On April 6, 2026, the U.S. Court of Appeals for the Third Circuit issued a closely watched decision in KalshiEX LLC v. Flaherty, No. 25-1922, affirming a preliminary injunction against New Jersey’s attempt to enforce its gambling laws against KalshiEX LLC (“Kalshi”), a financial services company operating a federally regulated prediction market. Writing for a 2-1 majority, Judge Porter held that the Commodity Exchange Act (“CEA” or “the Act”) likely preempts state regulation of sports-related event contracts traded on a CFTC-licensed designated contract market (“DCM”)—marking a pivotal development in the evolving regulatory landscape for prediction markets.
The decision arrives at a moment of increasing convergence between financial derivatives and gaming, and it offers an early but meaningful roadmap for how courts may allocate authority between federal and state regulators in this emerging space. For a broader overview of the prediction markets landscape, including related state enforcement activity and pending CFTC rulemaking, see our prior article.
Background
Kalshi operates a DCM licensed by the CFTC, on which it offers event contracts—a financial instrument whose value fluctuates based on market perceptions about the likelihood of a specified event. In early 2025, Kalshi began offering sports-related event contracts on its exchange. Shortly thereafter, New Jersey responded with a cease-and-desist letter, asserting that Kalshi’s listings violated the state’s constitution and gambling laws prohibiting betting on collegiate sports, with violations punishable as fourth-degree crimes and fines up to $100,000. Kalshi filed suit in the U.S. District Court for the District of New Jersey, and the district court granted a preliminary injunction barring New Jersey from enforcing its gambling laws against Kalshi’s sports-related event contracts.
Federal vs. State Regulatory Lines: A Structural Divide
At the core of the Third Circuit’s decision is the CEA’s definition of “swap,” codified at 7 U.S.C. § 1a(47). The court interpreted this provision expansively, concluding that agreements providing for payments contingent on the occurrence of an event can qualify as swaps even when the underlying event is a sports outcome. In doing so, the court rejected New Jersey’s argument that swaps must be “joined or connected” to traditional financial or commercial risks—a standard the court found nowhere in the statute. The Act requires only that the relevant event or occurrence be “associated with a potential financial, economic, or commercial consequence.”1 Applying that text, the court had little difficulty concluding that sports outcomes qualify, citing the wide range of financial stakeholders affected by sports events, including sponsors, advertisers, television networks, franchises, and local and national communities. Even the dissent conceded that “[a] plain reading of the Act’s text suggests that Kalshi’s sports-event contracts fit comfortably within the statutory definition.”2 That interpretation proved decisive. Because Kalshi’s sports-related event contracts are traded on a CFTC-licensed DCM and qualify as swaps, the court held that they fall within the CFTC’s exclusive jurisdiction under the Act.3 From there, the court concluded that federal law likely occupies the field.
This approach led the court to find both field preemption, on the basis that Congress created a comprehensive federal regime governing derivatives markets, and conflict preemption, because state enforcement would frustrate Congress’s objective of eliminating a patchwork of state-level regulation. As the majority explained, Congress amended the Act in 1974 specifically to do away with the patchwork of state regulations and bring futures trading on DCMs under the exclusive jurisdiction of the CFTC. Allowing New Jersey to enforce its gambling laws “would prohibit Kalshi, which operates a licensed DCM under the exclusive jurisdiction of the CFTC, from offering its sports-related event contracts in New Jersey” and would recreate “exactly the patchwork that Congress replaced wholecloth.”4
The implication is that market structure—not subject matter—may become a defining jurisdictional boundary. Even products that resemble gambling, such as contracts on game outcomes or point spreads, may fall within exclusive federal oversight if they are structured and traded as derivatives on a DCM.
Implications for Gaming Clients: A Parallel Pathway?
For gaming operators and related stakeholders, the ruling raises a notable possibility, at least within the Third Circuit, that certain sports-related products may be offered outside traditional state-regulated betting frameworks, provided they are structured as derivatives and listed on a CFTC-regulated exchange. As the court observed, other courts have already reached similar conclusions. A federal court in Tennessee found that “sports event contracts are ‘swaps’ and conflict preemption applies.”5 And a federal court in California held that the decision whether Kalshi’s event contracts violate the Act “belongs to the [CFTC], which has ‘exclusive jurisdiction’ over its contract markets.”6
At the same time, the Dodd-Frank Act of 2010 conferred on the CFTC a powerful but discretionary tool: a “special rule” authorizing the agency to review and prohibit six categories of event contracts—including those involving “gaming”—if it concludes they are “contrary to the public interest.”7 The CFTC has codified this power in 17 C.F.R. § 40.11, but to date, the agency has not acted to prohibit sports-related event contracts. In fact, the CFTC has already certified numerous “sporting events” contracts for listing and recently published an advance notice of proposed rulemaking inviting comment on the scope and public interest implications of “gaming” and “sports competition” in prediction markets. 91 Fed. Reg. 12516 (proposed Mar. 16, 2026).
This combination—broad jurisdiction paired with discretionary intervention rights—positions the CFTC as the primary arbiter of the outer limits of prediction markets. Looking ahead, several dynamics bear watching: whether the CFTC formalizes rules distinguishing permissible “event contracts” from impermissible “gaming” products; how the agency approaches retail participation and market integrity concerns; and the extent to which political or industry pressure accelerates regulatory action. In effect, the Third Circuit’s decision shifts the key regulatory battleground away from statehouses and toward federal agencies and courts.
That said, the pathway is far from settled. Several constraints remain. First, the CFTC retains discretionary authority to prohibit sports-related contracts on public interest grounds under the special rule. Second, regulatory uncertainty persists—the CFTC’s ongoing rulemaking could narrow or redefine permissible products. Third, litigation risk remains significant: 34 states plus the District of Columbia and Northern Mariana Islands appeared as amici in support of New Jersey’s position, and other jurisdictions may challenge similar offerings. Fourth, states may pursue indirect regulatory strategies, including consumer protection or advertising restrictions.
It is also worth noting the vigor of the dissent. Judge Roth argued that the presumption against preemption should apply with special force given the long history of state gambling regulation, that Kalshi’s products are “virtually indistinguishable from the betting products available on online sportsbooks,”8 and that the CFTC’s own Rule 40.11(a)(1) prohibits DCMs from trading event contracts that involve gaming9—potentially undercutting the preemption argument. The dissent also highlighted Kalshi’s own marketing materials, which routinely referred to its products as “sports betting.”10 The dissent’s arguments may resurface in future proceedings.
Whether this framework endures will depend largely on how the CFTC exercises its authority in the months ahead—and whether the Supreme Court or Congress intervenes to clarify the boundary between federally regulated derivatives and state-regulated gaming. For now, however, the decision marks a significant victory for federally regulated prediction markets and invites a strategic reassessment across the industry. Some gaming companies may explore partnerships with federally regulated exchanges or consider hybrid models that blend elements of trading and wagering; others may adopt a wait-and-see approach as the regulatory environment continues to take shape.
1 7 U.S.C. § 1a(47)(A), (A)(ii).
2 KalshiEX, LLC v. Flaherty, No. 25-1922, 2026 WL 924004, at *7 (3d Cir. Apr. 6, 2026) (Roth, J., dissenting).
3 7 U.S.C. § 2(a)(1)(A).
4 KalshiEX, 2026 WL 924004, at *5.
5 Kalshiex LLC v. Orgel, No. 3:26-CV-00034, 2026 WL 474869, at *7 (M.D. Tenn. Feb. 19, 2026).
6 Blue Lake Rancheria v. Kalshi Inc., No. 3:25-cv-6162, 2025 WL 3141202, at *7 (N.D. Cal. Nov. 10, 2025).
7 7 U.S.C. § 7a-2(c)(5)(C), (C)(i).
8 KalshiEX, 2026 WL 924004, at *7 (Roth, J., dissenting).
9 Id. at *12-13.
10 Id. at *9.
