Discussing Clarke v. CFTC: The Case of PredictIt & the CFTC's No-Action Letter

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In July of 2023, the Fifth Circuit reversed the district court's decision in Clarke v. CFTC, and remanded with instructions to enter a preliminary injunction against the Commodity Futures Trading Commission. The case is one concerning the CFTC's revocation of its "no-action letter" concerning PredictIt Market. PredictIt Market is an online marketplace for people to trade contracts predicting important political events, started as a research tool by Victoria University of Wellington in New Zealand. Before going into operation, PredictIt sought a "no-action letter" from the CFTC to operate in the US without registering under the Commodity Exchange Act as a designated contract market, which the CFTC issued in 2014.

However, in August 2022, the CFTC withdrew the letter and issued notice to PredictIt to cease operations within 6 months, which led to suit being filed by supporters of PredictIt. Questions included whether the revocation was arbitrary and capricious, whether the letter constituted "final action" on the part of the agency, and whether the plaintiffs had standing to sue.

Join us as a panel of experts discuss this interesting case.


  • Michael Edney, Partner, Hunton Andrews Kurth LLP
  • Hon. David Mason, General Counsel and Chief Compliance Officer, Aristotle International
  • Connor Raso, Deputy General Counsel, Public Company Accounting Oversight Board
  • (Moderator) Russ Ryan, Senior Litigation Counsel, New Civil Liberties Alliance


As always, the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker.

Event Transcript



Chayila Kleist:  Hello, and welcome to this FedSoc Forum Webinar call. Today, April 18, 2024, we're delighted to host a discussion on “Clarke v. CFTC, the Case of PredictIt, and the CFTC's No-Action Letter.” My name is Chayila Kleist, and I'm an Assistant Director of Practice Groups here at The Federalist Society. As always, please note that all expressions of opinion are those of the experts on today's program as The Federalist Society takes no position on particular legal or public policy issues. 


      In the interest of time, we'll keep the introduction of our guests today brief. But if you'd like to know more about any of our speakers, you can access their impressive full bios at FedSoc.org. Today, we are fortunate to have with us as our moderator Russell Ryan, who serves as senior litigation counsel at the New Civil Liberties Alliance. Before coming to NCLA, Mr. Ryan served as an assistant director of enforcement at the SEC. I will leave it to him to introduce our panel.


      As a note, throughout the panel, if you have any questions, please submit them by the question and answer at the bottom of your Zoom screen so it will be accessible when we get to that portion of today's webinar. With that, thank you all for joining us today. Mr. Ryan, the floor is yours.


Russ Ryan:  Thanks, Chayila. We're looking forward to this discussion about the PredictIt case. It's actually a case called Clarke v. CFTC. And I'll start by introducing our esteemed panelists here. First, we have Dave Mason. He's General Counsel and Chief Compliance Officer of Aristotle International, which, among other things, was a plaintiff in the PredictIt case and services the PredictIt market that we'll be talking about. Dave previously worked on Capitol Hill in the Defense Department and at the Heritage Foundation, and he was a Commissioner of the Federal Election Commission for ten years, including, at certain points, serving as chairman of the agency. 


      Next, we have Mike Edney, who is a partner at the law firm Hunton Andrews Kurth, where he chairs the White Collar and Government Investigations Practice Group. A big part of his practice is litigating constitutional challenges against administrative regulations. In the Bush administration he served in the Justice Department's Office of Legal Counsel, and in the White House as Deputy Legal Advisor to the National Security Council.


      And last but not least, we have Connor Raso. He is currently the Deputy General Counsel at the Public Company Accounting Oversight Board. He is also a regular contributor to the Brookings Institution's Series on Regulatory Process. He previously worked at the Securities and Exchange Commission, and he clerked at the U.S. Court of Appeals for the Second Circuit. He's a member of the American Law Institute, and his academic work has been published in some of the country's most prestigious law journals. 


      So, with that, let's get started. I'm first going to ask Dave to just give us a background on PredictIt, and the prediction market and the business in general. I just find it really interesting, and I think the listeners will too. 


Hon. David Mason:  Thanks, Russ. PredictIt is a real-money prediction market where you can go online, www.PredictIt.org, and take a position on upcoming political events: presidential race, Senate races, so on like that. The market was started pursuant to a no-action order that was issued by the CFTC in 2014. And the CFTC attempted to withdraw the letter in 2022, and that was the genesis of the litigation we're going to be talking about,


Though PredictIt is still operating right now under a preliminary injunction, traders are limited to a position limit of no more than $850 on any one contract, and we can have no more than 5,000 traders in any one contract. Now, PredictIt is not the only market of this type. The Iowa electronic markets, run by the University of Iowa, has been running similar markets, also under a no-action letter from the CFTC, since 1992.


And an organization called Polymarket was running a market without CFTC approval in the United States for a couple of cycles. CFTC brought an enforcement action. They settled. And that market is still operating, but now offshore, no longer in the U.S. And we've also got Kalshi, an approved market called a designated contract market, which is the commodities version of an exchange. And they offer politically related contracts. And they asked permission from the CFTC to offer a contract on control of Congress. The CFTC turned them down. And that ruling is now undergoing litigation.


Russ Ryan:  Dave, can I just interrupt you for a minute? Because I've always been confused as to why does the CFTC, or the federal government in general, have any business in these markets? I just don't fully understand that.


Hon. David Mason:  So, the legal concept is a swap. And under the Dodd-Frank Act, a swap is a contract or transaction dependent on the occurrence, non-occurrence, or extent of the occurrence of an event or a contingency associated with a potential financial, economic, or commercial consequence. And so, the typical swaps we're talking about have to do with bond failures, and so on like that. But, for instance, weather contracts, which have obvious economic consequences — think about a hurricane hitting Florida or severe drought in the Midwest affecting commodity prices — those kinds of contracts have been traded for many years without a whole lot of controversy. 


      And you can see why an election could be considered to be an event with potential economic consequences, though, whether it really is or not has actually been a subject of debate at the CFTC. And one of the reasons the CFTC turned down the Kashi application was that they concluded that the economic consequences were not sufficiently predictable to make it a useful instrument. And you could see how, of course, that same argument could be turned around and used to argue that the CFTC lacks jurisdiction. So, I'd have to say that's an untested legal question.


Russ Ryan:  Has anyone challenged it in court, do you know?


Hon. David Mason:  No one else I'm aware of has done that in court.


Russ Ryan:  Well, why don't we talk a little bit about the case. I think, Mike, you were lead counsel on it. Why don't you give us a thumbnail of what the case was about, and we'll eventually get to where it is right now, I guess. I think you're on mute.


Michael Edney:  Sorry for that rookie mistake. Yeah, absolutely. I, Dave, and the other plaintiffs in the case, I was very honored to have them ask us to go to the courts on this issue. It was a righteous cause because these folks were treated very unfairly. And all the administrative law wrangling out of this arises out of the fact that in 2014, when the CFTC turned the lights on on the PredictIt market, under the tutelage of Dave's operation and Victory University in New Zealand, they did so through what's called a no-action letter or no-action relief.


And, as you'll see as the case goes on, the CFTC, in particular — and, I think, other administrative agencies — thought that was a good way to make decisions because they thought it was a way to avoid accountability. They could say "yes" and then they could change their mind and say "no." And they wouldn't really have to explain themselves in between. I think this case is demonstrating that that assumption no longer holds.


Russ Ryan:  Mike, you mentioned these no-action letters. And I know Connor has written a lot about this and thought a lot about it. I think it might be a good time to just pause and, Connor, if you can just discuss no-action letters and explain what they're all about and what the utility is, that type of thing.


Connor Raso:  Sure. Great to be here. Actually, one of the reasons I wrote this piece for Brookings, one small reason, actually, I'm an alum of Victoria University in Wellington from 20 years ago and had a great year there. It's a beautiful place, if you ever get to Wellington. So, it sort of brought back good memories. I will also just give the obligatory disclaimer that I am here on my own lunch hour, not speaking on behalf of PCOB. I'm doing this in my private capacity.


      So, no-action letters, as the name implies, are a letter from some unit of a federal agency, usually agency staff, to a particular applicant, often a company. And the letter essentially states that if the applicant engages in a proposed transaction or activity, usually linked to a proposed transaction or activity, then the staff will not recommend that the agency head, whoever runs the agency, initiate an enforcement action against the company for engaging in this transaction or activity. 


So, the company presents facts, usually in writing. The agency staff analyze and respond. And, if they grant the letter, say, "If you, the applicant, engage in these facts, the transaction that follows these facts, then we do not anticipate recommending enforcement action to the head of our agency." 


The last thing I'll say, Russ, the rules that agencies have established for their no-action letter programs vary somewhat. And I can talk about which agencies have them if you're interested. But most of the rules state that the no-action letters don't bind the head of the agency and that they are subject to being revoked. But there is, I think it's fair to say, understanding that revocation is unlikely, absent something changing. And so, in the piece I wrote for Brookings, I sort of analogize it as a handshake deal.  So, that's the overview of no-action letters. 


Russ Ryan:  So, trust the agency staff, basically, it sounds like.


Connor Raso:  Well, Professor Nick Parrillo did a pretty comprehensive study for the administrative conference. It's about six or seven years old now. And he did find that there's some variation, but agencies are loath to go back on their guidance — not that they don’t, but the trust is generally well-placed — in that empirical piece for the administrator conference.


Russ Ryan:  So, can you just talk a little bit about the pros and cons of regulating through this device?


Connor Raso:  Sure. Russ, did you want me to just tell you a few of the agencies that have these programs, for the landscape? Would that be helpful?


Russ Ryan:  Sure, sure.


Connor Raso:  You and I are probably a little bit biased, Russ, but I think it's fair to say that the SEC has the premier no-action letter program. The SEC started it, I think, in 1936. And it's probably the most extensive and the one that sort of set the precedent. And I have not done a comprehensive survey, but a number of other important agencies have programs like this: the CFTC, as we're discussing today; FERC, the Federal Energy Regulatory Commission; HUD, Housing and Urban Development; the Office of Comptroller of the Currency; the Federal Trade Commission; DOJ Antitrust. And so, certainly, not every agency has a program. But they are important and widespread.


      Pros: I think, what a lot of agency rules that spell out their programs say is that no-action letters are intended to help facilitate compliance by regulated entities. And so, a lot of times, rules, or sometimes statutes, are ambiguous. And so, the agency is giving its views of how the ambiguous rule or statute applies to a fact pattern that is provided to it. And this can give comfort to somebody wanting to engage in this transaction in a way that consumes fewer resources than a rulemaking proceeding through notice and comment.


And given that agencies have limited time, limited staff resources, limited bandwidth at the top of the agency, this is a way to do that, in light of those constraints. And a number of the agencies do emphasize that these programs can help facilitate innovation as new products come out. But rules and statutes have been on the books a long time that didn't anticipate new products that might be driven by technology or changing market practice. So that's my list of pros. I'll briefly say some of the cons that folks cite.


Some of the courts have been skeptical, actually, of no-action letters as being used to change agency legislative rules without notice and comment. And so, the agency can actually change the law, effectively, via a no-action letter. Even if it technically only applies to the applicant, the world sees it. And so, it's a way to skirt notice and comment. And we can talk later about the structure of no-action letters in relation to that concern.


A second — and you do hear this some at agencies — is that agency staff say the chief counsel division would use their no-action letters as an exercise of important policy-making power without adequate supervision from his or her principles at the top of the agency who are much more accountable to Congress and the White House. 


Russ Ryan:  These typically are issued at the staff level, right?


Connor Raso:  Yes.


Russ Ryan:  Commissioners of the agency typically may not even know about it?


Connor Raso:  Correct. Although, Russ, there are some wrinkles. Sometimes, under SEC rules, for example, the staff can consult the Commission, often don't. And there are cases when the chair of the SEC has directed SEC staff to rescind a no-action letter. So, there can be a dialog. But, yes, they're staff letters. And then, finally, the last point I was going to say — and then I'll stop — is sometimes, as we said, the handshake deal can fall apart for various reasons. And that can be an awkward situation.


Russ Ryan:  Okay. Well, one thing, when I was in private practice, I was a big fan of the no-action process. And I think most of my clients really appreciated that. Now that I've switched hats a little and spend my time litigating against administrative agencies, it does occur to me that it gives the staff-level people the ability to essentially tell someone "You don't have to obey a statute written by Congress." And that aspect of it kind of rubs me the wrong way. But I don't know if there's any scholarship on that, or anything like that, or if it's just my own little quirk here.


Connor Raso:  Yeah, there is some scholarship, especially on the SEC's program, that sort of argues that accountability is one concern. On the other hand, as you said, a lot of the demand for these comes from folks who have a real need. So, it's a tricky issue.


Russ Ryan:  Yeah. So, Mike, sorry I cut you off, back a few minutes ago. I just thought it was important that people understood exactly what these no-action letters are. Because that's at the core of the case, as I recall. 


Michael Edney:  Yeah.


Hon. David Mason:  Mike, if I can, before you start back, I just want to emphasize this case was one of those breakdowns. And I think it's important for people to understand just how stark that was, from our perspective. We had been, with Victoria, operating this market for eight years. We had been in touch with the agency from time to time. They had raised concerns about certain markets. We had responded in what we thought were appropriate ways. And then, to us, out of the blue, in the summer of 2022, comes this call, "We're revoking the no-action letter."


And there was some follow-up discussion of that. But from the beginning of that discussion, we were told "This decision is not going to change." The decision had been made. And so, in terms of thinking about basic due process, there was no opportunity for a hearing. We got notice. And we were able to get a little more information and respond, but no chance to change the decision. The only thing we got was a slight extension in the closure date order, and no willingness to consider alternatives. And so, we threw out a whole bunch of things. 


And so that experience of having been operating in reliance on the letter for eight years and then having the rug pulled out from under us very suddenly, without alternatives, without a lot of explanation, without an opportunity to respond, to appeal to anybody, and so on like that, was really jarring to us, and what got this started. Sorry, Mike. Thank you. 


Russ Ryan:  Go ahead, Mike.


Michael Edney:  I think that's all very important background. And so, we had the 2014 no-action letter that kind of birthed the PredictIt market. And then, in 2022, they came in and revoked it over the course of a couple sentences. In terms of explanation for revoking it, there was an assertion that we had not complied with some restrictions inside the 2014 no-action letter. But that was not detailed in any way. 


And, as far as they were concerned, that was the end of the matter. That was not the end of the matter as far as we were concerned. We thought that this was an unfair way to proceed. And we took it to the court system. And we were up against all the arguments that everybody saw coming: no final agency action, we're just exercising our enforcement discretion, it's committed to agency discretion, there's nothing that the courts can do about it under the APA.


And, going to Connor's discussion, I really don't think that this case is about all no-action letters. I don't think any case can be about all no-action letters. I think there are no-action letters and there's no-action letters. And we're over on the kind of real no-action letter side of this whole thing. The SEC's program, if you look at the mine-run of their no-action letters, it's a lot of public companies getting ready for their 10K, like, "Well, it's time for our 2024 10K. Here's some stuff that's been going on with the company. We're going to disclose it this way."


And the SEC, who is enforcing a set of somewhat ambiguous authorities and regulations, say, "Well, that sounds okay to us. If you do that, given what you've told us, we're not going to come after you." Well, that's one thing. The 10K drops. It's kind of over with. We've gotten some advice for that event. But it's a point in time. This was different, because Dave and his team and Victoria University, they came to the CFTC and said, "We want to open this market," similar to the Iowa elections markets that were in place. "And here are the terms under which we would do it, and the principles that would guide us.  Is that okay with you?" 


And the CFTC took their time, and they came back with a lengthy letter explaining the conditions under which it would be okay and why it was okay. And then, these folks invested a lot of money in standing up that market and never would have done so if it weren't for the no-action letter. So, where a lot of the SEC no-action letters look kind of backwards, "This is what happened inside the company. Now it comes time for us to talk to investors. Is this an okay way to talk about it?" It kind of ends at that point. This was the beginning. 


And, in reliance on that no-action letter, a lot of money was spent. People organized their lives around it. We talk about money, but there's a lot of people that took their professional lives and kind of moved it into this framework and said, "I'm going to spend time on this. I'm going to set aside other responsibilities. I'm going to dedicate myself to this for several years." And they did that because the CFTC said it was okay. And when the Fifth Circuit got around to this, I think that was a very important aspect of it. 


This is not an opinion that says all no-action letters and their revocations are subject to this review. This is an opinion that says when you have a no-action letter that is in the form of a prospective permission, what they said is it's indistinguishable from a license. "Go ahead and do this.  Go forth and teach all nations. Go organize your affairs around all this. Go spend a bunch of money in reliance on our position." They can change that position.


But they're going to have to both explain themselves when they do so — which didn't happen here, I still think it hasn't happened — and they're going to have to take into account, if they want to change their position and go in a different direction, they can do that in a way that is gentler, that deals with these reliance interests that, if there's a way to avoid displacement, that is thought about and explained and there's an explanation of why we need to do this and why we need to do it now. All of that is missing, and I think it's appropriate. 


And I think the Fifth Circuit picked up on a principle that the Supreme Court has been articulating recently, including in the Board of Regents case about the Deferred Action for Childhood Admissions program. It's a controversial program politically, on both sides. But the Supreme Court had a point. Once an agency says, "Come on in. We're not going to do anything. Go ahead and organize your lives around this," and then they just pull the plug suddenly without a transition program or without considering the displacement, that's a problem. And that's kind of precisely what happened here.


So, I think the SEC's no-action practice, in large part, is probably safe. But if we're going to use no-action letters as a replacement for, essentially, licenses, prospective permissions, there's going to have to be some explanation if they change course. And, I think, another thing that Connor pointed out is one of the criticisms of no-action letters is you have these people that haven't been appointed by the president, they're not commissioners, don't have the accountability of having been confirmed by the Senate. 


A lot of these commissioners are on terms, so they have to go back and answer to folks again. You have folks that are deeper down in the process, making big decisions. And what the agencies want to say about that is, well, when that happens, you don't have final agency action all the way up at the top, so they should get no scrutiny when they do that kind of stuff. I kind of think, as a matter of democratic accountability, it should be the other way around. 


People and courts should probably be looking harder at the decisions of people who are further away from the one person in the executive branch that was elected by the people — and these are the people issuing no-action letters — than, perhaps, the commissioners themselves. It's kind of a paradox, the agencies' arguments on this, that the less senior the official, the further away he is from electoral accountability, the more deference he gets. And that doesn't make a lot of sense. 


And in our particular case, the mid-level to — I don't want to call them mid-level — but the senior-ish official that decided that this market could be stirred up was the same person that woke up on the wrong side of the bed eight years later and decided he didn't want the market to be around anymore. And, at least with that explanation, I don't know exactly what arbitrary and capricious agency action means in the APA. But it certainly sounds capricious. The definition of capricious is behaving in a way where you don't explain yourself and it seems irreconcilable with your previous decision. 


Russ Ryan:  So, let's talk a little bit about the litigation itself. So where do you file the lawsuit? Or do you go straight to the court of appeals? Or how did that work?


Michael Edney:  So, on behalf of a series of traders -- and they're the other, I think, probably the principal victims of the agency's decision-making here. Because the agency said, "Okay. I understand you guys have invested a lot of money in these contracts on the market. But this market's over on a date in January 2023. And if you don't like it, too bad." And so, on behalf of a bunch of those folks, including a bunch of folks in Texas, we brought this case down in the Western District of Texas, in the Austin area. That’s where probably our most engaged trader was, really one of the intellectual driving forces behind this case, in Kevin Clarke. 


We sought a preliminary injunction against this compliance date that was coming up to close the market. And the court didn't act on it particularly promptly. And at some point, about a month out, we said, "Look, essentially, our request, we've been having a bunch of displacement in the market. People couldn't really sell their contracts if they wanted to because they were kind of organizing their affairs around the wind down. The trading was organized around that. And our request for preliminary injunction has effectively been denied." And we took that, we appealed that to the Fifth Circuit.


And, again, we made good law on the conditions where that happens, where the courts don't step in quickly enough to take a look at agency action. We had an ability to take that up, even though we didn't have a ruling granting or denying our motion for preliminary injunction. This is a very interesting administrative law case sandwiched between a whole bunch of interesting procedural issues. And that was the first one. And on the other piece of bread is what happened after we won the Fifth Circuit, where the CFTC came back to the district court and said, "But we really don't like being here in the Fifth Circuit anymore. We want to go home. We want to go back to Washington." And they moved to transfer it out.


And a new district court judge said, "Yeah, go ahead. Go ahead and go back to Washington." And he granted the transfer motion and sent the files on, ten minutes later. And we had to take that up to the Fifth Circuit on mandamus. And we succeeded in that, in convincing the Fifth Circuit that it should not have been transferred. And this is, again, a recurring issue of a lot of agencies only wanting to defend themselves at home.


And my position on that is if the administrative agencies here in Washington want to only defend themselves in Washington D.C., then they should limit the scope of their regulations to Washington D.C. and stop regulating nationwide. Otherwise, they're going to have to defend themselves where their regulatory decisions have effects. Between that time, the Fifth Circuit reversed the district court's decision not to grant preliminary injunction. We had the entire administrative law playbook lobbed at us.


I think our opinion — and I'm very grateful to the court for this — is kind of a one-stop shop for dispensing with a whole array of agency arguments to avoid judicial review. And chief among them is the final agency action part of it, the rejection of the assertion that we have to wait until it percolates all the way up to the top. When a party has been threatened with an enforcement action, "Change your behavior or else," well, that's enough to get into court.


Because only the most intrepid regulated party is going to wait for the enforcement action to drop. As the Supreme Court said, you don't have to wait for the agency to drop the hammer. Once you're facing the expense and consequences of an enforcement action and exposing yourself to significant penalties, that's enough for you to get into court.  And I think that was an important outgrowth of this. And it was an important decision in terms of dealing with all sorts of subterranean agency decision-making. 


Russ Ryan:  You see a lot of agencies try to moot these cases by doing something sort of voluntarily to try to make it go away. And that was an issue in this case too, wasn't it?


Michael Edney:  Yeah, it absolutely was. We got one of the fastest circuit court arguments, I think, probably, in American judicial history. Between the time this appeal was filed and the day we argued it might have been a month, and it might have been five weeks. We argued it, and we got an injunction pending appeal in the meantime. And after oral argument and while the decision was pending, the CFTC came in and said, "Well, that revocation of the no-action letter, we're going to withdraw that, and I think we're probably going to close you. So don't get too comfortable. But if, at this point, you want to come in and try to talk us out of it, maybe some of you — not all of you, but some of you — we'll permit you to do that."


      And then, the very next minute, they run into the Fifth Circuit and say that it's mooted. The Fifth Circuit, I think, was steadfast on this. First, they said they rejected the ability of agencies to come in and try the Polder decision when there's a significant chance that the same outcome is going to occur. And they more or less said that in these papers. And so, that's important too. Not only do the agencies want to defend on their home turf in Washington, not only do they want to avoid administrative review, but when it looks like they're going to get some review, they have other moves. 


And the Fifth Circuit said "Not only are we not going to let that moot the case," they said it actually violated the injunction they had pending review, because they came in and told the traders and others that, "We're probably going to close you anyway. We're revoking this, but the writing is on the wall." And they said, "We told you not to give these folks a hard time while we're looking at this. And this qualifies." And so, like I said, the entire administrative law playbook got thrown at us, and each of these moves were rejected: the transfer move, the file agency action move, the mootness move, the standing move.


And I think the Fifth Circuit laid down some correct, very good law on shutting down these efforts to avoid some accountability in the courts system. And, by the way, it's not tons of accountability. All we're asking is for review for arbitrariness and capriciousness. And that's not second-guessing what the agency has done, but it is demanding a non-arbitrary explanation. It doesn't seem like that's too much to ask, after a company like David's and Victoria University invested so much of their time and treasure in reliance on the agency's decision. 


Russ Ryan:  So, it was a split decision. Connor, I want you to talk a little bit about Judge Graves' dissent. He focused on the issue of final agency action, whether the revocation of a no-action letter is final agency action. Can you just talk about that for a little while?


Connor Raso:  Absolutely. The dissent is sort of in line with where all the other circuit courts have been to date. And the dissent argues that a no-action letter, if you look at the famous Bennett v. Spear two-prong test for final agency action, the no-action letter does not mark the consummation of the CFTC's decision-making process because it's just a staff recommendation, with respect to enforcement action. And the CFTC itself, the full commission, could reject that recommendation and bring an enforcement action. So, the agency has not finished its decision. And that's where the law has long been. And then, the second is that the no-action letter does not determine legal rights or obligations. It's just a statement about staff enforcement recommendation. It's not binding. It's grounded in enforcement priorities.


And, finally, the dissent from Judge Graves argued that the no-action letter does not qualify as a license under the APA because while the term "license" is defined broadly, the key word there is "permission". And the plain meaning of "permission" means formal authorization. And this non-binding staff letter regarding intent to recommend enforcement does not grant permission. So, I have other thoughts about some of what Mike said. But that's sort of the high-level summary of Judge Graves' dissent. 


Russ Ryan:  So, this is probably a good time to ask. We had a question from one of the listeners. Basically, he's saying he's sympathetic to the plaintiffs, but won't this decision encourage agencies to essentially shy away from issuing no-action letters in the first place?


Connor Raso:  No. And that's sort of the main point of the Brookings piece I wrote, is that this decision, for a variety of reasons, will push agencies against issuing no-action letters and tighten up the conditions on those that they do issue, which, ultimately, I think would be a bad thing for regulated entities. So, I'll just give a few quick points.


If agencies do have to give more justification to revoke no-action letters, that will make the agencies more reluctant to issue them in the first place because, A, they're going to be more staff resource-intensive; B, agencies aren't going to want to take on the risk of being sued for not giving adequate justification; C it will be more complicated to get agency leadership to buy into. I think agencies would also include more disclaimers.


One of the unique things in some of the CFTC rules here, the CFTC rules use the word that recipients can "rely" on the letters. I think agencies will take that out of their rules and include more disclaimers about the fact that these letters should not be relied on, that they can be withdrawn at any time. And, in fact, the CFPB has kind of gone full circle on its no-action program. You can look at that, where it started with the program, then sort of in the middle. Then, under the last administration, included greater ability for recipients of CFPB no-action letters to rely, and raise the bar for the CFPB to rescind. 


And now the CFPB's gone back to an approach where folks cannot rely on the letters and the agency can withdraw them any time for any reason. And I think agencies may also provide fewer reasons and less analysis in their letters, again, to shield them from scrutiny in the court. And that will actually make them less useful as quasi-precedents for those who are similarly situated. So, I think, to summarize, you'll see fewer letters, more conditions, saying less, on this approach. 


Michael Edney:  And if I could just say a word about that, Russ.


Russ Ryan:  Sure.


Michael Edney:  And about Judge Graves' dissent. He's a great judge. Looking at this case from one perspective, the Fifth Circuit created a circuit split. Maybe the CFTC should have taken it to the Supreme Court and decided not to. But you look at the decisions in the Seventh Circuit and the Third Circuit and the Second Circuit saying that no-action letters are unreviewable, all of those cases were by third parties to the no-action letters saying, "I can't believe you're not going to enforce against these guys."


      And we think that that's an arbitrary decision. And Judge Easterbrook in the Seventh and two other circuit courts said, "No, we're not going to entertain those." Those are Heckler v. Chaney decisions. Those are decisions that you can't use the court system to drive an agency enforcement decision to go after somebody, because that's a decision within their discretion. Our case is unique because we're the recipient. And we're essentially trying to enforce the no-action letter. We're saying, as the CFTC regulation said, "We relied on it, to organize our affairs around it. And then, it changed without explanation."


      So that's point one. And point two is I do disagree that every advocate that argues a case wants to say it's the most important consequential case in history. I'm going to disagree with Connor on the no-action relief part of that. Because I do think our no-action relief letter was special. Because I think 95 percent of these no-action letters are either backward-looking or the kind of spot determinations that don't have prospective consequences.


Here, where the agency uses no-action relief to allow an entity to stand up a business, I think that comes with special obligations. And I think it was the reliance interests that came out of the Board of Regents case in the Supreme Court that drove this decision probably more than anything else. I don't think that that reasoning is going to apply to a lot of other no-action letters, because the reliance interests aren't quite as significant and forward-looking. 


Russ Ryan:  Let's bring Dave back into this, because I can't imagine what it was like for the PredictIt people during the litigation. And I'm not even sure they've got comfort with it now. Because, as I understand it, the litigation is effectively just starting. This was all preliminary injunction fighting. And now it's back at the district court for the full litigation. So, how are all these people handling it?


Hon. David Mason:  Well, for fans of Animal House, it was a little like we're the frat boys and Dean Wormer told us we were on double secret probation. As I said, it was jarring. And the market activity is way down. And, obviously, we in Victoria have pulled way back on the number of markets we've offered, and so on like that, because of just all the doubts that are surrounding what we're going to be able to do in the future. And, yes, we have a preliminary injunction at this point, and then this venue fight that Mike mentioned.


And so, we haven't gotten to the merits. And, frankly, we were trying to run a market that is per the letter and, in our belief, serves a valid academic purpose, a valid public purpose, in terms of how it measures public sentiment. It does so better than the polls. And that's what we wanted to do. And it's great to get a precedent-setting opinion or two from the Fifth Circuit. But we just really wanted to run a business, an operation on behalf of the university. And we are still hamstrung in doing that, obviously, as long as the litigation is pending.


Russ Ryan:  So, we've got another question here, and I think this is a good time to ask it. The question is "What impact could the Kalshi lawsuit have on the PredictIt case?


Hon. David Mason:  Probably none. It's fascinating that the underlying question is election markets in both cases. But the Kalshi case is a challenge to, essentially, an individual decision-making or adjudication by the commission. And so, the legal principles that apply are completely different, even though they're both within the APA. There's a big common element in the operation. But the legal issues are just so far apart that I don't think the two cases will intersect.


Russ Ryan:  Okay. Mike, there was a question of standing, too, in this case. Can you just describe that a little bit? There was, I think, at least some question about whether the actual plaintiffs had standing.


Michael Edney:  Yes, that's right. The CFTC argued that the traders who brought this case, whose contracts were going to be terminated or canceled, or their investments were going to be terminated or canceled in place in January, and the companies that helped the university operate the market, they didn't have standing to enforce any rights the university might have had under the no-action letter, because it was addressed to the university. And the University, the partner of David's company, was not here as a plaintiff and the regulations, and the letter itself, said only the recipient can rely on it.


      The Fifth Circuit rejected that argument. They turned to the APA, which has very broad language about who can bring a suit — that's in Section 702 of the APA — anybody who is adversely affected. And, certainly, in the court's view, the traders qualified. The academics who study the market qualified. They had organized their affairs around at least the ability of these markets to carry their contracts to maturity. The academics had organized studies around having this data around over a period of time. The operators had put money into standing up the infrastructure of the market.


And if that permission gets turned off, they certainly are within the group of individuals who are adversely affected by agency action and can come to court and say, "Was there an adequate explanation for this?" And that particularly makes sense in light of the Fifth Circuit's reasoning that there are reliance interests here that build up when the agency makes a decision. And those reliance interests depend on the situation.


But when the permission is to host the trading of contracts in which people invest money, that's got to extend to the traders when the permission extends and contemplates that academics will organize studies and academic work around the data that's coming out. It obviously extends to that. So, I think that was important too. I thought that was among the weakest of the CFTC's arguments. And I think it was appropriate the Fifth Circuit rejected it.


Russ Ryan:  So, Connor, have you got any thoughts on the standing issue in that case?


Connor Raso:  Not particularly, not something that I'd delve into. But if I can just say one thing, one troubling result to me is I see an asymmetry here between the granting of a license by no-action letter, which isn't considered a license, and then the rescission being subject to this arbitrary and capricious review. I think if Congress wanted to create a licensing regime it would do so with standards for the CFTC to follow in granting a license. And then that could be reviewable agency decisions, with respect to the license. 


And then, of course, the rescission of a license would be equally reviewable. And that makes sense. But this sort of world where we don't have statutory standards for the license, the agency can grant them by a letter but then the rescission is subject to a higher standard, makes me uneasy. What I see here more is Congress gave the CFTC a statute where it can exercise enforcement over. And I understand, Mike, that if the CFTC were to bring an enforcement action against the market, that would have serious consequences. But I don't think Congress envisioned a licensing regime here, much less one with this asymmetric treatment on who gets in and who's out.


Michael Edney:  I think that what the court focused on was the APA, which stood up some procedural protections around the revocation of a license, and it defined “license.” And I think Connor focuses on the word "permission." And that has some level of formality to it. I think the court focused on the three words that followed, "in any form," a permission in any form.


      And this was certainly in any form. Those are expansive words. And I got a little bit more concerned about this, what the consequences of it being a license are. And it is a pretty lean standard of fairness, frankly. It's kind of the least that any of us would expect from people who govern us. It has to give you notice if you screwed up, how you screwed up, and give you an opportunity to come in and say you didn't screw up or achieve compliance before they turn the lights off.


      And, when we talk about this bringing too many actions into the courts, well it doesn’t have to bring actions into the courts if the agencies follow these minimal standards of process, which I don't think are too terribly burdensome. Offer us a non-arbitrary explanation. Tell us what we did wrong. Give us an opportunity to comply. Give us an opportunity to explain that you're incorrect about it.  If that had happened, these cases would not be brought, the cases that people think that this decision is going to open the floodgates to. And I'm not sure any of that is a bad thing, those minimal steps for the agency to take. I think they're probably all good government steps.


Russ Ryan:  Dave, I don't know if you're at liberty to say. But on the standing issue, why wasn't the university a plaintiff? Are you able to speak to that? Or is that kind of privileged?


Hon. David Mason:  Well, I cannot speak for the university. They are not a party. But I will note two things. One is they're five or six or seven or eight thousand miles away. The other is that it's a public university. And, in fact, in New Zealand language, it is an instrumentality of the crown. And the implications of a New Zealand government entity suing a U.S. government entity, you can imagine drawing all kinds of considerations, and so on like that. Again, while I can't speak for the university, you can understand why they might be reluctant.


Russ Ryan:  Okay. And we have a question from the audience that I think is probably best for you to answer. I certainly don't know the answer. And I don't know if you can read it, but it's about jurisdiction. And it says, "I thought the swaps were a periodic exchange of cash flows during the duration of the swap. Is that right? And is that how it works with these prediction markets? Or do the funds change hands at the initiation of the prediction?"


Hon. David Mason:  Sure. So there certainly is one type of swap that involves that periodic exchange of cash flows. But I read the definition at the outset. So, the definition is much broader.  And so, for instance, the weather markets are again considered a swap, are binary options, where a condition is fulfilled or not. And the one side gets the payout, and the other side takes nothing, and so, it's definitely a different type of swap. And that's the type that are on the PredictIt market.


And so, the person who takes the correct side takes a dollar per contract, and the person on the other side takes nothing. And the contracts can vary in price between one cent and ninety-nine cents. And they're freely tradeable during the period. So, we’ve got markets up on the presidential election. It's no surprise that those markets are pretty close to 50/50 right now and have been for a while. And people can come in and buy shares, either for Trump or for Biden. And, come election time, one side of that party is going to get a dollar contract and the other side will lose their investment.


Russ Ryan:  Out of curiosity, how good are these markets at predicting things like that? Do they do better than pollsters?


Hon. David Mason:  Generally speaking, they do. But they don't always. And that really gets to the academic point. And that was the theory at Iowa when they first brought these up, and clearly behind us. Again, more often than not, the prediction markets seem to be more accurate than the polls. And, in our experience, when we see the market being less accurate, we can usually, at least on a look-back basis, figure out, okay why was that?


And that, then, helps us design a better prediction market. And that's just part of the point of this exercise. Because a lot of big companies use internal prediction markets. And there's a lot of fascinating research out there that has been done — and we think some still to be done — on how we can improve these to get better public policy outcomes.


Russ Ryan:  And, Mike, there's another question here that's probably best for you. He's saying, "in the filings with the Western District of Texas, why did the plaintiffs not request, in the event the judge ruled to transfer the case, that the court stay the transfer until the Fifth Circuit could review the order?"


Michael Edney:  Well, I do think it was pretty rare and remarkable that the actual physical transfer of the files occurred before the transfer decision hit the docket. So, very quickly after the transfer decision landed, we asked them to stay it. And that's when we found out from the judge that, well, the files were already gone. And, actually, they were gone when I signed the thing in chambers, and I sent it downstairs to the clerk's office. And then you found out about it the next day. 


      I think what the Fifth Circuit has said, and you've seen it here, and in the Consumer Financial Protection Bureau case, they're now counseling their district court judges to kind of hang on for a couple days and give time for the dust to settle and see whether appellate review through mandamus is warranted. I think it's probably advisable that folks do make that request. I, frankly, did not think we were going to lose it. And I guess I have three judges at the Fifth Circuit that agree with me that transferring the case was a clear abuse of discretion. I guess my prediction was wrong and it was right. 


Russ Ryan:  Well, we're running out of time here. I think maybe we just go around and just get everyone's final thoughts, takeaways, whatever you want to say, to maybe 20 seconds each. Let's start with Conner.


Connor Raso:  Thank you for the opportunity. Mike, I take your point that the facts matter. I do think some of the SEC no-action letters involved greater reliance interests than others. But some really do. I've heard at the SEC -- not to tell tales out of school, but why did we ever get into this business? Why do we keep doing it? And so, I do think, for some agencies, pulling back may be a strong temptation. But we'll see.


Russ Ryan:  Dave, final thought?


Hon. David Mason:  So, I'm sympathetic to what Connor is saying, and the agency reaction. But it really puts regulated entities in a bad place if the government agency says, in essence, "Well, if you're going to hold us to what we said, we're not playing." I don't think that's really a way that we want our government agencies to react.


Russ Ryan:  Mike, we'll leave it for you to finish up here.


Michael Edney:  I agree with Dave. As I said before, I'd like to say that our accomplishment packed dynamite under the no-action process and destroyed it. I don't think that's true. I think, A, we are a more special case than the mine-run of no-action letters. And, B, let's say they are judicially reviewable. Let's say they are licenses in some cases. What are we asking for? It's a duty of explanation and process that I think is probably kind of the base minimum that we should expect from the people who have been given the authority to govern us. So, the violins are not out for the government here as a result of this case, at least from my perspective.


Russ Ryan:  Okay. Thanks, Dave. Thanks, Mike. Thanks, Connor. We'll throw it back to Chayila.


Chayila Kleist:  Absolutely. I'll echo those thanks on behalf of The Federalist Society. We really appreciate you all joining us today and carving out this section of your afternoons. Thank you also to our audience for joining and participating. We love listener feedback by email at [email protected]. And, as always, keep an eye on our website and your emails for announcements about other upcoming virtual events. With that, however, this webinar can adjourn. Thank you all for joining us today.