A federal judge has determined that Kalshi’s lawsuit against the Commonwealth of Massachusetts should proceed in state court rather than federal court. This ruling may bolster Massachusetts in its bid to compel the prediction market operator to cease offering sports event contracts within its jurisdiction.

Having previously secured early injunctions in Nevada and New Jersey, Kalshi is now encountering challenges in both Maryland and Massachusetts. The company is navigating a dynamic legal landscape that will influence the legality of its event-based contracts across various US jurisdictions.

The US District Court for the District of Massachusetts has ruled that Kalshi’s lawsuit must be addressed in the Superior Court for Suffolk County, dismissing the company’s motion to keep the case in federal court. This order, issued on Tuesday, is not open to appeal.

This decision places Massachusetts in a stronger position, transitioning the legal proceedings to a venue where state gambling regulations may hold greater significance than arguments related to federal preemption.

Massachusetts’ Case Against Kalshi

In September, Massachusetts Attorney General Andrea Campbell initiated the lawsuit, making her the first state attorney general to take legal action against Kalshi. The lawsuit claims that Kalshi permits individuals to wager on sports outcomes without the appropriate state gambling license or adherence to local gambling operator requirements.

Kalshi asserts that its contracts are governed by the Commodity Exchange Act (CEA) and are under the jurisdiction of the Commodity Futures Trading Commission (CFTC). The firm contends that state gambling regulations are inapplicable since federal law overrides state governance in this matter.

Judge Dismisses ‘Complete Preemption’ Argument

Kalshi’s appeal to transfer the case to federal jurisdiction was based on the assertion that states are entirely “completely preempted” from enforcing gambling laws against contracts from a CFTC-registered exchange.

District Judge Richard G. Stearns ruled that this assertion did not meet the criteria for complete preemption. In his opinion, Stearns noted that Kalshi’s defense was a standard federal preemption claim, rather than a complete preemption argument that would merit federal jurisdiction.

“Kalshi does not assert that the federal Commodity Exchange Act (CEA) completely preempts the state’s inherent authority to regulate sports wagering within its territory,” Stearns explained. “It merely claims that the CEA limits regulation of the specific segment of sports gambling Kalshi offers — betting on specified contract markets. This constitutes a conventional federal preemption defense, not one of complete preemption.”

He further noted that complete preemption is applicable only in instances where Congress has “expressed such a strong intent for an exclusive federal cause of action that what a plaintiff identifies as a state law claim must be reinterpreted as a federal claim.”

Kalshi has faced varying verdicts across different jurisdictions. While the company successfully obtained injunctions in Nevada and New Jersey, the US District Court for the District of Maryland declined a similar injunction in July, though the state consented not to uphold its prohibition until Kalshi’s appeal is reviewed.

The ruling in Massachusetts adds to a growing number of state interventions concerning prediction markets. Earlier this month, the same judge who granted Kalshi an injunction in Nevada denied a comparable request from Crypto.com, which announced its intention to withdraw its prediction market contracts — potentially ushering in the enforcement of such a ban.

Legal analysts suggest that the Massachusetts case could set a precedent for how courts discern the division between state gambling laws and federal commodities regulation. As litigation progresses in various states, prediction market operators are keeping a close watch on how federal and state jurisdictions clarify their authority over event-based contracts across the US.