Washington’s College Betting Bill Validates the Prediction Market Pressure Thesis

Two federal judges sitting 270 miles apart in the same appellate circuit have reached diametrically opposite conclusions on the defining legal question of the prediction market era: whether a binary contract on the outcome of a football game is a federally regulated financial swap or an illegal sports bet. On March 9, 2026, Chief Judge Sarah Morrison of the Southern District of Ohio ruled that Kalshi’s sports event contracts “amount to acts of gambling” subject to state regulation, denying the platform’s bid for a preliminary injunction against the Ohio Casino Control Commission. Nineteen days earlier, Judge Aleta Trauger of the Middle District of Tennessee found the opposite — that those same contracts qualify as “swaps” under the Commodity Exchange Act, federal law preempts state enforcement, and Tennessee must stand down. Both courts sit within the Sixth Circuit Court of Appeals. Kalshi filed its appeal the same day Morrison ruled. What happens next will determine whether prediction markets remain a $100-billion-trajectory industry or face existential regulatory fragmentation across 50 states — and it is the sharpest inflection point yet in the legal war heading toward the Supreme Court.

This is not an abstract jurisdictional quarrel. Kalshi processed $9.5 billion in trading volume in January 2026 alone, roughly 90% of it on sports contracts. The company is valued at $11 billion and is reportedly exploring a new round at a $20 billion valuation. Nasdaq has filed with the SEC to list its own prediction products. Cboe plans a Q2 launch. ICE, the parent company of the New York Stock Exchange, invested $2 billion in Polymarket. The legal question splitting these two Ohio River-adjacent courtrooms will determine who regulates a sector that didn’t meaningfully exist three years ago and now rivals mid-tier sportsbook handle.

Two federal judges, the same statute, opposite answers

The core dispute turns on a single statutory provision: CEA § 1a(47)(A)(ii), which defines a “swap” as a contract “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.” Kalshi argues that a sporting event’s outcome is an “occurrence” and that the downstream economic activity — ticket sales, hotel bookings, merchandise revenue, broadcast rights — constitutes the required “financial, economic, or commercial consequence.” The two courts that most recently examined this argument reached irreconcilable conclusions.

Chief Judge Morrison’s 21-page opinion in KalshiEX, LLC v. Schuler dismantles Kalshi’s statutory interpretation with a methodical severity that reads like it was written for an appellate audience. She applied the interpretive canon from Gustafson v. Alloyd Co. — that courts should “avoid ascribing to one word a meaning so broad that it is inconsistent with its accompanying words” — and examined what Congress actually listed as examples of swaps in subsection (iii): interest rate swaps, foreign exchange swaps, equity index swaps, energy swaps, weather swaps, emissions swaps, agricultural swaps.

“Currency exchange rates, the weather, and energy costs all [affect commodity prices]; the number of points scored in the Huskies-Bobcats game does not.”
— Chief Judge Sarah Morrison, S.D. Ohio

Morrison then deployed what may be the opinion’s most devastating analytical move: the absurdity doctrine, drawn explicitly from Justice Scalia and Bryan Garner’s Reading Law. If sports event contracts are swaps, she reasoned, then all contracts for payment based on sporting outcomes are swaps. The CEA makes it unlawful to enter a swap outside a designated contract market. Therefore, under Kalshi’s reading, “every sportsbook in the country would be put out of business” — forced onto CFTC-regulated exchanges. She cited Whitman v. American Trucking Associations for the principle that Congress does not “hide elephants in mouseholes.” Finding no evidence that Congress intended such a “sea change” when Dodd-Frank amended the CEA in 2010, Morrison rejected the interpretation.

Morrison also highlighted a devastating piece of legislative history. During a July 15, 2010, Senate floor exchange, Senator Blanche Lincoln — then Chair of the Senate Agricultural Committee and principal author of the swap provisions — acknowledged that “it would be quite easy to construct an ‘event contract’ around sporting events such as the Super Bowl, the Kentucky Derby, and Masters Golf Tournament — but these types of contracts would not serve any real commercial purpose. Rather, they would be used solely for gambling.” Lincoln is now a registered lobbyist for Kalshi, with her firm, the Lincoln Policy Group, receiving $180,000 from the company.

On preemption, Morrison invoked the “strong presumption against implied preemption in fields that States traditionally regulate,” drawing directly from Murphy v. NCAA — the 2018 Supreme Court decision that affirmed states’ authority over gambling. She dismissed Kalshi’s conflict preemption argument as “ipse dixit” — Kalshi’s own unsupported assertion — and noted that the CFTC itself prohibits designated contract markets from listing contracts “that involves, relates to, or references…gaming” under 17 C.F.R. § 40.11(a). She also cited Kalshi’s own prior admission in its 2023 litigation against the CFTC that contracts on “who’s going to win the Kentucky Derby” or “the point spread in the Super Bowl” would constitute gaming.

Judge Trauger’s February 19 opinion in KalshiEX LLC v. Orgel — the preliminary injunction ruling that kicked off Tennessee’s role in this dispute — inhabits a different interpretive universe. Where Morrison read the CEA’s swap definition narrowly against its statutory context, Trauger read it broadly against its plain text.

“The outcome of an event can be an occurrence, too.”
— Judge Aleta Trauger, M.D. Tennessee

Trauger deployed a hypothetical: if the Tennessee Titans won a Super Bowl, “that would be a significant occurrence, something that happened or took place, and an occurrence of some importance with an antecedent cause — perhaps better coaching.” She analogized to presidential elections: “President Trump winning the 2024 presidential election was an outcome, but also an event.” On the “financial, economic, or commercial consequence” requirement, she leaned heavily on the statutory qualifier “potential” — Congress could have imposed a more stringent requirement but chose “potential,” which is broad. No materiality test applies. No proof of actual economic impact is required.

Trauger’s preemption analysis was equally assertive. She concluded that Tennessee’s sports wagering framework would require Kalshi to create a Tennessee-specific exchange where “individuals within Tennessee only trade with others in the state, who are over 21 years old” — effectively destroying the federally mandated nationwide impartial-access requirement. She found it “hard to see” how a federally regulated derivatives exchange could function under such constraints. Trauger directly rejected the Maryland court’s reasoning, which had suggested Kalshi could obtain a state gambling license to comply with both regimes, finding this “was not reasonable for a federally regulated nationwide exchange.”

A procedural detail worth noting: Trauger denied the Indian Gaming Association’s bid to file an amicus brief without explanation. Morrison, by contrast, not only allowed tribal amici but featured their arguments prominently — including a footnote warning that treating sports contracts as swaps “would have a seismic impact on Indian tribes’ authority to regulate gaming on tribal land.” The two judges’ treatment of tribal interests is itself a signal about their underlying analytical frameworks.

The two-word fault line splitting American courts

The entire multi-billion-dollar prediction market industry now turns on whether a sports event’s outcome is an occurrence. This is not mere semantics — it is the fulcrum of a statutory interpretation dispute that has produced opposite results in every jurisdiction that has considered it.

The CEA does not define “occurrence.” Neither has the CFTC. Courts are left to dictionary definitions and contextual reasoning, and they have diverged sharply. In Nevada, Judge Andrew Gordon held in October 2025 that the Kentucky Derby is an “event” but “who wins the Kentucky Derby is an outcome of that event, not a separate event.” He found that equating outcomes with events would provide “no limiting principle” and could make “anything…an event.” Morrison in Ohio adopted similar reasoning, anchoring her analysis in what Congress actually enumerated as swaps.

Trauger in Tennessee took the opposite view. The CFTC, in its February 17 amicus brief filed in the Ninth Circuit, went further, asserting that the “occurrence” versus “outcome” distinction “has no textual basis in the CEA” and that the score of a sporting event “falls easily within the broad language of the swap definition.”

What makes this split analytically interesting is that both positions are defensible. Morrison’s reading has the advantage of statutory coherence — it reads subsection (ii) against the enumerated examples in subsection (iii) and the CEA’s historical purpose of regulating financial instruments, not wagering on athletic contests. Trauger’s reading has the advantage of textual breadth — the word “occurrence” is capacious, and Congress did use “potential” as its modifier for economic consequences. The question is whether courts should interpret the CEA to reach its broadest possible meaning or to serve its manifest purpose. That is a classic statutory interpretation debate, and it maps neatly onto the textualist-versus-purposivist divide that runs through contemporary federal jurisprudence.

Morrison’s absurdity doctrine argument deserves particular attention because it exposes a structural incoherence in Kalshi’s legal position. Kalshi’s response, as Morrison noted, “boils down to this: ‘if contracts are not traded on an exchange, then they are not swaps that must be traded on an exchange.'” She agreed with the Nevada court that this logic is “self-fulfilling, circular, and inconsistent with the statutory text.” Until Kalshi can resolve this circularity, it will continue to face skepticism from courts that prioritize statutory coherence over textual breadth.

The interpretive gap between these positions is unbridgeable at the district court level. No amount of additional briefing or fact development will reconcile Morrison’s contextual reading with Trauger’s plain-text reading. This is a question that can only be resolved by a court with binding authority over both.

Both courts, one circuit: what happens next

The procedural architecture of this dispute is unusually consequential. Both the Southern District of Ohio and the Middle District of Tennessee sit within the Sixth Circuit Court of Appeals, which also covers Kentucky and Michigan — both states with their own active prediction market litigation. This is not merely a circuit split in the making. It is an intra-circuit split that the Sixth Circuit will be compelled to address.

Kalshi filed its notice of appeal from the Ohio ruling on March 10, 2026, the same day it was issued. As gaming attorney Daniel Wallach noted, “This is a prerequisite to filing a motion for a stay pending appeal, which are the next steps before Judge Morrison and then to CA6.” The procedural sequence is: motion for stay before Morrison (likely to be denied given the ruling’s conviction), then a motion for stay before the Sixth Circuit, followed by merits briefing and oral argument.

Tennessee state officials have not yet formally appealed Trauger’s injunction as of March 13, but such an appeal is widely expected given the 39-state AG coalition’s investment in the anti-preemption position and the contrary Ohio ruling that now gives Tennessee appellate ammunition. If both cases reach the Sixth Circuit — as they almost certainly will — the court has discretion to consolidate them. The Ninth Circuit has already taken this approach, consolidating the Kalshi, Crypto.com, and Robinhood appeals against Nevada for argument on April 16, 2026.

Timing matters. The Sixth Circuit’s median case disposition is roughly 10–14 months from notice of appeal to decision. Absent expedited treatment, the court would likely hear argument in late 2026 or early 2027. But the Sixth Circuit is not operating in a vacuum: the Third Circuit has had the New Jersey appeal under advisement since oral argument on September 10, 2025, and its opinion — the first federal appellate ruling on sports prediction market preemption — could drop at any moment. The Ninth Circuit will hear consolidated arguments on April 16. The Fourth Circuit has oral argument in the Maryland appeal scheduled for May 7, with former U.S. Solicitor General Neal Katyal arguing for Kalshi.

Consolidation would transform the Sixth Circuit into the primary appellate battleground for prediction market regulation, with the court confronting both sides of the argument in the same proceeding. Kevin King of Covington & Burling has estimated the Supreme Court “likely not until 2027 or 2028,” while Wallach predicts that “by the end of 2026, nearly every single federal judicial circuit will have a Kalshi-type lawsuit, thereby increasing the likelihood of U.S. Supreme Court review due to a circuit split.”

The national litigation battlefield

The Ohio-Tennessee split is the sharpest manifestation of a nationwide litigation war that has metastasized beyond anything the prediction market industry anticipated. Approximately 50 active cases now span federal and state courts. At least 11 states have active litigation against or involving Kalshi. The pattern is unmistakable: states are winning more often than they are losing.

The state-court track is proving particularly hostile to Kalshi. Massachusetts pioneered an “offensive” state-court strategy, with AG Andrea Joy Campbell and the Gaming Commission suing Kalshi directly in Suffolk County Superior Court — the first state attorney general to challenge sports event contracts in state court rather than federal court. When Kalshi attempted removal to federal court, the federal judge remanded it back, finding Kalshi “failed to show clear Congressional intent to displace the state regulations.” The superior court then granted a preliminary injunction — the first state-level ban — requiring geofencing. An appellate court stayed the injunction in February, but the Massachusetts Supreme Judicial Court granted direct appellate review on March 5, bypassing the intermediate court entirely.

Michigan AG Dana Nessel filed a civil enforcement action against Kalshi on March 5 in state court; Kalshi removed it to federal court. Polymarket immediately sued Nessel in a separate federal action, but Judge Maloney denied emergency relief on March 10, preserving Michigan’s enforcement authority. Kentucky’s federal judge remanded that state’s case back to state court on March 3, noting the preemption question was “far from settled.”

Iowa became the newest front on March 11, when Kalshi filed a preemptive federal lawsuit against AG Brenna Bird after a March 4 meeting where the AG’s office made “abundantly clear” its belief that Kalshi violates Iowa law. Utah, where Governor Spencer Cox publicly declared prediction markets are “gambling — pure and simple,” is stayed by agreement after Kalshi’s preemptive filing on February 23. Iowa’s pending Senate File 2085 would require a $10 million licensing fee, a 20% tax on prediction market revenue, and $100,000 annual renewals.

The 39-state AG coalition, co-led by Nevada’s Aaron Ford and Ohio’s Dave Yost, has filed amicus briefs in every major appellate proceeding. Their core argument: Kalshi’s contracts are “functionally indistinguishable” from sports wagering, and the CFTC lacks the expertise, infrastructure, and enforcement tools to oversee what is effectively a national sports betting operation.

“These ‘prediction markets’ have exploded and look an awful lot like gambling. Big win for Ohio!”
— Ohio AG Dave Yost, on X, following Morrison’s ruling

The CFTC goes to war

The federal regulatory posture has shifted from passive observation to active combat. CFTC Chairman Michael Selig — confirmed December 18, 2025, and sworn in December 22 as the sole commissioner on what is designed to be a five-member body — has made prediction market defense the centerpiece of his tenure. Understanding the SEC and CFTC jurisdictional divide is essential context for what is now a full-blown turf war between the federal derivatives regulator and 39 state attorneys general.

On February 17, 2026, the CFTC filed an amicus brief in the Ninth Circuit supporting Crypto.com against Nevada. This was only the CFTC’s ninth amicus brief since 2000 — a filing cadence that underscores the agency’s view that its jurisdictional survival is at stake. The brief advances three arguments: the CEA preempts state gambling laws for instruments traded on CFTC-regulated markets; the swap definition is intentionally broad and encompasses sports event contracts; and allowing state-by-state enforcement would “reintroduce precisely the regulatory fragmentation Congress deliberately displaced.”

“The CFTC will no longer sit idly by while overzealous state governments undermine the agency’s exclusive jurisdiction over these markets.”
— CFTC Chairman Michael Selig, February 17, 2026

Selig’s public rhetoric has escalated in parallel. He previewed the amicus filing in a Wall Street Journal op-ed on February 16 (“States Encroach on Prediction Markets”) and announced it in a viral X video that drew 3 million views. At the FIA conference on March 10, he called prediction markets “truth machines” that provide more accurate signals than traditional polls. On March 12, the CFTC issued an Advanced Notice of Proposed Rulemaking seeking public comment on event contract regulation, launching a formal rulemaking process that could take months.

Selig’s Innovation Advisory Committee membership reads like a prediction market industry directory: Kalshi CEO Tarek Mansour, Polymarket founder Shayne Coplan, DraftKings CEO Jason Robins, FanDuel’s Christian Genetski, and Nasdaq CEO Adena Friedman all sit on the 35-member panel. Critics view the committee as a “sounding board and shield” for the platforms the CFTC is supposed to regulate.

The congressional response is also taking shape. Senators Jeff Merkley and Amy Klobuchar are drafting legislation to ban members of Congress, the President, and the Vice President from trading prediction market contracts — a signal that some legislators view these instruments as closer to gambling than to financial hedging tools. Whether Congress will act more broadly to clarify the CEA’s scope remains an open question, but the current legislative trajectory suggests growing skepticism of the CFTC’s expansionist posture.

There is an important caveat to the CFTC’s aggressive stance: the agency’s interpretations no longer receive judicial deference. The Supreme Court’s 2024 Loper Bright Enterprises v. Raimondo decision eliminated Chevron deference, meaning courts evaluate the CFTC’s statutory arguments de novo rather than deferring to the agency’s expertise. The CFTC amicus brief carries persuasive weight, not controlling authority. Morrison’s Ohio opinion treated the agency’s silence on Kalshi’s sports contracts as irrelevant: “the agency’s inaction is not proof that the sports-event contracts are regulated by or permissible under the CEA.”

The $11 billion company that needs football season to survive

The financial stakes for Kalshi are existential. The company processed $9.5 billion in trading volume in January 2026 and $9.93 billion in February during the Super Bowl period, when a single day generated over $1 billion in contracts traded. For context, Kalshi’s full-year 2025 volume was $23.8 billion, with fee revenue reaching $263.5 million — a 994% year-over-year increase from $24 million in 2024. By March 2026, both Kalshi and Polymarket were reportedly exploring fundraising at $20 billion valuations, doubling from their late-2025 rounds.

But the concentration risk is severe. Sports contracts constitute roughly 90% of Kalshi’s trading volume during football season and approximately 89% of its 2025 revenue. Non-sports markets — economics, crypto, politics — comprise less than 10% of total activity. Without sports, as Wallach has observed, “there are no prediction markets other than very minor, minor levels of activity.” This means the Ohio ruling doesn’t threaten a peripheral product line; it threatens the company’s core revenue engine in every state that classifies sports prediction contracts as gambling.

The competitive landscape is simultaneously expanding and threatening, with the power struggle between sportsbooks and prediction markets reshaping the entire industry. Robinhood — responsible for more than half of Kalshi’s volume through its distribution partnership — acquired its own CFTC-licensed exchange (MIAXdx) in January 2026, with 9 billion contracts already traded by over 1 million customers in its first year. If Robinhood migrates volume to its own exchange, Kalshi loses its largest distribution channel. DraftKings launched “DraftKings Predictions” in 38 states in December 2025. FanDuel Predicts partnered with CME Group for a phased rollout. Fanatics launched its own platform with Crypto.com. By mid-2026, five or more CFTC-registered prediction market exchanges may be operational in the U.S.

Institutional players are circling. Nasdaq filed with the SEC on March 2 to list “Outcome Related Options” — binary contracts on Nasdaq-100 indices, priced between $0.01 and $1. Cboe plans to launch Mini S&P 500 prediction market contracts in Q2 2026 with an innovative three-outcome payout structure that moves beyond the binary yes/no format. ICE’s $2 billion investment in Polymarket at a $9 billion valuation signals that traditional exchange operators view prediction markets as a durable asset class. Clear Street is expected to begin clearing Kalshi trades in March, opening institutional access further. Both DraftKings and FanDuel resigned from the American Gaming Association in November 2025 over disagreements about prediction markets, fracturing the traditional gambling industry’s unified opposition.

Yet the tax differential remains a core vulnerability. Prediction markets classified as financial exchanges pay no state gambling taxes. Licensed sportsbooks pay 6.75% to 51% depending on the jurisdiction — with New York and Rhode Island at the high end. State legislators and regulators are not merely defending regulatory turf — they are defending revenue streams. Iowa’s pending legislation would require a $10 million licensing fee, a 20% tax on prediction market revenue, and $100,000 annual renewals. Every state that has legalized sports betting has a fiscal interest in ensuring prediction markets don’t operate as untaxed competitors.

Perhaps the most underappreciated dimension of this dispute is what it means for tribal gaming sovereignty. Thirty tribal gaming organizations — including the Indian Gaming Association, the National Congress of American Indians, and 22 federally recognized tribes — filed an amicus brief in the Ohio case supporting the state. Morrison gave their arguments prominent treatment, warning in footnote 6 that treating sports contracts as swaps “would have a seismic impact on Indian tribes’ authority to regulate gaming on tribal land.”

“[Prediction markets are] the most significant threat to Indian gaming since IGRA was enacted in 1988.”
— IGA Chairman David Bean

The logic is structural: tribal gaming operates under compacts negotiated with state governments under the Indian Gaming Regulatory Act. If sports contracts are federally regulated swaps exempt from state law, they are also exempt from tribal compacts — meaning prediction market platforms could offer what tribes view as sports betting nationwide without tribal consent, without revenue sharing, and without the consumer protections built into decades of negotiated agreements. Mashantucket Pequot Chairman Rodney Butler stated: “They’re violating our agreements, they’re violating our compacts…it completely circumvents that government-to-government relationship.”

The road to One First Street

The Supreme Court will almost certainly decide this question. The only uncertainties are timing and posture. Under Supreme Court Rule 10, the Court considers granting certiorari when circuit courts reach conflicting conclusions on questions of federal law. The prediction market dispute is currently producing district-level splits, but has not yet generated the inter-circuit split that typically triggers cert. That is about to change.

The ideological dynamics at the Court are genuinely uncertain. The current majority is business-friendly but also deferential to state sovereignty and skeptical of federal agency overreach — especially post-Loper Bright. The prediction market question forces a collision between these instincts. A ruling for Kalshi expands federal power at the expense of states’ traditional police authority over gambling. A ruling for states preserves federalism but constrains a financial innovation sector. As appellate lawyer Andrew Kim cautions, the Court may want merits-stage rulings rather than preliminary injunction postures before granting certiorari, but adds: “Reasonable minds are going to differ on these questions, which is why we’re probably heading to [the Supreme Court].”

Historical precedent offers limited guidance. The Court took Murphy v. NCAA in 2018, which addressed the intersection of federal power and state gambling regulation from the opposite direction — striking down PASPA as unconstitutional commandeering of state legislatures. Murphy affirmed states’ authority to legalize and regulate sports betting. The current dispute asks whether a different federal statute — the CEA — can override that authority for a subset of sports-related financial instruments. The Murphy majority’s strong language about respecting state autonomy over gambling cuts against Kalshi’s position, but the CEA’s preemption mechanism is structurally different from PASPA’s commandeering.

Three dates matter more than any others. The Third Circuit’s pending opinion in the New Jersey case is the single most consequential near-term event — the first federal appellate court to rule will set the analytical framework that other circuits either follow or reject. April 16 brings consolidated Ninth Circuit arguments where the CFTC will argue as amicus. May 7 brings the Fourth Circuit hearing with Katyal at the podium for Kalshi. By late summer, the appellate picture should be clear enough to assess whether a cert petition is forthcoming.

For prediction market traders and industry operators, the structural reality is this: Kalshi’s business model depends on federal preemption prevailing. If it does not — if the Supreme Court ultimately holds that states retain authority to regulate sports prediction contracts as gambling — the company faces a jurisdiction-by-jurisdiction licensing regime that would fundamentally alter its economics, its user base, and its competitive position. Meanwhile, Kalshi’s non-sports markets — recession odds, crypto prices, economic indicators — continue to show utility, with the U.S. recession prediction market recently surging to 34%. But those markets represent less than 10% of the company’s revenue. The tribal dimension adds a political complication that transcends legal doctrine: thirty tribal nations are invested in this fight, and their compacts represent billions in negotiated revenue-sharing agreements that a federal preemption ruling could unravel.

The prediction market industry has grown faster than its legal foundation can support. The Sixth Circuit will now determine whether that foundation holds — or whether the entire structure needs to be rebuilt from scratch.

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Sources

• KalshiEX LLC v. Schuler — S.D. Ohio Opinion (March 9, 2026) — CourtListener
• KalshiEX LLC v. Orgel — M.D. Tennessee Opinion (Feb. 19, 2026) — CourtListener
• CFTC Files Amicus Brief in Ninth Circuit (Feb. 17, 2026) — CFTC.gov
• Nasdaq SR-MRX-2026-05 — Outcome Related Options Filing — SEC.gov
• AG Campbell Secures Court Order Against Kalshi — Mass.gov
• AG Nessel Files Lawsuit Against Kalshi (March 5, 2026) — Michigan.gov
• 7 U.S.C. § 1a(47) — Commodity Exchange Act Swap Definition — U.S. Code
• 17 C.F.R. § 40.11 — CFTC Gaming Prohibition Regulation — Cornell LII
• Murphy v. NCAA, 584 U.S. 453 (2018) — Cornell LII
• Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024) — Justia