Kalshi achieved a pivotal legal win as the U.S. Court of Appeals for the Third Circuit ruled 2–1 to maintain an injunction preventing New Jersey from enforcing its gambling regulations on the prediction market platform.
This ruling is notable as it represents the initial instance where a federal appellate court has addressed the application of state sports betting laws to prediction markets. The decision follows a setback for Kalshi in Nevada, highlighting increasing legal inconsistencies among jurisdictions that may necessitate a resolution from the U.S. Supreme Court.
The case centered on two primary inquiries: whether the federal Commodity Exchange Act (CEA) supersedes state gambling laws, and whether Kalshi’s contracts fall under the definition of “swaps” as per the statute. Success on both fronts was crucial for Kalshi.
In the majority opinion, Judge David J. Porter stated that federal law takes precedence over state regulations in this scenario. “The District Court considered whether the Act impliedly preempted state regulation of designated contract markets (DCMs) and concluded that ‘at the very least field preemption applies,’” he stated.
The court asserted that the pertinent field pertains to trading on a designated contract market (DCM), rather than gambling in general. The findings confirmed that federal law governs that domain. Furthermore, the court determined that conflict preemption applies, indicating that New Jersey’s efforts to enforce its laws would hinder federal objectives.
“Permitting New Jersey to enact its gambling laws and state constitution would obstruct the implementation of the Act, as such state enforcement would prevent Kalshi, which operates a licensed DCM under the exclusive authority of the Commodity Futures Trading Commission (CFTC), from offering its sports-related event contracts in New Jersey,” Porter articulated. “This state regulation exemplifies the fragmented landscape Congress aimed to eliminate by instituting the CFTC.”
Regarding the second question, the court underlined the extensive definition of swaps according to the CEA, dismissing New Jersey’s claims that such contracts must be closely linked to financial instruments.
“New Jersey argues that Kalshi’s event contracts do not qualify as ‘swaps’ under the Act ‘because the result of a sports game is not “joined or connected” with a financial, economic, or commercial instrument or measure,’” Porter noted. “However, its suggested ‘joined or connected’ standard elevates the requirements beyond what the Act specifies.”
In dissent, Judge Jane Richards Roth contended that Kalshi’s offerings closely mirror traditional sports betting and should fall under state regulation.
“The offerings are nearly indistinguishable from the betting products found on online sportsbooks, such as DraftKings and FanDuel,” she stated. “I perceive Kalshi’s conduct as a performative maneuver intended to obscure the reality that Kalshi’s products constitute sports gambling,” adding, “Given that Kalshi is facilitating gambling, it should be subject to state oversight.”
Roth further warned against the broad application of federal preemption in a domain historically overseen by states, arguing that “DCM trading does not comprise such a comprehensive field where federal interests are so dominant that Congress intended to entirely exclude state authority.”
This ruling arrives just under 72 hours after a Nevada state court extended a prohibition on Kalshi’s contracts, including those related to sports, revealing the uncertain legal landscape.
In that Nevada case, Judge Jason Woodbury remarked: “I find based on the arguments presented that it is a gaming activity prohibited for any non-licensee to engage in.”
Representing Nevada, attorney Jessica Whelan informed the court: “There’s no real debate that Kalshi does not comply with Nevada’s gaming regulations. Kalshi’s central argument is that it does not need to adhere to Nevada’s wagering laws.”
The contrasting outcomes in New Jersey and Nevada point to a more extensive legal confrontation regarding the regulation of prediction markets across the United States, revealing a divide between federal commodities law and state gambling jurisdiction.