Federal court affirms state power over gambling despite swaps ruling

Sixth Circuit carves out state gambling authority even if swaps rule holds

Three federal appeals courts have now read the same statute and reached three different conclusions. The Third Circuit said sports event contracts are swaps and federal law controls. The Ninth Circuit said they are probably not swaps. The Sixth Circuit said they may well be swaps, and it does not matter — state gaming laws survive preemption regardless.

That last position is the one that should concern Kalshi more than the others, because it concedes the strongest part of Kalshi's argument and then rules against it anyway.

The preemption question in federal law has two distinct layers, and most of the public commentary on this litigation collapses them. The first is definitional: are these contracts swaps under the Commodity Exchange Act? The second is structural: even if they are swaps, does the CEA's grant of exclusive CFTC jurisdiction actually displace state gambling law? Courts that answer yes to the first question have, until the Sixth Circuit, tended to answer yes to the second. The Sixth Circuit separated them. That move matters because it gives states a path to regulate even after losing the definitional argument, and it gives the Supreme Court a reason to take the case that has nothing to do with what a swap is.

Javalin Dedaj, Kalshi's head of litigation, said at the Next Predict Summit that the company's position has always been that trading on a designated contract market should be regulated only by the CFTC. That framing works cleanly if the preemption question is settled. The Sixth Circuit's ruling makes clear it is not, and the definitional question and the structural question now need to be answered separately, in sequence.

The Fourth Circuit has not yet ruled. The Massachusetts Supreme Court has not yet ruled. Kalshi's brief in the New Jersey case is due November 9. The CFTC has a proposed rule on the docket that would expressly define sports event contracts as swaps, which would resolve the definitional layer but leaves the structural layer exactly where the Sixth Circuit put it.

I've watched preemption arguments that look airtight at the contract level run into structural readings a court was already disposed to reach. The Sixth Circuit's move — grant the swap classification, then hold that preemption doesn't follow automatically — is the kind of ruling that survives appellate review precisely because it doesn't require disagreeing with the other circuits on the facts. It disagrees on what the facts mean for federal displacement of state authority. That is a harder argument to reverse, and a cleaner vehicle for a Supreme Court that may want to address the structural question without deciding what a swap is.

The circuit split the industry has been describing as a two-sided disagreement is actually a three-sided one now. Kalshi wins on definition in two circuits and loses on structure in one. A Supreme Court that takes the New Jersey case to resolve the definitional split will also have to address whether resolving that split actually resolves the regulatory question, or whether the Sixth Circuit has correctly identified a separate structural floor beneath which federal preemption cannot reach.