With litigation involving prediction markets already widespread in the United States, Kentucky is suddenly at the center of multiple lawsuits involving state and private efforts to prevent these businesses from cutting into the state's licensed gambling market share—including pari-mutuel wagering on horse racing.
According to a release from Kentucky Attorney General Russell Coleman, his office filed three lawsuits June 17 against prediction market platforms Kalshi and Polymarket and their affiliated companies, as well as the online casino platform VGW.
Under Kentucky law, the Kentucky Horse Racing and Gaming Corporation has sole power to license sports betting in Kentucky. Coleman's lawsuit alleges the fact that the prediction market defendants are accepting wagers, or action, on sporting events in the state without licenses. The suit alleges the lack of those licenses renders their operations illegal in the state.
Kentucky's legislature has a long legislative history of promoting Thoroughbred racing, and the KHRGC's role in sportsbook licensing is designed in part to protect those interests. While the commission is not named as a plaintiff in the lawsuits against the prediction markets, the attorney general acts as its surrogate.
Coleman's lawsuits were filed in Franklin Circuit Court located in Kentucky's capital city of Frankfort, but were removed last week to U.S. District Court for the Eastern District of Kentucky. It is unclear whether the federal court will take jurisdiction or send the cases back to state court.
Another legal dispute arose June 12 in Franklin Circuit Court with a group representing the prediction market sites contesting a new Kentucky legislative mandate that imposes a 14.25% excise tax on wagers (or "contracts") on the sites. According to the lawsuit filed by Coalition for Fair Markets, the tax is not appropriate because it "applies only to event-contract transactions" operated by prediction market businesses. The coalition includes Kalshi, Polymarket, and Crypto.com.
The same lawsuit also challenges another new Kentucky statutory provision that prohibits licensed gaming operators from contracting with prediction marketers.
The federal Commodity Futures Trading Commission, which purports to regulate prediction market businesses, has gone on the offense against Kentucky. On June 23, the CFTC filed suit demanding a federal court declare it has exclusive jurisdiction over prediction markets in Kentucky and that state law requiring licensing of sportsbooks is unenforceable against Kalshi and the others.
The lawsuits filed by Coleman allege that Kalshi, Polymarket, and the other defendants are "acting as unlicensed sports wagering providers, and heavily advertising their sports wagering offerings in Kentucky ... (subverting) Kentucky’s efforts, under its sovereign authority, to control online sports gambling within its borders."
Typically, the prediction marketers argue their offerings on sporting events are "swaps" that fall under the sole jurisdiction of the CFTC. According to the Corporate Finance Institute, a swap is a derivative contract between two parties that involves the exchange of pre-agreed cash flows of two financial instruments. Essentially, Coleman's suit alleges money placed on the outcome of a sporting event cannot be defined as a swap.
According to the website cryptopolitan.com, Kentucky is the ninth state the CFTC has sued claiming exclusive jurisdiction over what the agency calls "event contracts." The others are reported to be Illinois, Arizona, Connecticut, New York, Rhode Island, Wisconsin, Minnesota, and New Mexico.
Another line of attack being used against prediction markets is class action lawsuits. A Kentucky resident filed May 11 in a Kentucky federal district court an action seeking class certification against Kalshi. The case, since transferred to the Southern District of New York where similar class actions have been consolidated, "seeks to recover the losses of Kentucky residents who have participated in illegal gambling on the website Kalshi.com, pursuant to the state’s gambling loss recovery statute ... to recover amounts they lost in illegal gambling."
In January BloodHorse reported on the first such class action, which was filed in New York.
READ: Is It a Bet? Prediction Markets Under Legal Scrutiny
Rulings about the prediction markets from federal district courts outside Kentucky have varied. Within the federal 6th Circuit Court of Appeals, of which Kentucky is a part, cryptopolitan.com reports that two of three district court judges addressing the issues preliminarily ruled in favor of state regulators.
Two months ago, the 3rd Circuit Court of Appeals ruled 2-1 that the CFTC has exclusive jurisdiction over prediction markets because sports-related event contracts are swaps; thus, it held the state of New Jersey cannot regulate them. The dissenting judge called Kalshi's offerings "virtually indistinguishable from the betting products available on online sportsbooks, such as DraftKings and FanDuel."
It is highly likely cases such as those filed by Coleman eventually will land in the U.S. Supreme Court.
