Kalshi Win & DOJ Tries to Shield Its Lawyers

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1:40Policies provided by Hartford Fire Insurance Company and its property and casualty affiliates, Hartford, Connecticut. This is Bloomberg Law with June Grosso from Bloomberg Radio. Calci won the first appellate court victory in the battle over who gets to oversee the fast-growing prediction markets, the states, or the Commodity Futures Exchange Commission. In a two-to-one decision, the Third Circuit Court of Appeals told New Jersey state officials that the CFTC regulates the platform. Calci has had mixed results in lower courts, arguing that it should be overseen by the CFTC rather than state officials.

2:24But this is just the first appellate court decision on an issue that's likely to reach the Supreme Court. Joining me is Elliott Stein, senior litigation analyst at Bloomberg Intelligence. Elliott, tell us about the legal battle that's been going on between the prediction markets and the states. Yeah, this litigation has been going on for over a year now. And we have cases all over the country in multiple state courts, multiple federal courts. And essentially, it started when states started sending cease and desist letters. Some states started sending cease and desist letters to the prediction markets like Cal-She, seeking to stop them from operating in those states because the states viewed those products as gambling.

3:09and the prediction markets, in particular Calci at that point, sued the states sort of preemptively to stop the states from filing an enforcement action against them. And the prediction markets argument is that these are derivatives that should be regulated by the CFTC and under the Commodity Exchange Act, states are preempted from regulating them as gambling And the states, of course, take the position that these products are really gambling in effect and they should be regulated as such. How are they not gambling? I mean, you're placing a wager on an outcome. I mean, there are some differences.

3:50And these event contracts that the prediction markets offer, you really have two sides to the contract. You have parties on both sides, as opposed to your traditional gambling and betting apps where a consumer is really betting against the house. And event contracts, like other derivatives, are contracts that you can get in and out of and sell, which is also a difference. But really it comes down to the statutory language in the Commodity Exchange Act and whether these event contracts fall into the definition of swaps, which is very broad in the Commodity Exchange Act. And then related to that is whether Congress intended to preempt states from regulating these products.

4:34There are different decisions in courts around the country. I mean, which side is winning more of those lower court arguments? Like you said, we have multiple decisions now at the trial court level. It's funny, the first decisions came almost exactly a year ago in April of 2025, with respect to these sports event contracts. And CalCII won those. They won a preliminary injunction in Nevada. They won a preliminary injunction in New Jersey. And so, you know, they sort of came out of the gate winning. Then shortly thereafter, in August, I believe, a federal court in Maryland ruled against Calci and ruled in the state's favor.

5:15And since then, we've had probably more trial court rulings going in favor of the states because you've had decisions in Ohio and in Michigan, I believe, in favor of the states. You had a state court in Massachusetts issue a preliminary injunction in favor of the state against Calci as well. So I would say, you know, up until yesterday's decision by the Third Circuit Court of Appeals, you sort of had more federal courts ruling in favor of the states, but you did have some, like I mentioned, New Jersey and also Tennessee ruling in favor of Calci. The Nevada decision I mentioned earlier was interesting because the judge there, even though a year ago he ruled in favor of Kalshi.

5:52More recently, in October, he sort of changed his mind and ruled in favor of Nevada. And that set off sort of a cascading series of events in Nevada litigation, which is all going to be teed up in the Ninth Circuit next week. Tell us what the Third Circuit decided in a two-to-one decision. So like you said, this is a split decision, but the majority ruled that the definition of swaps under the Commodity Exchange Act is very broad and is broad enough to encompass event contracts like those that are offered by the likes of CalSHE and other designated contract markets, DCMs, and that under the Commodity Exchange Act, the CFTC has exclusive jurisdiction over swaps that are traded on designated contract markets.

6:37And as a result, states are preempted from regulating them as gambling. Those are like sort of the two main issues. And those are the same issues that we see being decided in the trial court. But yesterday's decision by the Third Circuit is the first time that we have a federal appeals court rule on these issues in any sort of substance. The dissenting judge, Jane Richards Roth, wrote that Calci's actions are a performative slight meant to obscure the reality that Calci's products are sports gambling. And she said that their offerings were virtually indistinguishable from the betting products available on online sports books like DraftKings and FanDuel.

7:18Is she right? Well, it depends who you ask, right? Obviously, the states that are trying to regulate these products, again, think she's right. Obviously, the prediction markets think she's wrong. The majority of the judges on that panel yesterday disagreed with her. But, you know, she also cited a presumption against preemption for things that states usually regulate, like gambling. But, you know, I tend to think the prediction markets actually have the better statutory argument here. I think the Commodity Exchange Act is pretty clear that the CFTC has exclusive jurisdiction over swaps that are traded on designated contract markets.

7:56You know, that doesn't mean that states can't regulate your more traditional forms of gambling because the Commodity Exchange Act doesn't stop them from doing that. The Third Circuit covers Delaware, New Jersey and Pennsylvania. Other jurisdictions don't have to follow this ruling. So how important is it? It's important because it's the first federal appeals court to weigh in on these issues. But it's not going to be the last, right? I mean, I mentioned earlier that next week, the Ninth Circuit is going to hold argument in cases in Nevada concerning Cal, Shea, Robin Hood and Polly Market. The Maryland case that I mentioned earlier is going to be argued in the Fourth Circuit next month in May.

8:40The Massachusetts preliminary injunction that I mentioned earlier is going to be argued in the Massachusetts Supreme Court also next month in May. And then in the Sixth Circuit, we have conflicting rulings from federal trial courts in Ohio and Tennessee that is going to be argued sometime probably in the second half of the year. So we're going to have multiple decisions from multiple federal circuit courts. And inevitably, these cases are destined for the Supreme Court because you're probably going to get conflicting rulings from some of the circuit courts. And we're talking about issues of federal preemption, which is, you know, a really important issue that the Supreme Court likes to weigh in on.

9:20In 2018, the Supreme Court freed the states to legalize gambling on individual sporting events and struck down a federal law that had barred single game gambling in most of the country, saying it unconstitutionally forced states to maintain their prohibitions. I mean, do you think that is an indication of where the Supreme Court might stand on the state's traditional role in regulating gambling? I don't think so, because I think the issues here are slightly different and have to do with what the Commodity Exchange Act provides for and what Congress intended with the Commodity Exchange Act going back multiple decades.

10:04And then in 1974, Congress basically gave the CFTC exclusive jurisdiction over derivatives that trade on federally regulated exchanges. They removed language that would have given states concurrent jurisdiction over those products. And then in 2010, you get the Dodd-Frank Act, which adds swaps to that language and very clearly includes event contracts in the definition of swaps and also gives the CFTC authority and discretion to ban or reject event contracts that might be against the public interest. So I think that's really what the focus is going to be at the Supreme Court when these cases reach out, just like it's been in the lower courts.

10:51So has the CFTC been regulating any of these prediction markets? Have they done anything? So the CFTC under the Biden administration, actually, they proposed a rule that would have essentially banned contracts related to elections and sports. When Calci first started offering election contracts leading up to the 2024 presidential election, the Biden administration's CFTC tried to stop those. that was litigated. Kalshi won in the trial court and never really got litigated fully in the appeals court because then you had the Trump administration come in. And so the case sort of went away. And it was around that time that Kalshi also started getting into sports event contracts.

11:38And the CFTC at that point was a little bit in flux. Its leadership was changing. It didn't do much until really very recently in the last couple of months, where it first revoked the Biden administration's proposed rule and then started going down a path where it would read to its own rulemaking. It issued a staff advisory talking about, you know, contracts that might be susceptible to manipulation and how the exchanges have to be careful not to offer those and should really consult maybe with the CFTC before listing those. And it also issued an advance notice to proposed rulemaking, which is the first step towards further rulemaking.

12:16So the CFTC has started to get involved in this. It has taken the side of the prediction markets in the litigation. In the Ninth Circuit, it's filed an amicus brief in support of the prediction markets because the CFTC takes the position that these event contracts should be regulated by the CFTC, not by the states. The CFTC just last week sued three states to stop them from trying to regulate these products as gambling. And so, you know, we should see more developments in the area of rulemaking as well in the coming months, I would say. So, I mean, why is the CFTC suing the states? Why isn't it leaving it up to the prediction markets to sue?

12:54Yeah, it's a little bit of pile on, I would say. I'm not sure that their lawsuits add much, you know, beyond what the prediction markets lawsuits already are trying to do. But, you know, it's just a further thumb on the scale, I think. But I'm not sure it's going to change the outcome of the cases all that much. Thanks for joining me, Elliot. That's Bloomberg Intelligence Senior Litigation Analyst Elliot Stein. Coming up next on the Bloomberg Law Show, the Department of Justice wants to put its attorneys above state law. You're listening to Bloomberg. This message is brought to you by Apple Card.

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16:08Under a proposed rule, the Attorney General could pause or block state bar investigations into current and former DOJ lawyers. And former federal judges are warning that the proposal violates the Constitution and would put Justice Department lawyers above the ethical rules that govern every other attorney in the country. Joining me is former federal judge Jeremy Fogel. He was a district court judge of the U.S. District Court for the Northern District of California. Judge Fogel, licensing and regulation of lawyers has been the responsibility of the states. Will you explain the legal basis for that and why you think it's important?

16:50It actually goes back to the constitutions. It's in the 10th Amendment, and the 10th Amendment is one of the amendments doesn't often get as much attention as some of the others, but it's actually very important. And what it says in pretty plain language is that if the Constitution doesn't give the federal government power to do something, then the power belongs to the states or it belongs to the people. And there's lots of examples of that. You know, Congress has the power to tax. Congress has the power to regulate commerce. Congress has the power to wage war. I mean, there's all these different things that Congress is empowered to do in the Constitution.

17:27But if it's not enumerated in there or if it's not closely related to one of the enumerated powers, then the 10th Amendment says that that is a power that belongs to the states. The regulation of professions, including the legal profession, is not mentioned anywhere in the Constitution. It's not a power that's given to Congress. It's not a power that's given to the president. So it is by constitutional order. It's a power that belongs to the states. And historically, it is something that the states have always done. The states license lawyers, the states license doctors, the states license teachers.

18:03you know, any profession you can think of that requires licensing, the licensing is done by the states, not by the federal government. So that's the core point. And it's not in a statute or anything like that. It's actually in the Constitution. It's the way the Constitution divides the different powers of the government. What is the Justice Department proposing to do about ethical violations by its attorneys? Well, what they're proposing is that before a state can conduct a disciplinary proceeding with regard to a DOJ lawyer, to a federal lawyer, that they, the Department of Justice, has the right to vet that complaint to decide for itself what the merits of the complaint are and whether the complaint is justified or not.

18:58And while that's going on, while they're doing that, the state is not empowered to proceed against the lawyer. So it's kind of a pre-evaluation of what would be going on in the states. And it can constitute an interference depending on how long it takes. So, you know, they could look at it and say, well, we're going to turn this around in 48 hours and say, we got some concerns. But what the regulation would do is it simply says that it's up to the Justice Department to conduct a review. It doesn't provide how long that review would take, even what kind of review it would be. And while that review is taking place, the states, the other disciplinary authorities can't proceed to do anything with regard to the lawyers.

19:40That is unprecedented with regard to any other kind of lawyer. So, you know, let's say it's a law firm said, well, we don't want any of our law firm members, any of our partners, or any of our associates being disciplined by a state disciplinary body until we've had a chance to do an internal investigation. I don't think that would get very far. I mean, I don't think there's any precedent for that. There's no precedent that I'm aware of that gives a client, which in this case is the federal government, gives the client a right to conduct its own determination as to whether there's been any ethical wrongdoing by one of its lawyers.

20:16Every lawyer who works for the Department of Justice, to my knowledge, is licensed by somebody. And they can't be and are not licensed by the federal government. They're licensed by a state entity. For instance, in D.C., which is, I think, where a lot of this controversy is focused, the lawyers who work for the federal government in D.C. are licensed by the District of Columbia. And they have their own bar association and they have their own disciplinary authority. And that's true in all of the other states. So the idea that a client, in this case, the federal agencies that are represented by the Department of Justice, and the Department of Justice itself, would have some right to delay indefinitely the review of the actions of its own lawyers, there is no precedent for that.

21:01And I think the concern, certainly, that our group, our judges coalition has, and I think that many judges have, and many lawyers groups have, is that that is simply an inappropriate intrusion into the power of states to regulate the lawyers who practice there. I think that's the problem. We've come to a time where recently there have been actually hundreds of instances of Justice Department lawyers being scolded by judges for making false, misleading, or incomplete complete representations in defense of some of the government's policies, you know, unprofessional conduct, even failing to comply with court orders.

21:43Do you think that this rule from the Justice Department or the proposed rule has anything to do with what's been happening in federal courts? I do. And the reason I think that is that this move to establish this regulation arose in the context of the kinds of complaints that you're talking about. In other words, that there were actions taken by federal judges, by federal courts to raise the issue of noncompliance with court orders or unprofessional conduct or other things that DOJ lawyers are alleged to have done. And it was in the context of those kinds of complaints that this proposal emerged.

22:26I don't know what was in the minds of the Justice Department people who propose it. I'm not a mind reader, but there certainly is a proximity in time to the complaints and the emergence of this proposal. And one of the things that happened was that the disciplinary entity in the District of Columbia, where a lot of these lawyers are licensed, you know, began acting on some of these complaints. And the response from the Justice Department was, oh, this is a political witch hunt. This is weaponization of the disciplinary process. They just don't like the way we're representing the president. They don't like the way we're representing the Department of Justice or the federal government.

23:01And so they're using disciplinary proceedings as a tool, as a weapon to keep us from doing the kind of work we want to do for our clients. I think that's the rhetoric that has accompanied the proposal, at least from some quarters. And I can't read the minds of the regulatory authorities either. All I can say is that the way the Constitution devised these responsibilities, it's not the responsibility of the Department of Justice to decide and make its own independent determination about whether a complaint is justified and have that complaint be a barrier to any discipline taking place. It's incumbent on the disciplinary authorities to act responsibly and professionally in accordance with the rules.

23:43And if there is some violation of the rights of the lawyers, the lawyers have remedies. They can go to court and say that they were denied a fair hearing. They were denied due process. There wasn't evidence. I mean, my background as a legal ethics person, which goes back a long way, you know, certainly there have been opportunities when lawyers feel that the discipline imposed on them was excessive or unfair or not based on evidence. They have remedies and sometimes they can get relief from the courts that oversee judicial discipline. So it's not that they're without a remedy, but the idea is like, where do you start?

24:19And the history for 250, well, we've been a country for a little less than 250 years, but I mean, throughout our existence as a country, that the regulation of lawyers is done by state disciplinary bodies. If there's been some showing that a lawyer's rights are violated, they have remedies. They have appellate remedies in the disciplinary process. They have remedies in court. So I think they're just turning it around and they're saying, well, because we're right, and the disciplinary authorities don't like what we're doing, we have the right to stop them from acting. And I just, I think that's very problematic.

24:50It would put Justice Department lawyers on a different level than, you know, every other lawyer appearing in court. So would that be a violation of the McDade Amendment? Yes, that's why the McDade Amendment, that was its origins. You know, it's a real privilege and an honor to represent the United States government. I mean, I mean, the DOJ has always enjoyed a very, very fine reputation. When I was a federal judge, I was always very aware of that. But that doesn't mean that you put any lawyer, whether they work for DOJ or whether they work for the law firm of Smith & Jones, you don't put them on a pedestal by virtue of who they represent or the kinds of cases they have or the kinds of positions they take.

25:31There are ethical responsibilities that lawyers have. They apply equally to all lawyers in a particular jurisdiction. And the whole point of McDade and the whole point of the history of this conversation is that the lawyers, the DOJ, at the very least, have the same ethical responsibilities as every other lawyer. And I think culturally, in terms of what the aspirations of DOJ have been historically, they try to be better. They try to really be the model, the positive model for other lawyers. And I have to say, and I've said this before, I always have had a very high opinion of the DOJ lawyers and the work that they do.

26:10And I know a lot of other federal judges do as well. I think we've been very privileged to have that kind of representation in our courts. And I think this particular controversy really does not reflect well on DOJ. There have been instances of judges, even very conservative judges, I have to say this is not political, some of the most withering criticisms of DOJ lawyers have come from very conservative judges. And so the idea that they would have greater protection or that they would enjoy not a free pass, but at least something that would allow them to prevent or slow down a disciplinary process, I think that's very much antithetical to the way DOJ has been regarded over the decades.