CFTC Wins Panel Support for Preemption Argument in Circuit Split Case

CFTC preemption argument gains panel support but circuit split leaves outcome open

Javalin Dedaj, Kalshi's head of litigation, stood at a podium in New York on Friday and said something that sounds simple until you follow it to its conclusion: trading activity on a designated contract market should be regulated by the designated federal regulator for that market, and only by that regulator. The Commodity Exchange Act, he argued, does not leave room for New Jersey or Nevada or any other state to apply their gaming statutes to federally registered derivatives.

The attorneys on that panel were not speaking into uncertainty. They were speaking into a circuit split that has already produced three appellate decisions pointing in three different directions, with at least two more pending.

The Third Circuit agreed with Dedaj's reading in April, finding that sports event contracts are swaps under the CEA and that the CFTC's jurisdiction is exclusive. The Ninth Circuit reached the opposite conclusion in August, finding the contracts likely fall outside the swap definition. Then the Sixth Circuit added a third variation in September: yes, the contracts are swaps, but that classification may not be enough to displace state gaming authority anyway.

That third position is the one that has not received enough attention. The preemption question and the classification question are separable, and the Sixth Circuit separated them. An operator that wins on classification — that is, persuades a court these are swaps — still has to win on preemption before state enforcement stops. The industry has been treating those as a single argument. They are not.

The CFTC's proposed rule, which would expressly define event contracts as swaps, does the classification work. It does not do the preemption work. Whether a federal agency's rulemaking can override state gambling authority under the Supremacy Clause depends on whether Congress intended that displacement — and the CEA's legislative history on this point is not as clean as the industry's framing suggests. States have traditionally regulated gambling. Courts apply a presumption against preemption in domains of traditional state authority. The proposed rule does not eliminate that presumption; it creates a new fact pattern for courts to analyze.

DraftKings' position reflects a more candid reading of that uncertainty. Jason Robins has structured the company's prediction market operation to avoid placing state gaming licenses at risk, specifically by not offering event contracts in jurisdictions where DraftKings holds sports betting licenses. That is not a hedge for public relations purposes. It is a structural acknowledgment that the preemption question has not been resolved and that the consequences of the wrong answer are not recoverable.

Kalshi's November 9 Supreme Court brief will argue that the Third Circuit got it right and the other circuits got it wrong. That is a standard petition posture. The more interesting document will be whatever the CFTC files in response, because the agency's position on the scope of its own preemptive authority — distinct from its classification rulemaking — is what a reviewing court will actually need.

The legal standard that resolves this is not found in the CEA classification provisions. It is found in Altria Group v. Good and its predecessors: whether Congress, in enacting the relevant federal statute, intended to occupy the field or merely to establish a floor. Field preemption and conflict preemption produce different outcomes on the same facts. The circuits have not been applying the same framework, which is why they have not been reaching the same answers.