Ninth Circuit rules 3-0 states can regulate prediction markets as gambling

The Ninth Circuit Court of Appeals ruled 3-0 Friday that states can regulate prediction market contracts as gambling, rejecting Kalshi's claim that its sports event contracts qualify as federally regulated swaps.

"The substance of the sports event contracts offered on Kalshi's exchange is sports gambling, regardless of whether Kalshi calls them swaps," Judge Ryan Nelson wrote in the opinion, adding that the company's attempts to distinguish its products from sportsbook betting were "unpersuasive."

The ruling stems from Nevada's February lawsuit against Kalshi for "unlicensed operations." More than 20 states are locked in litigation over whether prediction platforms fall under state gaming laws, and 44 states have signed a letter arguing that "sports bets are not swaps, futures or other derivatives."

The decision directly contradicts an April ruling from the Third Circuit that classified Kalshi's sports contracts as swaps under the Commodity Exchange Act, granting federal pre-emption from state laws. The split tees up Supreme Court review, extending regulatory uncertainty for platforms that now process billions of dollars in weekly trading volume.

A Circuit Split Heads to the Supreme Court

"This is a classic circuit split," said Joshua Mitts, a law professor at Columbia University. "Ultimately, this is the kind of legal controversy which will make its way to the Supreme Court."

The Commodity Futures Trading Commission, which licenses prediction platforms as federally regulated exchanges, pushed back on the ruling. "A derivative contract structured as a swap is a swap regardless of the underlying subject matter," said Zach Fulton, a CFTC spokesman. "The Ninth Circuit erred today when it invented a new and atextual exception to the Commodity Exchange Act."

Nevada Attorney General Aaron Ford said his office was "proud to have defended Nevada's authority," adding that "sports betting does not become something else simply because a company calls it an 'event contract.'"

The ruling is binding precedent for federal courts in California, Arizona and six other states within the Ninth Circuit's jurisdiction. Similar cases remain pending in the Second, Fourth, Sixth and Seventh Circuit Courts of Appeals, meaning the legal landscape could shift further before the Supreme Court weighs in.

Prediction Platforms Face State Crackdowns

Kalshi, which now sees billions of dollars in weekly trading volume mostly from sports markets, condemned the ruling and said it would seek further review. "Despite the Ninth Circuit's opinion, we still believe the CFTC regulations as written do not prohibit sports contracts," said Dani Lever, a Kalshi spokeswoman.

The ruling also affects Crypto.com and Robinhood, which offer event contracts on their trading platforms. Robinhood announced plans to challenge the decision. Polymarket, the second-largest prediction site in the United States, was not part of the lawsuit but faces similar regulatory exposure.

Shares of DraftKings rose 7 percent and Flutter Entertainment, FanDuel's parent, gained more than 6 percent after the ruling, as investors bet that state-regulated gaming operators would benefit from tighter restrictions on prediction platforms.

Nevada Gov. Joe Lombardo said the ruling would help "safeguard the integrity of our gaming industry." Mike Dreitzer, chair of the Nevada Gaming Control Board, said the decision "completely vindicates what we have been saying all along."

The last time a federal appeals court weighed in on prediction market classification was in April, when the Third Circuit sided with the platforms and blocked New Jersey's attempt to apply state gaming laws. That ruling allowed Kalshi to continue operating in the state while the legal battle unfolded.

With dueling appellate decisions now on the books, the Supreme Court becomes the likely final arbiter. Until then, prediction platforms face a patchwork of state enforcement actions and federal regulatory oversight, with the CFTC proposing new formal rules for sports-related event contracts. For the platforms, the stakes are existential: if states win the broader legal fight, prediction markets could be forced to obtain gaming licenses in every jurisdiction where they operate, fundamentally altering their business model.

This article is for informational purposes only and does not constitute investment advice.