The 6th U.S. Circuit Court of Appeals ruled Friday that states have the right to regulate contracts for sporting events on prediction market platforms, marking a second major legal defeat for the industry as a fight looms before the U.S. Supreme Court.
In a unanimous decision, the three judges said Ohio and Tennessee are allowed to apply their state gambling laws to Kalshi’s sporting event contracts.
“We find that Kalshi has not demonstrated that its sporting event contracts meet the legal definition of a ‘swap’ and therefore fall within the ‘exclusive jurisdiction’ of the CFTC,” the opinion states.
Kalshi and other prediction market platforms claim that all event-driven contracts are swaps, a type of financial derivative regulated by the Commodity Futures Trading Commission. However, states argue that the platforms’ sports offerings constitute gambling and therefore should be regulated by their sports betting laws.
That disagreement has spawned a legal battle across the country as states sue platforms for operating what they often claim are illegal gambling operations, while exchanges also sue states to prevent them from enforcing local laws on what they claim are federally regulated financial exchanges.
The CFTC has sued nine states to defend what it considers its exclusive right to regulate event contracts, granted to it by the Commodity Exchange Act. But the 6th Circuit panel rejected that notion.
“Even assuming that Kalshi’s sporting event contracts are exchanges, we alternatively find that the CEA neither expressly nor implicitly preempts the Ohio or Tennessee gaming laws,” the opinion states. The ruling overturns a decision by a federal district court in Tennessee that sided with Kalshi and reaffirms a decision by a federal district court in Ohio that sided with the states’ argument.
“Kalshi attempted to circumvent Tennessee law to avoid rules or taxes associated with sports gambling. They failed,” said Jonathan Skrmetti, Tennessee Attorney General.
“Sports betting is heavily regulated because it can do a lot of harm, and I’m glad we thwarted Kalshi’s efforts to remove all guarantees and put Tennessee sports bettors at risk,” he added.
Kalshi spokesperson Dani Lever said the platform disagreed with the decision, noting that “the decision shows exactly why a state-by-state patchwork doesn’t work.”
“The courts cannot agree on the basics: some say federal law covers these contracts, others say it does not. Some recognize that sports have a real economic impact, while others claim (wrongly) that this is not the case,” she added. “Markets cannot function when the rules change at every state border, which is why Congress created a single federal regulator with nationwide rules.”
The CFTC did not immediately respond to a request for comment. CNBC also reached out to the Ohio Attorney General’s Office for comment.
The latest ruling now means prediction market platforms have recorded two defeats in legal battles at the Court of Appeal. The 9th U.S. Circuit Court of Appeals ruled last month that Nevada has the right to regulate contracts related to sporting events, saying they are sports betting, not exchanges. Meanwhile, the Third U.S. Circuit Court of Appeals ruled against New Jersey in April and declared that the CFTC has the exclusive right to regulate all swaps, regardless of contract type.
New Jersey appealed the ruling in a petition filed with the Supreme Court earlier this month. It is unclear whether the Supreme Court will take up the case now or wait until further circuit court rulings on the issue of sporting event contracts are issued.
Disclosure: CNBC and Kalshi have a business relationship that includes customer acquisition and minority investment.
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