An appeals court ruled Monday that New Jersey could not temporarily ban prediction market provider Kalshi, giving the platform a much-needed victory against an avalanche of state enforcement actions.
A panel of the Third Circuit Court of Appeals ruled in a 2-1 vote that the state could not bring an enforcement action against Kalshi because the company’s products are subject to the federal Commodity Exchange Act, rather than New Jersey state gaming laws.
“Kalshi began offering contracts for sports-related events on its DCM exchange,” the majority ruling said. “Kalshi self-certified compliance with applicable laws and regulations, so those event contracts were presumptively approved under federal law… To date, the CFTC has not determined that Kalshi’s sports-related event contracts are contrary to the public interest.”
The CFTC has not initiated any enforcement actions against “sports-related event contracts,” according to the ruling, signed by Chief Judge Michael Chagares and Circuit Judge David Porter.
“New Jersey argues that Kalshi’s event contracts are not ‘swaps’ covered by the Act because the outcome of a sports game is not ‘united or connected’ with a financial, economic, or commercial instrument or measure,” the ruling added. “But the proposed ‘joined or connected’ requirement raises the bar higher than [Commodity Exchange] “The law requires.”
Circuit Judge Jane Roth, writing a dissent, said that New Jersey state rules do not “undermine the objectives of Congress” under the Commodity Exchange Act, and that the actual products available on Kalshi’s platform “are sports betting,” pointing to as examples contracts that bet on the winner of a National Football League game, the point spread in that game, and the combined number of points scored.
US states have begun suing or issuing cease-and-desist orders to prediction market providers, including Kalshi and Polymarket, alleging that their sports-related contracts violate state gambling laws. The CFTC has held that prediction markets, or event contracts, are swaps governed by the Commodity Exchange Act, which preempts these state rules.
Different courts have issued divergent rulings. Some state courts have entered initial temporary restraining orders or preliminary injunctions in favor of the states, while federal district courts have been more mixed.
The appeals courts have also been mixed. While the Third Circuit’s ruling on Monday suggests that prediction market providers will prevail in their argument that the Commodity Exchange Act preempts these state rules, the Ninth Circuit declined to block another Nevada state enforcement action last month, clearing the way for that state to obtain a temporary restraining order and preliminary injunction against Kalshi. There will be another Ninth Circuit hearing later this month with several companies.
CFTC Chairman Michael Selig, speaking Monday at an event hosted by Vanderbilt University and the Blockchain Association, said it was important for the federal regulator to defend its “exclusive jurisdiction over these markets.” The CFTC filed an amicus brief with the Ninth Circuit ahead of a hearing next week.
“Our definition of merchandise and statute is very broad. It includes sporting events, it includes political events, it includes corn and grains and all kinds of things,” he said. “It doesn’t really distinguish between offering an event contract on grains, [that] “You’re regulating that differently than a sporting event contract.”
