Tribes wade into prediction market debate with New Jersey amicus brief
Of the flurry of amicus briefs filed this week in support of New Jersey’s legal case against Kalshi in the US Court of Appeals for the Third Circuit, one of the most notable came from a comprehensive tribal coalition of nine organisations and 60 individual tribes.
The 45-page brief represents Indian Country’s official entry in the legal debate after long signalling its displeasure. Since prediction markets such as Kalshi began offering sports contracts over the winter, tribes have been among the biggest detractors. A public comment portal opened by the Commodity Futures Trading Commission earlier this year has been dominated by tribal interests. And in late May, acting CFTC Chair Caroline Pham hosted a call with tribal leaders, although not much came of it.
In their court filing this week, tribes dived deep into several issues in describing how prediction markets’ sports events contracts infringe on tribal sovereignty under the Indian Gaming Regulatory Act. The brief was filed by attorneys Scott Crowell and Joseph Webster, who both had spoken recently about potential legal action.
Now that Kalshi has racked up multiple initial court victories, the stakes are being raised at the appellate level. As such, the powerful lobby behind tribal gaming has decided that it’s time to put pen to paper.
Addressing IGRA head-on
For the most part, the brief tackles a significant overarching issue: how prediction markets coexist with IGRA. The legislation has been mentioned briefly in other cases, but the tribal filing sought to address the issue with full context.
Enacted in 1988, IGRA is the federal framework for gaming on tribal lands while defining a gaming classification system. Classes I and II are less well-known, but Class III is traditional casino-style gaming, including slots and table games. Tribes contend in the brief that sports betting is also included under Class III, and therefore is under IGRA’s domain.
Sports betting is not defined explicitly in the act, but tribes pointed to 31 U.S. Code § 5362, which defines bet or wager under the Unlawful Internet Gaming Enforcement Act:
“[T]he staking or risking by any person of something of value upon the outcome of … a sporting event … upon an agreement or understanding that the person or another person will receive something of value in the event of a certain outcome.”
This definition applies to “precisely what Kalshi is offering”, attorneys wrote. Sports event contracts “stake or risk something of value upon the outcome of a sporting event based on the understanding that the person will receive something of value based on that outcome” and therefore each contract traded on tribal land violates IGRA, they said.
Yours against mine
Another key issue in this debate is whether IGRA is preempted by the Commodities Exchange Act, the primary legislation governing the CFTC.
In a separate Kalshi lawsuit against the state of Maryland, the company suggested that even if IGRA does include sports event contracts, “the CEA’s exclusive jurisdiction provision would displace any attempt by tribes to regulate those contracts”.
But the tribes’ brief contends that “the CEA neither preempts nor conflicts with IGRA”. It further argues that the CEA “is only preemptive with respect to lawful transactions that fall under the CFTC’s exclusive jurisdiction”, which tribes allege is not the case with sports contracts.
It is “inconceivable”, attorneys wrote, to believe that Congress intended the CEA to be a federal sports betting regulation “without explicitly stating as much”. This is especially true “in the face of comprehensive statutes and regulations governing gaming on Indian lands”.
The argument that the CEA upends IGRA then leads to a slippery slope that throws the entire Indian gaming framework into question, which would harm numerous states in terms of revenue sharing, job creation and more.
“If the court accepts Kalshi’s position that its sports event contracts – which constitute sports betting and therefore Class III gaming under IGRA – are ‘swaps’ subject to the CFTC’s exclusive jurisdiction, then the court must also accept the underlying assumption that Congress intended to upend the entire federal framework for tribal government gaming and repeal many key provisions of IGRA,” the brief says.
The almighty Special Rule
Opponents of prediction markets have from the beginning pointed to the CEA’s “Special Rule” amendment – 7 U.S.C. § 7a-2(c)(5)(C) – enacted after the financial crisis of the early 2000s. This rule states that the CFTC has authority to review and disallow contracts involving certain activities in the sake of public interest. Gaming is expressly mentioned as one of those activities.
In the CFTC’s regulations for enforcing this – § 40.11(a)(1) – the language takes away some of this ambiguity by stating that entities “shall not list” contracts involving the outlined activities, and thus gaming. It should be noted that Kalshi has not disputed this interpretation. Rather, it has successfully argued in court thus far that its contracts are simply not gaming.
Tribes contend in the brief that Kalshi has incorrectly interpreted the review process to believe that the CFTC must review and rule against contracts for them to be barred.
Instead, they assert that “§ 40.11(a)(1) is a categorical prohibition on event contracts that involve gaming or activity that is unlawful under federal or state law; there is no two-step process because the CFTC has already determined that such event contracts are contrary to the public interest. Additionally, this determination negates the need for a 90-day review of such event contracts.”
Attorneys also included part of a transcript between two senators who championed the Special Rule. In it, they said that their “intent” in shaping the law was to prevent “gambling through supposed ‘event contracts'”. Contracts for sporting events, they said, “would not serve any real commercial purpose”.
Stop hitting yourself
By now, Kalshi has been defending itself in court for so long that prosecutors are starting to use its previous arguments against it. The New-York based exchange first defeated the CFTC in court last year to offer election betting by saying that election contracts did not constitute gaming.
In doing so, as tribes pointed out, the company explicitly differentiated them from sports events. Those events, Kalshi’s attorneys said at the time, serve “no inherent economic significance” or “any real economic value”. The company also refrained from using the words “bet,” “gamble” or “wager”.
Yet since embarking on sports contracts, that messaging has changed. The brief cites an April article from Dustin Gouker’s Event Horizon newsletter pointing out several instances where Kalshi called its contracts sports betting, which has also been cited in other cases.
“For the foregoing reasons, the tribal amici respectfully request that the court reverse the District Court’s decision granting Kalshi’s motion for preliminary injunction,” the brief concludes.