A federal appeals court has ruled that states like Ohio and Tennessee can regulate Kalshi’s sports prediction markets under their gambling laws, marking another legal defeat for platforms that claim federal oversight. This decision, the second of its kind from a federal appeals court, intensifies the debate over the classification of these contracts, setting the stage for a potential showdown at the U.S. Supreme Court.
A federal appeals court has delivered another significant setback to prediction market platforms like Kalshi, ruling that states can indeed regulate sports-related event contracts under their gambling laws. This decision intensifies a nationwide legal battle that is widely expected to reach the U.S. Supreme Court.
On Friday, the 6th U.S. Circuit Court of Appeals issued a unanimous ruling, asserting that Ohio and Tennessee are within their rights to apply state gambling statutes to Kalshi's sports-related event contracts. This overturns a previous Tennessee federal district court decision that favored Kalshi and reinforces an Ohio federal district court ruling siding with the states.
Key Points:
- The 6th U.S. Circuit Court of Appeals confirmed states' authority to regulate Kalshi's sports prediction markets under gambling laws in Ohio and Tennessee.
- This marks the second federal appeals court decision affirming state oversight of sports-related prediction offerings, following a similar ruling by the 9th Circuit regarding Nevada.
- The escalating conflict over who regulates prediction markets' sports contracts is anticipated to ultimately be resolved by the U.S. Supreme Court.
Prediction market platforms, including Kalshi, contend that all event contracts are a form of financial derivative known as 'swaps,' placing them under the exclusive jurisdiction of the Commodity Futures Trading Commission (CFTC). However, states argue that sports-related offerings are essentially gambling and should therefore fall under their respective sports betting regulations.
The court's opinion explicitly 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.'" Furthermore, the panel rejected the notion of federal preemption, 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."
Tennessee's Attorney General, Jonathan Skrmetti, lauded the decision: "Kalshi attempted an end run around Tennessee law to avoid any of the rules or taxes associated with sports gambling. They failed. Sports wagering is heavily regulated because it can do a lot of harm, and I'm glad we thwarted Kalshi's efforts to remove every safeguard and put Tennessee sports bettors at risk."
In response, Kalshi spokesperson Dani Lever expressed disagreement with the ruling, highlighting the inconsistent judicial interpretations across states. Lever stated, "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. 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 ruling follows a similar decision last month by the 9th U.S. Circuit Court of Appeals, which sided with Nevada in its right to regulate sports-related event contracts as sports bets. Conversely, the 3rd U.S. Circuit Court of Appeals ruled in April against New Jersey, asserting the CFTC's exclusive right to regulate all swaps. New Jersey has since appealed this decision to the Supreme Court, signaling the high stakes of this ongoing legal battle.
The ultimate resolution of whether prediction markets' sports contracts are financial derivatives or gambling products, and who holds regulatory authority, is increasingly looking like a matter for the nation's highest court.
