A federal appeals court has ruled 2-1 that the Commodity Exchange Act preempts state gambling laws, granting the CFTC exclusive jurisdiction over prediction market platforms and setting up a potential Supreme Court challenge.
The United States Court of Appeals for the Third Circuit has delivered a ruling that could reshape the legal landscape for prediction markets nationwide. In a 2-1 decision handed down on 6 April, the panel found that New Jersey cannot enforce its state gambling laws against Kalshi, the CFTC-regulated prediction market platform, because the federal Commodity Exchange Act preempts state authority over derivatives traded on designated contract markets.
The decision marks the first time a federal appeals court has addressed whether states can regulate prediction markets that operate under CFTC oversight. Circuit Judge David J. Porter, writing for the majority alongside Chief Judge Michael Chagares, held that Kalshi's sports-event contracts qualify as swaps under the CEA and that the CFTC holds exclusive jurisdiction over exchanges facilitating such instruments. The ruling effectively bars all 50 states from imposing their own restrictions on federally regulated prediction market platforms.
The Legal Battle Over Sports-Event Contracts
The case originated when New Jersey regulator Mary Jo Flaherty moved to block Kalshi from offering event contracts tied to professional and collegiate sports outcomes within the state. Flaherty argued that Kalshi's products were functionally indistinguishable from sports wagers and fell squarely within New Jersey's regulatory authority under its expanded gambling framework, which the state has aggressively developed since the Supreme Court's 2018 decision in Murphy v. NCAA.
Kalshi countered that its platform operates as a designated contract market registered with the CFTC, and that the instruments it offers are commodity-linked derivatives governed exclusively by federal law. The company pointed to the CEA's broad preemption clause, which bars states from directly interfering with swaps traded on federally regulated exchanges. The CFTC filed an amicus brief supporting Kalshi's position, arguing that allowing a patchwork of state regulations would undermine the agency's ability to maintain orderly national markets.
At the district court level, Judge Robert Kugler sided with Kalshi, issuing a preliminary injunction that prevented New Jersey from enforcing its ban. The state appealed to the Third Circuit, setting up the first appellate test of federal preemption in the prediction market context.
The Majority Opinion and Its Reasoning
Porter's majority opinion rested on two central pillars. First, the court determined that Kalshi's event contracts satisfy the statutory definition of swaps under the CEA, regardless of whether they resemble traditional sports bets in form or function. The opinion noted that Congress deliberately cast a wide net when defining regulated derivatives instruments in the Dodd-Frank Act of 2010, and that the CFTC's decision to permit certain event contracts on registered exchanges carries the force of federal law.
Second, the panel applied the CEA's express preemption provision, which states that no state or political subdivision may impose any regulation on swaps traded on or subject to the rules of a designated contract market. Porter wrote that New Jersey's enforcement action constituted precisely the kind of direct interference that Congress intended to prohibit, noting that the state's attempt to classify Kalshi's products as gambling rather than derivatives did not alter the underlying federal characterisation.
The opinion also addressed the CFTC's own enforcement posture. Porter observed that while the CFTC has not yet commenced enforcement proceedings against sports-related event contracts, the agency's inaction does not create a regulatory vacuum that states may fill. The federal framework, the court held, is comprehensive and exclusive by design.
A Sharp Dissent and the Path to Rehearing
Circuit Judge Jane R. Roth filed a pointed dissent, arguing that the majority had effectively granted prediction market platforms blanket immunity from state consumer protection oversight. Roth wrote that Kalshi's offerings are virtually indistinguishable from the betting products available on online sportsbooks, such as DraftKings and FanDuel, and that the majority's interpretation of the CEA's preemption clause was overly broad.
Roth warned that the decision could create a loophole through which gambling operators restructure their products as derivatives to escape state regulation entirely. She noted that New Jersey and other states have invested substantial resources in building responsible gambling frameworks and that the ruling threatens to undermine those protections without any corresponding federal consumer safeguard.
Because the decision was not unanimous, New Jersey retains the option to seek rehearing en banc before all 14 active Third Circuit judges. Legal analysts at Bloomberg Law have assessed that the split decision increases the likelihood of either en banc review or an eventual petition to the Supreme Court, particularly given the absence of appellate precedent on this question in other circuits.
Industry Reaction and Market Implications
Kalshi CEO Tarek Mansour called the ruling a watershed moment for prediction markets and financial innovation, stating that the decision validates the company's longstanding position that federally regulated derivatives platforms should not be subject to conflicting state-by-state rules. Kalshi's platform has seen trading volumes surge past $1 billion in 2026, with sports-event contracts representing one of its fastest-growing product categories.
The ruling arrives at a sensitive moment for the broader prediction market industry. Polymarket and other platforms have faced increasing scrutiny over contracts tied to geopolitical events, including bets on the Iran conflict that attracted more than $200 million in volume. While the Third Circuit's decision specifically addresses state preemption rather than the permissibility of particular contract types, it nonetheless strengthens the legal foundation upon which all CFTC-regulated prediction platforms operate.
What Comes Next
The immediate question is whether New Jersey will seek en banc review. State Attorney General Matthew Platkin has indicated that his office is reviewing the decision and considering all available options. Meanwhile, legislators in at least four other states have pending bills that would impose restrictions on prediction market activities within their borders, and the Third Circuit's ruling casts significant doubt on the enforceability of any such measures.
At the federal level, the decision may accelerate efforts within the CFTC to formalise its approach to event contracts. Commissioner Caroline Pham has publicly advocated for clearer rules governing prediction markets, and the Third Circuit's affirmation of exclusive federal jurisdiction could provide the political impetus for the agency to act. For now, the ruling stands as the most significant judicial endorsement of prediction market legitimacy since Kalshi first received its CFTC designation in 2020.
