In a significant decision, a federal appeals court has granted a major victory to Kalshi, a prediction market platform, by blocking New Jersey's attempt to shut down its sports markets. The Third Circuit Court of Appeals ruled that the federal Commodity Exchange Act takes precedence over state gambling laws, thereby preventing New Jersey from taking enforcement action against Kalshi.
The court's decision, made by a 2-1 majority, determined that Kalshi's products fall under the jurisdiction of the federal Commodity Exchange Act, rather than being subject to New Jersey state gambling laws. The ruling stated that Kalshi had self-certified compliance with applicable laws and regulations, and as a result, its event contracts were presumptively approved under federal law. The Commodity Futures Trading Commission (CFTC) has not initiated any enforcement actions against sports-related event contracts, and the court noted that the CFTC has not determined that Kalshi's contracts are contrary to the public interest.
New Jersey had argued that Kalshi's event contracts did not qualify as 'swaps' under the Commodity Exchange Act, as the outcome of a sports game is not directly linked to a financial, economic, or commercial instrument or measure. However, the court rejected this argument, stating that it imposed a requirement beyond what the Act demands.
In a dissenting opinion, Circuit Judge Jane Roth expressed the view that New Jersey's state rules did not undermine the objectives of the Commodity Exchange Act and that the products offered on Kalshi's platform constituted sports gambling. The decision comes as states across the US have begun filing lawsuits or issuing cease-and-desist orders to prediction market providers, including Kalshi and Polymarket, alleging violations of state gambling laws. The CFTC has maintained that prediction markets, or event contracts, are swaps governed by the Commodity Exchange Act, which preempts state rules. The ruling may have significant implications for the industry, as courts have issued conflicting decisions on the matter.
While the Third Circuit's decision suggests that prediction market providers may prevail in their argument that the Commodity Exchange Act preempts state rules, 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 and encompasses various events, including sports and politics.