A federal appeals court panel ruled unanimously on Friday that Ohio and Tennessee can enforce their gambling laws against the prediction market Kalshi, which argues that only the US government may regulate it, Ars Technica reported.
The three-judge panel of the US Court of Appeals for the Sixth Circuit found that the sports wagers Kalshi offers do not meet the legal definition of “swaps” over which the US Commodity Futures Trading Commission holds exclusive jurisdiction - and that even if they did, the Commodity Exchange Act would not bar states from applying their gambling laws.
“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,’” Judge Julia Smith Gibbons, a George W. Bush appointee, wrote for the panel. “And, 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.”
Kalshi had sued the two states after their gambling regulators signalled enforcement actions. The company offers sports betting across the country without state gambling licenses or taxes, including in states where sports gambling is entirely illegal. Friday’s decision upheld an Ohio district court ruling against Kalshi and vacated a Tennessee ruling in its favour, according to Ars Technica.
Under US law, swaps include contracts dependent on events “associated with a potential financial, economic, or commercial consequence.” The panel held that such an event must be intrinsically tied to a financial consequence, as with interest rates, and that Kalshi’s contracts “have only downstream economic consequences, assuming they have the potential to cause economic consequences at all.”
The “patchwork of state regulations” that Congress sought to preempt includes only those that directly target the licensing and operation of DCMs, not ancillary laws that may incidentally burden contracts relating to a subject matter traditionally within the field of state control.
The panel also found Congress knew how to write express preemption provisions into other parts of the Commodity Exchange Act but did not do so in the swaps jurisdiction section, and said the Supreme Court requires “exceedingly clear language” before Congress alters the balance of federal and state power in an area of traditional state authority.
The ruling widens a split among federal appeals courts: Kalshi won a Third Circuit case involving New Jersey and lost a Ninth Circuit case involving Nevada, while a Fourth Circuit case involving Maryland is pending. New Jersey has asked the Supreme Court to settle the question nationwide. The CFTC backed Kalshi in an amicus brief and has separately sued nine states over what it calls infringement of its exclusive jurisdiction; New York, meanwhile, has sued rival prediction market Polymarket as unlicensed gambling.
Kalshi said it disagreed with the decision and did not believe it would survive further review. “The law does not require a swap to involve ‘intrinsic’ financial consequences - and even if it did, sports clearly do,” the company said in a statement to Ars Technica. “The ruling shows exactly why a state-by-state patchwork doesn’t work... Markets can’t operate when the rules change at every state line, which is why Congress created a single federal regulator with nationwide rules.”
The next step could come from the Supreme Court, where New Jersey’s petition is pending, or from the Fourth Circuit, which has yet to rule in the Maryland case.