Securities Regulation Daily Wrap Up, FEDERAL PREEMPTION—N.D. Ala.: Sports gambling action against Kalshi kicked back to Alabama state court, (Sep 10, 2026)

By Lene Powell, J.D.

Even if Kalshi’s defense of exclusive federal jurisdiction defeats the claim, a federal defense does not necessarily give rise to federal jurisdiction.

A state law claim against the Kalshi exchange over sports gambling was remanded to Alabama state court. A federal district court found that Alabama law, not federal law, created the sole claim, and the plaintiff did not seek relief under federal law. Although the complaint referenced the federal Commodity Exchange Act, this merely anticipated defenses and a federal defense does not create “arising under” jurisdiction (Willis v. Kalshi Inc., No. 3:26-cv-00722-HDM (N.D. Ala. Sept. 8, 2026)).

Gambling loss recovery. Plaintiff Nick Willis filed a complaint in Alabama state court seeking money allegedly lost from trading sports-event contracts on Kalshi’s prediction markets platform. Willis contended that Alabama law prohibits Kalshi’s contracts on sporting outcomes as “wagers,” including game winners, point spreads, combined scores, and player propositions. He asserted a cause of action under Ala. Code §8-1-150(b), which allows for recovery of money lost on games and wagers.

Kalshi removed the action to federal court, arguing that the challenged sports-event contracts are swaps governed exclusively by the federal Commodity Exchange Act (CEA) and that Alabama gambling law therefore cannot be applied to them. Willis moved to remand the action to state court.

No federal jurisdiction. The Alabama federal district court found there was no federal subject matter jurisdiction over the claim.

Under the well-pleaded complaint rule, Willis’s action did not “arise under” federal law because no federal question appeared on the face of the complaint. District courts have original jurisdiction over civil actions “arising under the Constitution, laws, or treaties of the United States.” Willis did not invoke a federal cause of action, nor seek relief for violation of the CEA.

The court explained that a federal defense does not create arising-under jurisdiction—even if the complaint anticipates the defense, and even if the defense may prove dispositive.

Exception did not apply. An exception for actions involving “embedded” federal issues did not apply, the court ruled. Under a Grable-Gunn analysis, the CEA issue was not “necessarily raised” by Willis’s claim.

Willis may attempt to prove under Alabama law that customers risked money on sporting outcomes and lost that money upon games or wagers. Kalshi could answer that the CEA authorizes or exclusively governs those transactions. But even if the answer ultimately defeats the claim, it remains a federal defense, said the court.

Moreover, Willis’s references to the CEA, swaps, futures, and the CFTC did not trigger the well-pleaded complaint rule because they merely anticipated Kalshi’s expected federal-law position. Case precedent involving cotton futures and other contracts also did not establish that the CEA was an element of the claim.

Federal-state balance. The substantiality of the federal issue concerns “the importance of the issue to the federal system as a whole,” the court explained. Here, the United States and the CFTC were not parties, and Willis did not challenge a CFTC order, seek to invalidate agency action, or ask the court to declare any provision of the CEA invalid. A judgment concerning the parties and transactions would not bind the CFTC or control federal adjudications of the CEA.

“[T]he possible application of the CEA matters greatly to these parties, but the state court’s resolution of a federal defense does not by itself threaten the uniform development of federal law,” the court wrote. “State courts are competent to adjudicate federal defenses, subject to review by the Supreme Court.”

Further, contract validity and gambling regulation are matters of traditional state concern, the court said. Accepting Kalshi’s jurisdictional theory would bring into federal court a broad range of state gambling, contract, and consumer actions whenever a federally regulated entity asserts that its conduct is authorized or preemptively protected by federal law.

Other remanded cases. Most courts considering comparable removals involving Kalshi have reached the same conclusion, the court said. Statutory schemes and pleadings have differed, but shared applications of the well-pleaded complaint rule have reinforced the court’s conclusion.

A denial of remand in Georgia Gambling Recovery LLC v. Kalshi Inc. was distinguishable because that complaint alleged violation of the federal Wire Act and the Georgia court relied on Georgia choice-of-law precedent holding that a gambling contract’s invalidity depended on the law governing the contract.

No property derived from a federal officer. The court also disposed of an alternative ground for removal by “[a] property holder whose title is derived from any [federal] officer, where such action or prosecution affects the validity of any law of the United States.”

Even assuming that Kalshi’s CFTC registrations as a Designated Contract Market (DCM) and Designated Clearing Organization (DCO) are “property,” removal still failed because Willis’s action did not “affect[] the validity” of federal law. He did not challenge the legal force of the CEA, seek invalidation of any CEA provision, or ask the state court to revoke either entity’s federal status.

The court said the CEA, DCM designation, and DCO registration would remain legally valid whichever party prevails.

“At most, the action presents questions about federal law’s meaning and application, not its validity,” the court wrote.

This is case No. 3:26-cv-00722-HDM.

Judge: Mooty, H.

Attorneys: D Frank Davis (Davis & Norris LLP) for Nick Willis. Joshua Brooks Sterling (Milbank LLP) for Kalshi Inc.

Companies: Kalshi Inc.

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