A significant decision was made by a federal appeals court on Monday, as it ruled that the state of New Jersey is not allowed to temporarily ban the operations of Kalshi, a company that provides prediction markets. This ruling is seen as a major victory for Kalshi, which has been facing numerous enforcement actions from various states. The Third Circuit Court of Appeals made this decision with a 2-1 vote, stating that Kalshi's products fall under the federal Commodity Exchange Act, rather than being subject to New Jersey's state gambling laws. The court's majority opinion noted that Kalshi had self-certified its compliance with applicable laws and regulations, and as a result, its event contracts were presumptively approved under federal law.
Furthermore, the Commodity Futures Trading Commission (CFTC) has not determined that Kalshi's sports-related event contracts are contrary to the public interest, and has not commenced any enforcement actions against such contracts. The ruling also addressed New Jersey's argument that Kalshi's event contracts do not qualify as 'swaps' under the Commodity Exchange Act, as the outcome of a sports game is not 'joined or connected' to a financial, economic, or commercial instrument or measure. However, the court found that this proposed requirement raises the bar beyond what the Act requires. In a dissenting opinion, Circuit Judge Jane Roth argued that the New Jersey state rules do not undermine the congressional objectives under the Commodity Exchange Act, and that the products available on Kalshi's platform constitute sports gambling.
This decision is part of a larger trend, 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 maintained that prediction markets, or event contracts, are swaps governed by the Commodity Exchange Act, which preempts these state rules.
The ruling by the Third Circuit Court of Appeals suggests that prediction market providers may prevail in their argument that the Commodity Exchange Act preempts state rules, but the outcome of similar cases in other courts remains uncertain. In a related development, 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 very broad and includes events on sports, politics, and other areas.