The battle over sports-event prediction markets such as those offered by Kalshi, Polymarket, Robinhood and others has expanded into one of the most consequential legal fights in modern gaming.
Over the last year, states, tribes, sportsbook operators, prediction market exchanges and the federal government have all lined up on opposite sides of a question that could ultimately reshape the U.S. betting landscape:
Are sports-event contracts federally regulated financial products, or are they simply sports betting by another name?
The answer is now being tested simultaneously in multiple federal courts. But three appellate cases stand above the rest -- the 3rd Circuit ruling involving New Jersey, the pending 6th Circuit case involving Ohio, and the pending 9th Circuit case involving Nevada.
Together, they could determine not only whether companies such as Kalshi and Polymarket can continue offering sports-event contracts nationwide, but also whether states retain authority over a rapidly growing form of online trading and/or wagering.
The Central Question: Federal Preemption
Virtually every lawsuit filed concerning prediction market operators, state legislatures, state regulators, state attorneys' generals, and the Trump Administration come down to one legal concept: federal preemption.
Prediction market operators - along with the federal government - argue that sports-event contracts are lawful event contracts regulated under the Commodity Exchange Act (CEA). Because Congress granted the Commodity Futures Trading Commission exclusive authority over federally regulated exchanges, states cannot interfere with those markets.
States, tribes and legacy gaming operators argue the opposite.
They contend that sports-event contracts are fundamentally sports betting products. If that is true, regulation belongs to state gaming agencies under traditional gambling laws rather than the CFTC.
Gaming and Prediction Markets Attorney Alex Dubin, who has closely followed the litigation and represents multiple clients in the space, said despite the growing number of lawsuits, they are all essentially asking the same question.
"These are state-by-state and district-by-district cases that are unfolding that, with very minor exceptions, are really all dealing with the same question ... federal preemption."
The Third Circuit: An Early Win for Prediction Markets
The first major appellate victory for prediction markets came in the 3rd Circuit, where Kalshi successfully challenged efforts by the New Jersey Division of Gaming Enforcement to block its sports-event contracts.
While the ruling did not definitively settle every issue surrounding prediction markets, it represented the first major indication that federal courts may be receptive to arguments that federally regulated exchanges operate outside traditional state gaming frameworks.
The decision also gave prediction market operators a critical piece of legal momentum heading into the more consequential cases now pending in the 6th and 9th Circuits.
Perhaps most importantly, the ruling created a benchmark against which future appellate decisions will be measured.
If other circuits reach similar conclusions, prediction markets could solidify their legal footing. If they reach different conclusions, the path to the U.S. Supreme Court becomes much clearer.
The Sixth Circuit: The Pure Federal Preemption Fight
The Ohio case pending before the 6th Circuit is arguably the cleanest test of the industry's legal theory.
Unlike Nevada, where additional regulatory questions have emerged, the Ohio dispute focuses almost entirely on whether sports-event contracts are federally regulated products protected by the Commodity Exchange Act.
At its core, the Ohio case asks a simple question:
Who gets to regulate sports-event prediction contracts—the federal government or the states?
Everything else flows from that.
Unlike Nevada, where Rule 40.11 creates an additional layer of analysis, the 6th Circuit is focused squarely on whether the Commodity Exchange Act preempts state gambling laws.
What Happened?
Ohio moved to stop Kalshi from offering sports-event contracts in the state.
Kalshi responded by arguing:
We're not a sportsbook. We're a federally regulated exchange operating under the Commodity Exchange Act.
The company sought an injunction that would have allowed it to continue operating while the case proceeds.
The 6th Circuit denied that request, but importantly, did not decide the ultimate merits of the case. As Dubin noted, the core legal question remains unresolved.
Why This Case Matters
The 6th Circuit may become the first appellate court to directly answer the central question that has hovered over prediction markets for years:
Are Sports Event Contracts Swaps?
Kalshi's position is:
These contracts are swaps or event contracts.
They are regulated under the Commodity Exchange Act.
Congress granted the CFTC exclusive jurisdiction over those markets.
States cannot interfere.
Ohio's position is:
These products are sports betting.
Calling them event contracts doesn't change their nature.
States have traditionally regulated gambling.
The CEA was never intended to create a nationwide sports betting market.
That fight is the entire ballgame.
Why "Exclusive Jurisdiction" Matters
The Commodity Exchange Act contains language granting the CFTC exclusive jurisdiction over certain regulated derivatives markets.
Kalshi's argument boils down to:
Congress already decided who regulates these products.
The states respond:
Congress never intended sports betting contracts to be included in that jurisdiction.
So the dispute isn't really about gambling.
It's about statutory interpretation.
The judges are essentially asking:
Did Congress give the CFTC authority over this particular type of contract?
Why The States Are Worried
If Kalshi wins in the 6th Circuit, the implications extend well beyond Ohio.
A victory would strengthen the argument that:
- Sports-event contracts can be offered nationally.
- State sports betting licenses may not be required.
- State taxes may not apply.
- State betting restrictions may not apply.
That would fundamentally alter the existing sports-betting framework.
For nearly a decade after the repeal of PASPA, states have largely controlled sports wagering.
Kalshi is effectively arguing for a parallel federal system.
Why The CFTC Is So Aggressive
One of Dubin's more interesting observations was that the CFTC isn't acting like an agency that's uncertain of its authority.
Chairman Michael Selig has repeatedly argued that states are attempting to intrude on the agency's "exclusive jurisdiction."
The agency has filed lawsuits against multiple states and submitted briefs supporting prediction markets.
As Dubin put it:
"The CFTC seems to have a strong opinion that this is their oversight, that the states are out of line trying to regulate it, and they seem to be aggressively pursuing that stance."
The Ninth Circuit: The Rule 40.11 Wild Card
The Nevada litigation involves the same federal preemption battle, but it also introduces a potentially game-changing secondary argument.
The dispute centers on CFTC Rule 40.11, which prohibits designated contract markets from listing contracts involving terrorism, assassination, war, unlawful activity, or "gaming."
That final word has become the focal point.
Prediction market operators argue that sports-event contracts are financial instruments and therefore fall outside the definition of gaming.
Nevada and other state regulators disagree.
Their position is straightforward: sports-event contracts are gaming, regardless of how they are labeled.
The argument gives states a unique fallback position.
Even if courts ultimately conclude that sports-event contracts are federally regulated under the Commodity Exchange Act, Nevada argues Rule 40.11 independently prohibits those contracts from being listed.
Dubin believes this issue has received far less attention than it deserves.
The states' argument is essentially:
Even if the CEA applies, Rule 40.11 should make sports-event contracts unlawful.
A victory for Nevada on Rule 40.11 could prove even more damaging to prediction markets than a traditional state-rights ruling because it would rely on federal law itself.
Rule 40.11 is probably the strongest substantive argument the states have in the 9th Circuit because it allows them to argue "even if Kalshi wins on federal preemption, it still loses under the Commodity Exchange Act itself."
What Rule 40.11 Actually Says
CFTC Rule 40.11 prohibits designated contract markets (DCMs) from listing contracts involving:
- Terrorism
- Assassination
- War
- Unlawful activity
- Gaming
The key word is "gaming."
The regulation was originally designed to prevent futures exchanges from creating markets that Congress and regulators viewed as contrary to the public interest.
Why Nevada Loves This Argument
The states' primary argument is:
Sports event contracts are gambling and therefore belong under state gaming regulation.
But the states know they could lose that argument.
So they have a backup position:
Fine. Let's assume these contracts are federally regulated event contracts under the CEA. They're still prohibited because Rule 40.11 says exchanges cannot list gaming-related contracts.
It's a clever fallback because it accepts Kalshi's premise—that the CEA governs—but then argues the CEA itself prohibits the product.
Kalshi's Counterargument
Kalshi and its allies essentially argue:
- Sports event contracts are swaps/event contracts.
- They are financial instruments.
- Financial instruments are not "gaming."
Therefore Rule 40.11 doesn't apply.
Their position is that the economic function of the contract matters more than the underlying event.
In other words:
- A bet on the Yankees = gambling.
- A federally regulated event contract tied to a Yankees game = financial product.
Nevada says that's a distinction without a difference.
Why This Could Matter More Than Federal Preemption
Most media coverage focuses on:
Does the CFTC or the states regulate these products?
But Rule 40.11 raises a different question:
Even if the CFTC regulates them, should they be allowed to exist at all?
That's why Dubin called it an underappreciated issue.
The CFTC's Historical Problem
The states also point to the fact that the CFTC has historically been skeptical of sports-related event contracts.
For years, the agency generally rejected or discouraged contracts that looked too much like gambling.
Only recently has the regulatory posture changed under newer leadership.
That history could make courts more receptive to arguments that "gaming" was always intended to cover sports wagering-type products.
What the 9th Circuit Could Do
The court has several options:
Option 1: Rule for Kalshi on preemption and ignore Rule 40.11.
Option 2: Rule that the CEA governs but send the Rule 40.11 question back for further consideration.
Option 3: Hold that sports event contracts constitute "gaming" under Rule 40.11 and therefore cannot be listed.
Option 4: Decide only the jurisdictional question and leave Rule 40.11 for another day.
The last option would not be unusual. Federal appellate courts often decide the narrowest issue necessary.
The Broader Stakes
If Nevada were to win on Rule 40.11, it would be a potentially existential problem for sports prediction markets.
A ruling that sports event contracts constitute prohibited "gaming" wouldn't just affect Nevada. It could call into question sports-event markets nationwide because Rule 40.11 is part of the federal regulatory framework itself.
That's why, from a legal perspective, the Rule 40.11 fight may ultimately be more important than the state-vs-federal jurisdiction fight that has dominated headlines.
Circuit Splits Could Pave Way To Supreme Court
The importance of these cases goes beyond the individual rulings.
What ultimately matters is whether the circuits agree.
If the 3rd, 6th and 9th Circuits all reach the same conclusion, the Supreme Court may decide there is no need to intervene.
But if one circuit sides with the states while another sides with prediction markets, the likelihood of Supreme Court review increases dramatically.
As Dubin noted:
"Circuit splits are a very compelling reason, historically, for the Supreme Court to take up the case."
That possibility looms over every prediction-market lawsuit currently pending across the country.
The Stakes Are Broad & Wide
The outcome of these appeals will affect far more than a single company.
Polymarket, Novig, Crypto.com, Robinhood and other exchanges all have a vested interest in how courts define sports-event contracts. Currently, more than 15 companies await government approval to operate prediction markets - legally defined as "Designate Contract Markets." Nearly all plan to offer sports-event contracts either in part or exclusively. In recent weeks, both Novig and ProphetX received the go-ahead from the feds to launch their prediction markets. Novig will offer only sports-related trades.
Tribal gaming operators are also watching closely because prediction markets operate outside the compact system established under the Indian Gaming Regulatory Act.
Sportsbooks are equally invested. DraftKings, FanDuel, and Fanatics launched their own branded prediction markets last year. DraftKings Predictions handled $108 million in consumer volume and $258 million in total trading volume in May. That would equal $3.1 billion per year.
And, in true gambling form, those operators are hedging. While operators will always prefer running a sportsbook over a prediction market in any state - all these sites are currently scooping up new users in states like California, Texas, and Georgia - where sports betting remains illegal.
The Endgame
For now, the legal war continues on multiple fronts.
The CFTC has filed lawsuits against several states. States continue to issue cease-and-desist orders and pursue enforcement actions. Tribes are increasingly entering the debate. Congress has even begun discussing legislation that could explicitly prohibit sports-event contracts resembling sports betting.
But regardless of how many lawsuits are filed, the industry's future may ultimately come down to three appellate courts.
The 3rd Circuit has already delivered an early victory for prediction markets.
The 6th Circuit is preparing to address the fundamental question of federal preemption.
And the 9th Circuit is weighing not only federal authority, but whether federal law itself may prohibit sports-event contracts through Rule 40.11.
Together, those cases could determine whether prediction markets become a permanent nationwide fixture of American finance -- or whether they are ultimately treated as sports betting and returned to the control of states and tribal regulators.
