In KalshiEX LLC v. Schuler, Nos. 26-3196/5235, 2026 WL 2884087 (6th Cir. Sept. 25, 2026), the United States Court of Appeals for the Sixth Circuit held that prediction market KalshiEX LLC (“Kalshi”) had not shown that its sports-event contracts qualify as “swaps” regulated under the Commodity Exchange Act (“CEA”). The Court held further that even if the event contracts were swaps, Ohio’s and Tennessee’s gambling laws would not be preempted by the CEA. Kalshi has filed similar suits across multiple jurisdictions, reaching different results in different courts. Schuler deepens a circuit split over prediction markets and raises broader questions about derivatives regulation.
An Inherent Economic Connection
Prediction markets allow participants to buy and sell financial products known as “event contracts” whose payoff depends upon a specified event, occurrence or value. Kalshi offers such event contracts as a designated contract market (“DCM”) regulated by the Commodity Futures Trading Commission (“CFTC”). After Kalshi began self-certifying sports-event contracts in January 2025, state regulators threatened enforcement. Invoking the CFTC’s statutory “exclusive jurisdiction,” Kalshi sought injunctions. The Sixth Circuit affirmed denial of preliminary relief in Ohio and vacated a preliminary injunction in Tennessee.
The dispute centered on the definition of swap under 7 U.S.C. § 1a(47)(A)(ii), which covers payments contingent on an event “associated with a potential financial, economic, or commercial consequence.” Although sports outcomes qualify as “events,” the Court required an inherent economic connection, such that hedging risk or deriving pricing information would be commonly understood as beneficial. Downstream effects on advertisers, sponsors or local businesses were insufficient. Predicting a game’s outcome, the Court reasoned, is not equivalent to discovering prices or managing financial risk.
The Court expressed concern that a broader reading threatened to make ordinary off-exchange sports wagers unlawful swaps. The Court reasoned that the instrument’s terms determine swap status and Section 2(e) generally requires persons other than eligible contract participants to enter swaps on DCMs.
No Preemption of Incidental Burdens
Even assuming swap status, the Court rejected express, field and conflict preemption. It distinguished direct regulation of DCM licensing and operations from gambling laws that, in its view, only “incidentally” burden exchanges offering sports bets. Although the CEA’s “Special Rule” authorizes the CFTC to prohibit certain event contracts involving gaming or unlawful activity, the Court found this to supply a federal backstop rather than displace state regulation.
This reasoning builds upon the motions panel’s earlier decision in KalshiEX LLC v. Schuler, No. 26-3196, 2026 WL 1295806 (6th Cir. Apr. 24, 2026) (per curiam). The motions panel assumed swap status without deciding it, found the preemption merits at most evenly balanced and denied an injunction pending appeal because Ohio’s enforcement interests tipped the balance. The more recent merits panel retained that preemption reasoning but also held the contracts to be outside the swap definition. It resolved both states’ appeals on lack of likely success, without weighing the remaining injunction factors.
A Deepening Circuit Split
The Sixth Circuit’s decision in Shuler follows a similar result by Ninth Circuit in KalshiEX LLC v. Assad, 2026 WL 2543846 (9th Cir. Aug. 28, 2026). There, the Ninth Circuit held the contracts likely were not swaps, affirming dissolution of the sports-contract injunction, although it did recognize that express and field preemption could exist for qualifying on-DCM swaps.
The Third Circuit previously reached the opposite result in KalshiEX, LLC v. Flaherty, 172 F.4th 220 (3d Cir. April 6, 2026), holding that sports contracts are swaps and affirming a preliminary injunction against New Jersey enforcement. It found the field of on-DCM trading federally occupied and state restrictions an obstacle to uniform federal regulation. It did not decide impossibility preemption or make a separate express-preemption holding.
Trial courts also have reached different results which may be addressed on appeal. KalshiEX LLC v. Williams, 2026 WL 1961872 (S.D.N.Y. July 7, 2026), and KalshiEX LLC v. Martin, 793 F. Supp. 3d 667 (D. Md. Aug. 1, 2025), denied injunctions despite assuming swap status; both are on appeal in their respective circuits, Nos. 26-1835 and 25-1892, respectively. Conversely, United States v. Minnesota, 2026 WL 2150211 (D. Minn. July 27, 2026), preliminarily enjoined a broader prediction-market ban on express-preemption grounds. The Shuler decision distinguished Minnesota’s direct restrictions on prediction-market operations from ordinary sports-betting laws.
New Jersey’s petition for United States Supreme Court review of the Third Circuit’s decision, No. 26-299, remained pending as of October 1, 2026. Operators therefore face jurisdiction-specific exposure.
Implications for Swaps and Rulemaking
The CFTC as amicus has supported Klashi’s position. It has argued that sports contracts are swaps and that express, field and conflict preemption apply. In Schuler, the Court denied the CFTC’s request to participate in oral argument and ultimately rejected its proposed construction. The CFTC has warned that allowing state restrictions on sports contracts could jeopardize federal oversight of other derivatives. Schuler’s inherent-consequence test could constrain new contingent-payment products beyond sports, even where developers identify plausible hedging uses. For qualifying products, the separate question under Schuler is whether a state requirement directly regulates exchange operations or merely affects a transaction. Federal control over core DCM functions remains intact, as do targeted protections such as the bar in 7 U.S.C. § 16(h) on regulating swaps as insurance contracts under state law. The decision nevertheless supplies an argument for additional state-law scrutiny.
The Securities and Exchange Commission’s and CFTC’s June 24 joint request for comment addressed swap and security-based-swap definitions, including event contracts. On September 28, the CFTC submitted for White House review a proposed rule including event contracts within “swap” and an interim-final-rule submission excluding casino-style gambling products. Both remain under review.
Even a valid rule establishing swap status would not, by itself, overcome the Sixth Circuit’s independent preemption holding. Product developers must assess both whether a contract falls within federal derivatives law and whether state restrictions remain applicable. DCM registration and self-certification alone do not resolve either question. Litigation on these issues is not settled and will be subject to significant continued litigation.