Kentucky remand puts Kalshi and Polymarket back before state courts

Robinhood's legal team spent most of the spring arguing that federal law leaves no room for Kentucky to regulate prediction market contracts. A Kentucky appeals court disagreed, and the cases are now heading back to the state level — arriving at a moment when the CFTC has just issued proposed rules that would, if finalised, make that exact question considerably harder for states to win.

The timing is worth sitting with. On October 9, CFTC Chairman Michael Selig published a notice of proposed rulemaking that would expressly define event contracts — sports, politics, cultural, weather — as swaps covered under the Commodity Exchange Act. The proposal cited the Third Circuit's April ruling in KalshiEX v. Flaherty extensively, leaning on the court's finding that sporting events carry genuine commercial consequences: franchises, advertisers, television networks, and the $380 million the New York Knicks' playoff run reportedly generated for the city's economy. That commercial nexus is the CFTC's jurisdictional argument in its plainest form, now formalised in proposed rulemaking rather than just asserted in briefs.

Kentucky, operating under state gambling law, does not need to accept that framing. And the remand means it won't have to — at least not yet. The cases return to state courts that are free to apply their own statutory definitions of gambling, independent of whatever the CFTC says a swap is. The CFTC's proposal is not a final rule. It has no immediate preemptive force. What it does is sharpen the federal position on paper at exactly the moment state courts are being asked to rule on state law.

This is where I think the consensus reading goes slightly wrong. The dominant interpretation treats the CFTC rulemaking as strengthening Kalshi and Polymarket's hand in state litigation — federal agency asserts jurisdiction, states back down. I don't think that's how the Kentucky remand plays. State courts applying state gambling statutes are not bound by a CFTC proposed rule. They are bound by their own legislature's definitions. If Kentucky's gambling statute reaches these contracts on its own terms, the existence of a federal rulemaking process — one that hasn't concluded — does not extinguish the state's claim. The Supreme Court would eventually have to resolve the preemption question, and that petition is already in the pipeline. But the Kentucky courts ruling in the interim are working in the gap between a pending federal proposal and a Supreme Court that hasn't spoken.

What the CFTC rulemaking actually does, more than anything else, is give the platforms a stronger argument at the Supreme Court level if and when the petition is granted. Selig has now put the agency's jurisdictional claim in writing, with citations and economic examples, in a form that carries more institutional weight than a brief. That matters for the federal track. It does less for the state track in the near term, which is precisely where Kalshi and Polymarket now find themselves in Kentucky.

The prediction markets on Supreme Court cert are active, and I think they are underpricing the likelihood that the Court takes the case. Divergent circuit outcomes plus a formal CFTC rulemaking in an election year — these are conditions that tend to attract a Court looking for a vehicle to settle a statutory question cleanly. Kentucky's remand adds another state-level data point to a circuit split that is already well-developed. The case for cert grows each time a state court rules differently from what the Third Circuit endorsed.