The 6th U.S. Circuit Court of Appeals issued a unanimous ruling on Friday stating that states have the authority to regulate sports-related event contracts on prediction market platforms. The three-judge panel determined that Ohio and Tennessee are permitted to apply their respective state gambling laws to Kalshi’s offerings, rejecting the platform's argument that these contracts fall exclusively under federal jurisdiction. The court held that Kalshi failed to demonstrate its sports-event contracts meet the statutory definition of a 'swap,' which would place them within the Commodity Futures Trading Commission's exclusive regulatory scope.
This decision marks the second significant legal defeat for the prediction market industry at the appeals court level, following a similar ruling by the 9th Circuit regarding Nevada last month. While the CFTC has sued nine states to defend its exclusive right to regulate event contracts under the Commodity Exchange Act, the 6th Circuit panel concluded that the Act does not expressly or impliedly preempt state gambling laws. The ruling overturns a previous federal district court decision in Tennessee that favored Kalshi and reaffirms an Ohio district court judgment supporting the states' position. Tennessee Attorney General Jonathan Skrmetti stated that Kalshi attempted to bypass state regulations and taxes associated with sports gambling but ultimately failed.
The 6th Circuit's decision significantly weakens the legal foundation for prediction market platforms operating across multiple jurisdictions without adhering to local gambling statutes. By rejecting the classification of sports-event contracts as federally regulated swaps, the court validates the states' ability to enforce consumer protections, licensing requirements, and tax obligations typically associated with sports betting. This creates a fragmented regulatory landscape where platforms must navigate varying state laws rather than relying on a uniform federal framework, potentially increasing compliance costs and operational complexity for firms like Kalshi.
With conflicting rulings from the 3rd, 6th, and 9th Circuits, the likelihood of Supreme Court intervention rises as New Jersey pursues its appeal against the 3rd Circuit's pro-CFTC stance. The divergence in judicial opinions highlights a critical unresolved question regarding the boundary between financial derivatives and gambling instruments. Market participants should monitor whether the Supreme Court consolidates these cases to establish a definitive national standard, as the current uncertainty poses substantial risks to the scalability and business model of prediction market exchanges.
