In a significant decision, a federal appeals court has sided with Kalshi, a prediction market platform, by ruling that New Jersey cannot temporarily ban the company's operations. The Third Circuit Court of Appeals made this ruling based on the understanding that Kalshi's products are subject to the federal Commodity Exchange Act, which supersedes New Jersey's state gambling laws. The court's decision, made by a 2-1 majority, emphasizes that since Kalshi has self-certified compliance with applicable laws and regulations, its event contracts are presumptively approved under federal law.
Furthermore, the Commodity Futures Trading Commission (CFTC) has not determined that Kalshi's sports-related event contracts are against the public interest, nor has it commenced any enforcement actions against such contracts. The ruling highlights a disagreement over the interpretation of what constitutes a 'swap' under the Commodity Exchange Act, with New Jersey arguing that sports game outcomes do not qualify because they are not directly linked to financial, economic, or commercial instruments or measures. However, the court found that New Jersey's proposed requirement for a 'joined or connected' relationship raises the bar beyond what the Act necessitates.
In a dissenting opinion, Circuit Judge Jane Roth expressed the view that New Jersey's state rules do not undermine the objectives of the Commodity Exchange Act and noted that the products available on Kalshi's platform essentially constitute sports gambling. This decision comes amidst a broader landscape where states across the U.S.
are taking legal action against prediction market providers like 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, thereby preempting state rules. The legal outcomes have been mixed, with some state courts initially siding with the states and federal district courts issuing varied rulings.
Appeals courts have also shown inconsistency, with the Third Circuit's ruling suggesting that prediction market providers may prevail in their argument that the Commodity Exchange Act preempts state rules, while the Ninth Circuit has allowed another state enforcement action to proceed. The CFTC Chairman, Michael Selig, has emphasized the importance of defending the federal regulator's exclusive jurisdiction over these markets, citing the broad definition of commodity and statute that encompasses a wide range of events, including sports and politics, without distinguishing between different types of event contracts.