Tennessee Judge Rules Kalshi’s Sports Contracts Are Swaps, Blocks State Crackdown

A federal judge in Tennessee has sided with prediction market exchange Kalshi, granting a preliminary injunction that blocks the state from enforcing its gambling laws against the platform — ruling that Kalshi’s sports event contracts likely qualify as federally regulated “swaps” that preempt state authority.

What the Court Ruled

Judge Aleta Trauger’s 67-page opinion methodically dismantled Tennessee’s core argument — that sports event contracts are “wagers” under state law rather than “swaps” under the federal Commodity Exchange Act (CEA). The ruling found that Kalshi has demonstrated a substantial likelihood of success on the merits, the first of four requirements for a preliminary injunction.

Tennessee had argued that sports event contracts are based on the “outcome” of sporting events, which the state classified as gambling. The CEA, by contrast, defines swaps as agreements based on the “occurrence” of events. Tennessee claimed these are fundamentally different — an outcome is a result, while an occurrence is something that happens.

“The outcome of an event can be an occurrence, too.”
— Judge Aleta A. Trauger, U.S. District Court for the Middle District of Tennessee

Judge Trauger rejected the “outcome vs. occurrence” distinction entirely, finding that the CEA’s definition of swaps is broad enough to encompass sports event contracts. She applied conflict preemption — the legal doctrine that federal law overrides state law when it is impossible to comply with both simultaneously. Since the CFTC requires Kalshi to offer these contracts as a designated contract market, while Tennessee demands they stop, compliance with both is impossible.

Critically, Trauger distinguished Kalshi from traditional sportsbooks. Kalshi operates as an exchange where users trade against each other, charges only transaction fees, and has no house edge — unlike sportsbooks that set odds, take the other side of bets, and build vig into their pricing. This structural distinction was central to the court’s finding that Kalshi’s products are financial instruments, not gambling products. The Tennessee Sports Wagering Council was dismissed from the case on sovereign immunity grounds, leaving only the individual commissioners as defendants.

Timeline — From Cease-and-Desist to Courtroom Victory

The Legal Battle Lines — Courts Are Split

Judge Trauger’s ruling adds to a growing and contradictory body of federal case law on prediction markets. Five different federal courts have now weighed in on whether CFTC oversight preempts state gambling regulation — and they’ve reached opposite conclusions.

The 2-3 split underscores just how unsettled this area of law remains. The same federal statute — the Commodity Exchange Act — is being interpreted in fundamentally different ways by different judges. This kind of disagreement among federal courts is exactly the condition that eventually forces appellate review. Third Circuit oral arguments on New Jersey’s appeal are expected in September 2026.

How Kalshi Differs From Sportsbooks

A key part of Judge Trauger’s reasoning focused on the structural differences between Kalshi and traditional sportsbooks. Understanding this distinction is critical to understanding why the court found federal preemption applies.

This structural distinction matters legally because swaps are defined by the CEA as agreements where parties exchange financial risk — which is precisely what happens on an exchange where users buy and sell event contracts. Sportsbooks, by contrast, function as counterparties who accept risk in exchange for a built-in edge. Kalshi’s model looks more like a financial exchange (think the CME or NYSE) than a casino, which is why Judge Trauger found it likely falls under federal jurisdiction. You can explore how prediction market pricing works with our odds converter or calculate potential returns using the expected value calculator.

The CFTC Enters the Fight

Perhaps the most significant development surrounding the Tennessee ruling wasn’t the ruling itself — it was the CFTC’s decision to weigh in directly. On February 17, just two days before Judge Trauger’s opinion, CFTC Chairman Michael Selig filed an amicus brief in the Tennessee case asserting the agency’s exclusive jurisdiction over event contracts.

“The CFTC will no longer sit idly by while overzealous state governments undermine the agency’s exclusive jurisdiction.”
— CFTC Chairman Michael Selig

Selig’s intervention marks a dramatic shift. Under the Biden administration, the CFTC had proposed banning sports and political event contracts entirely. Selig withdrew that proposed ban, created an Innovation Advisory Committee that includes the CEOs of Kalshi, Polymarket, DraftKings, and FanDuel, and has now taken the extraordinary step of filing briefs defending prediction markets against state enforcement.

The political backdrop is unmistakable. Donald Trump Jr. invested in Polymarket and serves as a strategic advisor to Kalshi. The current administration has signaled a broadly deregulatory stance toward financial innovation, and the CFTC’s amicus brief is the most concrete expression of that position to date. For states fighting prediction markets, the federal government is now an active opponent rather than a neutral observer.

What This Means for Prediction Market Users

The Tennessee ruling and the broader legal split create two possible futures for prediction market users — and which one materializes depends entirely on how the appellate courts rule.

The $63 billion+ prediction market industry in 2025 is caught between these two regulatory visions. For users, the practical impact is real: access to markets, available contract types, consumer protections, and withdrawal processes all depend on which framework prevails. Tennessee users can continue trading on Kalshi for now, but the injunction only lasts as long as the litigation continues — and a final ruling could go either way.

Road to the Supreme Court

The growing split among federal courts makes Supreme Court review increasingly probable. Three federal circuits are now handling prediction market cases simultaneously: the Third Circuit (New Jersey appeal), the Ninth Circuit (Nevada), and the Fourth Circuit (Maryland). If any two of these circuits reach opposite conclusions — which appears likely given the district-level disagreements — a circuit split would create strong grounds for the Supreme Court to take the case.

The timeline suggests a potential petition could arrive in late 2026 or 2027. Third Circuit oral arguments are expected in September 2026, with a written opinion likely following months later. Meanwhile, 34 state attorneys general have signed amicus briefs opposing federal preemption, and tribal gaming interests have also opposed prediction markets in multiple jurisdictions. The political and financial stakes are enormous — making eventual Supreme Court review not just likely, but almost inevitable.

Sources

• CFTC Reaffirms Exclusive Jurisdiction Over Event Contracts — Commodity Futures Trading Commission
• Chairman Selig Statement on Amicus Brief Filing — Commodity Futures Trading Commission
• US District Courts Are Split on Whether the Commodity Exchange Act Preempts State Gambling Laws — National Law Review