Federal Appeals Panel Sides With Nevada, Says State Can Bar Kalshi Sports Contracts
Ninth Circuit Court of Appeals says 'Kalshi has a gambling problem'
A three-judge panel ruled on Friday that the federal law overseeing commodities trading does not trump a state’s right to regulate gambling, striking a blow to Kalshi in its attempt to block Nevada gaming regulators from taking action against the prediction market regulator.
Friday’s ruling by the U.S. Ninth Circuit Court of Appeals conflicts with a split decision from the Third Circuit Court of Appeals nearly five months ago in Kalshi’s lawsuit against the New Jersey Division of Gaming. That all but assures the question of whether federally regulated prediction markets can facilitate trades on the outcome of sporting events will go to the next and final level in the federal judicial system, the U.S. Supreme Court.
In a 36-page opinion, U.S. Circuit Judge Ryan D. Nelson said Kalshi’s argument for offering contracts on sporting events was based on an “overly broad” interpretation of reforms the 2010 Dodd-Frank Act made to the Commodity Exchange Act, a section of which bars states from regulating swaps handled by a designated contract market. However, Nelson said that it was important to review not just a law’s language but other factors, such as subject matter, context, and history.
For years, the law overseeing commodity exchanges explicitly stated prediction markets “shall not list for trading” any transaction tied to or references such activities as “terrorism, assassination, war, gaming, or an activity that is unlawful under any State or Federal law.” Judicial precedence, the judge wrote, “has traditionally been interpreted as mandatory direction” in a law.
“It is difficult, then, to conclude that Congress intended to upend its decades of careful regulation of gambling based on broad definitions of the words used in a Wall Street Reform Bill,” Nelson wrote.
Kalshi Argument ‘Strains Credulity’
Nelson also noted that Kalshi “has a gambling problem,” pointing out that the largest prediction market operator touts its sports contracts as legal gambling to the public. However, in its legal arguments, Kalshi claims event contracts differ from wagers made through a sportsbook.
“(T)his argument strains credulity,” he added.
Kalshi and its attorneys also could not convince the judge, appointed to the Ninth Circuit by President Trump during his first term, that it only facilitates a trade, compared to a sportsbook that takes the opposing side in a bettor’s wager and profits when the bettor loses. In a footnote, Nelson said Kalshi’s trading affiliate acts as a market maker. Kalshi removed references to Kalshi Trading on its “Who Are You Trading With” web page shortly after Nevada officials took the prediction market to court.
Donald Trump Jr., the president’s son, became an advisor to Kalshi shortly after Trump began his second term last year. Reports indicate the younger Trump received a $300,000 stake in the company by joining it. With Kalshi’s valuation standing at $22 billion after it generated $1 billion in venture funding this spring, Trump’s holdings now are worth millions.
Appellate Courts Differ on Legality of Sports Contracts
The Ninth Circuit’s opinion is a polar opposite of the one handed down by the Third Circuit on April 6. U.S. Circuit Judge David J. Porter, another Trump appointee, pointed out in his ruling “that the CFTC has chosen not to enforce its regulation against” the sports markets offered by Kalshi and other prediction market operators.
New Jersey, which lost in the Third Circuit ruling, has until next Thursday to decide whether it wants the Supreme Court to consider the case.
Earlier this year, the commission proposed a series of new rules that would open the door for prediction markets to offer contracts on sporting events, with restrictions against contracts tied to player injuries, game official rulings, fights between players, youth sporting events, and certain in-game actions.
In a statement to Gambling Insider, Kalshi spokesperson Dani Lever said both the Third and Ninth circuits see eye-to-eye “on a fundamental point” in the case.
“(F)ederal law prevents states from regulating trading on a federally licensed exchange, like Kalshi,” Lever said. “Despite the Ninth Circuit’s opinion, we still believe the CFTC regulations as written do not prohibit sports contracts, and in any event, the CFTC is working to clarify those regulations. We will be seeking further review.”
Impact May Extend Beyond Nevada; Eyes on Arizona
While Kalshi considers its next steps, Friday’s ruling could open the door for more states other than Nevada to take action against Kalshi and other prediction market operators. No circuit court covers more jurisdictions than the Ninth. Besides Nevada, the circuit includes Alaska, Arizona, California, Hawaii, Idaho, Montana, Oregon, Washington, Guam, and the Northern Mariana Islands.
It could especially help Arizona officials. A federal district judge in May granted Kalshi a permanent injunction that barred the state from pursuing criminal charges against the prediction market operator. Arizona Attorney General Kris Mayes posted on X that her office is reviewing Nelson’s opinion.
“Financial reform legislation was never intended to strip states of their traditional police power over gambling, and I’m glad the court said so clearly,” Mayes said. “Kalshi’s position would have effectively federalized sports betting regulation nationwide and swept aside decades of state and Tribal oversight built to protect consumers from the real harms of unregulated gambling.”
While the Nevada case made its way through the circuit, state gaming officials got a state judge to order Kalshi to implement a geofencing system that would keep anyone physically in Nevada from accessing sports contracts. Gaming regulators have sought fines of $120,000 per day for each day Kalshi has not successfully implemented a third-party geolocation platform into its application.
“This completely vindicates what we have been saying all along,” said Mike Dreitzer, chairman of the Nevada Gaming Control Board. “This is sports betting and needs to be properly regulated by the state. The Nevada Gaming Control Board has been regulating gaming in the state of Nevada for more than 70 years in accordance with the highest standards and best practices. We will continue to vigorously enforce Nevada law to safeguard gaming in our state.”
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