Texas prediction markets face twin threats from state and federal courts

Dallas Cowboys against the New York Giants, Sunday Night Football, $208 million in contracts traded across US markets. That number sat in the background of a Texas Senate hearing three days later, and it explained why the room was as tense as it was.

The hearing ran sixty-two minutes. Kalshi sent Robert DeNault, its head of enforcement and legal counsel. The American Gaming Association sent Tres York, a vice president who has spent the better part of two years arguing that an event contract on a football game is a sports bet with different paperwork. The committee, convened by Senator Bryan Hughes in the Senate Committee on State Affairs, was not adjudicating anything. It was building a record for 2027, when the legislature reconvenes and the question of whether prediction markets can operate legally in Texas will require a formal answer.

The AGA's argument is structurally simple: Texas prohibits sports wagering, and the label on the instrument does not change what the instrument does. Kalshi's counter has always rested on federal preemption — CFTC-designated contracts operating under the Commodity Exchange Act cannot be reached by state gambling law. That argument was doing reasonably well in federal courts until the Ninth Circuit ruled that on tribal lands, the Indian Gaming Regulatory Act creates a carve-out the preemption doctrine cannot override. Judge McKeown's characterization of sports contracts as bets, already in the public record, is the kind of language that travels. Legislators read headlines.

The political architecture in Texas compounds the legal exposure. Dan Patrick, president of the Texas Senate, has blocked sports betting legalization consistently since the PASPA decision in 2018. Greg Abbott, running for a fourth term as governor, has not broken with Patrick on this. The attorney general's seat is in the middle of a contested campaign. None of the candidates whose names will appear on the November ballot have given prediction market operators reason for confidence.

Research from Eilers & Krejcik placed Texas and California together at 43% of sports-event contract activity nationally. California has already produced tribal litigation that the Ninth Circuit resolved against Kalshi. Texas has produced a legislative hearing and a political environment where the officials most likely to shape the state's response have shown no inclination toward accommodation.

The federal preemption argument is not gone. But the Ninth Circuit ruling introduced a doctrine — that IGRA's protections for tribal gaming create a floor the CEA cannot lower — that state legislators in non-tribal contexts will attempt to adapt. Whether the CEA's preemptive scope extends to state prohibitions outside the tribal land context is a question the Ninth Circuit left open, and the Fifth Circuit, which covers Texas, has not yet addressed it on these facts.

The standard a Texas court would apply begins with whether CFTC designation of a contract as a "contract of sale of a commodity for future delivery" immunizes it from state law under 7 U.S.C. § 7(d)'s preemption provision — and whether a state court, reading McKeown's opinion alongside the legislative history of Dodd-Frank, concludes that Congress intended that immunity to reach state gambling prohibitions written before prediction markets existed.