A federal appeals court handed prediction markets a potentially consequential defeat Friday, ruling that sports event contracts are likely bets rather than federally regulated swaps and opening the door for Nevada to enforce its gaming laws against the exchange.
- The Ninth Circuit ruled Kalshi’s sports event contracts are likely sports bets rather than federally regulated swaps, clearing the way for Nevada to enforce its gaming laws.
- The decision conflicts with Kalshi’s favorable Third Circuit ruling, deepening a divide that could increase the likelihood of U.S. Supreme Court review.
- The court found CFTC Regulation 40.11 still bars gaming-related contracts, potentially weakening Kalshi’s protection from regulators in other Ninth Circuit states.
The U.S. Court of Appeals for the Ninth Circuit affirmed a lower court’s decision dissolving a preliminary injunction that had protected Kalshi and other prediction markets from the Nevada Gaming Control Board. The 3-0 ruling directly rejects much of the reasoning behind Kalshi’s April victory in the Third Circuit, creating a divide between two federal appellate courts over whether federal commodities law supersedes state gaming regulation.
That disagreement could strengthen the case for what seems now like an increasingly likely U.S. Supreme Court review while creating different regulatory standards across the country.
“The substance of the sports event contracts offered on Kalshi’s DCM is sports gambling, regardless of whether Kalshi calls them swaps,” Judge Ryan Nelson wrote for the three-judge panel.
Court rejects Kalshi’s federal protection
Kalshi - and other prediction markets in this case - had argued its status as a Commodity Futures Trading Commission-regulated designated contract market gives the federal agency exclusive jurisdiction over contracts traded on its exchange. Under that position, state gambling regulators cannot require Kalshi to obtain gaming licenses or prevent it from offering sports contracts.
The Ninth Circuit agreed that the Commodity Exchange Act preempts state regulation of swaps traded on designated contract markets. It concluded, however, that prediction markets' sports contracts do not qualify as swaps.
The court said Kalshi customers can effectively take positions resembling point-spread, prop, and parlay wagers offered by licensed sportsbooks. It also cited Kalshi’s previous promotion of itself as the first legal sports betting app available in all 50 states.
“For Kalshi to deny that its sports event contracts are sports bets under a reasonable person’s understanding is disingenuous,” Nelson wrote.
The panel also found that existing CFTC Regulation 40.11 prohibits designated contract markets from listing contracts that involve or relate to gaming. Although the CFTC has proposed changing regulations, the court said a proposed rule has no legal effect and the existing prohibition remains controlling.
Third Circuit victory undercut
The decision contrasts sharply with the Third Circuit’s April ruling. That court concluded sports event contracts fit within the Commodity Exchange Act’s definition of a swap and that states could not regulate them as sports betting.
The Ninth Circuit explicitly rejected what it called the Third Circuit’s overly broad interpretation. It determined that Congress did not quietly transfer nationwide authority over sports gambling from states and tribes to the CFTC through legislation written primarily to regulate financial markets following the 2008 financial crisis.
“Congress did not take a wrecking ball to all sports gambling regulations built up over decades by federal, state, and tribal governments when it amended the CEA,” Nelson wrote.
The three judges appeared skeptical of the prediction markets’ legal arguments during a hearing earlier this year. The ruling cements that position.
The Ninth Circuit ruling represents a major setback for prediction market operators that have relied on favorable federal preemption rulings to offer sports contracts without state gaming licenses. Nevada may now resume enforcement against Kalshi, and the decision could undermine a preliminary injunction Kalshi secured against Arizona regulators.
This could also spark further legal challenges in Ninth Circuit states and nationwide.
Meanwhile, a bevy of existing court cases remains unresolved. The Fourth Circuit is considering Kalshi’s appeal from an unfavorable Maryland ruling, while federal district courts have reached differing conclusions in challenges involving Tennessee, Ohio, and New York.
The Ninth Circuit remanded a separate Nevada case involving Kalshi’s election contracts for further consideration, meaning Friday’s decision focused primarily on sports.
Judge Kenneth Lee joined the ruling but acknowledged that federal law may give the CFTC some discretion over whether to permit certain gaming contracts. He said the court did not need to resolve that question because the current CFTC regulation bars them.
“While CFTC has proposed revising that regulation,” Lee wrote, “it remains in the books and controls the outcome of this appeal.”
