preemption legislation, the question of whether CFTC registration shields a platform from state gambling enforcement is genuinely open. Thirty-six state wins out of forty-two relevant rulings is the kind of record a plaintiff's lawyer prices carefully.

What neither witness addressed directly is the position Texas finds itself in relative to its own legislative calendar. The next regular session opens on January 12. The committee is studying the issue now, which means any legislative response — a civil action authorisation, a statutory clarification of what constitutes gambling, a licensing framework — will be drafted against a legal environment that has shifted significantly since 2025. The CLARITY Act's failure removes the preemption argument that platforms have relied on most heavily. Connecticut's enforcement actions, and the CFTC's countermove to block them, have produced a jurisdictional conflict that no Texas committee hearing will resolve but that every Texas legislator will have to read.

Jonathan Covey of Texas Values raised the one point that tends to get lost in the jurisdiction argument: that insider trading detections on political event contracts represent a category of risk that commodity market regulation was not designed to address. His framing — that the same mechanism demonstrating Kalshi's compliance function also demonstrates that sensitive non-public political information can be converted into financial return — will be more difficult to answer than the offshore migration argument, and it will not be answered by a disclosure requirement.

The consensus view is that Texas will move toward legislation in 2027 rather than litigation before then. The consensus may be right. But the AGA's presence at this hearing, making the litigation case directly to committee, suggests the industry's largest incumbents have calculated that a state court challenge from Texas carries different weight than the Connecticut enforcement actions — and that the time to plant that argument is before the session, not during it.