U.S. Ninth Circuit: "Kalshi's Sports Contracts Are Gambling in Substance"… Diverging From the Third Circuit

On August 28 local time, the U.S. Court of Appeals for the Ninth Circuit upheld, as to the sports contracts, the lifting of a preliminary injunction that had blocked Nevada's gambling regulation from applying to Kalshi's sports event contracts. As a result, Nevada may apply its gambling regulation to Kalshi's sports contracts while the case proceeds on the merits. Kalshi argued that its sports event contracts are swaps governed by the federal Commodity Exchange Act (CEA), and that state law is preempted for swaps traded on a designated contract market (DCM). The appeals court, however, found that at the preliminary injunction stage Kalshi had not sufficiently demonstrated a likelihood of success on the merits. The court looked to the substance of the contracts rather than their label. It held that Kalshi's sports event contracts are in substance sports gambling, that they therefore do not qualify as swaps under the CEA, and that the provision preempting state law for swaps does not apply. The court also reasoned that gambling regulation has long fallen within the states' police powers, and that it is difficult to conclude that Congress handed that authority to the CFTC on the basis of an ambiguous definition of swaps alone. As for election event contracts, the court remanded the case on the ground that the lower court had not ruled on whether they constitute swaps under the CEA. In other words, it did not carry its holding on the sports contracts over to the election contracts. Earlier this year, in the New Jersey case, the Third Circuit treated Kalshi's sports event contracts as swaps and found that federal regulation by the CFTC could take precedence over state gambling regulation. With the Ninth Circuit reaching the opposite conclusion on the same issue, the likelihood that the U.S. Supreme Court will resolve the question has increased. Both rulings, however, are determinations at the preliminary injunction stage, not merits judgments conclusively establishing that all of Kalshi's contracts are legal or illegal.