The U.S. Court of Appeals for the Ninth Circuit has denied requests by Kalshi and Polymarket to block gambling-related cases against the prediction market platforms in Nevada and Washington state. According to Bloomberg Law, the court issued three separate orders on Thursday denying stays pending appeal of federal district orders remanding to state courts. The panel held that the companies failed to demonstrate that litigating in state court would cause them irreparable harm or that they were likely to succeed with their arguments that the US Court of Appeals for the Ninth Circuit has federal question jurisdiction. The ruling represents a significant setback for the platforms as they continue to navigate regulatory challenges across multiple jurisdictions. The panel's decision effectively keeps disputes between Kalshi and the states of Nevada and Washington in respective state court systems, where attorneys general and gaming regulators have challenged the legality of Kalshi's operations along the lines of gambling laws. The decision, in the short-term, means that Washington and Nevada will continue to enforce statewide bans on the exchanges' sports-related contracts as well as election forecasts.
The court rejected Polymarket's argument that it was operating under federal direction through its compliance with CFTC oversight requirements. As reported by Bloomberg Law, the judges stated that the companies did not show they were likely to prevail on claims that federal courts had jurisdiction. The panel emphasized that the CEA preemption defense is an affirmative defense, which cannot by itself give rise to federal question jurisdiction. The court held that the mere assertion by the platforms that the Commodity Exchange Act preempts state law is not sufficient to automatically establish federal jurisdiction. This decision adds to the growing split among federal courts over prediction market jurisdiction, with the Third Circuit siding with Kalshi in an earlier case, upholding a preliminary injunction against New Jersey gambling regulators. The divergence among federal courts could eventually push the question to the Supreme Court. Legal experts believe that state courts are more likely to rule in favor of state and tribal gaming authorities whereas federal courts may be inclined to recognize the CFTC's claim of exclusive jurisdiction over prediction markets.
Kalshi and Polymarket had previously argued that contracts on events like sports and politics are federal derivatives regulated by the CFTC, and that state authorities have no right to enforce gambling laws against them. However, as reported by Bloomberg Law, Nevada challenges Kalshi and Polymarket's lack of a state license while Washington questions whether Kalshi is offering illegal gambling, which doesn't necessarily raise a federal issue. This fundamental disagreement over the nature of prediction market contracts lies at the heart of the ongoing legal battle. The platforms maintain that their activities represent federally regulated financial instruments, while state authorities view them as unlicensed gambling operations subject to state regulatory oversight. The prediction markets' argument that a federal law preempts Nevada and Washington gaming laws was rejected by the Ninth Circuit panel, which stated that principles of federalism and comity tip the balance of hardships and public interest in favor of allowing the states to enforce their laws in state court.
The regulatory pressure on prediction market platforms has intensified with Rhode Island Attorney General Peter F. Neronha announcing a lawsuit in state court that names Kalshi and Polymarket as defendants. According to The Block, the complaint alleges that the exchanges are violating Rhode Island's gaming laws and asks the court to enjoin the platforms from offering trading of contracts related to sporting events in the state. This action, filed on Thursday, demonstrates the growing momentum among state attorneys general to restrict prediction market operations. If Nevada and Washington are ultimately successful in restricting Kalshi's activity within their borders, other state governments may look to replicate the strategy, with another state attorney general already starting down that path. The Supreme Court review could provide relief in civil actions like those initiated by Neronha, but barring such results, Kalshi must deal with the fallout of the Ninth Circuit's decision across multiple jurisdictions. The latest denial by the Ninth Circuit makes Kalshi and Polymarket more vulnerable to state-based civil enforcement brought by Nevada and Washington – two states that have aggressively pursued the blockage of sports-related contracts.
Kalshi's services are, at present, limited in roughly one-fifth of US state jurisdictions as legal battles continue, with the platform relying on its public availability throughout the country to provide much needed liquidity for its numerous trading markets. While Polymarket still hasn't launched to the public within the US, Kalshi's widespread availability allows it to obtain massive trading volume, which in turn sparks more user interest and activity. If the exchange is forced to further geo-fence or limit its products, the popularity of many markets could suffer significant liquidity crunches as market makers become more scarce and pricing fluctuations become more prominent. Prediction markets use peer-to-peer trades to facilitate activity on their apps, which makes them heavily reliant on liquidity to attract enough interest in specific markets, different from the business model of state-regulated sportsbook apps where customers place wagers against the house. The back-and-forth battle between exchanges and their detractors is likely headed to the Supreme Court, with the latest denial making the platforms more vulnerable to state-based enforcement actions.
