Kalshi came to the Sixth Circuit on Thursday (July 30) stating that sports-event contracts traded on its federally regulated prediction market are financial instruments under federal commodities law, and states such as Ohio and Tennessee therefore largely need to keep their hands off them.
The judges did not exactly roll out the welcome mat.
Kalshi federal-preemption theory meets a skeptical Sixth Circuit bench
A three-judge panel of the U.S. Court of Appeals for the Sixth Circuit — Judges Eric Clay, Julia Smith Gibbons and Rachel Bloomekatz — repeatedly pressed Kalshi on just how far its preemption argument goes, whether sports bets really look like the swaps Congress had in mind when it passed Dodd-Frank and, perhaps most importantly, why states should suddenly lose an authority over gambling they have exercised for generations.
At one point, Clay put the issue rather plainly.
“Why are you so disparaging of state regulators and state policymakers?” he asked Kalshi attorney William Havemann.
Clay said Kalshi appeared to be making a policy argument that “things come out badly when they fall within the purview of state regulators,” adding that he was not sure he followed the notion “that all things are better if they come from the federal government.”
Havemann quickly clarified that he was not arguing federal regulation is inherently superior. Traditional sportsbooks, he said, can sensibly remain under state control. His point was that Congress made a different choice for nationwide derivatives exchanges.
The main distinction — traditional sports betting over here, federally regulated event contracts over there — was essentially the whole ballgame Thursday.
The consolidated appeals involve two cases that reached opposite results. Ohio is appealing a preliminary injunction preventing it from enforcing its sports-betting laws against Kalshi, while Kalshi is appealing a ruling denying it similar relief against Tennessee. The Sixth Circuit heard the cases together, with Kalshi getting 15 minutes and the two states splitting another 15, although the clock proved somewhat aspirational once the judges got going.
They are arguing whether Kalshi’s sports-event contracts fall within the federal derivatives regime and, if they do, whether the Commodity Exchange Act’s grant of “exclusive jurisdiction” to the Commodity Futures Trading Commission prevents states from applying their own gambling laws.
Kalshi says yes.
Havemann argued that a nationwide exchange cannot realistically operate if every state gets to decide which contracts its residents may trade. In Kalshi’s view, the CFTC is supposed to make those calls nationally rather than leaving the exchange to litigate its product catalog in “50 different states.”
The panel seemed less convinced that Congress had spoken quite so clearly.
Clay questioned whether ordinary gambling transactions resemble swaps at all. The statute gives examples such as interest-rate, currency and commodity swaps, he noted, while “an immediate gambling transaction” does not necessarily fit comfortably into that financial framework.
And then there was the sports problem.
Kalshi argued that sports events can plainly have “potential financial, commercial or economic consequences,” pointing to the enormous sums generated by sponsors, advertisers, broadcasters and other businesses. A championship result can move plenty of money even before anyone opens a prediction-market account.
But the judges kept pulling at the loose threads.
What about a contract on the number of corner kicks in a soccer match? What about granular player propositions? What about some highly specific in-game occurrence that may be entertaining to wager on but looks considerably less like the sort of financial risk that brought Congress running after the 2008 financial crisis?
Kalshi’s answer was essentially that drawing those lines is the CFTC’s job. Havemann cautioned against treating individual examples as dispositive because sports in 2026 are “huge business,” with economic consequences extending through sponsors, networks, advertisers and online communities.
That did not end the hypotheticals.
The panel pressed Havemann on what Kalshi’s theory would mean for the remaining powers of states. Suppose, for example, the CFTC allowed people below a certain age to participate in a federally regulated prediction market. Could Ohio nevertheless say participants must be 18?
Havemann said “probably” not if the restriction amounted to an access criterion regulating the exchange.
The hypothetical got more pointed from there. What if a state wanted to restrict election contracts because it believed allowing residents to make money from election outcomes could distort democratic participation?
Again, Havemann acknowledged that if the federal regulator had permitted the contract, a state generally could not independently prohibit it. The state could challenge the CFTC under the Administrative Procedure Act, but it could not simply substitute its own judgment.
“They can’t make their own determination about what’s reasonable or things like that,” a judge asked.
“That’s right,” Havemann replied, saying a single set of rules was necessary rather than 50.
Ohio was more than happy to take that argument to its logical conclusion.
Mathura Sridharan, arguing for the state, told the panel that if Kalshi’s reading of Dodd-Frank is correct, the implications are rather extraordinary: Sports bets qualifying as swaps should have been occurring on federally regulated exchanges since roughly 2010.
In other words, states, sportsbooks, regulators and apparently everyone else somehow missed the federal takeover of sports betting.
“If Kalshi is right today,” Sridharan argued, “all sports bets since about 2010 had to have happened on federally regulated exchanges.”
Ohio’s preferred explanation was that Kalshi is wrong because sports bets are not swaps. Traditional derivatives markets may attract speculation, Sridharan argued, but Kalshi “flips that on its head” by beginning with speculation and then building a market around it.
Ohio also challenged Kalshi’s reliance on the phrase “exclusive jurisdiction.” According to the state, Congress knows perfectly well how to write a preemption clause when it wants one. The Commodity Exchange Act uses explicit language such as “supersede” and “preempt” elsewhere, while the provision Kalshi relies upon does not.
The panel seemed interested in that difference, repeatedly asking what the exclusive-jurisdiction provision actually does and how it should be reconciled with statutory language preserving some role for state regulators.
Tennessee Assistant Attorney General Aaron Bernard followed with an even more colorful description of Kalshi’s theory.
“Kalshi believes the Dodd-Frank Act legalized sports gambling across the country with a massive new role for the Commodities Futures Trading Commission as its sole regulator,” the rough transcript records Bernard saying, before arguing Congress “did not put the elephant of nationwide sports gambling into the mouse hole of the generic Dodd-Frank swap definition and the generic jurisdictional grant.” The transcript contains obvious transcription errors; the company name in Bernard’s remarks is Kalshi.
Bernard argued that Dodd-Frank’s swap definition does not turn on Kalshi’s preferred distinction between a “trade” and a “bet.” If the terms of a sports wager satisfy the swap definition, Tennessee argued, then Kalshi’s theory creates an awkward consequence: those sports bets would generally have to occur on federally regulated exchanges too.
The states offered the panel another way out as well.
Even if some Kalshi contracts qualify as swaps, Tennessee argued, that does not necessarily mean state gambling laws disappear. The CFTC may have exclusive jurisdiction to enforce federal commodities law without Congress having extinguished otherwise applicable state gambling laws.
That approach could be attractive if the judges would rather not decide whether every championship contract, player prop and corner-kick market in Kalshi’s catalog qualifies as a federally regulated derivative.
Indeed, the panel repeatedly entertained the possibility that some contracts might have genuine economic consequences while others are a stretch.
Tennessee said that would still be bad news for Kalshi because the company sought broad preliminary relief. If Kalshi cannot show that all the covered contracts qualify for protection, Bernard argued, it has not carried the burden required for such an injunction.
Clay appeared particularly interested in the basic financial nature of a swap.
“When we talk about swaps,” he said, the court is talking about a commercial or financial transaction involving “the transfer of future financial risk.” Not all sports betting does that, he suggested.
Bernard agreed, enthusiastically.
He contrasted financial hedging and price discovery with speculation over “whether or not there’ll be three or four corner kicks in a soccer game” or whether an NBA player will record a certain number of assists.
“This is not associated with any financial consequence directly,” Bernard argued, “and it’s way well outside of the financial risk context” Dodd-Frank was designed to address.
Consequences and difficult hypotheticals expose the stakes of Kalshi’s position
Kalshi got the last word and used it to warn that the states’ theory has some odd consequences of its own.
In rebuttal, Havemann argued that allowing state gambling laws to reach federally regulated exchange trading would amount to a “sea change” in more than 50 years of commodities law.
After all, gambling laws historically did not stop with football parlays and horse races. Tennessee itself had an 1883 statute treating certain contracts involving grain, cotton and other commodities as gambling when the parties had no intention of making delivery.
So if the states can apply their gambling laws to instruments traded on federally regulated exchanges simply because the instruments resemble wagers, Havemann argued, their theory does not necessarily stop with sports.
It could take everyone right back to gambling on grain.
“That would really be a radical change,” Havemann told the court.
No ruling came from the bench.
Clay thanked all sides for their “very able arguments,” and the court took the cases under advisement.
If oral argument is any indication, however, Kalshi has some convincing left to do.
Featured image: Kalshi / Canva
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