Skip to main content
X

Sixth Circuit: Kalshi Sports Contracts Aren't Swaps, States May Regulate Them

Steven Lofchie Commentary by Steven Lofchie
"At oral argument, for example, we asked Kalshi to explain how some of its sports-event contracts—like how many corner kicks were taken in a game or if an announcer said a particular word—could be associated with financial consequences. Kalshi conceded that to a 'layperson' it might be 'hard to see how certain of these contracts have economic consequences.'"
Julia Smith Gibbons, Circuit Judge
"At oral argument, for example, we asked Kalshi to explain how some of its sports-event contracts—like how many corner kicks were taken in a game or if an announcer said a particular word—could be associated with financial consequences. Kalshi conceded that to a 'layperson' it might be 'hard to see how certain of these contracts have economic consequences.'"
Julia Smith Gibbons, Circuit Judge

Sports-related event contracts offered on a prediction-market platform are not swaps under federal commodities law, the U.S. Court of Appeals for the Sixth Circuit held, clearing the way for state officials to enforce gambling laws against the platform.

The panel decided consolidated appeals from suits KalshiEX LLC filed against Ohio and Tennessee regulators after they moved to shut down its sports-event contracts under state gaming law.

The court held that Kalshi's contracts do not meet the Commodity Exchange Act's ("CEA") definition of a "swap," which requires the underlying event to be "associated with a potential financial, economic, or commercial consequence." Reading that phrase narrowly, the court said an event must inherently carry a financial consequence, not merely a downstream or speculative one. Outcomes like the number of corner kicks in a match or whether a broadcaster utters a particular word fail that test, the court said, even though Kalshi argued that sports outcomes carry financial consequences for sponsors, advertisers, broadcasters, and franchises.

As an alternative ground, the court held that even if the contracts were swaps, the CEA neither expressly nor impliedly preempts Ohio's and Tennessee's gambling laws as applied to Kalshi. The court rejected express, field, and conflict preemption in turn.

Because Kalshi had not shown a likelihood of success on the merits, the court (i) affirmed the Southern District of Ohio's denial of a preliminary injunction, (ii) vacated the Middle District of Tennessee's grant of one, and (iii) remanded both cases.

The ruling splits with the Third Circuit's decision in KalshiEX LLC v. Flaherty, which found such contracts to be swaps subject to CFTC preemption, and instead aligns with the Ninth Circuit's earlier ruling reaching the same conclusion as to Nevada (see prior coverage). The Fourth Circuit is weighing the same question in a separate appeal.

Commentary

Steven Lofchie
Steven Lofchie
While the court's holding, narrowly read, is about preemption (rejecting the claim that the CEA preempts state regulation of gambling), the language of the decision goes well beyond that, disparaging the argument that contracts on sports events are swaps as opposed to bets.

 

Email me about this

Primary Sources

  1. KalshiEX LLC v. Schuler

Related Articles

  • Ninth Circuit Rules Kalshi Sports Contracts Likely Aren't Swaps, Splits With Third

    The U.S. Court of Appeals for the Ninth Circuit unanimously affirmed in part the dissolution of KalshiEX's preliminary injunction against Nevada gaming regulators, holding that the prediction market operator's sports event contracts are likely not "swaps" under the CEA, a holding that splits with the Third Circuit.

Tags

Regulated Activities
Jurisdiction
Sub-Activity
Jurisdiction by Product or Activity
Regulated Entities
Markets
Sub-Entity
Exchanges / Contract Markets
Regulated Products
Swaps / SBS
Body of Law
CEA Regulation
Jurisdiction
US - Federal
Organization
CFTC, NFA, CFTC Markets Courts States