Ninth Circuit Ruling Casts Uncertainty Over Prediction Markets for Sports Event Contracts

On August 28, 2026, the U.S. Court of Appeals for the Ninth Circuit issued its decision in KalshiEX, LLC v. Assad, creating a direct conflict with the Third Circuit’s earlier decision in KalshiEX, LLC v. Flaherty and significantly increasing the likelihood of Supreme Court review. In its decision, the Ninth Circuit rejected key aspects of the Third Circuit’s reasoning, placing the future regulatory treatment of prediction market event contracts squarely in question.

The dispute centers on whether sports-related event contracts offered on a CFTC-designated contract market (DCM) constitute “swaps” subject to the Commodity Exchange Act’s (CEA) exclusive federal jurisdiction or are, in substance, forms of sports wagering subject to state gaming laws. The Third Circuit concluded that sports event outcomes can be associated with financial, economic, or commercial consequences, that the related contracts likely qualify as swaps and therefore fall within the CFTC’s exclusive jurisdiction. The Ninth Circuit reached the opposite conclusion.

The Ninth Circuit’s analysis focused heavily on statutory context. Although acknowledging that an expansive reading of the CEA’s swap definition could encompass these contracts, the court rejected what it described as an overly literal interpretation of terms such as “event” and “associated with.” Instead, the court held that sports event contracts are, in substance, sports bets rather than risk transfer instruments traditionally associated with swaps. The court emphasized that swaps historically function as hedging tools that transfer financial risk, whereas Kalshi’s sports event contracts create speculative risk for retail participants.

In its reasoning, the court also expressed concern that Kalshi’s interpretation lacked a workable limiting principle. In direct opposition to the Third Circuit’s decision, the Ninth Circuit judges observed that if any sporting event with downstream economic consequences qualified as a swap, the CEA could potentially sweep “bingo games and pingpong matches” into CFTC jurisdiction. According to the court, Congress did not clearly authorize such a dramatic expansion of federal regulatory authority when it enacted Dodd-Frank and finding otherwise would suggest that Congress “hid an elephant in a mousehole.”

The Ninth Circuit also placed substantial weight on the CFTC’s existing regulation prohibiting DCMs from listing contracts involving gaming. The court held that 17 C.F.R. § 40.11 remains in effect and bars gaming-related contracts unless and until amended, rejecting the argument that CFTC inaction effectively authorized such products. Because the CFTC never invoked its formal review process or affirmatively approved Kalshi’s sports contracts, the court concluded that the regulatory prohibition remains operative.

The Ninth Circuit panel rejected conflict preemption, reasoning that Kalshi could comply with Nevada law by geofencing Nevada users, as other regulated entities do, and that doing so would not jeopardize its DCM status or violate the CEA’s impartial access requirements. The court also rejected the argument that Nevada law obstructed the CEA’s purposes because, while the CEA occupies the field of swaps trading on a DCM, including ordinary financial swaps such as weather or interest-rate swaps, it does not occupy the field of gambling. Nevada’s laws target gaming and unlicensed sports pools, and Congress expressly provided that states should have primary responsibility for determining what forms of gambling may legally take place within their borders.

The result is a clean and acknowledged circuit split on a recurring federal question of significant economic and regulatory importance. The Ninth Circuit expressly criticized the Third Circuit’s “literalist” approach, while the Third Circuit relied on reasoning the Ninth Circuit later rejected. This type of direct doctrinal conflict is precisely the kind of dispute that frequently attracts Supreme Court review.

Core Legal Questions Still Outstanding

In light of this decision, several key legal questions remain without a definitive answer:

• The meaning of “swap”: Does § 1a(47)(A)(ii) reach sports-event outcomes because “event” can be read literally and broadly, as the Third Circuit held in Flaherty, or should “event” be read according to ordinary meaning in statutory context, as the Ninth Circuit held here?
• The meaning of “associated with”: Must the event have an inherent connection to a financial, economic, or commercial consequence, or is any downstream economic effect sufficient?
• The Special Rule’s operation: Is § 7a-2(c)(5)(C), together with § 40.11, a mandatory self-executing prohibition on gaming listings, or does “the Commission may determine” preserve a discretionary CFTC power? In his concurrence, Judge Lee identified this as unresolved, even though § 40.11 currently supplies the operative bar.
• The scope of preemption: Does § 2(a)(1)(A) preempt state regulation only of swaps traded on a DCM, or does field preemption extend to gambling as a whole?
• The CFTC’s interpretative weight after Loper Bright: After the Supreme Court rejected Chevron deference, what weight, if any, will courts give the CFTC’s interpretations of “swap,” “gaming,” and § 40.11?

Ramifications if Federal Law Does Not Preempt State Gambling Laws

The Ninth Circuit did not hold that sports event contracts are definitively state-regulated betting products, only that Kalshi failed to show a likelihood that the CEA preempts Nevada gaming law and that the contracts are “likely not swaps.” If sports event contracts are ultimately treated as state-regulated betting products rather than swaps within the CFTC’s exclusive jurisdiction (by reason of either a Congressional mandate or a Supreme Court decision), it introduces several practical risks to industry participants.

• Prediction market operators. Operators could face state-by-state licensing, product-classification, and enforcement risk. Geofencing would likely become an essential compliance tool, but at the cost of fragmenting liquidity and market access. Existing and future sports event contracts could also remain exposed to the CFTC’s prohibition of gaming-related listings under § 40.11. Operators should have close-out, customer-notice, and settlement plans, particularly given the concentration of industry revenue in sports-related products.
• Institutional and retail participants. Participants would face greater uncertainty over enforceability, regulatory treatment, and available CEA protections (tied to swap status and on-DCM trading) if sports event contracts are ultimately treated as gambling products rather than swaps. The CEA’s off-DCM rule would also make characterization important: a product treated as a swap could raise separate § 2(e) concerns if traded outside a DCM, while a product treated as betting could raise state law concerns. Counterparties and customers should assess settlement mechanics, default allocation, and the possibility of return-of-funds or restitution disputes.
• Funds and asset managers. Funds with exposure to event contracts may need to reassess valuation assumptions, liquidity risk, portfolio guidelines, and disclosure frameworks that rely on the premise that these instruments are CFTC-regulated swaps.
• Capital markets and structured finance participants. Documentation may not match legal reality where confirmations, opinions, risk factors, or collateral terms assume that an instrument is a CFTC-regulated swap. Parties should test illegality, change-in-law, termination, disruption, and close-out provisions against non-uniform state treatment and assess whether state-law invalidity or licensing failures create settlement or collateral consequences.
• Existing listings and pending DCM applications. Self-certification would not immunize a gaming listing from § 40.11(a). Pending self-certifications for gaming-related products would be presumptively barred under the current rule unless and, until a final rule changes that result, existing listings would remain exposed to the CFTC’s § 40.11(c) review and disallowance process. Proposed revisions do not have legal effect until finalized.

Key Considerations for DCMs

Considering the Ninth Circuit’s decision, operators of prediction markets and other DCM-listed event contract products should consider taking several immediate steps:

• Review state law exposure on a jurisdiction-by-jurisdiction basis and assess whether geofencing or similar controls may be appropriate given the Ninth Circuit’s express endorsement of that approach.
• Revisit contingency planning and close-out procedures for event contracts, particularly where products could face parallel state enforcement actions. The Ninth Circuit highlighted prior CFTC guidance encouraging DCMs to maintain such plans.
• Evaluate existing disclosures, contractual representations, and regulatory analyses that assume federal preemption or exclusive CFTC jurisdiction. Those assumptions are now under increased scrutiny.
• Closely monitor the CFTC’s ongoing prediction market rulemaking efforts, which may shape the regulatory landscape regardless of how the litigation develops.
• Prepare for the possibility of Supreme Court review and continued regulatory uncertainty as courts continue to grapple with the classification of prediction market event contracts.

For now, the Ninth Circuit’s decision represents the most significant judicial setback to the federal preemption theory advanced by prediction market operators. While the ultimate resolution remains uncertain, the existence of a clear circuit split means that market participants should prepare for a period of heightened regulatory and litigation risk pending further appellate review.

KalshiEX, LLC v. Assad, No. 25-7516 (9th Cir. Aug. 28, 2026); KalshiEX, LLC v. Flaherty, 172 F.4th 220 (3d Cir. 2026).

15 U.S.C. § 3001(a)(1)

This assessment may be tempered for two reasons: both leading appellate decisions arose from preliminary injunction proceedings, and the CFTC’s pending further NPRM to revise § 40.11 could affect the timing of Supreme Court review, including a possible mootness or hold issue. Until a rule is finalized, however, the Ninth Circuit treated the existing regulation as controlling.

Loper Bright Enters. v. Raimondo, 603 U.S. 369, 412 (2024).

Currently, sports betting is legal in 39 states, Washington, D.C., and Puerto Rico, leaving eleven states where it is prohibited in both online and in-person forms: Alabama, Alaska, California, Georgia, Hawaii, Idaho, Minnesota, Oklahoma, South Carolina, Texas, and Utah. A further group of states — including Mississippi, Montana, Nebraska, New Mexico, North Dakota, South Dakota, Wisconsin and Washington— permits sports wagering only in person at licensed or tribal venues, with no authorized statewide online or mobile betting. Not only could app-based products be unlawful in the eleven states that bar sports betting entirely and the eight states that allow wagering solely at physical venues, but they would also require state gaming licenses to operate in states where sports gambling is legal. Currently, no prediction markets have such a license.

The CFTC’s September 30, 2025 letter urged DCMs to account for state regulatory actions and litigation through contingency planning and close-out policies. CFTC Staff Advisory No. 25-36, Certain Contract Markets (Market Participants Div., Div. of Market Oversight, and Div. of Clearing and Risk Sept. 30, 2025).

More than 90% of Kalshi’s 2025 trades and 95% of its revenue were sports related. KalshiEX, LLC v. Assad at 14.