Sixth Circuit: Kalshi State Sports Betting Not Preempted By Federal Law

• The Sixth Circuit Court of Appeals ruled that federal law does not exempt Kalshi's sports event contracts from state sports betting regulations.
• The court determined that Kalshi's sports event contracts are not 'swaps' under the Commodity Exchange Act because they lack intrinsic financial consequences.
• Even if the contracts were swaps, the court found the Commodity Exchange Act's exclusive jurisdiction for the CFTC does not preempt state sports betting laws.
• This decision deepens a circuit split among federal appeals courts regarding the regulation of prediction markets and event contracts.
• Kalshi expressed disagreement with the ruling, citing the economic impact of sports and the impracticality of a state-by-state regulatory approach.

The Sixth Circuit's ruling against Kalshi deepens an existing divide among federal appeals courts regarding the regulation of prediction markets, signaling an increasingly complex and uncertain regulatory landscape.

In a significant setback for prediction market platform Kalshi, a federal appeals court has affirmed that state sports betting regulations can apply to its sports-related event contracts. The Sixth Circuit Court of Appeals, in a ruling issued on Friday, rejected Kalshi's argument that federal law, specifically the Commodity Exchange Act (CEA), exempts its offerings from state oversight. This decision stems from a multi-state regulatory dispute, where Ohio and Tennessee sought to regulate Kalshi's sports event contracts under their respective state sports betting laws.

Kalshi operates a digital marketplace facilitating the buying and selling of various "event contracts." These financial instruments are derivatives whose payouts are contingent upon the occurrence of specified events across diverse categories, including climate, economics, politics, and pop culture. The controversy arose last year when Kalshi expanded its offerings to include event contracts tied to sporting events, prompting regulatory action from state authorities in Ohio and Tennessee. Kalshi subsequently initiated lawsuits challenging these state-level regulatory efforts.

The Sixth Circuit panel, comprising Senior U.S. Circuit Judge Julia Smith Gibbons, U.S. Circuit Judge Eric Clay, and U.S. Circuit Judge Rachel Bloomekatz, delivered a two-pronged rejection of Kalshi's central arguments. Kalshi contended that its sports event contracts qualify as "swaps," a type of derivative over which the Commodity Futures Trading Commission (CFTC) holds "exclusive jurisdiction" under the CEA, thereby preempting state regulation. The court, however, disagreed, concluding that these contracts do not meet the definition of "swaps" as envisioned by the federal statute.

Writing for the panel, Judge Gibbons clarified that for an event to be considered "associated with a potential financial, economic or commercial consequence"—a key criterion for a swap—it must possess an intrinsic link to a financial outcome that would make hedging or pricing information desirable. The court found that Kalshi's sports event contracts only exhibit "downstream economic consequences," if any, and therefore lack this intrinsic association. Furthermore, the panel ruled that even if the sports event contracts were indeed swaps, the CEA's grant of exclusive jurisdiction to the CFTC would not preempt state sports betting laws. The court reasoned that these state laws primarily regulate sports betting and do not impose restrictions on the operation of designated contract markets (DCMs) themselves, affecting them only incidentally because DCMs like Kalshi choose to offer contracts that are "virtually indistinguishable from" sports bets.

The Sixth Circuit's ruling against Kalshi deepens an existing divide among federal appeals courts regarding the regulation of prediction markets, signaling an increasingly complex and uncertain regulatory landscape. Kalshi's spokesperson, Dani Lever, expressed disagreement with the court's interpretation, asserting that the law does not mandate "intrinsic" financial consequences for swaps and that sports inherently carry significant economic impact. Lever also highlighted the inconsistency among federal courts, noting that some recognize federal law's applicability to these contracts while others do not, and that judicial opinions diverge on the economic relevance of sports.

This judicial disagreement underscores the challenges faced by platforms like Kalshi, which must navigate a potential "state-by-state patchwork" of regulations. The decision means that compliance officers for prediction market platforms operating in the Sixth Circuit, which includes Ohio, Tennessee, Kentucky, and Michigan, must now assess their exposure to state-specific sports betting regulations, as federal preemption under the Commodity Exchange Act for 'swaps' was rejected. The lack of immediate comment from the offices of the Ohio and Tennessee attorneys general leaves the specific next steps for state enforcement unclear, but the ruling undeniably contributes to an evolving regulatory environment for event contracts and derivatives.

Compliance officers for prediction market platforms operating in the Sixth Circuit (Ohio, Tennessee, Kentucky, Michigan) must now assess their exposure to state-specific sports betting regulations, as federal preemption under the Commodity Exchange Act for 'swaps' was rejected. This ruling deepens a circuit split, signaling an evolving and uncertain regulatory landscape for derivatives and prediction markets that requires careful monitoring for potential future litigation or legislative action.

Source: Original reporting via Courthouse News Service