Kalshi Brief Argues 1981 Second Circuit Potato Case Already Settled CEA Preemption of State Gambling Laws
Kalshi’s Second Circuit brief cites the 1981 Leist v. Simplot potato futures case to argue CEA preemption of Connecticut gambling laws. It challenges the district court’s swaps ruling and offers an alternative reading that contracts need not qualify as swaps. The move comes after 15 straight federal losses amid circuit splits.
SCCG Take — The potato precedent supplies a novel preemption hook but faces headwinds from courts treating sports betting as core state territory. Resolution likely awaits Supreme Court review to clarify CFTC authority boundaries.
Kalshi submitted a new brief in the Second Circuit on Wednesday in its appeal of a Connecticut district court ruling. The filing contends that a 1981 decision from the Maine Potato War of 1976 already established that the Commodity Exchange Act preempts state law, and that the lower court ignored this precedent.
The district court denied Kalshi an injunction against state enforcement of sports betting laws and ruled against the prediction market on nearly every argument. “The district court got all this exactly backwards,” Kalshi’s brief said. “It began by finding that Kalshi’s sports-event contracts are not swaps, then determined that even if they were, the CEA does not preempt the application of state gambling laws.”
Second Circuit Precedent from Leist v. Simplot
In Leist v. Simplot, the Second Circuit addressed claims from traders caught between potato processors holding short positions and wholesalers attempting a short squeeze on Maine potato futures. The court determined the issues were not traditionally relegated to state law because the CEA grants the CFTC exclusive jurisdiction that “preempts the application of state law.”
Kalshi asserts this holding is broad and should apply to its sports event contracts. The brief criticizes the district court for failing to cite or distinguish the 1981 case. According to InGame, Kalshi maintains the precedent undercuts the lower court’s preemption analysis even though sports betting is often viewed as a traditional state domain.
Risks in Kalshi’s Swap and Jurisdiction Arguments
Preemption alone would not guarantee victory. Kalshi must also establish that its contracts qualify as swaps dependent on the occurrence of an event with financial or commercial consequence. The district court rejected this, finding a sports game outcome does not meet the standard. Kalshi counters that such a view is impossible to apply consistently, as it would permit a contract on the World Series reaching game seven but bar one on whether a team wins a majority of the first six games.
The brief additionally argues the contracts need not be swaps to fall under CFTC exclusive jurisdiction. It parses the CEA as covering all accounts, agreements and transactions on a designated contract market. This position has gained emphasis in recent filings but has received limited traction from judges.
Kalshi has lost its last 15 consecutive federal court decisions. As @FormerCFTCGC posted on X: “So now we have (a) it’s a swap and there is preemption (CA3); (b) there would be preemption but it’s not a swap (CA9); and (c) it’s not a swap and there wouldn’t be preemption even if it was (CA6). The Supreme Court can’t get here soon enough.” The Second Circuit matters will be heard alongside a related New York appeal, adding to a growing set of conflicting rulings across circuits.
Reporting: InGame
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