A significant ruling was handed down by a federal appeals court on Monday, stating that the state of New Jersey is not permitted to temporarily ban Kalshi, a platform offering prediction markets. This decision marks a crucial victory for the company in the face of numerous state-led enforcement actions. The Third Circuit Court of Appeals, in a 2-1 decision, determined that Kalshi's products fall under the federal Commodity Exchange Act, rather than being subject to New Jersey's state gambling laws.
According to the majority ruling, 'Kalshi initiated the offering of sports-related event contracts on its DCM exchange, and having self-certified compliance with applicable laws and regulations, these event contracts are presumed to be approved under federal law.' The ruling further noted that the Commodity Futures Trading Commission (CFTC) has yet to determine that Kalshi's sports-related event contracts are contrary to the public interest. Moreover, the CFTC has not initiated any enforcement actions against such contracts. The court rejected New Jersey's argument that Kalshi's event contracts do not qualify as 'swaps' covered by the Act, as the outcome of a sports game is not directly linked to a financial, economic, or commercial instrument or measure.
In a dissenting opinion, Circuit Judge Jane Roth argued that New Jersey's state rules do not undermine the objectives of the Commodity Exchange Act and that the actual products offered on Kalshi's platform constitute sports gambling. This decision comes as states across the US have begun filing lawsuits or issuing cease-and-desist orders against prediction market providers like Kalshi and Polymarket, alleging that their sports-related contracts violate state gambling laws. The CFTC has maintained that prediction markets, or event contracts, are swaps governed by the Commodity Exchange Act, which takes precedence over state rules.
The ruling has significant implications, as different courts have issued conflicting decisions on the matter. While some state courts have granted temporary restraining orders or preliminary injunctions in favor of the states, federal district courts have been more divided in their rulings.
The Third Circuit's decision suggests that prediction market providers may prevail in their argument that the Commodity Exchange Act preempts state rules, but the Ninth Circuit has declined to block another state enforcement action, allowing Nevada to secure a temporary restraining order and preliminary injunction against Kalshi. CFTC Chairman Michael Selig emphasized the importance of defending the federal regulator's exclusive jurisdiction over these markets, stating that the definition of commodity and statute is broad, encompassing events in sports, politics, and other areas, and does not distinguish between different types of event contracts.