Key facts
- New Jersey is asking the Supreme Court to rule on whether prediction market sports bets are gambling or 'swaps'.
- A circuit split exists between the 3rd Circuit (favoring 'swaps') and the 9th Circuit (favoring 'gambling').
- New Jersey argues that Kalshi's model seeks to federalize the sports betting industry, bypassing state laws.
- The Dodd-Frank Act's definition of 'swap' is central to the legal dispute.
- The Trump administration has supported Kalshi in its legal battles against states.
New Jersey has petitioned the Supreme Court to review a case concerning whether prediction markets like Kalshi can offer sports wagers without adhering to state gambling laws. The state's Attorney General, Jennifer Davenport, stated that companies like Kalshi claim to operate legally nationwide but refuse to comply with any state's gambling regulations.
The legal battle hinges on the definition of 'swaps' under the Dodd-Frank Act. The US Court of Appeals for the 3rd Circuit previously ruled that sports-related event contracts qualify as swaps, granting the Commodity Futures Trading Commission (CFTC) exclusive jurisdiction and preventing state regulation. New Jersey's petition argues this decision is 'badly mistaken' and seeks to prevent the federalization of the multi-billion-dollar sports betting industry at the expense of state laws.
Adding complexity, the 9th Circuit Court of Appeals reached a different conclusion, ruling that Nevada could prohibit Kalshi from accepting sports bets, viewing them as gambling disguised as swaps. This circuit split has significantly increased the likelihood that the Supreme Court will intervene to provide a definitive ruling.
New Jersey's petition highlights the "tremendous importance" of this issue, noting that it will determine if a multi-billion-dollar gaming industry can operate outside state sports-gaming laws. Litigation concerning these questions is active in at least 20 states, with some state gambling laws currently enjoined by federal courts. This marks the first certiorari petition filed with the Supreme Court on the legality of Kalshi's business model.
The core legal question is whether athletic contests constitute 'events' with potential financial, economic, or commercial consequences as defined by the Dodd-Frank Act for swap contracts. While the 3rd Circuit acknowledged such consequences, 9th Circuit judges like Ryan Nelson and Kenneth Lee argued that typical sports game outcomes are not 'events' in the sense intended by the law governing swap contracts, emphasizing that placing sports bets, regardless of labeling, remains gambling.
New Jersey contends that Congress did not intend to federalize gambling regulation through the Dodd-Frank Act, arguing that the 9th Circuit's reasoning is more aligned with the statutory text and structure. The state also points out that if Kalshi's interpretation were correct, then state-licensed sportsbooks, including those in casinos, would also be in violation of Dodd-Frank. Furthermore, New Jersey argues that even if sports bets are considered swaps, the CFTC's exclusive jurisdiction applies only relative to other federal agencies and does not preempt states' inherent police powers over gambling.