States Score Victory: Appeals Court Upholds Regulation of Kalshi’s Sports Prediction Markets

In a significant legal development for the burgeoning prediction market industry, the 6th U.S. Circuit Court of Appeals has ruled that states can indeed regulate sports-related event contracts offered by platforms like Kalshi. This decision, handed down on Friday, marks the second time a federal court of appeals has affirmed a state's authority in overseeing such offerings, signaling a potential shift in the regulatory landscape and setting the stage for a possible U.S. Supreme Court showdown.

The unanimous three-judge panel determined that Ohio and Tennessee are within their rights to apply their respective state gambling laws to Kalshi's sports prediction contracts. The court's opinion stated, "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.'"

This ruling directly challenges the assertion by Kalshi and similar platforms that all their event contracts qualify as 'swaps,' a category of financial derivatives under the exclusive regulatory purview of the Commodity Futures Trading Commission (CFTC). States, however, contend that sports-related prediction contracts are fundamentally akin to gambling and should therefore fall under their established gambling regulations.

The ensuing legal battles have seen states filing lawsuits against prediction market operators, alleging illegal gambling operations, while the platforms, in turn, have sued states to prevent the enforcement of local laws, arguing for federal oversight as financial exchanges.

The CFTC has actively defended its perceived exclusive jurisdiction by suing nine states, citing authority granted by the Commodity Exchange Act. However, the 6th Circuit panel's decision casts doubt on this claim, further stating, "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." This decision overturns a previous ruling by a Tennessee federal district court that favored Kalshi, while affirming a federal district court ruling in Ohio that supported the states' position.

Tennessee Attorney General Jonathan Skrmetti lauded the decision, asserting, "Kalshi attempted an end run around Tennessee law to avoid any of the rules or taxes associated with sports gambling. They failed." He emphasized the importance of regulating sports wagering due to its potential harms and expressed satisfaction that Kalshi's efforts to bypass safeguards were thwarted.

Kalshi spokesperson Dani Lever expressed disagreement with the ruling, highlighting the "state-by-state patchwork" as an impediment to market operations. "Courts can't agree on the basics: Some say federal law covers these contracts, and others say it doesn't. Some recognize that sports have real economic impact, while others (incorrectly) claim they don't," Lever stated. "Markets can't operate when the rules change at every state line, which is why Congress created a single federal regulator with nationwide rules."

This latest ruling adds to a series of legal setbacks for prediction market platforms. The 9th U.S. Circuit Court of Appeals previously ruled against prediction markets, stating that Nevada has the right to regulate sports-related contracts, deeming them sports bets rather than swaps. Conversely, the 3rd U.S. Circuit Court of Appeals had initially ruled in favor of New Jersey, asserting the CFTC's exclusive right to regulate all swaps, irrespective of contract type. New Jersey has since petitioned the Supreme Court to review this decision, leaving the ultimate resolution of this complex regulatory question uncertain.