Prediction Markets and Federal Preemption

Exclusive Jurisdiction: My Old Trust Company Precedent Shows How The Commodity Exchange Act Could Preempt State Gambling Laws.

Some legal commentators argue that KalshiEX LLC (Kalshi) will ultimately lose its battle against state gambling regulators if the case reaches the Supreme Court. Their reasoning is that Murphy v. NCAA (2018) (Murphy) discussed no federal regulatory framework for sports betting, suggesting that the absence of such a framework matters for preemption analysis. Kalshi, a CFTC-regulated exchange presently offering contracts on sporting event outcomes, relies on the Commodity Exchange Act (CEA), the federal statute governing commodity futures, options, and swaps, enforced by the Commodity Futures Trading Commission (CFTC). But the CEA wasn’t designed to regulate gambling per se, which some suggest may prove fatal to Kalshi’s preemption claims.

I never practiced law and don’t claim any legal expertise in the area of federal preemption law. My experience with the preemption issue was when one of my employers in 1998 relied on federal preemption to deliver personal trust services nationwide through a limited purpose, non-depository federal savings bank. (I took two other trust companies through the chartering process in later years.) The U.S. Department of the Treasury’s Office of Thrift Supervision issued a charter for the federal savings bank, and that gave our firm authority to provide trust services across state lines. Using the federal charter, we avoided the need to maintain multiple state-chartered institutions to comply with a patchwork of fifty different state statutory schemes to offer our services nationwide from a single platform.

As I understood the principle back then, traditional preemption cases involve federal laws that regulate private conduct and may thereby displace conflicting state laws as a consequence. In contrast, Murphy involved the anti-commandeering doctrine, which protects states from federal commands to their legislative processes.

So how important is it that future CFTC preemption of state gambling laws impacting an industry that hadn’t yet come into commercial existence wasn’t contemplated in the 2018 Supreme Court anti-commandeering case?

It shouldn’t be very important, and here’s why. Murphy wasn’t really about whether federal regulatory schemes existed. It was about whether Congress can order state legislatures around. The CFTC cases involve traditional preemption, where the question is whether validly enacted federal law conflicts with state law. That’s a completely different constitutional question.

In the trust company context, states had legitimate interests, such as consumer protection, local oversight, preventing unreliable operators. Sounds similar to state regulation of gambling, doesn’t it? Yet federal preemption still prevailed in the trust company cases because Congress had established a comprehensive national banking framework under the Commerce Clause. The CFTC’s ‘exclusive jurisdiction’ language in the CEA looks remarkably similar to the federal banking statutes we relied on.

I acknowledge Congress has long regulated banking as inherently interstate commerce. Whether Congress intended to federalize gambling when it gave the CFTC jurisdiction over derivatives markets is far less clear. The appellate court in the Maryland case found that ambiguity fatal to Kalshi’s preemption claim.

(I believe the Supreme Court will accept the Maryland case, and not the New Jersey and Nevada cases which Kalshi won at the appellate level, if/when it addresses CEA preemption. The court in the Maryland case applied the strong presumption against preemption in areas of traditional state regulation, requiring Kalshi to show Congress had a “clear and manifest purpose” to strip states of gambling regulatory authority. This contrasts with the Nevada and New Jersey courts, which focused primarily on the plain language of the CEA’s exclusive jurisdiction clause.)

Is it unreasonable to predict federal preemption will win? Not at all. The CEA’s ‘exclusive jurisdiction’ language is broad, the CFTC has not objected to these contracts going forward, and federal preemption has a strong track record in financial services. The real question doesn’t seem to be whether Murphy blocks this path. It’s whether the Supreme Court will find Congress intended to occupy this particular field when it regulated derivatives markets.

My personal experience with trust companies suggests that when Congress speaks clearly about exclusive federal jurisdiction, the states usually lose, even when they have good policy reasons for wanting to regulate.