It’s starting to look like the political futures market PredictIt may get to continue operating. Oral arguments in the legal battle to save the site took place in the Fifth Circuit on Feb. 8. According to reporting by Courthouse News, two of the three judges appeared inclined to side with PredictIt’s supporters, who are the plaintiffs in the case.
The Commodity Futures Trading Commission (CFTC) does not generally register markets that trade in contracts on propositions like election outcomes, as PredictIt does. However, PredictIt is not a commercial endeavor but an educational one created by Victoria University in New Zealand. It obtained a “no-action letter” from the CFTC, allowing it to operate the market in the US for research purposes without fear of enforcement action.
Last fall, the CFTC withdrew its promise not to pursue legal action against the site. In doing so, it instructed PredictIt to close out all its contracts and positions by Feb. 15, 2023.
That provoked a legal response from PredictIt, its operator Aristotle International, and an assortment of individual plaintiffs with an interest in keeping the market open. Notably absent from the plaintiffs, however, is Victoria University itself.
Ideally, the plaintiffs would like the site to continue to operate, notwithstanding the CFTC’s objections. Failing that, however, they’re seeking to be allowed to let open contracts reach their natural conclusion. The prices on propositions like Which Party Wins the Presidency in 2024? have been distorted due to uncertainty over how they’d be settled if the market does shut down before the answer is known.
Having heard arguments from the plaintiffs and defendants, the three-judge panel is now deliberating. It has not given a timeline for its ruling, but the two Trump appointees on the panel seemed skeptical of the CFTC’s arguments.
Shifting Momentum in the PredictIt Case
The University’s decision not to participate in the suit is one reason some observers expected PredictIt to lose its case. And indeed, early proceedings seemed to bode poorly for the plaintiffs. US Magistrate Judge Mark Lane denied their request to file a supplemental memorandum while recommending in favor of a transfer of venue the CFTC had requested.
However, the tide has been turning. The plaintiffs successfully avoided dismissal of the case, setting up this week’s hearing with the Fifth Circuit. Better yet, they obtained the temporary injunction they’d been seeking. This will prevent the CFTC from initiating enforcement action on Feb. 15. For now, the markets can remain open while the remainder of the case plays out.
That may have foreshadowed that the Fifth Circuit would be more sympathetic to PredictIt than the District Court. Per the Courthouse News account of oral arguments, that appears to be the case for Judges Kyle Duncan and James Ho. Their votes would be enough for the case to go PredictIt’s way, whether the third member, Judge James Graves, concurs or dissents.
Is it an Order or a Recommendation?
The plaintiffs have characterized the CFTC’s decision as “arbitrary, capricious, an abuse of discretion” and said it violated the Administrative Procedures Act. They also claim the CFTC provided no rationale for withdrawing the letter beyond the vague assertion that Victoria University had “not operated its market in compliance with the terms of the letter.”
CFTC’s defense hinges on the claim that issuing and withdrawing a no-action letter are not actions subject to judicial review. Its legal team describes them as “acts of prosecutorial discretion” that don’t constitute an enforcement action in their own right. Such an action would be a separate decision made by the commission’s five members and not the staffer who issued the letter.
One question that arose during oral arguments was whether the Feb. 15 deadline constituted an order or a recommendation. The exact phrasing in the withdrawal letter is as follows:
To the extent that the University is operating any contract market[…] all of those related and remaining listed contracts and positions comprising all associated open interest in such market should be closed out and/or liquidated no later than 11:59 p.m. eastern on February 15, 2023.
Judge Duncan expressed incredulity that PredictIt should take this as “a friendly suggestion.” Instead, he likened it to “setting the death penalty” for the site. Judge Ho remarked that exempting such letters from judicial review would effectively give the CFTC “a license to bully.”
Based solely on those comments, it sounds like the court is not buying the CFTC’s defense, which would be great news for PredictIt. However, remarks during oral arguments don’t constitute a decision. For that, we’ll have to wait.
Even if the decision is favorable for the Plaintiffs, it won’t necessarily mean PredictIt goes on operating forever as it has been. It may simply mean the CFTC needs to try again with a new deadline, a better explanation of how it feels PredictIt has violated the terms of the no-action letter, and perhaps an opportunity for the site to amend those problems.