NextFin News - New Jersey has taken the fight over prediction markets to the U.S. Supreme Court, becoming the first state to ask the justices to decide whether platforms like Kalshi can offer sports wagers nationwide without following state gambling laws. The petition, filed Wednesday, sets up a high-stakes clash over who controls the fastest-growing corner of the betting industry: state regulators, or the federal Commodity Futures Trading Commission.
The move comes less than a week after two federal appeals courts reached opposite conclusions on the same question, producing the kind of direct circuit split that almost forces the Supreme Court's hand. In April, the Third Circuit ruled that federal commodities law preempts New Jersey's gambling rules and cleared the way for Kalshi's sports markets. On August 28, the Ninth Circuit ruled the opposite way for Nevada, holding that prediction-market sports bets are gambling, not federally regulated derivatives.
At stake is not only the future of prediction markets, which have exploded into a multi-billion-dollar industry, but the legal foundation of the state-licensed sports-betting market that New Jersey itself helped create. The state argues that a victory for Kalshi would do more than deregulate one company — it would potentially outlaw the brick-and-mortar and tribal sportsbooks that have operated legally since the Supreme Court opened the door to state-legalized sports wagering in 2018.
The Petition and the Split
Attorney General Jennifer Davenport filed the petition for a writ of certiorari on behalf of the New Jersey Division of Gaming Enforcement, asking the Supreme Court to resolve a single, sharply framed question: whether the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act "preempted States from regulating sports bets that occur within their jurisdictions if those bets are offered on markets registered with the Commodity Futures Trading Commission."
The case is docketed as Flaherty v. KalshiEX, LLC, No. 25A1465. New Jersey had obtained an extension from Justice Samuel Alito, the circuit justice for the Third Circuit, pushing its filing deadline to September 3; the state filed one day early. The underlying Third Circuit case is KalshiEX LLC v. Flaherty, No. 25-1922.
The petition describes itself as the first certiorari request filed with the Supreme Court on this business model — the practice of offering sports wagers that the platform self-certifies with the CFTC as event contracts, then argues are beyond the reach of state gambling law. Litigation over the model has now erupted across at least 20 states, with dozens of active suits pending and the gambling laws of several states currently blocked by federal courts, according to the attorney general's office.
"Companies like Kalshi claim to offer legal sports betting in all 50 States, but they refuse to follow the gambling laws of any State," Davenport said in a statement. "These companies have no right to offer their sports bets without following state law, which is why dozens of States across the ideological spectrum have opposed them."
The division's interim director, Mary Jo Flaherty, framed the issue as a matter of state sovereignty.
"This is a states' rights issue," Flaherty said. "In New Jersey, gaming is prohibited by its Constitution, other than for exceptions approved by New Jersey voters. In this case, the State is upholding the will of New Jerseyans regarding the manner in which gaming can be conducted."
How a Wall Street Reform Law Became a Sports-Betting Loophole
The dispute turns on a definitional argument with enormous consequences. Kalshi's sports products are structured as "event contracts" — binary wagers on whether a team wins, whether a player hits a statistical mark, and similar outcomes. The company registers these contracts with the CFTC under the Commodity Exchange Act, the same federal statute that governs futures and options exchanges.
Kalshi's legal theory is that these contracts qualify as "swaps" under the Dodd-Frank Act's broad definition, and that swaps may legally trade only on CFTC-registered markets. If that classification holds, federal law preempts conflicting state gambling statutes, and a single federal license gives the company access to bettors in every state, regardless of whether that state has legalized sports betting.
The Third Circuit accepted that reasoning in April, at least at the preliminary-injunction stage. A 2-1 panel held that New Jersey's gambling laws are preempted because Kalshi's sports-related event contracts are swaps traded on a CFTC-registered designated contract market, placing them under the CFTC's exclusive jurisdiction. The panel noted that the CFTC had not made a determination that Kalshi's sports products were contrary to the public interest.
But the ruling was explicitly limited. The court found only that Kalshi had a "reasonable chance, or probability" of winning on the merits — a lower bar than "more likely than not" — and sent the case back to the district court for a full trial. The Third Circuit declined to decide whether the Commodity Exchange Act preempts all state gambling regulation, and it did not resolve the implications of the CFTC rule Kalshi used to list the contracts.
Four months later, the Ninth Circuit reached the opposite conclusion in a case brought by Nevada. In a unanimous 3-0 decision, the panel held that sports event contracts are not swaps under the Commodity Exchange Act and are not subject to the CFTC's exclusive jurisdiction.
"Congress did not take a wrecking ball to all sports gambling regulations built up over decades by federal, state, and tribal governments," the Ninth Circuit wrote, rejecting the idea that a 2010 financial-reform bill silently federalized sports wagering.
The split runs deeper than the two published opinions. New Jersey co-led an amicus brief in the Ninth Circuit case that was joined by 39 other jurisdictions, and the Ninth Circuit cited that brief in its ruling. Beyond the circuit courts, federal and state judges across the country have issued conflicting decisions, with some blocking state enforcement and others allowing it to proceed.
The Stakes: A $16.89 Billion Industry, and a Possible Legal Boomerang
New Jersey's petition emphasizes that the consequences of a Kalshi victory would extend far beyond prediction markets. In 2025, sports betting generated $16.89 billion in revenue for states nationwide, not counting sportsbooks in tribal casinos, according to the attorney general's office. The state argues that 44 states, hundreds of tribes, and casino operators have already weighed in against Kalshi's legal theory.
Here is the boomerang at the center of the case. Kalshi's argument depends on its contracts being "swaps." But federal law prohibits trading swaps outside CFTC-registered markets. If the Supreme Court accepts Kalshi's premise that sports wagers are swaps, then sports bets placed off a CFTC-registered exchange — including at licensed casinos in Atlantic City, Las Vegas, and on tribal lands — could themselves become illegal under federal law, even in states that expressly authorize them.
The Third Circuit dissent flagged exactly this problem. Judge Jane R. Roth wrote that Kalshi's sports event contracts were "virtually indistinguishable" from sportsbook products and that New Jersey's laws appeared to complement, rather than conflict with, the federal regime. Because swap trading outside registered markets is unlawful, she reasoned, Kalshi's theory would cast doubt on the legality of the conventional sports-betting industry.
The petition makes the same point in blunt terms: a ruling for Kalshi "would make sports wagers at classic sportsbooks like brick-and-mortar casinos — whether in Atlantic City, Las Vegas, or on tribal lands — illegal, and throw the entire industry into turmoil."
For Kalshi, the classification question is existential. The company markets itself as the "first app for legal sports betting in all 50 States." New Jersey's filing notes that 95% of Kalshi's 2025 revenue came from sports betting, meaning the company's business model depends almost entirely on the sports contracts that states are now trying to regulate as gambling.
Flaherty pointed directly at that marketing.
"Kalshi markets itself as the 'first app for legal sports betting in all 50 States,' including for wagering on NCAA games held in New Jersey and participated in by New Jersey teams, which is impermissible under New Jersey's Constitution," she said. "But Kalshi does not abide in any way with our State's gaming laws."
The Regulatory Gap at the Center of the Fight
Underlying the legal arguments is a practical question about regulatory competence. The CFTC is a financial-market watchdog built to police derivatives exchanges for manipulation, position limits, and customer protection. It is not a gaming regulator. The attorney general's statement notes that the CFTC has admitted it is not a gaming regulator and has no specialized expertise in overseeing gaming.
States, by contrast, have spent decades building the regulatory architecture that governs legal sports betting: age verification, problem-gambling safeguards, rules against insider trading on athletic events, tax collection, and licensing requirements. New Jersey's core complaint is that prediction markets are operating inside states while opting out of every one of those requirements.
"States have long adopted careful laws to regulate gambling, including to prevent compulsive gambling, gambling by minors, and insider trading on sports games," Davenport said. "We're calling on the Supreme Court to resolve this issue and recognize that Congress did not silently make the sports-betting industry immune from state law."
Kalshi and its allies see it differently. The company, backed by the current federal administration, argues that a patchwork of 50 different state regimes would make a functioning national market impossible. Event contracts, in this view, are financial instruments that happen to settle on real-world outcomes, and they belong under the single federal framework that governs all other derivatives.
A Kalshi spokesperson, Dani Lever, said after the Ninth Circuit ruling that the company "still believe[s] the CFTC regulations as written do not prohibit sports contracts, and in any event, the CFTC is working to clarify those regulations. We will be seeking further review." The CFTC did not immediately respond to a request for comment on the New Jersey petition.
What the Supreme Court Could Do — and What It Might Avoid
One framing matters for everything that follows: this is a structural question, not a cyclical one. The Supreme Court's answer will set a durable rule about who regulates prediction markets — states or the CFTC — and that rule will not revert on its own. What can move in the shorter term is only the litigation posture: which court hears which case, and whether the CFTC acts first. The structural verdict, once delivered, rewrites the playing field for the entire industry.
The justices have broad discretion over which cases to hear. The clean circuit split between the Third and Ninth Circuits, on a pure question of federal statutory interpretation with no disputed facts, is the classic recipe for a grant. The petition gives the Court a vehicle to answer the question definitively for the entire country, rather than leaving prediction markets and state regulators to fight it out state by state.
But the Court could also decline to intervene. If certiorari is denied, the split persists: Kalshi would remain protected in the Third Circuit's territory while facing enforcement in the Ninth Circuit's, and the company would continue litigating in the many other states where cases are pending. That outcome would preserve regulatory uncertainty — the very condition that has allowed prediction markets to scale quickly while legal challenges lag behind.
There is a third path that does not require the justices to rule on the merits at all. The CFTC is already working to clarify its rules on sports-related event contracts, a process Lever pointed to. If the agency issues a definitive determination on whether such contracts are contrary to the public interest, it could change the factual footing of the preemption argument without any Supreme Court decision.
Second-Order Consequences: The Industry Nobody Is Talking About
Most coverage of this fight focuses on whether prediction markets survive. The less-discussed second-order effect runs the other direction. A ruling that sports event contracts are swaps would not merely deregulate Kalshi; it would redefine the entire sports-betting market through the lens of the Commodity Exchange Act.
Because swaps may legally trade only on registered markets, the logical endpoint of Kalshi's theory is that the state-licensed sportsbooks that dominate the U.S. industry — DraftKings, FanDuel, and the casino operators — are offering swaps outside a CFTC-registered exchange. Those operators control the vast majority of the legal U.S. sports-betting market and operate under state licenses, not federal derivatives oversight. A Kalshi win would hand their competitors a federal preemption shield while potentially exposing the incumbents to federal illegality.
That is why the coalition against Kalshi includes not only state attorneys general but also tribes and legacy casino operators — parties that would normally be on opposite sides of a gambling-expansion fight. The petition's warning about throwing "the entire industry into turmoil" is not rhetorical overstatement; it is the direct implication of the classification Kalshi is asking the Court to endorse.
Counter-Thesis: Why the States May Be Overreading the Threat
The strongest argument against New Jersey's position is that the doomsday scenario depends on a chain of reasoning the Supreme Court may never accept. The Court could rule that Dodd-Frank preempts state gambling laws as applied to CFTC-registered markets without holding that all sports wagering constitutes swap trading. It could also accept the Third Circuit's narrower framing — whether a state can regulate trading on a federally regulated exchange — rather than the broader question New Jersey prefers.
There is also a serious institutional argument on Kalshi's side. If event contracts are derivatives, then letting 50 states set conflicting rules for the same instrument traded on a national exchange would fracture the very uniformity the Commodity Exchange Act was designed to create. The Third Circuit's majority found this reasoning persuasive, and the current federal administration has sided with the prediction-market industry.
Moreover, the Ninth Circuit's reasoning is not unassailable. Its conclusion that Congress did not intend to federalize gambling rests on an inference about legislative intent, not on explicit statutory text. A Court inclined toward textualism could find that the Dodd-Frank definition of "swap" is broad enough to encompass binary event contracts, whatever the consequences for state gambling policy.
But these arguments do not fully answer the boomerang problem. If sports bets are swaps, then the prohibition on off-exchange swap trading applies to them — and that prohibition predates any state licensing scheme. The counter-thesis is strongest if the Court can draw a clean line between exchange-traded event contracts and conventional sportsbooks. Whether such a line is legally coherent, or just a convenient compromise, is precisely what the justices would have to decide.
The judgment that this case poses an existential threat to the state-licensed industry has one clear falsifying signal: if the Supreme Court rules for Kalshi but confines its holding to contracts on CFTC-registered designated contract markets — leaving conventional sportsbooks untouched — the boomerang does not land. A denial of certiorari would have the same effect, preserving the status quo and the $16.89 billion state-regulated market while the lower-court split continues.
What to Watch
The first signal will be whether the Supreme Court grants certiorari at all — a decision that typically comes months after a petition is filed. A grant would put the case on track for briefing and oral argument, with a decision likely in the Court's next term. A denial would leave the circuit split in place and hand the initiative back to state regulators and lower courts.
Second, watch the CFTC. The agency's ongoing effort to clarify its rules on sports-related event contracts could resolve the dispute administratively, or at least narrow the questions the Court would need to answer. A definitive agency determination that such contracts are contrary to the public interest would undercut Kalshi's preemption argument at its foundation.
Third, watch the other pending cases. With dozens of suits across at least 20 states, additional appellate rulings could sharpen the split, narrow it, or produce a consensus that makes Supreme Court intervention less urgent. The outcome in any one of them could also create the next cert petition if New Jersey's is not accepted.
Finally, watch the market itself. Prediction markets have grown from niche curiosities into a venue where billions of dollars change hands on sports, politics, and economic data. However the Court rules, the decision will define whether that growth happens inside the state-regulated gambling system, outside it under federal derivatives oversight, or in some hybrid that no jurisdiction has yet designed.
The Bottom Line
New Jersey's petition forces a choice the lower courts have been avoiding. The question is not whether prediction markets are popular or profitable — they clearly are. It is whether a 2010 financial-reform law, drafted to regulate derivatives, silently rewrote eight years of state sports-betting policy that the Supreme Court itself authorized in 2018.
The irony is sharp: the state that won the 2018 case that legalized sports betting is now asking the same Court to protect that victory from a company claiming a federal loophole. If the justices take the case, they will not just be deciding Kalshi's fate. They will be deciding whether the sports-betting industry New Jersey helped build rests on state law — or on borrowed time.
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