Commodity Exchange Act preemption fails its first appeals court test

In April, a two-judge majority of the Third Circuit held that Kalshi's sports-event contracts were swaps and futures, placing them squarely under CFTC jurisdiction and beyond the reach of New Jersey's gaming regulators. Four months later, a unanimous three-judge panel of the Ninth Circuit reached the opposite conclusion on the same statutory question — that the Commodity Exchange Act likely does not preempt Nevada's gaming regulations as applied to those same contracts.

That word "likely" is doing work. The Ninth Circuit was reviewing a district court's dissolution of a preliminary injunction, which means the panel was not deciding whether preemption fails as a matter of law. It was deciding whether Kalshi had shown a sufficient probability of success on the merits to justify blocking Nevada enforcement while the case proceeded. The answer was no. The merits question remains open.

This distinction matters more than the headlines suggest, because Kalshi spokeswoman Dani Lever was not wrong when she said the Ninth Circuit agreed with the Third on a threshold point — that federal law prevents states from regulating trading on a federally licensed exchange. The panels diverge on what follows from that premise. The Third Circuit read sports-event contracts as instruments that fall within CEA coverage. The Ninth Circuit read the same contracts as things the CEA likely does not reach, at least in this context, at this stage of review.

The Commodity Exchange Act's preemption clause, 7 U.S.C. § 16(e)(2), bars states from imposing requirements on CFTC-registered entities "with respect to" activities that the CEA regulates. The operative question — the one neither circuit has fully resolved — is whether sports-event contracts fall within the category of instruments the CEA was designed to regulate, or whether they are, as Nevada and its allied attorneys general argue, wagers that happen to be structured as contracts.

I have watched regulators and courts spend years arguing about whether an instrument's economic function or its formal legal structure should control its classification. The function argument almost always wins eventually, because courts reading remedial statutes tend toward the reading that closes the gap the statute was meant to close. Whether that principle favors Nevada or Kalshi here depends on how a court characterizes the statute's purpose — consumer protection in derivatives markets, or something narrower.

Forty-four state attorneys general have now told the CFTC directly that they read the CEA as something narrower. Kalshi's position is that the CFTC's own rulemaking will resolve the ambiguity in its favor. Whether the Commission acts on that schedule, and whether any resulting rule survives the same judicial review now fragmenting the preemption question across circuits, is what the Supreme Court will have to address.