A tsunami of litigation has flowed from the creation of so-called prediction markets that compete with horse racing for gambling dollars. Courts across the country are being tasked with deciding exactly what those markets are, their legality, and if they're found to be legitimate—how they should be regulated.
As of Jan. 15 Kalshi, one of the leading prediction market sites, and related companies were named as parties in 77 federal court lawsuits pending in more than a dozen states. Do these companies primarily function as an online bookie or is it a "prediction market" where, according to the investment website Investopedia, "individuals trade contracts based on the outcomes of unknown future events."
The answer to those questions will determine how companies such as Kalshi are regulated, or if they're allowed to exist at all. One such case is a purported class action filed in New York seeking monetary damages from Kalshi on behalf of millions of people.
A group of seven plaintiffs filed the suit seeking certification as a nationwide class, a declaration that Kalshi’s conduct violates the law of New York and other states, judgment for all losses incurred by the plaintiffs and each member of the sought-after class including triple damages when appropriate, attorneys fees, and injunctive relief.
A 42-page complaint filed in November alleges plaintiffs, and others similarly situated, used Kalshi's online app which markets itself as a prediction market when in actuality the business operates as an unlicensed sports gambling platform. In so doing, the complaint alleges, Kalshi has been engaged in illegal, deceptive activity and unjustly enriched itself at the expense of millions of consumers.
“(C)onsumers place bets on Kalshi on the outcome of sports games, individual player metrics, team results, and/or a combination (parlays). These bets do not differ materially from bets available at casinos or sportsbooks. Indeed, Kalshi markets it product as betting on sports,” the complaint alleges, citing 90% of its volume is derived from sporting events.
That lawsuit alludes to action taken in October by the New York State Gaming Commission. The agency sent a letter to Kalshi informing the company it was operating an unlicensed mobile betting platform in violation of New York law. States typically regulate gambling activity.
Kalshi decided its best defense was to go on offense, filing suit in New York federal court against the NYSGC. Kalshi contends it is regulated at the federal level and is seeking a ruling that the Commodity Futures Trading Commission, a regulatory framework Congress established for regulating derivatives or designated exchanges, has sole jurisdiction over its business.
The New York Racing Association, which competes with Kalshi for gambling dollars, is not involved in the latter lawsuit. However, a number of Indian tribes requested and were granted permission to file amicus briefs advocating against Kalshi.
No substantive orders have been entered in either lawsuit, but both cases are emblematic of a national dispute involving the legality of Kalshi‘s prediction markets regardless of whether they do or do not take place in jurisdictions that allow licensed sports betting.
A search by BloodHorse revealed at least three federal cases resulting in preliminary rulings last year. A district court in Maryland declined to grant Kalshi a preliminary injunction against state regulation; a counterpart court in Nevada entered an injunction favoring Kalshi but subsequently vacated it; and a New Jersey federal court sided with Kalshi. All the rulings are under appeal.
