Kalshi suffered yet another legal defeat Friday, as the U.S. Court of Appeals for the Sixth Circuit became the second federal appellate court to rule that states can apply their gambling laws to sports event contracts.
The Sixth Circuit’s three-judge panel of Julia Smith Gibbons, Eric Clay, and Rachel Bloomekatz ruled unanimously in favor of Tennessee and Ohio in their cases against Kalshi.
26a0272p-06The panel was considering appeals of two decisions from district courts, which came out on opposite sides of the sports event contract debate.
The U.S. District Court for the Middle District of Tennessee in February granted Kalshi an injunction protecting it from state-level enforcement, determining that the prediction market could not reasonably follow state gambling laws and the federal Commodity Exchange Act (CEA) at the same time, and that therefore state law was preempted. A month later, the U.S. District Court for the Southern District of Ohio, on the other hand, denied Kalshi an injunction, determining that state law was not preempted.
The Sixth Circuit comprehensively rejected Kalshi’s arguments. In a 3-0 opinion, it determined that Kalshi’s sports contracts did not meet the definition of a swap, and even if they did, the CEA did not preempt state gambling laws. The states only needed to win on one of those two arguments to win the case, and the court was not required to make a decision on both arguments if it found in the state’s favor on one of them.
Gibbons wrote the court’s opinion.
SCOTUS getting closer?
The Sixth Circuit joins the Ninth Circuit in ruling that states can enforce their sports betting laws against Kalshi. In contrast, the Third Circuit in April ruled in Kalshi’s favor. Observers expect that the issue will ultimately be decided by the Supreme Court. Earlier this month, the Ninth Circuit also ruled against Kalshi when it overturned a lower-court decision in a case with two California tribes.
The Supreme Court is already considering a petition by New Jersey to hear its appeal of the Third Circuit case, as well as an appeal from Robinhood of the Ninth Circuit case. An additional circuit court ruling likely brings an eventual Supreme Court case closer.
The decision should make it easier for Ohio and Tennessee — as well as Kentucky — to ban sports event contracts within their states. Michigan, which is also in the Sixth Circuit, has already banned Kalshi’s sports contracts.
Swap definition
In the CEA, a swap as 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 Sixth Circuit sided with Kalshi with regards to part of that definition, but with the states on another part, which was enough to determine that sports contracts did not meet the definition of a swap.
Unlike the Ninth Circuit, which also ruled against Kalshi, the Sixth Circuit determined that sports results can be “the occurrence of an event.” It said that the words “occurrence” and “event” should not have to be mutually exclusive.
“By way of example, it would be reasonable to describe the Giants winning the Super Bowl as both an occurrence and an outcome, depending on how the ‘event’ is defined,” the court said. “If the relevant event is the Giants winning the Super Bowl, then, in plain language, one might describe the Giants having won as that event having occurred. But if the relevant event is defined as the Super Bowl itself, then one would reasonably be expected to describe the Giants’ victory as the outcome of the game.”
Economic consequences
However, the court disagreed with Kalshi’s interpretation on the latter part of the definition, on whether sports contracts have a “potential financial, economic, or commercial consequence.” Kalshi has argued for a broader reading of that phrase, including downstream consequences like the impact of a Super Bowl parade, while states have argued that only direct consequences count.
“We conclude that ‘associated with’ is best read as requiring that the event be one inherently associated with a ‘financial, economic, or commercial consequence,’” the court said.
“If we were to adopt Kalshi’s preferred approach, ‘associate with’ would effectively have no force. At oral argument, for example, we asked Kalshi to explain how some of its sports event contracts—like how many corner kicks were taken in a game or if an announcer said a particular word—could be associated with financial consequences. Kalshi conceded that to a ‘layperson’ it might be ‘hard to see how certain of these contracts have economic consequences.’ However, Kalshi ‘caution[ed] the court’ about relying on that ‘intuition’ in its decision-making process because sports is a ‘huge business’ with inconspicuous economic consequences.
“But if we—or a ‘layperson’—cannot discern that a sports-event contract has potential economic consequences, then it would be a stretch to say such a contract is “associated” with potential economic consequences.”
The court went on to note that even Kalshi’s lawyers’ example of a sports contract with no economic consequences – the color of the Gatorade shower for the Super Bowl-winning coach – likely would have economic consequences based on the standard Kalshi uses, because “it is conceivable that if a yellow Gatorade shower were broadcast, sales for that flavor would increase.”
The opinion added that the word “potential” in the swap definition did not substantially broaden the type of events that could be covered by a swap. It said that the word referred to consequences that may or may not come to fruition, not associations with economic consequences that may or may not exist.
In addition, the court said that a narrower definition of economic consequences makes sense given how the phrase appears in the CEA. The phrase is one of six possible definitions for a swap, with the other five all being much narrower and dealing very specifically with financial products, such as exchange rate swaps. Therefore, Kalshi’s interpretation of the definition, the court said, appears out of place and renders most of the other definitions pointless, because every kind of swap would already be captured within the “economic consequences” definition.
“We must strive to ‘avoid[] an unbounded interpretation”’ that would ‘render superfluous’ the other subparts of a ‘reticulated list,’” the court said.
Occasional financial uses not enough
The court considered the fact that some sports contracts have been used for hedging risk. It mentioned an insurance company using Kalshi to cover its risk of paying out a policy related to Spanish soccer club Osasuna being relegated, and a New York bar running a promotion if the Knicks won Game 1 of the NBA finals, which it hedged with a Kalshi bet. It said these examples were too few and far-between to be treated as proof of real economic consequences.
“These isolated examples are a far cry from establishing that sports-event contracts are inherently associated with a financial consequence or are commonly used to hedge risk and derive pricing information in any meaningful way,” the court said.
Presumption against preemption
The court then went on to address preemption. Kalshi argues that state gambling laws are preempted because the CEA says that the Commodity Futures Trading Commission (CFTC) has “exclusive jurisdiction” over swaps, and the law was intended to be comprehensive enough to “preempt the field” of trading on regulated exchanges, and because it couldn’t reasonably follow both state and federal laws. However, the court disagreed.
“Our conclusion that Kalshi’s sports-event contracts are not ‘swaps’ ends the analysis because that necessarily means regulation of these contracts does not fall within the CFTC’s ‘exclusive jurisdiction’ and thus that federal law does not preempt application of the States’ gambling laws,” the court said. “However, even assuming Kalshi’s sports-event contracts constitute swaps for the purposes of this analysis, we alternatively hold that the CEA neither expressly nor impliedly preempts the States’ gambling laws.”
To begin with, the court noted that gambling is traditionally the domain of states, and so it should apply a “presumption against preemption.”
‘Exclusive jurisdiction’ unusual for preemption
It then addressed the “exclusive jurisdiction” language, arguing that this “would represent an unusual express preemption provision.” Those words, the Sixth Circuit said, usually apply to courts, whereas preemption is more often done with the words “preempt” or “supersede.” The court notes that Congress used the words “preempt” and “supersede” elsewhere when it wanted to preempt state law, so it did not seem like “exclusive jurisdiction” was meant to refer to preemption of state laws.
“Because the provision does not use the language Congress traditionally employs when it preempts state power to make laws, we are hesitant to impute an expansive meaning,” the court said.
In the Sixth Circuit’s view, the term “exclusive jurisdiction” is meant to displace non-CFTC authority “pertaining to the licensing and operation of DCMs.”
“But ancillary regulations that only incidentally burden DCMs do not come within the provision’s substantive scope,” it said.
The court determined that if that is the correct reading of “exclusive jurisdiction,” it would not be enough to box out state gambling laws.
“The state gambling laws that the States seek to enforce do not directly regulate the licensure and operation of transactions on DCMs [designated contract markets] —but only incidentally burden those functions—and therefore are not blocked,” it said. “The laws impose no restrictions on the designation or operation of contract markets as such. Instead, they regulate sports betting. Their effects on DCMs are limited—and are felt only because DCMs like Kalshi have decided to offer event contracts that ‘are virtually indistinguishable from’ sports bets.”
CEA did not ‘preempt field’
Turning to another of Kalshi’s preemption arguments, the Sixth Circuit determined that the CEA did not “preempt the field” of trading on DCMs, making all state laws on the subject irrelevant.
The court found that Congress had included a number of clauses in the CEA, reserving certain powers for states, including with regard to on-DCM transactions. At other times, it explicitly noted that state laws were preempted for certain kinds of on-DCM transactions, indicating that they were not automatically preempted.
Possible to comply with both
Finally, the Sixth Circuit examined the argument that the court in Tennessee had accepted, that it would not be possible to comply with both the relevant federal and state laws.
Kalshi argued that complying with Ohio’s geographic requirement that “all sports wagers are initiated, received, and completed within the state” is “impossible for federally regulated DCMs that match traders with other traders nationwide through a ‘non-discretionary automated trade matching and execution algorithm,’” and that “abiding by Tennessee law would violate CFTC regulations” because “DCMs are required to provide ‘impartial access to their markets and services.’” During oral arguments, the Sixth Circuit judges were skeptical of those claims.
The court determined that it was not impossible to comply with both because the CFTC’s impartial access rules do not prevent an exchange from offering a contract in some states but not others. It added that while geofencing states may be costly, it is not impossible.
In other federal cases this week
In other court news this week, Kalshi petitioned the Seventh Circuit Monday to hear its case against the Wisconsin Ho-Chunk Nation. The district-court case is set for trial in May 2027. The appeal filing comes after the district court Sept. 11 denied the Ho-Chunk’s request to amend its complaint and the court stayed the case “pending resolution of the legal questions certified for interlocutory appeal.”
Despite the Ninth Circuit overruling its decision last week, a California district court held a status conference Thursday in the Blue Lake Rancheria-Kalshi case. Judge Jacqueline Scott Corley denied the tribe’s request to amend its complaint, and Kalshi continues to operate.
In the Tenth Circuit, where a case between Kalshi and the state of Utah is pending, Kalshi filed its opening brief Monday, arguing that the CEA preempts state gambling laws, and that a district court and Ninth Circuit wrongly found that it does.
The CFTC is also in court with more than 10 states. In a case against the state of New Mexico, the state filed a motion to dismiss due to “failure to state a claim,” and requested a preliminary injunction to keep certain prediction market products out of the state. In the agency’s case against Kentucky, a flurry of briefs were filed Monday for and against dismissal, including the state filing a motion in opposition to summary judgement filed by the CFTC. And in a case against the state of Arizona in the Ninth Circuit, the CFTC Thursday asked the court to deny the state’s request for summary disposition, saying such a decision would be “premature.”
Jill R. Dorson contributed to this report
