April 7, 2026

Federal Appeals Court: CFTC Jurisdiction Over Sports Event Contracts Likely Exclusive

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Highlights

• The U.S. Court of Appeals for the Third Circuit is the first circuit court to address whether the Commodity Exchange Act (CEA) preempts state gambling laws as applied to sports-related event contracts, setting precedent for parallel proceedings in the Ninth, Fourth and Sixth Circuits.
• In a 2-1 opinion on April 6, 2026, the court affirmed the district court's preliminary injunction barring New Jersey from enforcing its gambling laws against Kalshi, holding that Kalshi's sports event contracts are "swaps" under the CEA, and field preemption and conflict preemption shield them from state regulation.
• This is a preliminary injunction ruling; the court found only a reasonable likelihood of success, not a merits determination. The case returns to the district court, and the federal regulatory framework itself remains in flux as the Commodity Futures Trading Commission's rulemaking on event contracts continues, with comments due April 30, 2026. The Ninth Circuit will hear consolidated oral arguments on April 16, 2026, in cases involving Kalshi, Robinhood and Crypto.com, and if it reaches a different result, a circuit split would accelerate the path to the U.S. Supreme Court.
• This Holland & Knight alert analyzes the decision, emerging appellate landscape and implications for the industry. A divided panel of the U.S. Court of Appeals for the Third Circuit on April 6, 2026, issued a landmark ruling in KalshiEX LLC v. Flaherty, No. 25-1922, becoming the first federal appellate court to hold that the Commodity Exchange Act (CEA) preempts state gambling laws as applied to sports-related event contracts traded on Commodity Futures Trading Commission (CFTC) registered designated contract markets (DCMs). In a 2-1 opinion authored by Judge David J. Porter and joined by Chief Judge Michael A. Chagares, the court affirmed the district court's preliminary injunction barring New Jersey from enforcing its gambling laws against Kalshi, holding that Kalshi's sports event contracts are "swaps" under the CEA, and field preemption and conflict preemption shield them from state regulation. This Holland & Knight alert analyzes the decision, emerging appellate landscape and implications for the industry.

The Outcome: A Closer Look

In a 2-1 decision authored by Judge Porter and joined by Chief Judge Chagares, the Third Circuit affirmed the district court's preliminary injunction barring New Jersey from enforcing its gambling laws against Kalshi's sports-related event contracts traded on a CFTC registered designated contract market. Judge Jane R. Roth dissented.

Critically, this is a preliminary injunction ruling: The court found that Kalshi only has "a reasonable chance, or probability, of winning," not that it has definitively prevailed on the merits. Importantly, reasonable "does not mean 'more likely than not,' but it does mean 'significantly better than negligible.'" The case returns to the U.S. District Court for the District of New Jersey for full merits adjudication, and the Third Circuit's analysis, though extensive, does not constitute a final determination on the underlying legal questions. The court reviewed factual findings for clear error, legal conclusions de novo and the ultimate injunction decision for abuse of discretion.

Legal Questions Presented

The Third Circuit addressed two principal questions, whether 1) Kalshi's sports-related event contracts qualify as "swaps" under the Commodity Exchange Act, 7 U.S.C. § 1a(47)(A)(ii), thereby triggering the CFTC's exclusive jurisdiction, and 2) the CEA preempts New Jersey's gambling laws and state constitutional prohibition on collegiate sports betting as applied to those contracts when traded on a CFTC registered DCM. New Jersey framed the issue broadly (whether the state can regulate all sports gambling), and Kalshi framed it narrowly (whether the state can regulate trading on federally regulated DCMs). The court held that the narrow framing is the better reading of the statute.

Analysis

Swap Classification

The majority held that Kalshi's sports-related event contracts satisfy the CEA's definition of "swaps" because they provide for payments "dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence." The court rejected New Jersey's proposed heightened "joined or connected" standard (New Jersey argued that event contracts are not swaps "because the outcome of a sports game is not 'joined or connected' with a financial, economic or commercial instrument or measure"), finding that the statute requires only an "association" with a potential economic consequence – a threshold easily met, given the documented financial impact of sports outcomes on sponsors, advertisers, broadcast networks, franchises and communities. The majority emphasized a strict textual reading: Because the statute's plain language is unambiguous, there is no need to resort to inference. The court criticized New Jersey and the dissent for "pil[ing] inference upon inference" and postulating that the majority's reading would sweep everything from bingo games to ping-pong matches under CFTC jurisdiction. The majority dismissed these hypotheticals as "far-fetched," noting that Kalshi makes no such sweeping claim and the U.S. Congress expressly delegated to the CFTC and U.S. Securities and Exchange Commission (SEC) the power to "further define" swaps, a safety valve that would address any genuinely overbroad applications. 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."

Federal Preemption

Federal preemption – the principle that federal law overrides conflicting state law under the Supremacy Clause – can be either express (where a statute explicitly says it displaces state law) or implied. Implied preemption takes two forms: 1) field preemption, where federal regulation is so comprehensive that it leaves no room for state law in a given area, and 2) conflict preemption, where compliance with both federal and state law is impossible, or state law stands as an obstacle to federal objectives. The Third Circuit found that both forms of implied preemption apply here.

Field Preemption

The majority concluded that the CEA occupies the field of trading on CFTC regulated DCMs, preempting state laws that purport to regulate such trading. The court carefully defined the preempted field as "regulation of trading on a DCM" rather than the broader field of gambling regulation. This framing draws on long-standing circuit authority holding that the CEA preempts state regulation of futures trading, citing cases from the U.S. Courts of Appeals for the District of Columbia, Seventh and Second Circuits. The court then addressed the CEA's two savings clauses – provisions in a federal statute that expressly preserve certain state powers or rights that might otherwise be displaced by the statute's preemptive reach. Savings clauses are significant because they can limit or negate an otherwise broad preemption finding; if a savings clause covers the state law at issue, preemption does not apply, despite the federal statute's general supremacy. Here, New Jersey argued that two such clauses in the CEA preserved its authority to enforce state gambling laws against Kalshi. The majority rejected both arguments. As to the first clause, which preserves state jurisdiction "except as hereinabove provided," the court held that this qualifying language means the clause does not reach swaps already subject to the CFTC's exclusive jurisdiction, and because Kalshi's contracts are swaps traded on a DCM, the savings clause does not save New Jersey's gambling laws from preemption. As to the second clause, the court held that it preserves only state court jurisdiction over common-law causes of action such as fraud and negligence – not state regulatory authority over DCM trading.

Conflict Preemption

Going beyond the district court's analysis, the majority also held that conflict preemption applies. Enforcing New Jersey's gambling laws would "prohibit Kalshi, which operates a registered DCM under the exclusive jurisdiction of the CFTC, from offering its sports-related event contracts in New Jersey," creating exactly the "patchwork" of state regulation "that Congress replaced wholecloth by creating the CFTC."

Presumption Against Preemption

The majority addressed the dissent's invocation of the presumption against preemption, acknowledging states' traditional role in regulating gambling but emphasizing that the federal government has regulated derivatives markets for more than a century and the CEA's text clearly grants the CFTC exclusive jurisdiction over swaps traded on DCMs. The relevant question, the court emphasized, is not whether the CEA preempts all state gambling regulation (it does not), but whether it preempts state laws that seek to regulate trading on DCMs.

The Dissent

Judge Roth's vigorous dissent characterized Kalshi's products as "virtually indistinguishable from the betting products available on online sportsbooks" and argued that the presumption against preemption should apply with "special force" in the field of gambling regulation. The dissent contended that DCM trading is a "subfield" of futures trading insufficient to support field preemption, the savings clauses are "fundamentally incompatible with complete field preemption," and CFTC Rule 40.11(a)(1), which prohibits DCMs from trading gaming contracts, itself undermines Kalshi's conflict preemption argument.

Appellate Options

New Jersey's Options

New Jersey may petition for rehearing en banc before the full Third Circuit (due in approximately late May 2026), where the 2-1 split and significant federalism questions provide plausible grounds – though en banc rehearing is granted sparingly. Alternatively, New Jersey may petition the U.S. Supreme Court for certiorari (due in approximately early July 2026, absent an en banc petition, or later if one is filed and denied). The 2-1 split and the significant federalism implications provide plausible grounds for further review.

Supreme Court

The Supreme Court would likely await a circuit split before granting certiorari. With the U.S. Court of Appeals for the Ninth Circuit expected to rule between 60 days and 120 days after its argument on April 16, 2026, and U.S. Court of Appeals for the Fourth Circuit also considering the issue, a split could emerge by late 2026. If a split materializes, certiorari petitions could be filed by early 2027, with the Supreme Court potentially granting review during the October term 2027. More than 34 states, the District of Columbia and Northern Mariana Islands have filed amicus briefs asserting state regulatory authority – a level of opposition that may independently attract the Supreme Court's attention even absent a formal split. Prediction market traders currently assign a 64 percent probability that the Supreme Court will accept a sports event contract case by the end of 2026.

Next Paths

The Ninth Circuit

The Ninth Circuit on April 16, 2026, will hear consolidated oral arguments in cases involving Kalshi, Robinhood and Crypto.com challenging the Nevada Gaming Control Board. The three-judge panel consists of Judges Ryan D. Nelson, Bridget S. Bade and Kenneth K. Lee – all appointed by President Donald Trump. Though no individual judge's vote can be predicted from the appointing president alone, the panel's composition is notable given the current administration's strong support for CFTC jurisdiction over prediction markets. The Ninth Circuit as a whole leans slightly liberal, but this particular panel may signal a more receptive posture toward federal preemption arguments. The CFTC has filed an amicus brief asserting exclusive jurisdiction. Notably, the district court below ruled against all three platforms, finding sports event contracts are not swaps – a position directly at odds with the Third Circuit's holding. If the Ninth Circuit affirms, a circuit split would be created, dramatically increasing the likelihood of Supreme Court review.

Other Circuits

The Fourth Circuit will hear oral arguments in a Maryland case on May 7, 2026, and the U.S. Court of Appeals for the Sixth Circuit has pending appeals from conflicting district court decisions in Tennessee (pro-Kalshi) and Ohio (anti-Kalshi), creating an intra-circuit split. This multi-circuit posture strongly suggests that a circuit split is likely and Supreme Court review may be necessary.

CFTC Offensive Litigation

The CFTC and U.S. Department of Justice on April 2, 2026, jointly sued Arizona, Connecticut and Illinois, asserting that those states' enforcement actions against prediction market platforms are preempted by the CEA. This unprecedented federal offensive underscores the current administration's commitment to defending CFTC jurisdiction.

Legislative Developments

Sens. John Curtis (R-Utah) and Adam Schiff (D-Calif.) introduced the Prediction Markets Are Gambling Act on March 23, 2026, which would amend the CEA to reclassify sports and casino-style event contracts as gambling outside CFTC jurisdiction. If enacted, the legislation would eliminate any purported ambiguity at the heart of the preemption dispute.

Conclusion

The Third Circuit's ruling is a significant win for prediction market platforms, but it is not the final word. The court held that Kalshi has demonstrated a reasonable likelihood of success on its preemption argument and affirmed the preliminary injunction on all four factors, but this remains a preliminary ruling, not a final judgment. The court expressly declined to address whether the CEA preempts all state gambling regulation, did not resolve the implications of CFTC Rule 40.11(a)(1) and left untouched the CFTC's pending advanced notice of proposed rulemaking on event contracts (comments due April 30, 2026).

Within the Third Circuit (New Jersey, Pennsylvania, Delaware and the Virgin Islands), prediction market platforms may continue to offer sports-related event contracts without interference from state gambling regulators while the preliminary injunction remains in effect. The ruling does not provide protection in jurisdictions outside the Third Circuit, where conflicting decisions remain in force. The legal landscape remains highly fragmented, and platforms operating in multiple jurisdictions should maintain compliance programs calibrated to the legal posture in each state.

The Third Circuit's opinion, combined with the CFTC's aggressive defense of its jurisdiction, signals that federal primacy over prediction markets is the current regulatory trajectory. However, the political landscape is complex: More than 34 states have filed amicus briefs asserting their regulatory authority, and a bipartisan coalition of over 20 senators has urged the CFTC to abstain from intervening in prediction market litigation. The ultimate resolution will almost certainly require either congressional action or Supreme Court review.

It is recommended that stakeholders:

1. review their compliance posture in light of this ruling
2. monitor the Ninth Circuit's argument on April 16, 2026, and forthcoming opinion closely
3. prepare for the possibility of a circuit split and eventual Supreme Court review
4. engage with the CFTC's pending rulemaking process to shape the regulatory framework for event contracts

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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