Landmark Ruling: Federal Appeals Court Shields Kalshi’s Prediction Markets from New Jersey Ban

In a significant legal triumph for the burgeoning prediction market industry, a federal appeals court has delivered a decisive blow to New Jersey’s efforts to shut down Kalshi’s sports-related event contracts. The Third Circuit Court of Appeals ruled on Monday that the federal Commodity Exchange Act (CEA) preempts state gambling laws, effectively blocking New Jersey from taking enforcement action against the platform.

A Crucial Win for Kalshi

The 2-1 decision by a Third Circuit panel provides much-needed clarity and a substantial victory for Kalshi, which has faced a barrage of state-level enforcement actions across the U.S. The court found that Kalshi’s sports-event contracts fall squarely under the purview of the federal Commodity Exchange Act, rather than being subject to New Jersey’s state gambling regulations.

Central to the ruling was the court’s interpretation of Kalshi’s self-certified contracts. The majority opinion stated, “Kalshi self-certified compliance with the applicable laws and regulations, so those event contracts were presumptively approved under federal law… To date, the CFTC has not determined that Kalshi’s sports-related event contracts are contrary to the public interest.” Furthermore, the Commodity Futures Trading Commission (CFTC) has not initiated any enforcement actions against these specific types of contracts.

The Preemption Argument: Federal vs. State Authority

New Jersey had argued that Kalshi’s event contracts were not ‘swaps’ covered by the CEA, contending that the outcome of a sports game is not ‘joined or connected’ with a financial, economic, or commercial instrument. However, the appeals court rejected this argument, asserting that the state’s proposed requirement “raises the bar beyond what the [Commodity Exchange] Act requires.”

Circuit Judge Jane Roth, in her dissenting opinion, argued that New Jersey’s state rules did not “undermine the congressional objectives” of the CEA. She maintained that the products offered on Kalshi’s platform, such as contracts betting on NFL game winners, point spreads, and total points, are, in essence, “sports gambling.”

A Patchwork of Rulings and the CFTC’s Stance

The legal landscape for prediction markets remains complex and fragmented. While the Third Circuit’s ruling offers a strong precedent for federal preemption, other courts have issued divergent decisions. Some state courts have sided with states, issuing temporary restraining orders or preliminary injunctions against platforms like Kalshi and Polymarket, alleging violations of state gambling laws.

Notably, the Ninth Circuit Court of Appeals recently declined to block a state enforcement action from Nevada, allowing that state to secure a temporary restraining order and preliminary injunction against Kalshi. This highlights the ongoing judicial debate and the need for a more unified legal interpretation.

CFTC Chairman Michael Selig has consistently championed the federal regulator’s “exclusive jurisdiction over these markets.” Speaking at a recent event, Selig emphasized the broad definition of ‘commodity’ under the CEA, which he stated “includes events on sports, it includes events on politics, it includes corn and grains and all sorts of things.” He underscored that the regulatory approach should not differentiate between event contracts based on their underlying subject matter.

As the legal battles continue, with another Ninth Circuit hearing on the horizon, the Third Circuit’s decision marks a pivotal moment, bolstering the argument that federal law should govern the rapidly evolving world of prediction markets.

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