Third Circuit Affirms Preliminary Injunction in Favor of Kalshi

On April 6, the U.S. Court of Appeals for the Third Circuit issued a 2-1 decision affirming a preliminary injunction in favor of KalshiEX LLC (Kalshi) against New Jersey state officials, partly on the basis that Kalshi has a reasonable chance or probability of winning on the merits. Most notably, the Third Circuit expressly stated that the Commodity Exchange Act (the CEA) preempts New Jersey’s gambling laws and state constitution as applied to sports-related event contracts offered on Kalshi’s designated contract market (DCM), stating that “both field and conflict preemption apply.”¹ The decision is the first federal appellate ruling squarely addressing whether federal preemption shields prediction market operators from state gambling enforcement, and it carries significant implications for the prediction market industry, state gaming regulators, and the Commodity Futures Trading Commission (CFTC) alike.

What You Need To Know:

• Federal preemption of state gambling laws. The Third Circuit held that the CEA both field-preempts and conflict-preempts New Jersey’s gambling laws as applied to sports-related event contracts traded on a DCM. The majority found that Kalshi’s sports-related event contracts qualify as “swaps” under the CEA, bringing them within the CFTC’s exclusive jurisdiction. This decision establishes, at least in the Third Circuit, that states cannot enforce gambling laws against federally regulated DCMs offering event contracts, even where those contracts closely resemble traditional sports betting products.
• The decision is another win for prediction market operators but will have limited effects outside New Jersey. Other courts have reached similar conclusions, including decisions in the Northern District of California and the Middle District of Tennessee. However, the opinion is limited in scope; it addresses only the preliminary injunction standard and does not represent a final merits determination. Moreover, the Third Circuit encompasses only New Jersey, Pennsylvania, Delaware, and the U.S. Virgin Islands, none of which other than New Jersey had ongoing litigation with prediction market operators. And although courts considering prediction market jurisdictional issues have looked at other relevant decisions – given the split in the decisions to date and judges’ independence – it is unlikely the Third Circuit’s decision will be determinative of other circuits’ decisions. Thus, litigation is likely to continue until all federal circuits rule the same way or the Supreme Court resolves the issues.
• A vigorous dissent signals continued uncertainty. The dissent argued that the presumption against preemption applies with special force in the gambling context, that DCM trading is a “subfield” insufficient to support field preemption, and that the limited legislative history of the Special Rule granting the CFTC authority to permit or bar event contracts involving gaming disdained such contracts, meaning state gambling laws complement rather than conflict with federal objectives.²
  
  

Background

Kalshi is a financial services company that operates an online exchange licensed by the CFTC as a DCM. DCMs list derivatives for trading. Derivatives include futures, options on futures, and swaps. Kalshi and other DCMs list “event contracts,” which allow customers to trade on the predicted outcomes of future events, including political elections, weather events, and sports outcomes. In March 2025, New Jersey’s Division of Gaming Enforcement sent Kalshi a cease-and-desist letter alleging that its sports-related event contracts violated the state’s constitution and gambling laws prohibiting betting on collegiate sports and threatening criminal penalties of up to $100,000. Kalshi immediately filed suit in the District of New Jersey seeking a preliminary injunction. The District Court granted the injunction, and the state of New Jersey appealed.

The Majority Opinion

The Third Circuit determined that Kalshi satisfied all four requirements for preliminary injunctive relief: (1) likelihood of success on the merits, (2) irreparable harm, (3) balance of equities, and (4) public interest. Because the government was the opposing party, the last two factors merged. The court’s analysis focused primarily on the first factor: likelihood of success on Kalshi’s preemption claims.

The court’s analysis proceeded in several steps. First, the court addressed whether Kalshi’s sports-related event contracts qualify as swaps under the CEA. The CEA defines swap to include any agreement or transaction dependent on the occurrence of an event or contingency “associated with a potential financial, economic, or commercial consequence.”³ The court concluded that the outcome of a sports event satisfies this standard, pointing to the economic interests of sponsors, advertisers, television networks, franchises, and communities as evidence of financial consequences. The court rejected New Jersey’s argument that an event’s outcome must be “joined or connected” with a “financial, economic, or commercial instrument or measure,”⁴ which would represent a heightened standard inconsistent with the statutory text that requires only an association with a potential consequence.⁵

Second, the court took the view that the CEA field-preempts New Jersey’s gambling laws. The majority defined the preemption field as the regulation of trading on a DCM – incorrectly characterizing event contracts as a form of futures trading – rather than the broader field of gambling.⁶ Relying on the CEA’s grant of exclusive CFTC jurisdiction over swaps traded on DCMs and sister circuit precedent, the court concluded that the CEA’s regulatory framework is sufficiently comprehensive to displace state regulation of DCM trading.

Third, the court independently found conflict preemption, holding that New Jersey’s enforcement of its gambling laws would “create an obstacle to executing the … [CEA] because such state enforcement would prohibit Kalshi, which operates a licensed DCM under the exclusive jurisdiction of the CFTC, from offering its sports-related event contracts in New Jersey.”⁷ The court characterized this as re-creating the patchwork of state regulation that Congress sought to eliminate when it created the CFTC.

Finally, the court addressed CEA Section 2(a)(1)(A)’s two savings clauses, which carve out exceptions for other regulators from the CFTC’s exclusive jurisdiction. The first clause preserves the jurisdiction of the Securities and Exchange Commission (SEC) and other federal or state regulatory authorities, ensuring that the CFTC’s mandate does not supersede the power of the SEC and other state and federal authorities when acting within their jurisdiction. The second clause serves to protect the jurisdiction of state and federal courts, preventing the CEA from supplanting the judiciary’s ability to adjudicate private contract disputes or other legal claims that do not fall strictly within the CFTC’s specialized regulatory purview. Together, these clauses act as a jurisdictional buffer, ensuring that while the CFTC manages the derivatives markets, the traditional oversight roles of the other regulators and the judiciary remain intact. The majority determined that the first clause preserves state regulatory jurisdiction only outside the CFTC’s exclusive domain and that the second clause preserves state court jurisdiction for common-law actions (e.g., fraud, negligence) without undermining the CFTC’s exclusive regulatory authority over DCM trading.

The Dissent

The dissent challenged the majority on multiple grounds. It began by noting that Kalshi’s products are “virtually indistinguishable from the betting products available on online sportsbooks” and cited Kalshi’s own marketing materials referring to its offerings as “sports betting.” The dissent argued that the presumption against preemption applies with “special force” because gambling regulation is a traditional state prerogative and that the majority failed to give this principle adequate weight.⁸

On field preemption, the dissent contended that DCM trading is a “subfield” of futures trading (again missing the statutory futures-swaps distinction)⁹ and that federal occupation of a subfield is insufficient to overcome the presumption against preemption in an area traditionally regulated by the states.¹⁰ The dissent also argued that the CEA’s savings clauses are “fundamentally incompatible with complete field preemption” because they evidence Congress’s intent to permit some complementary state regulation.¹¹

On conflict preemption, the dissent advanced two arguments. First, on impossibility preemption – which Kalshi raised in briefing but the majority did not address because it found obstacle preemption sufficient – the dissent argued that the CFTC’s “impartial access” requirement does not mandate that any particular market exist but only that access to existing markets be nondiscriminatory. Citing the CFTC’s final rulemaking preamble explaining that the impartial access requirement was designed to prevent DCMs from using discriminatory membership standards (such as high net worth requirements), the dissent concluded that Kalshi could comply with both state and federal law by establishing different categories of market participants. For example, the dissent noted Kalshi could create a separate market for New Jersey residents that meets New Jersey requirements as long as it does not “discriminate within [that] particular category.”¹² This analysis is significant because it offers states a potential road map for crafting tailored regulations that could coexist with federal law rather than pursuing outright prohibitions that the majority found preempted.

Second, on obstacle preemption, the dissent focused on Dodd-Frank’s legislative history to argue that Congress intended to prevent gambling using futures markets. For instance, the dissent cited Sen. Blanche Lincoln’s statement that the Special Rule was intended to “prevent gambling through [CFTC-regulated] ... markets” and that “[i]t would be quite easy to construct an ‘event contract’ around sporting events such as the Super Bowl, the Kentucky Derby, and Masters Golf Tournament … [which] would be used solely for gambling.”¹³ The dissent noted that the CFTC effectuated this congressional intent by enacting Rule 40.11(a)(1), which prohibits DCMs from trading event contracts involving “gaming.” The dissent argued that if Kalshi’s contracts violate this federal regulation, state gambling laws cannot be said to frustrate congressional objectives but instead complement them.

Looking Ahead

The Third Circuit’s decision is a win for Kalshi and the prediction market industry, but it is not the final word, and this decision is likely just the first of many federal appeals court decisions. The decision is limited to the jurisdiction of the Third Circuit(New Jersey, Pennsylvania, Delaware and the U.S. Virgin Islands), and it affirms only a preliminary injunction – the case will return to the District Court for a final merits determination. New Jersey may seek en banc review by the full Third Circuit or petition the Supreme Court for certiorari, and either court may take or refuse to take the case. Additionally, other circuits may reach different conclusions in similar cases.

Several developments bear watching. At the state level, enforcement efforts continue to intensify. Arizona has filed the first criminal charges against a prediction market operator, with related federal court proceedings ongoing. New York is reportedly considering exercising its disgorgement authority against operators. At the federal level, the CFTC’s pending Advance Notice of Proposed Rulemaking on prediction markets could result in a new rulemaking that defines “gaming” for purposes of the Special Rule. The CFTC’s recently announced enforcement priorities, including a focus on insider trading in prediction markets and heightened scrutiny of contract design and surveillance programs, suggest that federal oversight of this space is intensifying regardless of the preemption outcome. Of course, such CFTC actions only matter if prediction markets prevail in their legal battle to preserve their ability to offer event contracts subject to exclusive federal jurisdiction.

Additionally, the CFTC and the Department of Justice have recently filed suit against three states, asserting that the CFTC has exclusive jurisdiction over DCM-listed prediction markets, signaling a coordinated federal push to consolidate regulatory authority.¹⁴

For prediction markets, the Third Circuit ruling provides operational certainty within that circuit, but the likely appeal and the limited number of states in which the decision is binding constrain its broader significance. For states seeking to regulate these markets, the dissent’s analysis – particularly on impossibility preemption and Dodd-Frank’s legislative history – offers a path for future challenges.

¹ KalshiEX LLC v. Flaherty, No. 25-1922 (3d Cir. Apr. 6, 2026).
² Id. at 9 (Roth, J., dissenting).
³ CEA § 1a(47)(A)(ii).|
⁴ KalshiEX, slip op. at 7.
⁵ Id. at 8.
⁶ The majority opinion characterized Kalshi’s event contracts as swaps. However, CEA § 1a(47)(B)(i) provides that futures are not swaps. Thus – although some DCMs do list futures – the court was incorrect as a matter of law to characterize trading on DCMs as a form of futures trading for purposes of this case, since the court had just characterized Kalshi’s contracts as swaps.
⁷ KalshiEX, slip op. at 13.
⁸ CEA § 1a(47)(A).
⁹ KalshiEX, slip op. at 28 (Roth, J., dissenting). As noted above in the discussion of the majority opinion, futures are not swaps.
¹⁰ Id.
¹¹ Id. at 28 and 32 (internal citations omitted).
¹² KalshiEX, slip op. at 36 (internal citation omitted).
¹³ Id. at 38 and 39 (quoting 156 Cong. Rec. S5906-07 (2010)).
¹⁴ The CFTC and the DOJ convinced the U.S. District Court for the District of Arizona to issue a temporary restraining order against Arizona, halting for two weeks Arizona’s enforcement of its gambling laws against DCMs.