Betting the House on a Definition: The Circuit Split Over Sports Event Contracts
Behind every derivatives exchange lies a simple statutory promise: transactions conducted on a federally regulated market are not, by definition, a “bet” or “wager.” That promise is now being tested by a new generation of prediction market platforms that let users trade contracts on the outcome of sporting events, claiming the protection of federal commodities law rather than state gambling regulation. In April 2026, the Third Circuit sided with Kalshi, holding that its sports event contracts are “swaps” under the Commodity Exchange Act (CEA) and that federal law preempts New Jersey's gambling laws as applied to them. Four months later, the Ninth Circuit reached the opposite conclusion, holding that Nevada could continue treating those same contracts as unlicensed sports betting. With the circuits now openly split and New Jersey Attorney General Jennifer Davenport petitioning the Supreme Court to resolve the question, the fate of a multibillion-dollar industry, and the boundary between federal derivatives law and state police power over gambling, now rests on how courts read a single statutory word: “swap.”
WHAT IS A SPORTS EVENT CONTRACT?
Kalshi, a leading “prediction market” platform, operates a designated contract market (DCM) licensed by the Commodity Futures Trading Commission (CFTC), on which it lists event contracts, or derivatives whose value depends on the outcome of some future event. A DCM does not need CFTC pre-approval before listing a new contract; it need only self-certify that the contract complies with applicable law, after which the contract can go live the next business day. In January 2025, Kalshi began self-certifying sports-related event contracts, letting users trade on everything from game winners to point spreads to player props. The offerings quickly became Kalshi's core business: over 90% of its 2025 trades, representing 95% of its revenue, were sports-related. Kalshi has marketed the product as “the first app for legal sports betting in all 50 states,” a phrase that would come back to haunt it in court.
Both New Jersey and Nevada responded with cease-and-desist letters, and Kalshi sued in each state seeking to enjoin enforcement.
STATUTORY BACKGROUND
The dispute turns on the CEA's own history. Congress created the CFTC in 1974 to regulate futures markets beyond agriculture. In 1988, the CFTC allowed predictions to be placed in a limited capacity, and in 2004, it allowed HedgeStreet Inc. to be the first DCM offering binary options. In 2010, the Dodd-Frank Act added a new category, “swaps,” to the CFTC's exclusive jurisdiction, defining a swap broadly as any transaction whose payment depends on the occurrence of “an event or contingency associated with a potential financial, economic, or commercial consequence.” Dodd-Frank also gave the CFTC a “Special Rule” power to bar gaming-related contracts from DCMs, which it has since exercised through Rule 40.11(a).
A separate federal statute, the Unlawful Internet Gambling Enforcement Act, defines “bet or wager” for its own purposes, and expressly excludes any transaction conducted on a CFTC-registered exchange from that definition. Kalshi leans on this carve-out to argue that Congress already drew the line it needs: if a transaction happens on a registered exchange, it isn't a bet by federal definition, whatever a state calls it.
CIRCUIT SPLIT, PART ONE: THE THIRD CIRCUIT SIDES WITH KALSHI
Writing for the Third Circuit majority in KalshiEX, LLC v. Flaherty, Judge David Porter held that Kalshi's sports contracts fit comfortably within the CEA's broad “swap” definition because sporting events can affect sponsors, advertisers, networks, and franchises, giving them the requisite “financial, economic, or commercial consequence.” From there, the court found both field preemption (the CEA's grant of exclusive CFTC jurisdiction over swaps traded on a DCM leaves no room for state regulation) and conflict preemption (allowing states to ban the contracts would recreate the very regulatory patchwork Congress built the CFTC to eliminate). The majority brushed aside concerns that this reading would sweep too broadly, reasoning that the CFTC and SEC retain power to “further define” swap and carve out categories that Congress never meant to cover.
Judge Jane Roth dissented, arguing that DCM trading is too narrow a subfield of futures trading to trigger complete field preemption. She also pointed to Dodd-Frank's legislative history as evidence Congress meant its Special Rule to prevent exactly this use of event contracts, not bless it.
CIRCUIT SPLIT, PART TWO: THE NINTH CIRCUIT SIDES WITH NEVADA
Four months later, in KalshiEX, LLC v. Assad, the Ninth Circuit rejected the Third Circuit's reasoning outright. Writing for the panel, Judge Ryan Nelson found that reading “event” and “associated with” as broadly as Kalshi (and the Third Circuit) proposed would leave the swap definition with no limiting principle — sweeping in everything from bingo games to backyard ping-pong matches — and would effectively hand the CFTC unprecedented authority to regulate gambling nationwide based on vague statutory language. The panel concluded that Congress does not casually delegate control over a field, such as gambling, that states and tribes have regulated for over a century. As the court put it, for Kalshi to deny that its sports contracts are sports bets is not just implausible; everyone, including Kalshi itself in earlier litigation, has described them as exactly that.
The Ninth Circuit went further, holding that even accepting Kalshi's swap theory, its sports contracts would still be unlawfully listed: CFTC Rule 40.11(a) already bars DCMs from listing gaming-related contracts, and the CFTC's failure to formally review Kalshi's specific contracts does not undo that categorical prohibition. Judge Kenneth Lee, concurring, flagged an unresolved wrinkle: because the Special Rule is phrased permissively (“may determine”), the bar on gaming contracts currently rests on the CFTC's own regulation rather than a hard statutory command, meaning the agency could, in principle, revise Rule 40.11 and reopen the question administratively, regardless of what the courts say.
THE CASE FOR SUPREME COURT REVIEW
Days after the Ninth Circuit's ruling, New Jersey Attorney General Jennifer Davenport and Solicitor General Jeremy Feigenbaum filed a petition for certiorari asking the Supreme Court to resolve the question directly: whether Dodd-Frank preempts states from regulating sports bets that occur within their borders when those bets are offered on CFTC-registered markets. The petition frames the stakes starkly: if Kalshi is right, a single statutory term can let any company “disregard all state sports-gambling statutes with ease” simply by registering with the CFTC through application with the National Futures Association's Online Registration System (ORS). AG Davenport has invoked the Supreme Court's 2018 decision in Murphy v. NCAA, which struck down the federal ban on state authorization of sports betting and held that if Congress “elects not to” regulate sports gambling directly, “each State is free to act on its own” — the same line the Ninth Circuit itself relied on in siding with Nevada.
POLICY AND MARKET EFFECTS
A win for Kalshi would let a single CFTC registration override every state's gaming statute, letting sports prediction markets operate as a genuinely national product rather than a state-by-state licensing business. A win for New Jersey would force Kalshi and its peers back into the conventional sportsbook model that companies like DraftKings and FanDuel already operate under. Notably, both the Third Circuit dissent and the Ninth Circuit majority flagged a paradox in Kalshi's position: if sports event contracts really are swaps entitled to exclusive federal treatment, and if trading swaps off a DCM is unlawful, then Kalshi's own logic could threaten the legality of state-licensed brick-and-mortar sportsbooks and tribal gaming operations that have never operated as CFTC-registered exchanges.
There is also a wildcard that neither court can resolve: the CFTC itself. Both circuits noted that Rule 40.11(a)'s ban on gaming contracts is a regulation, not a statute, and the agency has already proposed revising it. If the CFTC amends the rule to formally bless sports event contracts, much of this litigation could become moot regardless of how the Supreme Court eventually rules on preemption, shifting the fight from the courts to notice-and-comment rulemaking.
CONCLUSION
What began as a dispute between one company and two state gaming regulators has become a genuine, acknowledged circuit split, both on outcome and interpretive method, with the Third Circuit applying a more literal textual reading and the Ninth Circuit reinforcing its narrower reading with the major questions doctrine. With a cert petition now pending, dozens of states and tribes weighing in, and the CFTC simultaneously reconsidering its own rules, this is no longer a hypothetical question of “if” the Supreme Court will have to weigh in, but “when.” However the Court ultimately rules, the message for the prediction market industry is the same one that has defined nearly every innovation in financial regulation: a clever statutory label is not a substitute for a clear answer from Congress, an agency, or, eventually, the Court itself.
*The views expressed in this article do not represent the views of Santa Clara University.
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