Federal Magistrate Recommends Sending Kentucky's Polymarket and Kalshi Suits Back to State Court

A magistrate judge has recommended that Kentucky's gambling suit against Polymarket go back to the state court where it was filed, leaning on the Sixth Circuit's September ruling against Kalshi, and the same is reported in the Kalshi case. If the district judges agree, a Kentucky judge will hear the state's claims for injunctions, penalties and treble damages.

• Magistrate Judge Edward B. Atkins of the US District Court for the Eastern District of Kentucky recommended on 14 October that Kentucky's suit against Polymarket's US entities be remanded to the Franklin Circuit Court, rejecting both grounds for removal
• Gambling Insider reports a matching recommendation in the Commonwealth's suit against Kalshi, which also names Robinhood, Webull and Coinbase; it was not in the public court archive on 15 October
• Attorney General Russell Coleman filed both suits on 17 June under Kentucky consumer protection and gambling law, and the companies removed them to federal court within two days
• The recommendation relies on the Sixth Circuit's 25 September ruling that Kalshi's sports contracts are not swaps and that federal commodities law would not preempt state gambling law even if they were
• Neither recommendation is final: the parties have 14 days from service to object, and the assigned district judges decide whether to adopt them

A Magistrate Judge Finds No Federal Question in Kentucky's Polymarket Suit

Magistrate Judge Edward B. Atkins signed a 14-page report and recommendation on 14 October in Commonwealth of Kentucky v. QCX LLC, No. 3:26-cv-00047, recommending that the Commonwealth's motion to remand be granted. The suit names QCX LLC, Blockratize Inc., QC Clearing LLC and QC Tech LLC, the entities behind Polymarket's US exchange. District Judge Claria Horn Boom referred the motion to Atkins on 1 October.

A report and recommendation is not a ruling. The district judge reviews afresh any part to which a party objects, and may adopt, reject or modify it. The report gives the parties 14 days from service to object, and warns that general objections will not preserve a right of appeal.

Attorney General Russell Coleman filed the complaint in the Franklin Circuit Court on 17 June, alleging unlicensed sports wagering. It pleads four counts: two under the Kentucky Consumer Protection Act, one under the Loss Recovery Act, which voids gambling transactions and lets the Commonwealth recover money lost, and one alleging that Polymarket's website and apps are illegal gambling devices. Polymarket removed the case the next day.

The same day, Coleman sued five Kalshi entities, Robinhood Markets, Robinhood Derivatives, Webull and Coinbase Financial Markets in a 16-count complaint seeking injunctions, civil penalties of up to $2,000 per violation, and treble the value of money lost. Kalshi removed that case on 19 June, with Robinhood and Coinbase consenting.

Why the Federal Arguments Failed

Polymarket gave two grounds for removal. The first was the federal officer removal statute: as a designated contract market, it argued, it acts under the Commodity Futures Trading Commission (CFTC), because federal law requires it to set and enforce its own rules. Atkins found that policing its own exchange is compliance with the law, not help in carrying out the CFTC's duties, noting that a Nevada federal court rejected the same argument from Polymarket in March.

The second was that the state claims necessarily raise a substantial, disputed federal question, the narrow exception known as Grable. Atkins found that none of the four counts requires Kentucky to prove anything under the Commodity Exchange Act (CEA). He cited the Sixth Circuit's opinion in KalshiEX LLC v. Schuler as settling the swap question, leaving only Kentucky law in issue, and said preemption is a defence, which under Supreme Court precedent cannot support removal. On the Loss Recovery Act he followed Judge Gregory Van Tatenhove, who in March sent a private gambling-loss suit against Kalshi back to state court, holding that the Act's exemption for authorised gambling is an affirmative defence.

Neither company argued complete preemption, the doctrine under which a federal statute so fully occupies a field that a state claim is treated as federal from the start; Kalshi's opposition said preemption was "not the basis for removal here". Atkins recommended refusing Kentucky its costs and fees, because the Sixth Circuit had not ruled when the motion was briefed.

The Kalshi Case and the CFTC's Own Suit

The Kalshi case, No. 3:26-cv-00048, is before Judge Robert E. Wier and the same magistrate judge. Gambling Insider, citing filings highlighted by gaming lawyer Daniel Wallach, reports a remand recommendation there too, and that Wallach said a return to state court could expose the operators to injunctions and geofencing of the kind seen in Nevada, Michigan and Washington.

A separate federal case remains: the CFTC and the United States sued Kentucky, Governor Andy Beshear, Coleman and the Kentucky Horse Racing and Gaming Corporation on 23 June, seeking a declaration that state gambling law is preempted for CFTC-registered exchanges. On 5 October Judge S. Chad Meredith cancelled oral argument and ordered briefs by 23 October on Schuler and on the CFTC's forthcoming rulemaking.

The Sixth Circuit Has Already Done Most of the Work

The report's most telling line is that the swap question "has now been resolved by the Sixth Circuit". Before 25 September the exchanges could call the reach of the CFTC's exclusive jurisdiction an open federal question, and the fee ruling shows Atkins thought that reasonable then. After Schuler, the answer binds courts in Kentucky, Ohio, Tennessee and Michigan. That makes the remand routine rather than bold: removal had already failed in Michigan, Nevada, Washington and Massachusetts, according to Kentucky's motion.

State Court Is Where Kentucky's Remedies Are Strongest

The forum matters because of what Kentucky wants. A state judge applying Kentucky law can enjoin sports contracts, and Washington shows where that leads: after a federal judge sent its case back in May, a King County judge ordered sports markets out of the state and Kalshi geofenced Washington under threat of $120,000 a day. The treble-damages count can reach losses from the past five years, and the Kalshi complaint reaches the brokers that route customers to the exchange. One federal route remains: a remand order in a case removed under the federal officer statute can be appealed, unlike ordinary remand orders, so a Sixth Circuit appeal could delay the return.

The CFTC Rule Is the Last Federal Lever, and It Arrives Late

The industry's newest argument is the CFTC's 9 October proposal to write event contracts into the swap definition. Underdog cited it when it sued Tennessee this week, according to Gambling Insider, and Judge Meredith wants briefs on it. But a proposed rule does not change the statute the Sixth Circuit construed, and it cannot put a federal question into a complaint that pleads only Kentucky law.

Kentucky has won the first round on where its cases will be heard, on reasoning that leans almost entirely on Schuler. Unless the district judges depart from it or the Supreme Court takes up the swap question, the fight moves to a state court in Frankfort.