Kalshi recently secured a significant victory in the U.S. Court of Appeals for the Third Circuit in a case known as KalshiEx LLC v. Flaherty. This marks the first time this court has addressed whether federal regulations trump state gambling laws concerning specific trading contracts.
This case has been unfolding for several months.
While New Jersey might consider appealing the decision, the current ruling stands and is regarded as a major win by those supporting prediction markets.
About Kalshi
Kalshi is a designated contract market (DCM) registered with the U.S. Commodity Futures Trading Commission (CFTC). It offers event contracts, which are similar to swaps or futures based on real-world events in areas like sports, politics, and entertainment. These contracts are regulated as federally approved derivatives under the oversight of the CFTC.
They are commonly referred to as prediction markets.
How The Legal Dispute Started
In March 2025, New Jersey's Division of Gaming Enforcement (DGE) ordered Kalshi to halt operations, asserting that its sports-related contracts were "unauthorized sports wagers" that violated the state's Sports Wagering Act and constitution.
In response, Kalshi took the matter to federal district court, contending that the Commodity Exchange Act (CEA) gives the CFTC sole authority over trading on its designated contract market (DCM). They argued that this federal authority overrules state gaming laws due to the Supremacy Clause.
In April 2025, U.S. District Judge Edward S. Kiel issued a preliminary injunction, blocking New Jersey from implementing its laws against Kalshi’s sports contracts. New Jersey challenged this decision, resulting in oral arguments before the Third Circuit in September 2025.
The Dissenting View
The dissenting judge argued that Kalshi’s products are essentially the same as state-regulated sports betting. They suggested that calling them “swaps” or “event contracts” was merely a strategy to avoid state oversight and maintained that states should still treat these activities as gambling.
Ruling from the Third Circuit
The court sustained the preliminary injunction with a 2-1 decision, written by Judge David J. Porter and supported by another judge. The dissenting voice came from either Chief Judge Chagares or Judge Roth. Key points from the majority decision included:
- Kalshi showed a strong likelihood of winning the case, since the Commodity Exchange Act (CEA) overrides New Jersey’s gambling laws as they relate to Kalshi’s event contracts.
- These contracts are considered “swaps” and fall solely under the CFTC’s jurisdiction.
- The court clarified that the focus was specifically on whether states could regulate trading on federally designated contract markets, rather than addressing all types of sports gambling. The intention of Congress, along with the CEA’s framework, indicates that federal law takes precedence here.
The court found the lower court's conclusion—that New Jersey law does not apply to Kalshi’s federally licensed platform—to be sound. It also acknowledged potential irreparable harm to Kalshi, such as loss of business and reputation damage, and determined that upholding federal law was in the public interest.
The Impact of the Kalshi Ruling
The court's decision marks a crucial turning point for Kalshi and other prediction markets for several reasons:
- It allows Kalshi to operate freely in New Jersey and potentially in other states within the Third Circuit, bypassing the need for state gaming licenses, taxes, or enforcement actions.
- As the first appellate ruling on this complex issue, it may influence decisions in other judicial circuits and could lead to a review by the Supreme Court.
- The decision underscores the ongoing clash between state-regulated sports betting, which has rapidly expanded since 2018, and federally regulated prediction markets.
While New Jersey may pursue additional judicial challenges, the current decision is in effect and is viewed as a landmark victory by supporters of prediction markets. Although the case concerning the preliminary injunction is not yet resolved, the Third Circuit’s clear endorsement of federal preemption is a positive outcome for Kalshi.
What's Next for Prediction Markets?
The ruling highlights the tension between emerging prediction markets and traditional state-regulated gambling systems. While states worry about losing revenue, ensuring consumer protection, and maintaining integrity, platforms like Kalshi argue for regulation under more adaptable federal standards.
This dynamic could trigger further legal battles and might eventually attract the attention of the Supreme Court. Meanwhile, Kalshi celebrates a substantial victory.
