Sixth Circuit Says States May Police Kalshi Sports Contracts as Gambling

A federal appeals court ruled Sept. 25 that Ohio and Tennessee may apply their gambling laws to Kalshi’s sports-events contracts.

Kalshi, which was valued in May at $22 billion, has been the focus of an intensifying legal battle over the ability of state gaming regulators to police businesses in the rapidly expanding prediction markets sector.

States argue that firms like Kalshi are operating platforms that allow bets without required state licenses and violate state gaming laws, including prohibitions on wagers by individuals under the age of 21.

On Sept. 25, a panel of the U.S. Court of Appeals for the Sixth Circuit held unanimously that the prediction market operator had not shown its sports-event contracts meet the federal Commodity Exchange Act’s definition of a “swap,” so they do not fall within the U.S. Commodity Futures Trading Commission’s (CFTC) exclusive jurisdiction. The cases are KalshiEX v. Schuler and KalshiEX v. Orgel.

Writing for the panel, U.S. Circuit Judge Julia Smith Gibbons said the company failed to show its products are federally regulated “swaps” that would stop Ohio and Tennessee from applying their gambling laws.

A swap under the federal Commodity Exchange Act includes a contract whose value depends on the occurrence of an event “associated with a potential financial, economic, or commercial consequence.” Kalshi argued its sports-event contracts fit that definition and are therefore subject only to the CFTC. The panel disagreed.

However, the panel said it agrees with Kalshi that its sports-event contracts are conditioned on the occurrence of “events,” but concluded that its contracts do not depend on events that are “associated with a potential financial, economic, or commercial consequence” within the meaning of the federal Commodity Exchange Act.

The panel said Kalshi also did not establish “that its sports-event contracts satisfy the statutory definition of a ‘swap,’” under the statute. Even if they were swaps, the panel said the statute “neither expressly nor impliedly preempts” the two states’ gambling laws.

“Unlike contracts based on financial values or instruments (e.g., interest rates or stock prices), Kalshi’s sports-event contracts have only downstream economic consequences, assuming they have the potential to cause economic consequences at all.”

The panel affirmed the Southern District of Ohio’s denial of the company’s request for a preliminary injunction to block Ohio state regulators from moving against Kalshi.

At the same time, the panel vacated the Middle District of Tennessee’s preliminary injunction blocking Tennessee’s state regulatory action against the company there.

The Sixth Circuit, with its decision on Ohio and Tennessee, joins the Ninth Circuit in allowing Nevada to apply state gambling laws.

The Sixth Circuit’s ruling conflicts with the Third Circuit’s decision in April that blocked New Jersey regulators.

The ruling comes weeks after New Jersey asked the U.S. Supreme Court to decide whether states have the authority to regulate sports betting that takes place on prediction markets operated by Kalshi and its competitors.

The specific issue, according to the Garden State, is whether prediction markets may offer sports wagers without having to follow state sports-gambling laws—that is, whether Congress removed state authority over gambling on these platforms.

The case is currently going through the briefing process at the nation’s highest court. The justices have not yet decided whether to hear the case.