Sixth Circuit says states can regulate Kalshi’s prediction market

The ruling deepens a divide among the federal appeals courts on state regulation of the prediction market.Kalshi operates a digital market where participants can buy and sell “event contracts” — derivatives whose payoff depends on a specified occurrence in fields ranging from climate and economics to politics and pop culture. Last year, Kalshi began offering event contracts based on sporting events, leading state regulators to move to regulate the platform under state sports betting laws.Kalshi argues it’s exempt from those laws because the sports event contracts it offers are “swaps,” a type of derivative the Commodity Futures Trading Commission — a federal agency that regulates designated contract markets like Kalshi — has “exclusive jurisdiction” over under the Commodity Exchange Act.Ruling on a pair of lawsuits by Kalshi challenging efforts by Ohio and Tennessee to regulate its sports event contracts, the Sixth Circuit panel rejected that argument, finding Kalshi’s sports event contracts are not “swaps” and, even if they were, the act does not preempt state sports betting laws.“We hold that for an ’event’ to be ‘associated with a potential financial, economic or commercial consequence,’ the event must be intrinsically associated with a financial consequence such that we can reasonably understand why hedging financial risk or ascertaining pricing information for the occurrence of that event would be desired and beneficial (e.g., a change in interest rates),” Senior U.S. Circuit Judge Julia Smith Gibbons wrote.“Kalshi’s sports event contracts have only downstream economic consequences, assuming they have the potential to cause economic consequences at all. Thus, they are not ‘associated’ with potential financial, economic or commercial consequences, even if they may eventually lead to some down the line,” Gibbons, a George W. Bush appointee, wrote.U.S. Circuit Judge Eric Clay, a Bill Clinton appointee, and U.S. Circuit Judge Rachel Bloomekatz, a Joe Biden appointee, joined Gibbons on the panel.The panel further ruled that even if sports event contracts were swaps, the act would not preempt regulation of them under state sports betting laws, finding the act’s grant of “exclusive jurisdiction” over swaps to the commission doesn’t preclude “ancillary regulations that only incidentally burden” designated contract markets.“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,” Gibbons wrote.The offices of the Ohio and Tennessee attorneys general did not immediately respond to requests for comment.Kalshi said it disagreed with the ruling.“The law does not require a swap to involve ‘intrinsic’ financial consequences - and even if it did, sports clearly do," Kalshi spokesperson Dani Lever told Courthouse News.Lever also noted on the divide between federal courts of appeals on regulation.“The ruling shows exactly why a state-by-state patchwork doesn’t work. Courts can’t agree on the basics: Some say federal law covers these contracts, and others say it doesn’t. Some recognize that sports have real economic impact, while others (incorrectly) claim they don’t. Markets can’t operate when the rules change at every state line, which is why Congress created a single federal regulator with nationwide rules.”With today’s ruling, the Sixth Circuit joins the Ninth Circuit, which ruled last month they can be regulated under state gambling laws.But in April a divided Third Circuit panel ruled the Commodity Exchange Act preempts regulation of Kalshi’s sports event contracts under New Jersey gambling laws.New Jersey has challenged the Third Circuit’s ruling, asking the U.S. Supreme Court to weigh in on the issue. The high court has not yet decided whether it will take the case.Subscribe to our free newslettersOur weekly newsletter Closing Arguments offers the latest about ongoing trials, major litigation and rulings in courthouses around the U.S. and the world, while the monthly Under the Lights dishes the legal dirt from Hollywood, sports, Big Tech and the arts.Additional Reads