Federal court sides with Ohio, Tennessee, arguing sports event contracts are subject to gambling laws

• A federal court has sided with Ohio and Tennessee, arguing that the states may apply their gaming laws to sports event contracts
• This is the latest difference of opinion on a federal level, after two other courts have arrived at decisions for and against the issue
• The latest decision, argues Kalshi, will not withstand further judicial review

Prediction markets in the U.S. face even more uncertainty as another court has ruled against the sector, arguing that state gaming laws apply in cases where federally regulated exchanges offer products such as sports event contracts.

Federal court says sports event contracts are subject to gambling laws

The ruling from the 6th U.S. Circuit Court of Appeals in Cincinnati, Ohio, creates a fresh legal headache for prediction market platforms. The court effectively said that Ohio and Tennessee can regulate event contracts based on the states’ existing gambling laws.

This ruling adds to the difference of opinions across federal courts in the U.S. and could pave the way for a final review of the matter by the Supreme Court of the United States (SCOTUS), which has already been urged to weigh in on th issue in places such as New Jersey.

The arguments put forward by opposing camps are already familiar. On the one hand, there are state gaming regulators, attorneys general, and lawmakers who argue that sports event contracts are too much like gambling and therefore subject to state gaming laws.

The counter-argument by exchanges runs that prediction markets offer federally regulated derivatives and swaps and are therefore the exclusive remit of the Commodity Futures Trading Commission (CFTC). Attempts by state authorities to regulate, under whatever premise, are misplaced.

However, the decision by the court is not immediately a sign of alarm to some of the market’s biggest players, including Kalshi, which argued that it does not expect the decision to survive further legal review. In a comment for Reuters, a media outlet, Kalshi spokesperson Dani Lever had this to say:

"The ruling shows exactly why ​a state-by-state patchwork doesn't work. Markets can't operate when the rules change at every state line, which is why Congress created a single federal regulator with nationwide rules."

Kalshi did not demonstrate that sports event contracts were indeed "swaps"

However, the three-judge panel and Circuit Judge Julia Smith Gibbons disagreed, arguing that while Kalshi’s argument held merit insofar as swaps are exclusively regulated under the CFTC’s statutes, the company had failed to prove that its sports event contracts were similarly regulated, i.e., "swaps."

But opinions have been divided even on a federal level. The 9th Circuit in San Francisco said in August that Nevada could apply its gambling laws to sports event contracts, but the 3rd Circuit in Philadelphia sided with Kalshi in April, arguing the exact opposite - i.e., that these markets are the exclusive remit of the federal regulator.

Friday’s decision will now further complicate matters for Kalshi in both Tennessee and Ohio, where the company has been trying to use injunctions to bar the states from applying gambling laws to prediction market platforms. These efforts will now be further strained.

Similarly, a federal court in Utah allowed state gaming laws to be applied against prediction markets in the jurisdiction. In the meantime, Missouri and New York attorneys general have pressed on against the sector.

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