Appeals Court Deals Blow to Kalshi, Granting States Authority Over Sports Prediction Markets

A federal appeals court dealt a major blow to prediction market operator Kalshi on Friday, ruling that states possess the constitutional authority to regulate sports-related event contracts under their gambling statutes. The unanimous decision by a three-judge panel of the 6th U.S. Circuit Court of Appeals in Cincinnati determined that federal commodities laws do not preempt state enforcement, stripping the platform of its key defense against state-level gaming oversight in Ohio and Tennessee.

The ruling marks the second appellate defeat in less than a month for the burgeoning prediction market industry, as reported by CNBC and Reuters. The decision deepens a sharp divide across the federal judiciary regarding whether these fast-growing trading exchanges fall under the exclusive oversight of the Commodity Futures Trading Commission (CFTC) or remain subject to the patchwork of state gaming commissions, setting up an inevitable review by the U.S. Supreme Court^[3].

The Circuit Decision: Sports Bets Are Not Derivatives Swaps

Writing for the unanimous Sixth Circuit panel, Circuit Judge Julia Smith Gibbons rejected Kalshi's central premise that its sports event contracts qualify as federally shielded derivatives, according to court documents cited by Reuters. Kalshi had maintained that because its exchange operates as a federally designated contract market licensed by the CFTC, its contracts constitute "swaps" governed exclusively by the Commodity Exchange Act (CEA)^[4].

The court found that argument unconvincing. Judge Gibbons noted that swaps historically refer to financial indices, interest rates, and commercial instruments designed for risk management and economic hedging, rather than consumer wagering on athletic competitions. Addressing Kalshi's claim that sports contracts involve events associated with commercial consequences, the court affirmed that athletic outcomes are not inherently financial in nature. Isolated examples, such as an English pub hedging a free-drinks promotion tied to a basketball game, were insufficient to establish that corner kicks or final scores are swap commodities.

Critically, the Sixth Circuit established an alternative holding: even if the instruments were classified as swaps under federal rules, the Commodity Exchange Act does not expressly or impliedly preempt state gambling enforcement. The panel upheld an Ohio federal court decision refusing to shield Kalshi and vacated an injunction that had previously barred Tennessee officials from taking action^[7].

State Enforcers Push Back on Federal Shields

The decision was immediately embraced by state regulators, who have argued for months that prediction platforms are offering unlicensed sports wagering under the guise of Wall Street derivatives trading. Tennessee Attorney General Jonathan Skrmetti characterized the outcome as a rebuke to the sector's regulatory positioning, telling CNBC that Kalshi had attempted an end run around state law to evade consumer safeguards and gambling taxes.

The ruling shows exactly why a state-by-state patchwork doesn't work. Markets can't operate when the rules change at every state line, which is why Congress created a single federal regulator with nationwide rules.

Dani Lever, Kalshi spokesperson, via statement to Reuters

Kalshi firmly disputed the legal holding, stating that it does not expect the ruling to survive subsequent appellate review. Company spokesperson Dani Lever argued that subjecting nationwide electronic exchanges to local statutes disrupts interstate commerce. However, the courtroom loss in Cincinnati follows closely behind a late-August ruling from the 9th U.S. Circuit Court of Appeals. In that case, a three-judge panel in San Francisco unanimously dissolved an injunction against Nevada regulators, holding that the actual substance of Kalshi's products is sports gambling regardless of the swap terminology applied to them^[10].

An Entrenched Split Across Federal Circuits

The Sixth Circuit's decision establishes an intractable conflict across the federal judicial system, making uniform national operation legally perilous for event platforms. The geographical divide leaves platforms with conflicting regulatory frameworks depending on the venue of enforcement.

This tripartite split represents a complete reversal of momentum from the spring, when the 3rd U.S. Circuit Court of Appeals in Philadelphia handed Kalshi a major triumph against New Jersey regulators. Writing for that panel, Circuit Judge David J. Porter ruled that event contracts only need to bear an association with economic consequences to constitute swaps, placing them squarely under exclusive CFTC jurisdiction. New Jersey has already petitioned the U.S. Supreme Court to review that April ruling, according to legal filings cited by Reuters^[3].

Commercial Fallout and the Road to the High Court

The mounting string of state-level legal victories threatens to upend the business model of Kalshi and its peers, including Polymarket and retail brokers such as Robinhood, which have moved aggressively into prediction contracts. Prediction market operators secured momentum over the past two years by registering with the CFTC, enabling nationwide access without enduring the rigorous licensing procedures and heavy gross gaming revenue taxes imposed on commercial sportsbooks like DraftKings or FanDuel.

That regulatory arbitrage is now collapsing under multi-state enforcement actions. Outside of Ohio, Tennessee, and Nevada, state attorneys general in Arizona, Massachusetts, Michigan, and Washington have pursued aggressive legal measures or issued criminal cease-and-desist warnings against unlicensed prediction operations. Earlier in September, the Ninth Circuit also barred Kalshi from offering sports wagers to users located on California tribal reservations, affirming tribal sovereignty under the Indian Gaming Regulatory Act^[16].

The CFTC itself remains caught in an administrative standoff. While agency officials have previously insisted that statutory exemptions from the swap definition extend strictly to specific agricultural commodities and box-office receipts, federal judges have repeatedly pushed back on administrative overreach that trenches on historical state police powers. With two appellate courts now firmly aligned against Kalshi and one supporting its federal preemption stance, market observers and company executives agree that the ultimate classification of prediction contracts will be decided by the high court in Washington.