The 6th Circuit Court of Appeals ruled Friday that Ohio and Tennessee can regulate Kalshi's event contracts under state gambling laws, handing the prediction market company its second federal appeals loss in two months. The unanimous three-judge panel, authored by Judge Julia Smith Gibbons, rejected Kalshi's argument that its contracts are exempt from state-level oversight. The ruling deepens an unusual three-way circuit split. The 9th Circuit ruled last month that Nevada's gambling laws apply to Kalshi. The 3rd Circuit in Philadelphia reached the opposite conclusion in April, finding New Jersey's gambling laws do not cover Kalshi's contracts. Three circuits, three answers — a textbook setup for Supreme Court review. Kalshi's legal strategy is straightforward: classify event contracts as federally regulated financial instruments under the Commodity Futures Trading Commission, thereby preempting the patchwork of state gambling regulations that would impose licensing requirements, consumer protections, and operational constraints. If event contracts are derivatives, the CFTC owns them. If they are bets, fifty state attorneys general do. The stakes extend well beyond Kalshi. Prediction markets have exploded in popularity, allowing users to wager on presidential elections, geopolitical outcomes, and cultural events. Polymarket, another major platform, was sued Thursday by New York State, with Governor Kathy Hochul framing the company as an unlicensed gambling operation putting underage users at risk. Polymarket responded that it would fight the action. The regulatory ambiguity is the product itself. Prediction markets operate in a liminal space between financial innovation and sports betting — and the companies have strong incentives to stay in that space. Federal oversight through the CFTC means lighter-touch regulation designed for institutional participants. State gambling oversight means age verification, addiction safeguards, advertising restrictions, and tax obligations that cut into margins. Experts have flagged the proliferation of betting apps as a particular risk for young users, a concern that state regulators are better positioned to address than federal commodity regulators. The consumer protection infrastructure — problem gambling hotlines, self-exclusion programs, deposit limits — lives at the state level. Preempting state authority doesn't just change who regulates; it changes whether consumer protection exists at all. The Supreme Court path is now open. The circuit split is clean, the industry is growing fast, and both sides have well-funded legal teams. However the Court rules, the decision will set the template for how an entire category of financial-gambling hybrid products is governed for a generation.
