The Sixth Circuit Court of Appeals dealt Kalshi another setback on Friday, ruling that the company's sports event contracts do not qualify as swaps under federal commodities law and are therefore subject to enforcement of Ohio and Tennessee’s sports betting regulations.
In a unanimous decision addressing Kalshi’s legal battles against regulators in Ohio and Tennessee, the court upheld the Southern District of Ohio's refusal to grant Kalshi a preliminary injunction and overturned a ruling from the Middle District of Tennessee that had previously blocked the enforcement of state regulations in that jurisdiction.
This marks the second federal appellate court ruling in favor of state gaming regulators, following a similar conclusion reached by the Ninth Circuit in August regarding Kalshi’s argument against Nevada. In contrast, the Third Circuit had a differing opinion in a New Jersey case, suggesting a growing divide among circuits that the U.S. Supreme Court may soon be urged to address.
The ruling is particularly significant for regulators, as stated by Ohio Attorney General Dave Yost and his Tennessee counterpart Jonathan Skrmetti. They noted that the Sixth Circuit unanimously agreed that sports event contracts are not classified as "swaps," meaning they fall outside the exclusive jurisdiction of the Commodity Futures Trading Commission (CFTC).
Kalshi contends that its sports event contracts are swaps that should be regulated as such under the Commodity Exchange Act (CEA), which they claim would preempt state sports betting laws. However, the Sixth Circuit rejected this argument on two grounds. The court determined that Kalshi failed to prove that their sports event contracts fulfill the CEA's requirements for a swap, emphasizing that a qualifying event must have intrinsic potential financial, economic, or commercial consequences, rather than merely indirect effects on related industries like sports leagues and advertising.
Judge Julia Smith Gibbons articulated this point, stating, "Kalshi’s sports event contracts have only downstream economic consequences, assuming they have the potential to cause economic consequences at all. Therefore, they are not 'associated' with potential financial, economic, or commercial consequences."
The court differentiated between sports markets and more traditional financial instruments linked to interest rates or currency values, where risks are more direct. It noted examples from Kalshi's offerings, including contracts based on sporting outcomes, that lack significant financial or commercial implications.
The Sixth Circuit's ruling also addresses ongoing issues for both Ohio and Tennessee. In Ohio, the Casino Control Commission had issued a cease-and-desist letter to Kalshi for allegedly providing unlicensed sports betting to individuals under 21. Kalshi's efforts to seek an injunction against the enforcement of Ohio’s laws were ultimately denied.
In Tennessee, after receiving a cease-and-desist letter from the state's Sports Wagering Council earlier this year, a district court had temporarily granted Kalshi relief by determining that its contracts were swaps and thus governed by the CEA.
As pressure mounts for the Supreme Court to intervene, the Sixth Circuit's decision exacerbates the divide between the circuits. In April, the Third Circuit upheld Kalshi's position, suggesting that its sports event contracts should be classified as swaps under the CEA, thereby blocking state enforcement of gambling regulations in New Jersey.
With the Ninth Circuit siding with Nevada, this combination of legal decisions creates a complex scenario for Kalshi as they navigate an active appeal in the Fourth Circuit. Overall, the current split among circuits, particularly with two supporting state rights and one upholding federal regulation, sets the stage for potential Supreme Court involvement.
