CFTC authority faces legal challenge in federal court ruling

CFTC preemption faces its clearest test yet as Sixth Circuit splits the swap question

Javalin Dedaj, Kalshi's head of litigation, sat on a panel in New York on Friday and said something that sounds like a legal principle but is actually a confession about the state of the law: the question of who regulates prediction markets is, as he put it, "sort of what's driving this litigation in the first place." That is not a reassurance. That is a circuit split, acknowledged from the inside.

The architecture of Kalshi's argument has always rested on a single load-bearing wall: sports event contracts are swaps under the Commodity Exchange Act, which means the CFTC holds exclusive jurisdiction, which means state gaming regulators have no authority to touch them. The Third Circuit accepted this in full when it ruled against New Jersey. The Ninth Circuit, reviewing the Nevada case, went the other way and concluded the contracts are likely not swaps at all. Then the Sixth Circuit produced something more complicated — finding that the contracts probably are swaps, but that state gaming laws might survive preemption regardless.

That Sixth Circuit position is the one that should be read most carefully, because it does not simply reject the swap classification. It accepts the classification and then asks whether preemption follows automatically. The answer the court gave was: not necessarily. That is a different problem than the Ninth Circuit's holding, and in some ways a harder one for the industry to manage. A ruling that the contracts are not swaps could be corrected by the CFTC's proposed rule, currently pending, which would expressly define event contracts — sports, political, cultural, weather — as swaps. A ruling that swap status does not guarantee preemption of state gaming law survives any rulemaking the Commission can produce.

The CFTC proposed rule is doing real work here as a piece of administrative positioning, but its legal reach has limits. Under the Supremacy Clause, federal law preempts state law when Congress has occupied the field or when compliance with both is impossible. The Commission can define its jurisdictional scope through rulemaking, but it cannot, through a rule alone, resolve whether Congress intended the Commodity Exchange Act to displace state gambling authority entirely. That question belongs to courts, and at the moment, courts disagree about it by a margin that has now produced at least three circuits going in at least two different directions.

The Supreme Court petition in the New Jersey case is the most direct path to resolution. Kalshi's brief is due November 9. Whether the Court grants certiorari will depend partly on whether the Fourth Circuit and the Massachusetts Supreme Judicial Court, both of which have decisions pending, deepen the split further or narrow it. A clean three-way circuit conflict on a federal preemption question, in an industry generating the volume that prediction markets now generate, is close to the textbook case for certiorari.

The legal standard that controls the outcome, whenever the Court reaches it, is field preemption under Gade v. National Solid Wastes Management Ass'n and the narrower conflict preemption inquiry from Crosby v. National Foreign Trade Council. The Court will ask whether the Commodity Exchange Act's regulatory scheme is sufficiently comprehensive that Congress implicitly left no room for state law to operate alongside it — and whether the specific state gaming prohibitions at issue stand as an obstacle to the full purposes and objectives of that federal scheme.