A unanimous three-judge panel of the U.S. Court of Appeals for the Sixth Circuit ruled on Sept. 25 that Ohio and Tennessee may apply their state gambling laws to Kalshi’s sports-event contracts, deepening a split among federal appeals courts over regulatory authority in prediction markets.
The decision in KalshiEX v. Schuler and KalshiEX v. Orgel marks the second major legal setback for Kalshi, a prediction market platform valued at $22 billion as of May. The panel rejected Kalshi’s argument that its contracts qualify as federally regulated “swaps” under the Commodity Exchange Act, thereby falling under the exclusive jurisdiction of the Commodity Futures Trading Commission (CFTC).
Core Facts of the Ruling
- The Sixth Circuit held that Kalshi failed to demonstrate its sports-event contracts meet the statutory definition of a swap, which requires dependence on events tied to financial, economic, or commercial consequences.
- The panel also concluded that the Commodity Exchange Act does not preempt Ohio’s or Tennessee’s gambling laws, allowing state regulators to enforce their own rules.
State vs. Federal Jurisdiction
The ruling hinges on the distinction between financial derivatives and gambling contracts. Writing for the panel, U.S. Circuit Judge Julia Smith Gibbons stated that “swaps” typically involve financial hedging tools, not gaming-related agreements. She emphasized that gambling regulation falls under the “police power” of states, which Congress has not explicitly overridden.
Legal Landscape and Split Among Courts
The Sixth Circuit’s decision aligns with rulings from the Ninth Circuit (which sided with Nevada’s gambling laws) but contradicts the Third Circuit, which found that Kalshi’s contracts are not subject to New Jersey’s gambling regulations. This divergence increases the likelihood that the U.S. Supreme Court may intervene to resolve the jurisdictional conflict.
Kalshi’s Position and Industry Impact
Kalshi contends that its event contracts function as financial derivatives, regulated by the CFTC, and has argued that state gambling laws should not apply. The company has not yet responded to requests for comment following the ruling. The decision overturns a Tennessee federal district court ruling that favored Kalshi and upholds an Ohio federal district court decision siding with the states.
Broader Implications for Prediction Markets
Prediction markets allow users to wager on outcomes of events ranging from sports and elections to cultural phenomena like the Oscars. The legal uncertainty surrounding these platforms has prompted multiple states, including Ohio and Tennessee, to challenge their operations. The CFTC has sued nine states to assert its exclusive authority over event contracts, arguing that federal regulation preempts state laws.
Reactions and Political Context
The dispute has exposed tensions between state regulators and federal agencies, as well as between Republican-led states and the CFTC under the Trump administration. While some states seek to crack down on prediction markets, others have taken a more permissive approach, creating a patchwork of regulations.
What’s Next
The Sixth Circuit’s ruling leaves Kalshi and similar platforms in a precarious position, as they navigate conflicting state laws while awaiting potential Supreme Court clarification. The decision also raises questions about the future of event contracts in financial markets and whether Congress will step in to define their regulatory status.