US Appeals court rejects Kalshi’s bid to block state regulation of prediction markets

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The Backstory

A court split turns into a national test

The fight over Kalshi’s sports event contracts has moved from a dispute over one platform’s business model into a broader test of who controls the next phase of online wagering: federal commodities regulators or state gambling agencies. The latest ruling from the 6th U.S. Circuit Court of Appeals deepens that conflict by siding with Ohio and Tennessee, allowing them to enforce gambling laws against Kalshi despite the company’s argument that its contracts are federally regulated swaps.

That decision matters because prediction markets have challenged the state-by-state framework that has governed U.S. sports betting since the Supreme Court struck down the federal ban on state-authorized sports wagering in 2018. Kalshi’s position is that sports outcomes can be listed as event contracts on a federally regulated exchange overseen by the Commodity Futures Trading Commission. States argue the practical effect is simpler: consumers are staking money on whether a team or athlete wins, which they say is sports betting by another name.

The 6th Circuit’s ruling does not resolve the issue nationwide. Instead, it intensifies a split among federal appeals courts, with some judges accepting Kalshi’s preemption argument and others saying states retain authority to police gambling within their borders. That inconsistency has made Supreme Court review increasingly likely and has left operators, regulators and investors weighing a legal landscape that can change at the state line.

Early wins gave Kalshi momentum

Kalshi’s legal strategy gained traction in Tennessee when a federal judge granted the company a preliminary injunction blocking state officials from enforcing local sports betting laws against its contracts. U.S. District Judge Aleta Trauger found that Kalshi’s sports event contracts fit within the Commodity Exchange Act and could be treated as swaps, placing them outside Tennessee’s sports wagering regime while the case proceeded.

That ruling was important because it accepted Kalshi’s core theory: that the CFTC’s authority over federally listed derivatives can displace state gambling enforcement. Tennessee had argued that Kalshi’s products depended on game outcomes and therefore functioned like unlicensed wagering. Trauger rejected a narrow distinction between an “outcome” and an “occurrence,” concluding that an outcome could also be an occurrence under the law.

The decision followed earlier preliminary victories for Kalshi in other jurisdictions, including Nevada and New Jersey, where courts initially restrained regulators from taking enforcement action. Together, those rulings created the impression that prediction markets might be able to expand across sports without obtaining individual state gaming licenses. For a company seeking scale, a federal path offered a potentially faster and less expensive route than applying for approval in dozens of jurisdictions, each with its own tax rates, responsible gambling rules, advertising limits and age restrictions.

But the early momentum also prompted pushback. Tennessee Attorney General Jonathan Skrmetti moved quickly to appeal, arguing that the contracts were effectively indistinguishable from sports wagers offered by licensed sportsbooks. In his appeal of the Kalshi injunction, Skrmetti’s office told the 6th Circuit that the state must be allowed to enforce licensing conditions, consumer protections and age limits against companies offering sports-related products to Tennessee residents.

Other circuits undercut the federal-only argument

Kalshi’s position weakened as other appellate courts took a more skeptical view. In August, the 9th U.S. Circuit Court of Appeals ruled against Kalshi in litigation tied to Nevada, finding that the platform had not shown the Commodity Exchange Act preempted state gaming regulations as applied to sports event contracts. The panel described the contracts as sports gambling, regardless of the label Kalshi used.

That ruling had consequences beyond the courtroom. A J.P. Morgan analyst said the decision was a near-term positive for DraftKings and Flutter Entertainment’s FanDuel, because restrictions on Kalshi would protect licensed sportsbook operators from a federally regulated competitor that could otherwise bypass state gaming taxes and compliance obligations. The analysis, covered in a report on the 9th Circuit ruling’s impact on DraftKings and FanDuel, framed the decision as a reprieve for incumbents while the courts sort out the broader preemption question.

The 9th Circuit’s reasoning also addressed a central policy concern for states: whether Kalshi’s contracts help users hedge real economic risk or mainly create speculative exposure for ordinary consumers. That distinction matters because commodities law is built around markets that can serve hedging and price-discovery functions. State regulators say sports contracts do not perform the same role when retail users are effectively wagering on games.

Utah has become another front in the dispute. A federal court there refused to shield Kalshi from enforcement while an appeal continues, finding the company had not met the standard for an injunction. As described in the Utah injunction fight, the ruling did not finally decide whether federal law overrides Utah’s anti-gambling rules. It did, however, allow the state to keep enforcing its laws while the 10th Circuit considers the underlying question.

New Jersey presses for Supreme Court review

The strongest ruling for Kalshi came from the 3rd U.S. Circuit Court of Appeals, which found in April that the CFTC had exclusive authority over the company’s sports-related event contracts. In a 2-1 decision, that court classified the contracts as swaps under the Commodity Exchange Act, as amended by the Dodd-Frank Act, and allowed Kalshi to keep operating in New Jersey while the litigation continued.

That result created a direct conflict with the 9th Circuit and now stands in sharper tension with the 6th Circuit’s decision. New Jersey has asked the U.S. Supreme Court to intervene, arguing that states must be able to regulate sports betting offered through prediction market platforms. In its petition seeking Supreme Court review of Kalshi sports markets, the state said the products should be subject to gambling laws, including licensing, age restrictions and consumer safeguards.

The appeal highlights the national stakes. More than 40 states have opposed Kalshi’s position in some form, reflecting bipartisan concern that prediction markets could undermine local gambling regimes. States that legalized sports betting built regulatory systems around licensed operators, tax collection, integrity monitoring and responsible gambling obligations. If event-contract exchanges can offer similar sports products under federal commodities law, states could lose control over market entry and revenue.

For Kalshi, the opposite risk is a fragmented system in which a federally regulated exchange must adjust or withdraw products state by state. The company argues that Congress created a national regulator for derivatives markets precisely to avoid inconsistent rules across jurisdictions. The growing circuit split gives that argument procedural force, even as more courts question whether sports outcomes belong within commodities regulation at all.

Business stakes extend beyond one platform

The outcome will affect more than Kalshi. Licensed sportsbooks, tribal gaming interests, state lotteries, exchanges and emerging prediction-market competitors are watching because the courts may define the boundary between financial products and gambling products for years. A Supreme Court ruling favoring Kalshi could open a federally regulated lane for sports event contracts, potentially pressuring sportsbooks that must comply with state taxes and licensing costs. A ruling favoring states could force prediction markets to geofence more aggressively or seek gaming approvals where they offer sports products.

The legal uncertainty also affects investors. Shares of major sportsbook operators have reacted to court decisions because prediction markets represent both a competitive threat and a regulatory unknown. If Kalshi and similar companies can offer sports markets nationally under CFTC oversight, they could reach customers in states where sports betting is restricted or where licensed operators face high costs. If states prevail, incumbents such as DraftKings and FanDuel would retain the advantages of existing licensing infrastructure and market access deals.

The 6th Circuit’s decision adds weight to the state-regulation side of the ledger, but it does not end the fight. With the 3rd Circuit pointing one way and the 6th and 9th circuits pointing another, the dispute now has the elements that often draw Supreme Court attention: conflicting appellate rulings, significant economic consequences and a recurring question of federal-state authority. Until that happens, prediction markets and gambling regulators remain locked in a fast-moving contest over whether sports contracts are derivatives, bets or both.