Supreme Court Could Decide Future of Sports Prediction Markets - Sportico.com

As federal district judges across the U.S. reach conflicting conclusions about whether sports prediction markets are subject to state sports betting laws, the prospect of the U.S. Supreme Court intervening becomes—in the parlance of sports predictions—a more likely event.

Supreme Court review could provide an intriguing mix of issues for the nine justices, a majority of whom are viewed as business-friendly but also deferential to states’ rights and skeptical of federal agencies.

It’s the kind of mix that makes a prediction on a ruling a hard bet.

The latest twist in the sports prediction market legal saga took place in Tennessee last week. U.S. District Judge Aleta A. Trauger granted Kalshi, a federally regulated predictions market, an injunction against the chairman of the Tennessee Sports Wagering Council and other state officials. They argue Kalshi must comply with Tennessee laws that permit online sports betting so long as operators obtain a license, pay taxes and fees, and abide by various restrictions.

Kalshi doesn’t comply with those Tennessee state laws and maintains it is under no legal obligation to do so. One of the best defenses in civil litigation is that the plaintiff has pleaded laws that are preempted by other laws. If that argument succeeds, then whether the defendant followed or broke the laws at issue in the lawsuit no longer matters.

Enter the Commodity Exchange Act of 1936 (CEA). The Act extends exclusive jurisdiction to regulate commodities and futures on designated exchanges to the Commodity Futures Trading Commission (CFTC), an independent federal agency. The CEA covers swaps traded on designated contract markets and—arguably—online sports wagers when they operate as swaps on designated contract markets.

This arrangement, Kalshi and other prediction markets insist, forecloses states from using state gaming laws to try to regulate commodities and futures already regulated by the CFTC. The CEA also contains language compelling exchanges to provide impartial access to their markets and services, an obligation that could become impossible if states imposed varying regulations on access.

Now pivot to the Supremacy Clause of the U.S. Constitution, as detailed in Article VI, Clause 2, and accompanying U.S. Supreme Court precedent. Those sources of law dictate the U.S. Constitution and federal statutes are generally the supreme law of the land and that state laws in conflict with federal law don’t apply. There’s more nuance, including that some powers are constitutionally reserved to the states through the 10th Amendment (a relevant point with college sports federal legislation), but usually when federal and state laws conflict, the federal ones win out.

Trauger agreed with Kalshi that Tennessee officials are likely preempted by the CEA, and she reasoned Kalshi could not comply with the CEA’s impartiality requirement if it follows Tennessee sports betting laws. Especially problematic, the judge reasoned, is that those laws require individuals “within Tennessee [to] only trade with others in the state, who are over 21 years old” and mandate that people “outside the state cannot trade with those within the state.”

Trauger added that it’s “hard to see” how a federally regulated nationwide derivatives exchange could properly function while adhering to state laws that impose divergent restrictions effectively limiting access.

The judge also surmised that even if Kalshi could find a way to comply with both Tennessee and federal laws, Tennessee law would likely limit “who can trade with whom” on a Kalshi sports prediction market. Tennessee law, the judge explained, thus still frustrates a core goal of the CEA—uniform regulation of the derivatives market.

It’s worth noting that while Kalshi is the plaintiff in the Tennessee litigation, there are other major players in the sports prediction market who have a stake in how this case and similar ones shake out. Robinhood and Polymarket have amassed significant roles in the industry, and FanDuel and DraftKings are joining the fray.

Trauger’s ruling comes as other federal judges have landed in different places on the same topic in extremely similar cases. Federal judges in Nevada and New Jersey have sided with Kalshi, while one in Maryland sided against Kalshi. In doing so, the Maryland judge adopted a narrower viewpoint on preemption while not seeing why requiring Kalshi to comply with Maryland laws would violate CEA impartiality.

There are also motions for a preliminary injunction pending in federal courts in Ohio, New York and Connecticut. In addition, state courts have weighed in, with a Massachusetts judge recently siding against Kalshi.

To date, no federal appellate court has ruled on any of these cases, but that will change in the months ahead. It’s possible those appellate courts could disagree, which would be legally problematic: The legal rights of derivatives exchanges that offer sports contracts and their customers would be different in different parts of the country.

The Supreme Court only grants review to about 1% of petitions, but one scenario where the odds are higher involves federal circuit splits—especially when the number of people impacted is considerable and when the legal question interests the justices. Sports cases seldom make it to SCOTUS, but seldom isn’t never, and in Murphy v. NCAA (2018), the Court ruled it was unconstitutional for Congress to compel states to deny sports betting when there was no accompanying federal standard.

If one of these cases is heard by the Supreme Court, there would be betting on what happens.

In one respect, the odds would seem to favor Kalshi. The current Supreme Court, led by Chief Justice John Roberts and with six of the nine justices nominated by Republican presidents, tends to favor businesses; some commentators go so far as to say there is “lopsided success for corporate interests” when businesses are heard by the Court.

But other factors could weigh against Kalshi. The Roberts Court is also favorable to states’ rights and accompanying powers, including those at the expense of the federal government. To the extent the justices view regulation of sports betting, sports-based event contracts and related activities as appropriately governed by states, the justices might be more skeptical of Kalshi’s position.

There’s also the issue of agency deference—or lack thereof—by the Roberts Court.

In Loper Bright Enterprises v. Raimondo (2024), the Court clarified that agencies “have no special competence in resolving statutory ambiguities” and that judges may no longer defer to an agency interpretation because the statute is ambiguous. Loper Bright overturned the so-called Chevron deference doctrine, which was captured in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. (1984) and obligated judges to defer to agency interpretation when a statute was ambiguous and when the accompanying agency interpretation was reasonable or permissible.

Recent comments by CFTC chair Michael Selig suggest the CFTC is weighing the possibility of intervening in existing litigation between states and prediction market platforms or initiating litigation against states that are trying to claim jurisdiction in areas where the CEA indicates jurisdiction belongs to the CFTC.

An active CFTC in fighting for its turf in sports prediction contracts could be a relevant consideration for the justices. If they believe the language related to preemption in the CEA is ambiguous—clearly some federal district judges disagree as to how preemption ought to apply to sports prediction contracts and states’ sports gaming laws—the CFTC might not get the deference it expects.

Like any prediction, no one knows for sure what “event” will happen until it happens or doesn’t happen. That’s true of Supreme Court intervention in sports prediction markets. But should it take place, all bets are off as to the outcome.