Appeals Court Deals Kalshi Another Legal Setback, Upholds States’ Right to Regulate Sports Prediction...

The legal battle over whether sports prediction contracts are financial derivatives or a form of gambling has deepened after a federal appeals court ruled that Ohio and Tennessee can apply their state gambling laws to sports-related contracts offered by Kalshi.

The 6th U.S. Circuit Court of Appeals ruled unanimously on Friday that Kalshi had failed to establish that its sports-event contracts qualify as "swaps" under federal commodities law. The decision represents a significant setback for Kalshi and other prediction market platforms that have argued their event contracts fall exclusively under the jurisdiction of the Commodity Futures Trading Commission.

"We hold that Kalshi has not shown that its sports-event contracts satisfy the statutory definition of a 'swap' so as to fall within the scope of the CFTC's 'exclusive jurisdiction,'" the three-judge panel wrote.

The ruling adds a fresh layer of uncertainty to a rapidly expanding prediction markets industry that has increasingly moved into sports, politics and other events. It also creates a growing split among federal appellate courts over the extent of the CFTC's authority, increasing the prospect that the U.S. Supreme Court could eventually be asked to settle the dispute.

Kalshi and other prediction market operators maintain that event contracts are financial products rather than wagers. Their argument is that the Commodity Exchange Act gives the CFTC exclusive authority over swaps, preventing individual states from applying their own gambling laws.

States have taken the opposite position, arguing that sports contracts offered by prediction platforms are effectively sports bets and should therefore be subject to state gambling regulations.

The development has major implications for the industry. If the states prevail, prediction exchanges could face a patchwork of licensing requirements, restrictions, and enforcement actions across the country. If the CFTC's position prevails, operators could potentially offer sports-related contracts under a federal regulatory framework without obtaining approval from individual states.

Sixth Circuit Rejects Federal Preemption Argument

The 6th Circuit's decision addressed both parts of Kalshi's argument. First, the judges found that Kalshi had not demonstrated that its sports contracts meet the statutory definition of a swap. Second, the court said that even if the contracts were considered swaps, federal law would not prevent Ohio and Tennessee from enforcing their gambling laws.

"Even assuming that Kalshi's sports-event contracts are swaps, we alternatively hold that the CEA neither expressly nor impliedly preempts Ohio's or Tennessee's gambling laws," the court said.

The decision overturns a federal district court ruling in Tennessee that had sided with Kalshi and reaffirms an earlier federal district court ruling in Ohio that supported the states' position.

The case is part of a much broader legal confrontation involving prediction market platforms, state regulators and the CFTC.

The commission has sued nine states in an effort to defend what it considers its exclusive authority over event contracts under the Commodity Exchange Act. The 6th Circuit's ruling rejects the central premise of that federal position, at least in the context presented by Kalshi's sports contracts.

A Growing Split Among Federal Courts

The 9th U.S. Circuit Court of Appeals ruled last month that Nevada could regulate sports-related event contracts, finding that the contracts were sports bets rather than swaps.

The 3rd U.S. Circuit Court of Appeals reached a different conclusion in April in a case involving New Jersey. That court ruled against the state and held that the CFTC has exclusive authority to regulate swaps regardless of the type of underlying contract.

New Jersey has asked the Supreme Court to review that decision, filing its petition earlier this month.

The emerging division among the appellate courts increases the possibility of Supreme Court involvement, although it remains uncertain whether the justices will take up the New Jersey case now or wait for additional appellate decisions.

For the prediction market industry, the legal question is broader than Kalshi's ability to offer sports contracts in a handful of states. Prediction markets have expanded rapidly by presenting contracts on future events as tradable financial instruments. Sports contracts have become an especially important part of that expansion because they create a potentially enormous market tied to games, leagues and individual sporting outcomes.

That growth has brought the platforms into direct competition with traditional sports-betting businesses while simultaneously placing them under a regulatory framework designed for derivatives markets.

The dispute therefore involves two different regulatory models. State gambling authorities generally regulate betting based on factors such as licensing, consumer protection and the legality of particular forms of wagering. The CFTC, by contrast, oversees derivatives markets and focuses on financial-market integrity, trading practices and systemic risks.

How courts classify sports-event contracts determines which regulatory system applies.

Supreme Court Question Comes Into Play

The conflicting appellate decisions make the Supreme Court relevant to the industry's future regulatory structure. The 6th Circuit has now joined the 9th Circuit in allowing states to regulate sports-event contracts, while the 3rd Circuit has backed the CFTC's broader jurisdiction over swaps. That means the legal status of similar products can depend on which federal appellate jurisdiction they are operating in.

The uncertainty could have practical consequences for prediction exchanges seeking to expand their sports offerings nationwide. Platforms may have to account for different legal environments while courts continue to determine whether the contracts constitute financial derivatives or gambling products.

The dispute also raises a larger question about the boundary between federal financial regulation and state gambling authority. The CFTC's position is based on the Commodity Exchange Act and its claim to exclusive jurisdiction over swaps. The states' position is that federal derivatives law does not prevent them from regulating contracts that function as sports wagers under their own laws.

The 6th Circuit's unanimous ruling gives the states another significant legal victory and puts additional pressure on the prediction market industry's federal regulatory theory. The Supreme Court may ultimately be asked to resolve the conflict, but there is no guarantee that it will intervene immediately.