Ninth Circuit rejects prediction markets, 44 states win sports fight

The Ninth Circuit ruled Friday that sports event contracts are not "swaps," handing 44 states a victory in their fight to regulate prediction markets as sports betting.

"This is a classic circuit split," said Joshua Mitts, a professor at Columbia Law School. "Ultimately, this is the kind of legal controversy or legal difference of opinion which will make its way to the Supreme Court."

The panel, led by Judge Ryan D. Nelson, affirmed a lower court's decision to dissolve a preliminary injunction against Nevada gaming officials, allowing the state to continue cracking down on sports prediction offerings as unlicensed sportsbooks. "For Kalshi to deny that its sports event contracts are sports bets under a reasonable person's understanding is disingenuous," Nelson wrote. The court simultaneously upheld preliminary decisions against Crypto.com's North American Derivatives Exchange and Robinhood Derivatives.

The ruling directly contradicts an April decision from the Third Circuit, which held that all event contracts are swaps on CFTC-designated contract markets under the agency's exclusive jurisdiction. New Jersey is expected to seek high court review, now armed with a circuit split that legal experts say makes Supreme Court review all but certain.

The Commodity Futures Trading Commission has sued nine states to defend what it argues is its sole right to regulate all event contracts as derivatives under the Commodity Exchange Act. The agency filed as amicus before the Ninth Circuit on behalf of the prediction market platforms. But the court rejected that reading, concluding that sports event contracts are, in reality, sports bets.

The ruling covers three separate cases: KalshiEX LLC v. Assad (No. 25-7516), North American Derivatives Exchange Inc. v. Nevada (No. 25-7187), and Robinhood Derivatives LLC v. Dreitzer (No. 25-7831). Judges Kenneth Kiyul Lee, who filed a concurring opinion, and Bridget S. Bade joined Nelson on the panel.

The Third Circuit's April decision was itself a 2-1 split, with Judge Jane R. Roth dissenting that Kalshi's offerings were "virtually indistinguishable" from sportsbooks' products and that New Jersey's laws seemed to complement the Commodity Exchange Act. That dissent now reads as prescient given the Ninth Circuit's contrary conclusion.

Market reaction

Shares of online sportsbooks rallied on the ruling. DraftKings jumped 7 percent, while Flutter Entertainment — the parent company of FanDuel — rose more than 6 percent. Both companies have been hit over the past year on concerns that prediction markets could disrupt the sports betting industry, and both have rushed to launch their own prediction market exchanges.

The stock moves reflect investor relief that the Ninth Circuit's ruling could slow the encroachment of prediction markets into sports betting territory. DraftKings and Flutter have invested heavily in building their own event contract platforms, betting that they can compete in a federally regulated market. The ruling complicates that strategy, potentially subjecting their offerings to state-by-state gaming oversight.

What's at stake

The prediction market industry has exploded in recent years, allowing people to wager on everything from whether unemployment will surpass 8 percent by 2030 to whether the Dodgers will win tonight's game. The legal question now before the courts is whether these offerings are federally regulated derivatives or state-regulated gambling.

If the Supreme Court sides with the Ninth Circuit, prediction market platforms would face a patchwork of state gaming regulations, potentially restricting their operations in states that classify sports event contracts as gambling. If the court sides with the Third Circuit, the CFTC would maintain exclusive jurisdiction, giving platforms a single federal regulatory framework.

The Supreme Court typically grants certiorari to resolve circuit splits, and legal experts widely expect the Court to take up the case. The timeline for a decision remains unclear, but the split between the Third and Ninth Circuits provides the Court with a clean vehicle to settle the question. Kalshi, Crypto.com, Robinhood, the CFTC, and the Nevada Attorney General's office did not immediately respond to requests for comment.

This article is for informational purposes only and does not constitute investment advice.