New Jersey yesterday asked the Supreme Court to rule on whether states can regulate sports betting on prediction markets such as Kalshi.
“Companies like Kalshi claim to offer legal sports betting in all 50 states, but they refuse to follow the gambling laws of any state,” New Jersey Attorney General Jennifer Davenport said in a press release announcing the lawsuit.
In April, the US Court of Appeals for the 3rd Circuit ruled that New Jersey cannot regulate sports bets on prediction markets. The court determined that sports-related event contracts meet the legal definition of “swaps,” giving the US Commodity Futures Trading Commission (CFTC) exclusive jurisdiction.
New Jersey’s petition to the Supreme Court said, “The issue is one of tremendous practical and legal consequence: Kalshi seeks to federalize the multi-billion-dollar sports betting industry at the expense of every state sports gaming law. And the decision [by the 3rd Circuit] is badly mistaken.”
New Jersey’s petition to the Supreme Court came about a week after the 9th Circuit appeals court ruled that Nevada can stop Kalshi from allowing sports bets. Unlike the 3rd Circuit, the 9th Circuit judges determined that sports betting labeled as swaps is just gambling with a different name.
The split between circuits “has tremendous importance, as it will determine whether a multi-billion-dollar gaming industry can suddenly operate free from state sports-gaming laws,” New Jersey’s petition said.
Circuit split raised odds of Supreme Court taking case
The circuit split dramatically raised the odds that the Supreme Court will step in and determine who’s right, although Kalshi reportedly said it won’t allow bets on the case. Davenport’s office said New Jersey’s petition asks the Supreme Court “to hear a question that divided courts nationwide: whether prediction markets can offer sports wagers without following state sports-gambling laws.”
“Litigation regarding these questions has erupted across at least 20 states, with dozens of active suits pending and the gambling laws of several states currently enjoined by the federal courts,” Davenport’s office said. “This is the first certiorari petition filed with the US Supreme Court regarding the legality of this business model—of offering sports wagers self-certified by Kalshi with the Commodity Futures Trading Commission (CFTC) without following state laws.”
New Jersey regulates gambling and prohibits betting on college sports entirely but hasn’t been able to enforce its laws against Kalshi. New Jersey’s petition asked the Supreme Court to determine “whether the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act preempted States from regulating sports bets that occur within their jurisdictions if those bets are offered on markets registered with the Commodity Futures Trading Commission.”
New Jersey’s petition said that “if Kalshi is right that it can offer sports bets on federal exchanges irrespective of state law, companies can disregard all state sports-gambling statutes with ease, so long as they register with the CFTC.” New Jersey said the 3rd Circuit decision is “profoundly wrong.”
Defining sports bets as swaps
The more specific legal question is whether the US law’s definition of a swap includes sports bets. The Dodd-Frank Act amended the Commodity Exchange Act to give the CFTC exclusive jurisdiction over swaps and defined “swap” as “any agreement, contract, or transaction… that provides for any purchase, sale, payment, or delivery… that is dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.”
Judges have come to different conclusions about whether athletic contests are events with potential financial, economic, or commercial consequences. Third Circuit judges ruled that “the outcome of a sports event certainly can be associated with a potential financial, economic, or commercial consequence,” with “numerous affected stakeholders, including sponsors, advertisers, television networks, franchises, and local and national communities.”
The Trump administration has backed Kalshi in the company’s fights against states, and the CFTC has filed lawsuits itself against states to block them from regulating prediction markets. Donald Trump Jr. is an advisor to Kalshi and Polymarket, and his venture capital firm has invested in Polymarket.
While Trump has had plenty of success at the current Supreme Court, the court’s conservative majority isn’t necessarily a guarantee that states will lose this battle. After all, the three 9th Circuit judges who unanimously ruled against Kalshi were all appointed by Trump.
“Placing sports bets, even when called by another name, is still gambling,” 9th Circuit Judge Ryan Nelson wrote. Judge Kenneth Lee said the outcome of a typical sports game is not an “event” with financial, economic, or commercial consequences as conceived in US law governing swap contracts.
“Few people would describe, say, the New York Mets’ latest loss of a game as an ‘event.’… perhaps in an uber-technical sense a Mets’ loss could have marginal economic impact as some fans guzzle more beer to drown away their sorrows. But it seems somewhat fanciful to say that the outcome of a single game in a 162-game season is likely ‘associated’ with a ‘financial, economic, or commercial consequence’ that one would expect in a swap contract,” Lee wrote.
NJ: Congress did not federalize gambling regulation
New Jersey’s petition to the Supreme Court cited the 9th Circuit’s discussion of swaps and said that prohibiting state regulation of sports bets on prediction markets would conflict with other US laws on the balance of power between the federal government and states.
“Kalshi argues that in granting the CFTC ‘exclusive jurisdiction’ over ‘swaps’ on CFTC-registered markets, Congress in 2010 actually preempted sports-wagering laws applied to these bets,” New Jersey said. “But as the Ninth Circuit has since explained, these sports bets are not ‘swaps’ as the statutory text and structure uses that term. And it strains credulity to hold that Congress in resolving the 2008 financial crisis took steps to federalize regulation of sports gambling that was otherwise explicitly addressed across other federal statutes spanning decades.”
New Jersey argued that if Kalshi is right, it would mean casinos are violating US law. “Dodd-Frank also prohibits companies from offering swaps off of CFTC-registered markets. So if Kalshi is correct that Dodd-Frank federalized regulation of sports wagering, then state-licensed sportsbooks that everyone has understood to be legal since [Murphy v. NCAA]—including at brick-and-mortar casinos—have apparently been violating Dodd-Frank all along,” New Jersey said.
New Jersey also said the CFTC’s exclusive jurisdiction over swaps doesn’t preempt state laws. The state argues that even if sports bets are considered swaps, the CFTC authority is exclusive only relative to other federal agencies. The CFTC authority doesn’t preempt states’ police powers over gambling, which “Congress repeatedly recognized and embraced across decades of reticulated federal gaming laws,” New Jersey said.
Jon BrodkinSenior IT Reporter
Jon BrodkinSenior IT Reporter
Jon is a Senior IT Reporter for Ars Technica. He covers the telecom industry, Federal Communications Commission rulemakings, broadband consumer affairs, court cases, and government regulation of the tech industry.
Source: arstechnica.com
