[co-author: Stephanie Kozol]*
A lawsuit between KalshiEx LLC (Kalshi) and New Jersey state gaming regulators in the Third Circuit is testing the balance between federal commodities regulation and state authority regarding sports betting.
Kalshi operates as a designated contract market registered with the Commodity Futures Trading Commission (CFTC), offering “event contracts” that allow users to trade on the outcomes of real-world events — including the results of sporting events. These contracts function similarly to bets: users pay to enter positions based on whether a particular event will occur (e.g., the Ravens winning the Super Bowl or the Mets clinching the National League East). Kalshi operates without a license under any state gaming framework.
This model has triggered concerns from multiple state regulators. In early 2025, the New Jersey Division of Gaming Enforcement issued Kalshi a cease-and-desist letter, asserting that its sports contracts constituted unauthorized sports wagering under state law. Kalshi responded by filing suit in March in the U.S. District Court for the District of New Jersey, seeking to enjoin the state from taking enforcement action. Kalshi argued that its event contracts, certified for trading on its CFTC-registered platform, are permitted under federal law and that New Jersey’s enforcement efforts are preempted by the Commodity Exchange Act (CEA).
In April, U.S. District Court Judge Edward Kiel granted a temporary restraining order and preliminary injunction against state regulators, temporarily blocking the state from taking enforcement action against Kalshi’s sports contracts. The court held that Kalshi’s event contracts “fall within the CFTC’s exclusive jurisdiction” and that the CEA preempts New Jersey’s attempt to classify them as unauthorized wagers under its Sports Wagering Act. The court also emphasized the potential reputational and business harm Kalshi would suffer from continued state threats of enforcement — noting that one partner had already declined to list its products in New Jersey. The decision is currently on appeal to the U.S. Court of Appeals for the Third Circuit.
In June, attorneys general (AG) from 34 states, the District of Columbia, and the Northern Mariana Islands filed an amicus brief urging the Third Circuit to reverse the district court’s ruling. Co-led by Ohio and Nevada, the brief centers on principles of federalism, statutory interpretation, and consumer protection.
The AGs argue that:
- Kalshi’s Products Are Indistinguishable From Sports Betting: The AGs reject Kalshi’s contention that it operates merely as an exchange for event contracts. They point out that Kalshi users place wagers on the outcomes of specific sporting events, and that Kalshi charges transaction fees akin to the “rake” taken by a poker room operator from each hand of poker. From the user’s perspective, the platform enables speculation on sports outcomes in ways that mirror traditional sports betting, and Kalshi’s own marketing materials have used terms like “bet” and “sports betting” to describe its offerings.
- Gambling Regulation Is a Core State Power: The brief traces the history of state gambling regulation, from 17th-century colonial prohibitions to modern regulatory regimes in Nevada, Ohio, and beyond. The regulation of gambling, including sports betting, “undeniably qualifies as an area of ‘traditional state responsibility,'” say the state AGs, and federal courts should hesitate before displacing that authority without an unmistakable mandate from Congress.
- Preemption Requires a Clear Congressional Statement: As noted in cases like Bond v. United States, a traditional canon of federalism requires Congress to “speak clearly” if it intends to preempt traditional state police powers. The AGs argue that the CEA contains no such clarity regarding preemption and, in fact, expressly contemplates continued state authority over conduct like gambling.
- Federal Commodity Regulation Is Not a Substitute for State Oversight: The AGs emphasize that the CEA’s exchange regulations were designed for financial derivatives, not consumer-facing sports wagers. The AGs assert that state regulations provide protections for vulnerable consumers, including licensing, exclusion programs, age restrictions, and dispute resolution mechanisms. Under Kalshi’s theory, these state-level safeguards would evaporate if companies simply structure wagers as CFTC-regulated contracts.
Why It Matters
Kalshi’s claims raise questions about the current state-based regulatory structure that governs most sports betting in the U.S. If the Third Circuit upholds the district court’s ruling, it could set a precedent for allowing actors not licensed by the states to bypass state gambling laws by operating under a federal commodities framework. Such a ruling could disappoint state-licensed operators who have invested heavily in compliance, licensing, and responsible gambling programs and impact competition by allowing companies to opt for lighter federal regulatory oversight instead.
For regulators and industry stakeholders alike, this case raises fundamental questions about the future of dual sovereignty in gaming regulation. Can states meaningfully enforce their licensing regimes if federal registration can immunize new entrants from state oversight? Or will courts hold that, even in the digital age, gambling remains a matter of traditional state concern? This litigation will be critical in shaping these outcomes.
*Senior Government Relations Manager
