Kalshi has achieved a notable legal success after the U.S. Court of Appeals for the Third Circuit ruled in a 2–1 decision to uphold an injunction that prevents New Jersey from enforcing its gambling regulations against the prediction market platform.
This ruling is significant as it marks the first time a federal appellate court has addressed the applicability of state sports betting laws to prediction markets. The decision comes shortly after Kalshi faced a setback in Nevada, highlighting the increasing legal discrepancies across various jurisdictions that may eventually require intervention from the U.S. Supreme Court.
The case centered around two critical questions: whether the federal Commodity Exchange Act (CEA) supersedes state gambling laws, and whether Kalshi’s contracts can be classified as “swaps” under this statute. For Kalshi to succeed, it needed to win on both fronts.
Judge David J. Porter, writing for the majority, stated that federal law takes precedence over state regulation in this scenario. He noted, “The District Court considered whether the Act impliedly preempted state regulation of DCMs and concluded that ‘at the very least field preemption applies.’”
The court concluded that the relevant area of concern is trading on a designated contract market (DCM) rather than gambling in a broader sense, asserting that federal law governs this domain. Furthermore, it determined that conflict preemption is applicable, indicating that New Jersey’s enforcement would disrupt federal objectives.
Porter elaborated, “Allowing New Jersey to enforce its gambling laws and state constitution would create an obstacle to executing the Act because such state enforcement would prevent Kalshi, which operates a licensed DCM under the exclusive jurisdiction of the Commodity Futures Trading Commission (CFTC), from offering its sports-related event contracts in New Jersey.” He emphasized that this type of state regulation is precisely the fragmented approach that Congress sought to eliminate by establishing the CFTC.
On the second point, the court highlighted the expansive definition of swaps under the CEA, dismissing New Jersey’s claim that these contracts must be directly linked to financial instruments. Porter remarked, “New Jersey argues that Kalshi’s event contracts are not ‘swaps’ covered by the Act ‘because the outcome of a sports game is not “joined or connected” with a financial, economic, or commercial instrument or measure.’ However, its proposed ‘joined or connected’ requirement sets the bar higher than what the Act stipulates.”
In a dissenting opinion, Judge Jane Richards Roth contended that Kalshi’s offerings closely resemble conventional sports betting and should therefore fall under state regulation. She stated, “Offerings are virtually indistinguishable from the betting products available on online sportsbooks, such as DraftKings and FanDuel.” Roth described Kalshi’s actions as a performative maneuver intended to obscure the reality that its products constitute sports gambling, asserting, “Because Kalshi is facilitating gambling, it can be subjected to state regulation.”
Roth also warned against broadly interpreting federal preemption in an area traditionally governed by states, stating that “DCM trading is not the kind of comprehensive field where the federal interest is so dominant that Congress intended for the ‘complete ouster of state power.’”
This ruling comes just under 72 hours after a Nevada state court extended a ban on Kalshi’s contracts, including those related to sports, further emphasizing the unsettled legal environment.
In the Nevada case, Judge Jason Woodbury remarked, “I find based on the arguments presented that it is a gaming activity that is prohibited for any non-licensee to engage in.”
Representing Nevada, attorney Jessica Whelan informed the court, “There’s no real dispute that Kalshi is not in compliance with Nevada gaming regulations. Kalshi’s primary argument is that it does not need to adhere to Nevada wagering law.”
The conflicting rulings in New Jersey and Nevada highlight a broader legal conflict regarding the regulation of prediction markets in the United States, with courts divided on the extent of federal commodities law versus state gambling authority.