The Federal Strike: CFTC, DOJ, and the Third Circuit Draw the Battle Lines for Sports Event Contracts

On April 2, 2026, the federal government did something it has never done before in the history of American gambling regulation: it sued the states. Not one state — three of them, simultaneously, with the Department of Justice standing alongside the Commodity Futures Trading Commission, seeking declarations that Arizona, Connecticut, and Illinois had unconstitutionally interfered with federally regulated markets. The defendants were not private parties who violated a rule. They were governors — Katie Hobbs of Arizona, JB Pritzker of Illinois, and Ned Lamont of Connecticut — represented by their attorneys general, defending their authority to regulate what arrives in their jurisdictions looking, to their citizens and legislators, exactly like sports betting.

Two days later, on April 4, the U.S. Court of Appeals for the Third Circuit issued a 2-1 ruling in *KalshiEX LLC v. New Jersey Division of Gaming*, becoming the first federal appellate court in American history to rule that the Commodity Exchange Act preempts state gambling laws as applied to sports-related event contracts traded on a federally regulated designated contract market. The majority found field preemption and conflict preemption. The dissent called it an overreach that would hollow out a century of state police power over gambling.

The Ninth Circuit will hear oral arguments on April 16, 2026 — tomorrow, as of this writing — in consolidated cases involving Kalshi, Robinhood, and Crypto.com against Nevada. If the Ninth Circuit reaches a different conclusion than the Third, the circuit split will make a Supreme Court petition not just likely but essentially compulsory. This is not a niche regulatory dispute. It is a foundational question about whether states retain any meaningful authority over the fastest-growing form of online wagering in the country.

The Factual Record: What Was Filed and What Was Ruled

**CFTC v. Arizona, Connecticut, and Illinois** (April 2, 2026): Three separate complaints, filed simultaneously by the CFTC and DOJ in the respective federal district courts. Each complaint seeks declaratory and injunctive relief preventing the named state from enforcing gambling statutes, cease-and-desist orders, or criminal prosecutions against CFTC-registered designated contract markets (DCMs) offering sports, political, or entertainment event contracts.

The CFTC's theory is field preemption: Congress granted the CFTC exclusive jurisdiction over swaps and commodity-based contracts under the Commodity Exchange Act (7 U.S.C. § 1 *et seq.*), as amended by Dodd-Frank in 2010. Once a product is traded on a CFTC-registered DCM, the states are preempted from treating it as gambling, regardless of whether the state's gambling statutes would otherwise cover the product. Chairman Michael Selig stated the CFTC would "safeguard its exclusive regulatory authority over these markets and defend market participants against overzealous state regulators," citing Congress's intent to replace the "patchwork of state regulation" with federal supervision.

Arizona had gone furthest: the state not only issued cease-and-desist letters to Kalshi but filed criminal charges against Kalshi executives. The federal court in Arizona issued a temporary restraining order blocking the criminal prosecution shortly after the CFTC filed its complaint, representing the first instance of a federal court intervening to block a state criminal gambling prosecution in the prediction markets context.

**KalshiEX LLC v. New Jersey Division of Gaming Enforcement** (Third Circuit, No. [docket under seal at time of writing], April 4, 2026): Chief Judge Michael Chagares and Judge David Porter, majority; Judge Jane Richards Roth, dissent. The Third Circuit affirmed the district court's preliminary injunction barring New Jersey from enforcing its gambling laws against Kalshi's sports event contracts.

The majority's preemption analysis proceeded in two steps. First, it found that sports event contracts fit the CEA's definitional scope — specifically the broad statutory definition of "swaps," which includes agreements "dependent on the occurrence...of any event...associated with a potential financial, economic, or commercial consequence" (7 U.S.C. § 1a(47)). Second, having established that the CEA covers the product, the court found field preemption: the statutory grant of exclusive CFTC jurisdiction over DCM-traded swaps leaves no room for states to apply inconsistent gambling prohibitions. Conflict preemption reinforced the conclusion — allowing states to prohibit the product would frustrate the federal interest in uniform, centrally regulated commodity markets.

Judge Roth's dissent argued that states retain police power over gambling that predates and coexists with the CEA, that the majority's interpretation would swallow any state gambling law touching an instrument that could theoretically be characterized as a swap, and that the CEA's legislative history does not support such expansive preemption. The dissent's strongest point: Congress never explicitly prohibited states from regulating sports gambling in the CEA, in contrast to the explicit anti-commandeering structure of PASPA (which the Supreme Court struck down in *Murphy*). The absence of explicit preemption language, Roth argued, should counsel against finding it by implication.

This is a preliminary injunction ruling, not a final merits judgment. The court applied the *Winter* standard (*Winter v. Natural Resources Defense Council*, 555 U.S. 7, 2008): likely success on the merits, irreparable harm, balance of equities, and public interest. The Third Circuit found likely success; it did not make a final finding on preemption.

A. Live Cases to Watch

Beyond the Third Circuit ruling, the following dockets are active and will collectively shape the legal landscape within 12 months:

**CFTC v. State of Arizona** (D. Ariz., April 2026): Declaratory and injunctive relief. TRO against criminal prosecution of Kalshi executives already granted. Preliminary injunction hearing expected before June 2026.

**CFTC v. State of Connecticut** (D. Conn., April 2026): Declaratory and injunctive relief. Connecticut has been the most procedurally aggressive state respondent, filing a 47-page opposition to the CFTC's pre-complaint TRO motion that previews the state's strongest arguments.

**CFTC v. State of Illinois** (N.D. Ill., April 2026): Declaratory and injunctive relief. Illinois has accused prediction market platforms of "enabling insider trading schemes" — a characterization that previews a potentially novel argument that sports event contracts allow information asymmetry exploitation beyond the scope of CFTC oversight.

**KalshiEX v. Nevada Gaming Control Board** (Ninth Circuit, oral argument April 16, 2026): Consolidated with cases involving Robinhood Markets and Crypto.com's prediction market products. Nevada has a court-enforced ban on Kalshi's sports, politics, and entertainment contracts. The Ninth Circuit is the most consequential pending proceeding: if it departs from the Third Circuit's reasoning, a circuit split is confirmed and the Supreme Court path accelerates.

**KalshiEX v. Montana Gaming Division** (D. Mont., filed April 2026): Kalshi's second Montana lawsuit, following a second cease-and-desist from Montana after the original non-enforcement agreement. Covered separately in this series.

**Polymarket v. [Multiple States]** (various dockets): Polymarket, unlike Kalshi, is not a CFTC-registered DCM. Its exposure is categorically different: without DCM registration, the federal preemption argument that Kalshi is winning is not available to Polymarket. A class action in the Southern District of New York alleges Polymarket operates an unlicensed sports betting enterprise. This distinction — DCM vs. non-DCM — is the single most operationally important line in the prediction markets legal landscape.

B. Historical Frame: Murphy, PASPA, and the Preemption Architecture the States Thought They Had

The Supreme Court's 2018 decision in *Murphy v. NCAA* (138 S.Ct. 1461) is the unavoidable historical reference for this dispute — and it cuts in multiple directions simultaneously.

In *Murphy*, the Court struck down the Professional and Amateur Sports Protection Act (PASPA) as an unconstitutional commandeering of state legislative authority. PASPA prohibited states from "authorizing" sports gambling by statute; the Court found that Congress cannot dictate what state legislatures must prohibit. The ruling liberated states to legalize sports betting, which they have done in 38 jurisdictions since 2018.

States are now invoking *Murphy*'s logic in precisely the opposite direction: they argue that the CEA cannot be read to preempt state gambling laws without an explicit textual statement, because doing so would effectively commandeer states — this time, by forcing them to permit activity they have chosen to prohibit. The Third Circuit majority disagrees: it distinguishes *Murphy*'s anti-commandeering principle (which prevents Congress from dictating what states must do) from straightforward Supremacy Clause preemption (which Congress can accomplish through explicit grants of exclusive jurisdiction). The CEA's grant of exclusive jurisdiction to the CFTC, in the majority's view, is a lawful exercise of the latter kind of federal authority.

The tension is genuine. If the Ninth Circuit reads *Murphy* as the states read it — as establishing a heightened anti-commandeering baseline that applies to prediction markets as it applied to PASPA — a circuit split emerges on a question with no obvious textual resolution. That is what a Supreme Court petition is for.

The other essential precedent is *KalshiEX LLC v. CFTC* (D.C. Cir. 2024), in which Kalshi successfully challenged the CFTC's own 2023 proposed rulemaking that would have prohibited sports-related event contracts. The D.C. Circuit held that the CFTC had overstepped its authority in attempting to categorically ban the product class, effectively requiring the agency to permit sports event contracts on registered DCMs. That ruling is the predicate for everything that followed: because the D.C. Circuit forced the CFTC to permit Kalshi's products, and because the CFTC now actively defends them, Kalshi operates inside a federal regulatory authorization that states claim is irrelevant to their police power authority over gambling.

C. Regulation and Rulemaking in Motion

**CFTC Advanced Notice of Proposed Rulemaking on Event Contracts**: Under Chairman Selig, the CFTC issued an ANPR in early 2026 soliciting public comment on a regulatory framework for event contracts that would affirmatively confirm DCM authority to offer sports, political, and entertainment contracts. The comment period closed in March 2026; a final rule is anticipated in late 2026 or Q1 2027. A final rule would significantly strengthen the preemption argument by creating an explicit, comprehensive federal regulatory scheme.

**CFTC's Prior Rulemaking Withdrawal**: One of Chairman Selig's first acts was to withdraw the Biden-era proposed rule that would have prohibited political and sports-related event contracts. The withdrawal signals the current administration's posture unambiguously: event contracts are a federal commodity product, and the CFTC will protect them.

**State Legislative Activity**: Arizona HB 2800 (introduced March 2026) would amend the state's gambling code to explicitly exclude CFTC-registered DCMs from the definition of "gambling establishment." Legislative sponsors argue this would moot the federal-state conflict; opponents argue it creates a new unregulated gambling category. Status: committee.

**Congressional Activity**: Senate Majority Whip introduced a "Prediction Markets Clarification Act" in February 2026 that would add an explicit preemption clause to the CEA, removing any statutory ambiguity the Ninth Circuit or state courts might exploit. The bill has 42 co-sponsors. House companion bill has 89 co-sponsors. Industry analysis suggests a 55-60% probability of passage before the end of the 119th Congress.

**Tribal Authority**: Multiple tribal gaming authorities — particularly in California, Washington, and the upper Midwest — have filed amicus briefs in the Third and Ninth Circuit proceedings arguing that sports event contracts offered to residents of states with tribal gaming compacts constitute Class III gaming under IGRA, requiring compact approval and NIGC oversight. This argument, if accepted by any circuit, would create a separate preemption battleground between the CEA and IGRA.

D. Points of Contention

**Does "swap" under the CEA cover sports event contracts?** The Third Circuit says yes, applying the broad statutory definition. The dissent and the states argue that a sports event contract is not a financial instrument with economic hedging utility — it is simply a bet. The resolution of this definitional question drives everything downstream. If "swap" is read narrowly to require some financial or economic hedging purpose, prediction markets lose. If read broadly as the majority reads it, they win. The Supreme Court's interpretive principles will ultimately resolve this.

**Does CEA field preemption leave room for state gambling law?** The majority found that the CEA's exclusive jurisdiction grant over swaps preempts the field. The dissent argues that states retain concurrent authority over gambling, a domain they have regulated since before the republic's founding, and that Congress would have said so explicitly if it intended to preempt state gambling laws. This is a classic Chevron-era debate about statutory silence, now operating in a post-*Loper Bright* world where courts owe no deference to CFTC's own interpretation of its jurisdiction.

**Is the CFTC's enforcement posture an exercise of valid authority or political discretion?** Connecticut's brief argues that the CFTC's decision to sue states is a policy choice by the current administration, not a legal obligation, and that the next administration could reverse course. This argument is more politically resonant than legally significant — the courts will decide preemption questions on the merits, not on assessments of administrative durability — but it points to a real risk for DCM operators: federal preemption protection is as durable as the administration that asserts it.

**The Polymarket distinction.** Polymarket is not a CFTC-registered DCM. Every preemption argument that Kalshi, Robinhood, and Crypto.com are making is predicated on DCM registration. Unregistered prediction market operators have no federal shield. The class action pending against Polymarket in the SDNY proceeds on exactly this basis: Polymarket is, the complaint alleges, an unlicensed sportsbook operating without the protection that DCM registration would provide. This creates a two-tier legal landscape that will accelerate DCM registration applications from competitors seeking the same federal protection Kalshi enjoys.

**The Illinois "insider trading" theory.** Illinois's brief in the CFTC litigation introduces a novel argument: that sports event contracts are inherently susceptible to insider trading — players, coaches, and team personnel with non-public information about injuries, lineup changes, or game outcomes can exploit information asymmetries unavailable to retail traders. If courts or the CFTC take this argument seriously, it could impose information-barrier and market-manipulation requirements on DCMs that would significantly increase operational costs.

E. Our Analysis: Implications and What Operators Should Do

The Third Circuit ruling is a landmark, but it is a preliminary injunction, not a merits judgment, and it binds only the Third Circuit (New Jersey, Pennsylvania, Delaware, and the U.S. Virgin Islands). The Ninth Circuit argument tomorrow could produce a conflicting result covering nine western states, including Nevada — the state with the most developed gambling regulatory infrastructure in the country. The legal landscape for the next 12-18 months is genuinely uncertain, and operators must plan for multiple scenarios simultaneously.

**For existing operators with DCM registration:** You are in the strongest position available. The Third Circuit ruling, the CFTC's litigation posture, and the pending Prediction Markets Clarification Act all support continued operation in states where you currently have preliminary injunctions. Focus on: (i) ensuring all products offered are clearly within your DCM authorization; (ii) maintaining robust compliance programs that demonstrate you are operating as a commodity exchange, not as a sportsbook — this distinction matters both legally and politically; (iii) supporting the ANPR comment process with detailed operational data that makes the CFTC's rulemaking case stronger.

**For founders building prediction market products:** DCM registration is not optional if you want federal preemption protection. The Polymarket class action makes this clear: without registration, you are exposed to state gambling law in every jurisdiction, with no federal shield. DCM registration takes 12-18 months and requires substantial compliance infrastructure, but it is the cost of operating in this space with legal certainty. Begin the process now; the regulatory window is open under the current CFTC administration, but it will not remain open indefinitely.

**For vendors and service providers:** The legal exposure of prediction market operators flows downstream. Payment processors, geolocation vendors, and technology providers that service Polymarket-style unregistered operators face the same liability exposure that sweepstakes casino vendors now face under AB 831 and similar statutes. The distinction between DCM-registered and unregistered operators is the key variable: service registered operators, and insist on representations of compliance. The legal risk profile for servicing unregistered prediction market operators is now materially higher than six months ago.

The Ninth Circuit oral arguments on April 16 are the next critical event. Watch for how the judges engage with the following questions: Is the Third Circuit's swap definition correct? Does the CEA's silence about state gambling preemption weigh against finding preemption? Does *Murphy* cut in the states' favor? The answers will determine whether the prediction markets legal war moves to the Supreme Court in 2026 or early 2027.

Founder's Playbook

Three immediate actions for operators and founders in the prediction markets space:

1. **Register or assess registration.** If you are operating a prediction market product and are not a CFTC-registered DCM, your legal risk is categorically higher than registered competitors. Commission a DCM registration feasibility analysis now. If full registration is impractical, assess whether your product can be restructured to operate through a white-label arrangement with an existing registered DCM.

2. **Monitor the Ninth Circuit ruling.** The April 16 oral arguments are closely watched; a ruling is expected within 60-90 days. If the Ninth Circuit creates a circuit split, anticipate state regulatory agencies in California, Nevada, Washington, Oregon, and Idaho will become more aggressive pending Supreme Court resolution. Plan your compliance response before the ruling, not after.

3. **Engage the CFTC comment process.** The ANPR on event contracts is the most important rulemaking of the year for this industry. A comprehensive final rule will significantly strengthen preemption arguments and may resolve the definitional questions that animate the circuit split. Submit detailed comment letters by the reopened comment period deadline; ensure your operational data supports the Commission's case.

Watch-List

- **Ninth Circuit ruling** (expected June-July 2026): Circuit split or affirmance. The most consequential pending development.
- **CFTC event contracts final rule** (late 2026 or Q1 2027): Would establish comprehensive regulatory framework and significantly strengthen preemption arguments.
- **Prediction Markets Clarification Act** (Congressional, 2026 session): 55-60% passage probability; if enacted, resolves statutory ambiguity and moots the preemption litigation.
- **Arizona criminal case against Kalshi executives**: TRO in place; preliminary injunction hearing expected before June 2026. If criminal charges survive federal court scrutiny, it escalates the enforcement model used by other states.
- **Polymarket SDNY class action**: Proceeding without federal preemption protection available to DCM operators. A ruling on whether Polymarket's products constitute illegal gambling could define the non-registered operator liability standard.
- **Tribal gaming compact challenges**: NIGC guidance on whether IGRA compacts cover prediction market products is expected in H2 2026. A NIGC finding that tribal compacts require coverage of prediction markets would add a third preemption regime to an already complex landscape.