Third Circuit Rules States Can’t Block Kalshi in First-Ever Prediction Market Appeals Decision

For the first time in American legal history, a federal appeals court has drawn a line in the sand: states cannot shut down prediction markets. On April 6, 2026, the Third Circuit Court of Appeals ruled 2-1 that New Jersey’s gaming regulators have no authority to block Kalshi from offering sports-related event contracts to residents of the state — a decision that could reshape the boundaries between federal financial regulation and state gambling enforcement nationwide.

The ruling is the opening salvo of what legal observers expect to become a Supreme Court battle, as courts across the country reach contradictory conclusions on a deceptively simple question: are prediction market contracts federally regulated financial instruments, or are they just sports bets with a different label?

The Ruling: What the Third Circuit Decided

A three-judge panel of the Philadelphia-based Third Circuit affirmed a lower court’s preliminary injunction that had blocked New Jersey from enforcing its cease-and-desist order against Kalshi. The case originated in March 2025, when New Jersey’s Division of Gaming Enforcement gave Kalshi just 24 hours to stop offering sports-related event contracts to state residents, claiming the platform was violating state gambling laws — including prohibitions on college sports betting — and operating without a license.

Kalshi sued immediately, arguing its event contracts qualify as “swaps” — a type of derivative contract — that under the Commodity Exchange Act (CEA) can only be regulated by the CFTC, which had granted the company a license to operate as a designated contract market (DCM). In April 2025, U.S. District Judge Edward Kiel agreed and issued a preliminary injunction blocking NJ’s enforcement action. New Jersey appealed.

The Third Circuit upheld that injunction. Writing for the majority, Judge David Porter stated plainly: “Kalshi’s sports-related event contracts are swaps traded on a CFTC-licensed DCM, so the CFTC has exclusive jurisdiction.” The ruling means Kalshi can continue operating freely in New Jersey — and sets a powerful precedent for the entire Third Circuit, which covers New Jersey, Pennsylvania, and Delaware, as we previously covered in our analysis of Kalshi’s legal war heading toward the Supreme Court.

The Legal Reasoning: Swaps vs. Sports Bets

The heart of this case — and of every prediction market lawsuit now winding through courts across the country — comes down to classification. Is a binary contract on the outcome of an NFL game a financial derivative regulated by federal commodities law, or is it a sports bet regulated by state gambling law? The Third Circuit’s majority and dissent answered that question in diametrically opposite ways.

The majority opinion found that Kalshi’s event contracts meet the statutory definition of “swaps” under the CEA, and that because Kalshi operates on a CFTC-licensed designated contract market, federal law preempts state regulation. The reasoning is straightforward: Congress gave the CFTC exclusive jurisdiction over swaps traded on registered exchanges, and states cannot layer their own gambling regulations on top of that federal framework.

“Kalshi’s sports-related event contracts are swaps traded on a CFTC-licensed DCM, so the CFTC has exclusive jurisdiction.”
— Judge David Porter, majority opinion

Judge Jane R. Roth saw things entirely differently. In a sharp dissent, she argued that the majority had fallen for what she called “performative sleight” — that Kalshi’s registration as a DCM and its branding of wagers as “sports-event contracts” are cosmetic labels that obscure a simple reality: these products are functionally identical to the sports bets offered by DraftKings and FanDuel.

“The Majority holds that Kalshi’s registration as a DCM and branding of its wagers as sports-event contracts are acts of alchemy that transmute its products from sports gambling to futures trading. I see Kalshi’s actions as a performative sleight meant to obscure the reality.”
— Judge Jane R. Roth, dissenting opinion

Roth specifically noted that Kalshi’s offerings were “virtually indistinguishable from the betting products available on online sportsbooks” and argued that because the platform is facilitating gambling, states retain the right to regulate it. The dissent cuts to the core tension that will ultimately need to be resolved by the Supreme Court: the difference between a swap and a bet may be a legal distinction without a practical difference.

The State-by-State Legal Scorecard

The Third Circuit ruling is a significant win for Kalshi, but it arrives in the middle of a national legal patchwork where the company is losing as many fights as it’s winning. Courts across the country have reached contradictory conclusions, creating exactly the kind of circuit split that typically draws Supreme Court intervention.

Federal judges in New Jersey and Tennessee have held that the CEA preempts state gambling laws. But state courts in Massachusetts, Ohio, and Nevada — plus a federal court in Maryland — have reached the opposite conclusion, ruling that Kalshi’s event contracts are subject to state regulation. Nevada is the only state to have secured a court-enforced, currently active ban against Kalshi, with state Judge Jason Woodbury extending a temporary restraining order on April 4, saying the contracts were “indistinguishable from illegal gambling.”

The Circuit Split: Why This Is Heading to the Supreme Court

The contradictory rulings are not just a headache for Kalshi’s legal team — they are creating the textbook conditions for Supreme Court review. When federal appeals courts disagree on the same legal question, the Supreme Court typically steps in to resolve the conflict.

The Third Circuit has now firmly planted its flag on the side of federal preemption. But the case that could force the Supreme Court’s hand is coming from the Fourth Circuit, where Kalshi lost in a Maryland federal court in August 2025. That court held that Congress did not clearly intend to displace state authority over gambling and that Kalshi could theoretically comply with both federal and state rules. Kalshi has appealed, with oral arguments scheduled for May 7, 2026, and is being represented by Neal Katyal — one of the most prominent Supreme Court advocates in the country.

If the Fourth Circuit disagrees with the Third Circuit, the split between appeals courts becomes undeniable. Meanwhile, the Ninth Circuit is hearing a consolidated Nevada case on April 16, adding another data point. Legal observers widely expect this issue to reach the Supreme Court within the next 12-18 months.

The CFTC Goes on Offense

The Third Circuit ruling came just four days after the CFTC itself took the extraordinary step of suing three states. On April 2, 2026, the Trump administration’s CFTC filed lawsuits against Arizona, Connecticut, and Illinois, asking courts to declare that all state gambling laws are “unconstitutional and invalid” when applied to prediction markets operated on CFTC-registered exchanges.

Each state had taken different enforcement actions. Arizona went furthest, filing criminal charges against Kalshi in March 2026 — making it the first state to pursue criminal prosecution against a prediction market operator. Connecticut and Illinois had issued cease-and-desist letters, with Connecticut describing Kalshi’s activity as “unlicensed online gambling, more specifically sports wagering.”

The CFTC’s lawsuits represent a dramatic escalation. Federal regulators are not merely defending their jurisdiction in response to lawsuits — they are proactively attacking state enforcement efforts, arguing that the CEA’s preemption clause bars states from interfering with CFTC-licensed markets. CFTC Chairman Michael Selig lauded the Third Circuit ruling on social media, signaling that the agency views the decision as validation of its legal position.

The Industry at Stake: Kalshi’s Explosive Growth

The legal battles are playing out against the backdrop of an industry that is growing at a speed few predicted. Kalshi’s valuation has rocketed from $2 billion to $22 billion in just 12 months, fueled by back-to-back funding rounds that attracted Paradigm, Sequoia, Andreessen Horowitz, and ARK Invest.

The broader prediction market industry grew fourfold in 2025, hitting $63.5 billion in total trading volume — up from roughly $15.8 billion in 2024. Monthly active users surged from around 4,000 to over 600,000 in the same period. Industry projections suggest prediction market volumes could exceed $325 billion in 2026 based on year-to-date run rates, with some analysts projecting a $1.1 trillion market by 2030.

Sports contracts are the engine driving this growth. Sports accounted for 89% of Kalshi's 2025 fee revenue at $235 million, with the share exceeding 90% in the final four months of the year. Kalshi's Super Bowl single-day trading volume hit $871 million — double the combined volume of DraftKings and FanDuel on the same day. The company also became the infrastructure powering Robinhood's prediction markets hub, with 11 billion contracts traded by more than one million Robinhood customers as of February 2026.

The Sportsbook Industry Trembles

For traditional sportsbook operators, the Third Circuit ruling is an existential threat. The power shift between sportsbooks and prediction markets is already visible in the stock market: DraftKings shares have fallen roughly 35% from a year ago, while Flutter Entertainment — FanDuel's parent company — is down 56% since August. Meanwhile, Kalshi has overtaken DraftKings in valuation.

The competitive advantage is structural. Kalshi operates under a single federal license from the CFTC, avoiding the state-by-state licensing, compliance costs, and tax obligations that traditional sportsbooks must navigate across approximately 40 states. This creates a fundamental asymmetry that licensed sportsbook operators argue is unfair.

Congress Pushes Back

The legislative branch is not sitting idle while courts and regulators reshape the gambling landscape. On March 23, 2026, Senators John Curtis (R-Utah) and Adam Schiff (D-California) introduced the "Prediction Markets Are Gambling Act" — the Senate's first bipartisan bill aimed directly at prediction markets. The legislation would amend federal law to prevent CFTC-registered entities from listing any prediction contract that resembles a sports bet or casino-style game.

The bill's sponsors argue that prediction market contracts "evade state and tribal consumer protections, generate no public revenue, and undermine sovereign tribal regulatory regimes." The data backs up the scale of the concern: a March Madness winner contract on Kalshi already had more than $100 million in trading volume, while Super Bowl trading volume on prediction markets surpassed $1 billion in 2026.

Whether the legislation can pass a Congress that has generally been friendly to deregulation remains to be seen, but it signals that the prediction market question has reached the highest levels of American policymaking — and that not everyone in Washington is convinced the CFTC should have sole authority over what many see as gambling by another name.

The Consumer Protection Gap

Perhaps the most uncomfortable question raised by the Third Circuit ruling is what happens to consumer protections when prediction markets operate outside state gambling frameworks. Traditional sportsbooks are subject to extensive state oversight: age verification (21+ in most states), responsible gambling programs, self-exclusion lists, tax contributions, and marketing restrictions.

New Jersey Attorney General Jennifer Davenport made this point explicitly in her reaction to the ruling, saying it will "allow certain companies to offer sports gambling in our states without following the careful gaming rules that everyone else follows." Nevada's attorney general has similarly argued that Kalshi is operating an illegal gambling business without the proper state license and — critically — allowing users under 21 to place bets.

"We profoundly disagree with today's decision... [it will] allow certain companies to offer sports gambling in our states without following the careful gaming rules that everyone else follows."
— Jennifer Davenport, New Jersey Attorney General

The Political Dimension

The Trump administration's CFTC has been one of the prediction market industry's most vocal defenders, and the political dimensions of this alliance are impossible to ignore. Donald Trump Jr. serves as a strategic advisor to Kalshi and is separately an investor and advisory board member at Polymarket, having invested "double-digit millions" through his Palm Beach-based 1789 Capital.

Critics have noted the appearance of a conflict of interest: any favorable CFTC decision on prediction markets could financially benefit the president's family. Trump Jr.'s spokesperson has stated that his role with both companies is limited to marketing advice and that he has not interacted with the federal government on behalf of either platform.

The political picture grows more complex with the 39-state coalition that filed amicus briefs opposing Kalshi in the Ninth Circuit case, and the hiring of Stephanie Cutter — a former Obama strategist — by Kalshi, signaling the company is building bipartisan lobbying firepower. Both parties have members on each side of this fight, making prediction market regulation one of the rare issues that doesn't fall neatly along partisan lines.

What Happens Next

The Third Circuit ruling is a landmark, but it is far from the final word. The legal and political landscape will shift rapidly in the coming weeks and months.

Kalshi CEO Tarek Mansour celebrated the ruling, stating "This is a big win for the industry and millions of users. People use prediction markets because they are fairer, more transparent, and reward being right. Free markets work. We should keep them that way."

But the prediction market industry's legal fate is far from settled. The Third Circuit has established a powerful precedent, but conflicting rulings in other circuits, aggressive state enforcement actions, bipartisan congressional legislation, and mounting consumer protection concerns suggest the ultimate resolution will come from the Supreme Court — where the justices will have to answer the question that Judge Roth posed in her dissent: can you really turn a sports bet into a financial instrument just by calling it one?

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Sources

• New Jersey cannot regulate Kalshi's prediction market, U.S. appeals court rules — CNBC
• CFTC Sues Trio of States to Reaffirm its Exclusive Jurisdiction Over Prediction Markets — U.S. Commodity Futures Trading Commission
• Curtis, Schiff Introduce Bipartisan Legislation to Ban Sports Prediction Market Contracts — Office of Sen. John Curtis
• Washington Sues Online Betting Platform Kalshi for Illegal Gambling — Washington State Attorney General
• Kalshi Reaches $11 Billion Valuation — Kalshi Official Blog
• Kalshi Scores Biggest Legal Win Yet in Appeals Court Decision Against New Jersey — Decrypt