In a significant victory for prediction market provider Kalshi, a federal appeals court has ruled that New Jersey cannot temporarily ban the company's operations. The Third Circuit Court of Appeals decided that the state's enforcement action is preempted by federal law, specifically the Commodity Exchange Act, which governs Kalshi's products.
The ruling, made by a 2-1 majority, found that Kalshi's sports-related event contracts are subject to federal regulation, rather than New Jersey state gambling laws. The Commodity Futures Trading Commission (CFTC) has not determined that Kalshi's contracts are contrary to the public interest, and the court noted that the CFTC has not commenced any enforcement actions against such contracts. The ruling rejected New Jersey's argument that Kalshi's event contracts are not covered by the Act, as the outcome of a sports game is not connected to a financial instrument. However, Circuit Judge Jane Roth dissented, arguing that the state rules do not undermine the congressional objectives under the Commodity Exchange Act and that Kalshi's products are essentially sports gambling.
The decision comes as states across the US have been filing lawsuits 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 contended that prediction markets are swaps governed by the Commodity Exchange Act, which preempts state rules.
The ruling may have implications for the ongoing debate over the regulation of prediction markets, with different courts issuing divergent rulings. CFTC Chairman Michael Selig emphasized the importance of defending the federal regulator's exclusive jurisdiction over these markets, noting that the CFTC's definition of a commodity is very broad and includes events on sports, politics, and other areas.