Since the Supreme Court’s groundbreaking decision in Murphy v. NCAA[1], sports betting has become a completely ubiquitous part of the American sports experience. Recent advertisements featuring the world’s most famous names and faces in professional sports have only continued to raise the profile of apps like Kalshi and Polymarket.[2] [3] Ironically, however, apps such as Kalshi and Polymarket are not technically tied to the Supreme Court’s ruling in Murphy v. NCAA. That’s because prediction markets have found a controversial workaround to avoid being legally classified as gambling. This Post seeks to give a short background and explanation of the legal battle that is currently taking place in the sports prediction market space, specifically regarding Kalshi.[4]
Background
Kalshi was founded in 2018 by Tarek Mansor and Luana Lopes Lara, who met each other while studying at MIT.[5] For the first two years of its establishment, Kalshi was not open to the public as it was being developed and working on achieving regulatory approval.[6] In 2020 Kalshi made history by becoming the first fully regulated financial exchange in the U.S. designated as a Designated Contract Market (DCM), by the Commodity Futures Trading Commission (CFTC).[7] Kalshi grew exponentially, attracting top-grade investors and receiving extensive media coverage.[8]
Kalshi’s basic framework is that it offers event contracts, a type of derivative.[9] Derivatives are financial products that are intended to mitigate risk and ‘derive’ their value from an underlying asset.[10] A typical financial derivative is a commodity futures contract, where a buyer or seller goes on to a regulated exchange, and can buy or sell a specific quantity of a commodity (corn, for example) at a predetermined price on a future date.[11] Kalshi’s event contracts, quite a bit more abstract, “‘identify an event with multiple possible outcomes, a payment schedule for those outcomes, and an expiration date. The contract’s value [meaning each individual prospective outcome; the payout is always $1 per contract]is determined by market forces, which means its price fluctuates from the time of its creation to its expiration based on perceptions about the event’s likelihood.’” [12] Kalshi customers can buy and trade on virtually anything, so long as it can be framed as a binary proposition.[13] For example, at the time of this writing, Kalshi offers event contracts for predictions such as “Which party will win the U.S. House?”; “Oscar Winner: Best Actor (John Malkovich or Andrew Scott)”; “Gold 15 min (Up or Down)”; “Highest temperature in Seattle today? (64 to 65 or 62 to 63)”; “What nicknames will Trump say before October (Piggy or Whack Job/Wack Job)”, amongst many more.[14]
In January 2025, Kalshi started offering sports event contracts, inaugurating the new offering with the paragon of all sporting events, the Super Bowl.[15] Almost immediately, this drew the attention of multiple states, which traditionally control regulation over gambling.[16] New Jersey and Nevada both sent Kalshi cease-and-desist letters, arguing that Kalshi was engaged in a form of unauthorized sports gambling and must immediately stop its operations.[17] These two cases have resulted in a circuit split between the Ninth and Third Circuit Courts, and hinge on a fascinating mix of Federalism issues, statutory interpretation, and good old common sense.
Third Circuit
The first Circuit Court to issue its ruling on the matter was the Third Circuit Court, on April 6, 2026, ruling against New Jersey and granting Kalshi’s motion for a preliminary injunction.[18] In KalshiEX, LLC v. Flaherty, the Third Circuit Court accepted Kalshi’s argument (at least to the point of clearing the threshold for Kalshi having a reasonable chance at winning on the merits to satisfy a preliminary injunction) that the CFTC’s exclusive jurisdiction over DCMs as conferred by the Commodity Exchange Act (CEA) preempts New Jersey’s gambling laws.[19] To arrive at that conclusion, the Third Circuit Court accepted Kalshi’s argument that their sports event contracts are, in fact, swaps, and not just plain old gambling.[20] “The Act provides that the relevant event or occurrence need only be ‘associated with a potential financial, economic, or commercial consequence.’”[21] And as both the dissent and majority note, this broad language can viably encompass a sporting event, and fit cleanly into the Act’s definition of a swap, which would put it under Federal jurisdiction.[22]
Judge Roth, dissenting, argues that while a plain reading of the Act suggests that Kalshi’s sports-event contracts fit within the statutory definition of a ‘swap’, we cannot read statutes literally “if reliance on that language would defeat the plain purpose of the statute”, or would def[y]rationality.”[23] As New Jersey argues, virtually any kind of wager could conceivably fit within the broad language of the statute, “even a bet over the outcome of a friendly neighborhood ping pong match.”[24] The dissent also publishes multiple screenshots of Kalshi ads describing its platform as “The First Nationwide Legal Sports Betting Platform,” to stress its point that sports-event contracts are, in substance, gambling.[25]
Ninth Circuit
The Ninth Circuit took the position opposite that of the Third Circuit, with six amicus briefs submitted in support of Nevada, representing 39 states and a broad coalition of organizations and stakeholders.[26] The Ninth Circuit frames the central question as whether CEA preempts Nevada’s gaming regulations.[27] The court addresses three different types of Federal preemption, and holds that under all three forms, Nevada’s gaming laws are not preempted.[28] Marshaling a cadre of statutory interpretation creeds, the conclusion of the opinion is that sports-event contracts are not considered swaps under the CEA’s definition, and are thus not preempted by Federal Law.[29] After a discussion of various dictionary definitions of ‘event’, the court points out that it is difficult to believe that “Congress intended to upend its decades of careful regulation of gambling based on broad definitions of the words used in a Wall Street Reform Bill” [Amendments to the CEA regulating swaps].[30] This ruling appears to take a very common-sense approach, akin to that advocated by the dissent in Flaherty: “if it looks like gambling, talks like gambling, and calls itself gambling, it’s gambling.”[31] As both the Ninth Circuit and the dissent in the Third Circuit point out, Kalshi themselves repeatedly refer to their sport-event contracts as ‘gambling’ and ‘betting’.[32]
Conclusion
This is a fascinating legal issue that has wide-ranging financial and regulatory ramifications. With the proliferation and ease of sports betting apps, it seems unlikely that companies would opt to operate under the patchwork of state regulation (gambling), as opposed to uniform Federal regulation (event-contracts), if that is a legal option. As such, it seems likely that the Supreme Court will look to take up this issue to rule on the circuit split and give some clarity to all the relevant stakeholders.[33] How likely? Check Kalshi.
[1] Murphy v. NCAA, 584 U.S. 479 (2018).
[2] See, e.g., Matt Yoder, LeBron James Polymarket ad is a who’s who of disappointing sellouts, Yahoo Sports, https://sports.yahoo.com/articles/lebron-james-polymarket-ad-disappointing-153043158.html.
[3] Another very interesting issue is the propriety of not just endorsing gambling, but of active athletes being perceived as being active market participants in the games they play in. However, that is beyond the scope of this post.
[4] Polymarket U.S. operates similarly to Kalshi (with some significant differences), but had a much more circuitous route to regulation and its parent company is not based in the U.S. This post will focus on Kalshi specifically.
[5] Kalshi, https://kalshi.com/about.
[6] Id.
[7] Id.
[8] Id.
[9] KalshiEX, LLC v. Flaherty, 172 F.4th 220, 224 (3d Cir. 2026).
[10] Id.
[11] Adam Hayes, Commodity Futures Contracts: Key Strategies and Definitions, Investopedia, https://www.investopedia.com/terms/c/commodityfuturescontract.asp.
[12] Flaherty, 172 F.4th, 224-225 (quoting Appellee’s Brief at 9).
[13] See Id. at 225.
[14] Astute readers may have noticed what seems like legal sleight of hand. Derivatives are based on an underlying asset. An event contract seemingly has no underlying asset whatsoever; this is an excellent point. The short answer is that event contracts are technically ‘swaps’, a form of derivatives explicitly allowed under the Commodity Exchange Act (CEA). See id. At 229.
[15] Alexander Osipovich, Prediction Market Kalshi Launches Sports Betting, The Wall Street Journal, https://www.wsj.com/livecoverage/stock-market-today-dow-sp500-nasdaq-live-01-23-2025/card/prediction-market-kalshi-launches-sports-betting-EMq0xRAi1BL20HWrFKIm.
[16] See Flaherty, 172 F.4th, 225, 234; KalshiEX, LLC v. Assad, No. 25-7516, 2026 WL 2543846, at *4 (9th Cir. Aug. 28, 2026).
[17] Flaherty, 172 F.4th, at 225; Assad, No. 25-7516, 2026 WL 2543846, at *4.
[18] Flaherty, 172 F.4th, at 224.
[19] Id. at 225-226.
[20] See id. at 228.
[21] Id. at 227 (quoting the relevant U.S.C. of the Act).
[22] Id.
[23] Id. at 233 (cleaned up).
[24] Id. The dissent has other, more subtle arguments about the role of field preemption, but due to space constraints we will keep it brief.
[25] Id. at 235.
[26] Assad, No. 25-7516, 2026 WL 2543846.
[27] Id. at *6. The court, technically, frames their question as “whether Kalshi has shown a likelihood that the CEA preempts Nevada’s gaming regulations”, because it is ruling on a preliminary injunction (as opposed to a final ruling on the underlying matter). Id.
[28] Id. at *6-*7.
[29] Id. at *8, *18.
[30] Id. at *10.
[31] Flaherty, 172 F.4th, at 235.
[32] Assad, No. 25-7516, 2026 WL 2543846, at *11; Flaherty, 172 F.4th, at 235.
[33] On September 2, 2026, New Jersey filed a petition for a writ of certiorari asking the Supreme Court to review the Third Circuit’s ruling in Flaherty. Petition for Writ of Certiorari at 1, Flaherty v. KalshiEX, LLC, No. 26-299 (U.S. Sept. 2, 2026).
