April 6 (Reuters) - A federal appeals court ruled on Monday that New Jersey gaming regulators cannot prevent Kalshi from allowing people in the state to use its prediction market to place financial bets on the outcome of sporting events.
A three-judge panel of the Philadelphia-based 3rd U.S. Circuit Court of Appeals ruled 2-1 in finding that the U.S. Commodity Futures Trading Commission has exclusive jurisdiction over the sports-related event contracts that Kalshi allows people to trade on its platform.
The ruling marked the first time a federal appeals court has ruled on what has become the central issue in an escalating battle over the ability of state gaming regulators to police the activity of prediction market operators.
"This is a big win for the industry and millions of users," Kalshi CEO Tarek Mansour said in a social media post on X.
Kalshi and companies like it allow users to place trades and profit from predictions on events such as sports and elections. States argue that firms like Kalshi are operating without required state licenses, in violation of gaming laws, includingbans on wagers by those under 21.
Those states include New Jersey, which last year sent Kalshi a cease-and-desist letter stating that its listing of sports-related event contracts on its platform violated state gambling laws that prohibit betting on collegiate sports.
Kalshi sued the state, arguing its event contracts qualify as "swaps," a type of derivative contract, that under the Commodity Exchange Act can only be regulated by the CFTC, which had granted the company a license to operate a designated contract market (DCM).
A lower-court judge had sided with New York-based Kalshi and issued a preliminary injunction, prompting New Jersey to appeal. But a majority of the judges on the 3rd Circuit panel concluded the Commodity Exchange Act likely preempted state law.
"Kalshi's sports-related event contracts are swaps traded on a CFTC-licensed DCM, so the CFTC has exclusive jurisdiction," U.S. Circuit Judge David Porter wrote.
The ruling was in line with the position advanced in other litigation by the CFTC under President Donald Trump's administration. The regulator last week sued Arizona, Connecticut and Illinois to prevent them from pursuing what it called unlawful efforts to regulate prediction markets.
"Congress gave the CFTC exclusive jurisdiction over trades on DCMs, and this decision affirms the goals of Congress," CFTC spokesperson Brooke Nethercott said in a statement.
U.S. Circuit Judge Jane Richards Roth dissented, saying Kalshi is facilitating gambling and that its "offerings were virtually indistinguishable from the betting products available on online sportsbooks, such as DraftKings and FanDuel."
New Jersey Attorney General Jennifer Davenport in a statement said her office is evaluating its options, as the ruling will allow "certain companies to offer sports gambling in our states without following the careful gaming rules that everyone else follows."
Her office could potentially ask the full 3rd Circuit to rehear the case. The issue is also pending before several other courts, including a different federal appeals court in San Francisco that is set to hear arguments next week.
A Nevada judge on Friday said he would issue an injunction preventing Kalshi from offering event-based contracts that run afoul of state gaming law, and a Massachusetts judge had issued a similar ruling that is on hold pending appeal.
(Reporting by Nate Raymond in Boston; additional reporting by Chris Prentice; Editing by Andrea Ricci, Alexia Garamfalvi, Bill Berkrot and Aurora Ellis)
