Kalshi secured a major courtroom win Friday, winning an injunction that prevents Illinois from imposing its gambling laws and taxes on the prediction market’s sports event contracts.
The decision from the U.S. District Court for the Northern District of Illinois ends a run of 15 consecutive defeats in federal court for Kalshi.
Illiniois-1Judge Martha M. Pacold broke from the recent pattern among the federal judiciary, granting Kalshi and Coinbase an injunction that prevents states from enforcing their laws against the business.
Kalshi, alongside Coinbase — which offers its users access to Kalshi contracts — the Commodity Futures Trading Commission (CFTC), and trade group the Coalition for Prediction Markets, sued Illinois after the state sent Kalshi and Coinbase cease-and-desist letters and then amended its budget to impose a “transaction fee” on every “exchange wager” made on prediction markets. The transaction fee is higher than the fees Kalshi charges for most contracts, meaning that absent a change to its fee structure, the vast majority of Illinois trades would be unprofitable for the company.
Judge: Swaps can be gambling
The court made a point of distinguishing that the case was not about whether sports event contracts were gambling. It said that it was instead about whether the contracts were swaps, which may at times overlap with gambling.
“People may view these contracts as gambling, but little in the statutory definition turns on what people think,” it wrote. “Instead, most of the definition turns on commercial function.”
Pacold gave the example of a casino that acquired a designated contract market license and then started offering weather swaps — a common form of swap that is explicitly mentioned in the Commodity Exchange Act (CEA). She wrote that these contracts would clearly be swaps, even if they are offered to the general public who gambles on them.
“Whatever the potential for gambling, a swap is a swap, and the Commodity Exchange Act requires it to be traded on a designated contract market, beyond state regulation,” her opinion said.
“To make the point more forcefully: swaps are swaps whether they are used to gamble.”
Game winners are events
In the CEA, a swap is defined as “dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.”
The court said that a dictionary definition of “event” says it “captures who wins a game.” It noted that it was possible to read the definition more narrowly, as the Ninth Circuit did, to exclude game-winners as events. However, it said that the context of the word suggested a wider definition.
“Although ‘event’ and ‘contingency’ could be interpreted narrowly to refer only to the game itself, the words sit next to phrasing that broadens them: ‘the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency,’” it said.
“Nor would that narrow interpretation make sense. Differentiating between the results of games and the contingencies associated with those results is basically semantics.”
It gave the example of a contract on a baseball game between the Cubs and the Reds and argued that a contract on the Cubs winning would not fit the narrow definition of an event, but a contract on whether or not the Cubs’ record improved would meet this definition, despite the two contracts being about the exact same thing.
“The court finds the distinction unlikely,” it said. “Little separates the two contracts, and statutes do not usually draw lines so capriciously.”
Economic consequences
It then looked at whether sports contracts have economic consequences. It said that they do, citing the example of a contract on an NBA Finals game if the series score was already 3-0.
“Holding a fifth game, otherwise uncertain to occur, is ‘associated with a potential financial, economic, or commercial consequence,’” the court said.
It determined that Kalshi and Coinbase’s interpretation of the phrase — as opposed to the state, which argued the consequence must be inherent to the event — did still have a limiting principle. It cited Coinbase’s example of the color of Gatorade shower that a Super Bowl-winning coach receives as an example of a contract that would fail to pass the economic consequence test.
The court added that Congress likely intended a wide definition of swap, because swaps were brought under the CFTC’s exclusive jurisdiction in the wake of the global financial crisis in the late 2000s, and so it would make sense that Congress intended to capture novel products, not simply products that resembled swaps that had already been traded.
“The crisis arose from unforeseen risks, so risky financial instruments might arise unexpectedly in the future, too,” the court said.
Preemption question
Outside of the definition of a swap, the court must also determine whether the CEA preempts state law.
Illinois is under the Seventh Circuit, which had previously ruled that the Commodity Exchange Act does not explicitly preempt all state law in its language or preempt the field by being so comprehensive that any state laws covering the same subject are preempted.
However, in the same case, the Seventh Circuit also found that “state regulations are preempted when they subject swap trading to conflicting regulatory demands.” As a result, this was the standard that the district court in Illinois looked to in order to determine if state law was preempted.
“In other words, under precedent, when state regulations add to the CFTC’s requirements for swap trading on designated contract markets, state regulations cause conflict,” according to the district court opinion. “That is because, the Seventh Circuit reasoned, ‘Congress’ intent’ was to ‘bring the markets under a uniform set of regulations.’”
The court determined that Illinois laws do add to the CFTC’s requirements for swap trading.
“lllinois attempts to regulate how Kalshi’s swaps can be structured and what sorts of sporting events they can relate to,” Pacold wrote. “Illinois also attempts to control whom Kalshi can allow to buy and sell swaps with age limits and geographical restrictions. Compliance would accordingly force Kalshi to build a market solely for Illinoisans — all at the threat of criminal penalties, against Kalshi itself, for non-compliance.”
Rule 40.11
The court also addressed the state’s defense that Kalshi’s contracts violate the CFTC’s rule 40.1, which refers to a “prohibition” on contracts that “involve … gaming.” The CFTC is aiming to replace that regulation with one that states contracts involving gaming are allowed in certain circumstances, but for now, rule 40.11 is still in place. Illinois argues that its laws do not go beyond CFTC requirements, because under CFTC requirements the contracts cannot be listed at all so its additional rules should present no additional burden.
“Defendants may have a case that Kalshi is impermissibly listing certain contracts,” the court wrote. “But defendants’ argument has several issues.
“First, Illinois’s law still regulates what the CFTC can and cannot permit designated contract markets to do. The laws, then, subject Kalshi to non-uniform regulation. Even assuming defendants are right that Kalshi’s contracts are impermissibly listed under § 40.11(a)(1), Illinois law in effect controls what the CFTC can permit on designated contract markets.”
It added that the CFTC has “an immense amount of discretion” over what contracts can and cannot be listed, and has not determined that sports contracts are impermissible.
Key win as SCOTUS looms
The win for Kalshi comes at a key time, as it had appeared that a consensus had been building against the prediction market’s arguments. While the Third Circuit has ruled in Kalshi’s favor, the vast majority of other appellate and district courts have sided with states, including a decision from the Sixth Circuit last month that overturned Kalshi’s district court win in Tennessee.
The Illinois result suggests that judges are still divided on the questions at the heart of the case as the Supreme Court considers whether or not to take it up. The Supreme Court’s 2026-27 term began last week. It has been asked to consider market cases from the Third and Ninth Circuits.
