Kalshi faces setback as federal judge sends Massachusetts case back to state court

A federal judge has ruled that Kalshi’s lawsuit against the state of Massachusetts must be heard in a state court and not in a federal court. The decision could give Massachusetts an advantage in its efforts to force the prediction market operator to stop offering sports event contracts in the state.

After securing early injunctions in Nevada and New Jersey, Kalshi is now facing setbacks in Maryland and Massachusetts. The company faces a shifting legal environment that may determine where its event-based contracts can legally operate across US jurisdictions.

The US District Court for the District of Massachusetts ruled that Kalshi’s lawsuit against the state must be heard in the Superior Court for Suffolk County, rejecting the company’s request to keep the case in federal court. The order, issued Tuesday, is not subject to appeal.

The ruling gives Massachusetts an advantage in the case, moving the legal battle to a forum where state gambling laws may carry more weight than arguments based on federal preemption.

Massachusetts’ complaint against Kalshi

Massachusetts Attorney General Andrea Campbell filed the case in September, becoming the first state attorney general to sue Kalshi. The complaint alleges that Kalshi allows customers to place wagers on sports outcomes without having obtained a state gambling license or complying with local requirements for gambling operators.

Kalshi maintains that its contracts fall under the Commodity Exchange Act (CEA) and are regulated by the Commodity Futures Trading Commission (CFTC). The company argues that state gambling laws do not apply because federal law preempts state regulation in this area.

Judge rejects ‘complete preemption’ defense

Kalshi’s request to move the case to federal court was based on its claim that states are “completely preempted” from enforcing gambling laws against contracts offered by a CFTC-registered exchange.

District Judge Richard G. Stearns ruled that the argument did not satisfy the legal standard for complete preemption. In his written decision, Stearns said Kalshi’s defense amounted to a standard federal preemption claim rather than one of complete preemption that would justify federal jurisdiction.

“Kalshi does not contend that the federal Commodity Exchange Act (CEA) completely preempts the state’s traditional police power to regulate sports gambling within its borders,” Stearns wrote. “It argues only that the CEA precludes regulation of the specific subset of sports gambling that Kalshi offers — wagering on designated contract markets. This is a plain vanilla federal preemption defense, not a claim of complete preemption.”

He added that complete preemption applies only in cases where Congress has “so strongly intended an exclusive federal cause of action that what a plaintiff calls a state law claim is to be recharacterized as a federal claim.”

Kalshi has faced differing outcomes across multiple jurisdictions. The company previously obtained injunctions in Nevada and New Jersey, allowing it to continue offering its contracts. In contrast, the US District Court for the District of Maryland denied a similar injunction in July, though the state agreed not to enforce its ban until Kalshi’s appeal is heard.

The Massachusetts ruling adds to a growing list of state actions involving prediction markets. Earlier in October, the same judge who granted Kalshi an injunction in Nevada denied a similar request from Crypto.com. The company announced plans to remove its prediction market contracts, which could mark the first enforcement of such a ban.

Legal observers say the Massachusetts case could influence how courts interpret the boundary between state gambling laws and federal commodities regulation. As litigation continues in several states, prediction market operators are monitoring how federal and state jurisdictions define their authority over event-based contracts in the US.