Federal Appeals Court Rules States Retain Authority to Regulate Prediction Markets Under Gambling Laws

A federal appeals court has determined that state governments possess the authority to regulate prediction markets under existing state gambling frameworks. In a unanimous ruling issued on Friday, the Ninth Circuit Court of Appeals affirmed that platforms offering event-based prediction contracts are subject to state-level gaming oversight. The decision marks a significant development for the rapidly expanding prediction market industry and establishes a direct jurisdictional conflict with previous appellate rulings regarding federal pre-emption, setting the stage for further judicial review.

Prediction markets allow participants to trade contracts based on the outcomes of future events, ranging from economic indicators to sports results. Over recent years, platforms such as Kalshi and Polymarket have experienced substantial growth, positioning their offerings as financial derivatives subject to federal oversight. Industry operators have sought to consolidate their regulatory compliance under the Commodity Futures Trading Commission (CFTC), arguing that a unified national framework is necessary for the efficient operation of financial exchanges.

The current legal dispute originated in Nevada, where state regulators intervened to prevent Kalshi from offering sports-related event contracts. The Nevada Gaming Control Board argued that such contracts functioned as unlicensed sports betting, thereby necessitating strict adherence to the state’s established gaming laws. Kalshi countered the state’s enforcement actions by asserting that its operations were federally regulated under the Commodity Exchange Act (CEA) and that state-level gambling enforcement posed a direct obstacle to federal regulatory purposes.

A three-judge panel for the Ninth Circuit rejected the platform’s argument for federal pre-emption in this context. Writing for the court, Judge Ryan Nelson stated, “Because we disagree with Kalshi’s overly broad reading of the CEA, and because CFTC regulations currently prohibit offering contracts related to gaming on prediction markets, we affirm the district court’s order dissolving the injunction as to sports event contracts.” The appellate ruling upheld a prior decision by U.S. District Judge Andrew Gordon, effectively allowing Nevada regulators to enforce their prohibition on the unlicensed markets within state borders.

State officials welcomed the appellate court’s decision as an affirmation of local regulatory authority and consumer protection mandates. Nevada Governor Joe Lombardo stated, “Prediction markets offering sports-event contracts constitute gambling and must comply with Nevada’s gaming laws and regulatory framework.” Similarly, Nevada Gaming Control Board Chairman Mike Dreitzer noted that the ruling “vindicates” the state’s position that sports betting “needs to be properly regulated by the state,” a practice Nevada has maintained for over seven decades. Dreitzer added, “We will continue to vigorously enforce Nevada law to safeguard gaming in our state.”

Conversely, the prediction market industry and federal regulators have advocated for a centralized regulatory structure. The CFTC has recently taken an active stance against state intervention, initiating lawsuits against states such as New York, Wisconsin, Arizona, Connecticut, and Illinois to prevent the application of state gambling laws to federally registered exchanges. The federal agency maintains that event contracts should be classified exclusively as commodity derivatives under national jurisdiction.

Earlier in the year, the Third Circuit Court of Appeals issued a ruling that aligned with the industry’s perspective. In that precedent, the court determined that Kalshi’s sports-event contracts qualified as swaps and that federal law prevented states like New Jersey from applying local gaming regulations to federally licensed exchanges. Following the Ninth Circuit’s divergent ruling, Kalshi spokeswoman Dani Lever issued a statement referencing the discrepancy, noting that the Ninth Circuit judges acknowledged the prior Third Circuit opinion regarding federal pre-emption.