By Jonathan Stempel
Sept 25 (Reuters) - A US appeals court on Friday ruled against the prediction markets operator Kalshi, saying Ohio and Tennessee can regulate its so-called event contracts under their gambling laws.
The decision by the 6th US Circuit Court of Appeals in Cincinnati deepens a split among federal appeals courts over whether state regulators or the federal Commodity Futures Trading Commission should have authority to regulate the fast-growing industry. This raises the potential that
the US Supreme Court may decide to settle the matter.
Kalshi and its lawyers did not immediately respond to requests for comment.
Prediction markets are best known for letting people wager on the outcomes of sports events, though people can also wager on a wide variety of subjects including elections, the weather and cultural events such as the Oscars.
Circuit Judge Julia Smith Gibbons wrote for a unanimous three-judge panel that Kalshi did not show that its sports event contracts were "swaps" that should be regulated exclusively by the CFTC. She also said the federal Commodity Exchange Act did not preempt Ohio's or Tennessee's gambling laws.
Many states including Ohio and Tennessee, which are both Republican-controlled, have sought to crack down on prediction markets such as Kalshi and Polymarket, putting them at odds with Republican President Donald Trump's administration, as well as the CFTC.
Two other federal appeals courts have addressed the same issues. The 9th Circuit in San Francisco said last month that Kalshi's event contracts are subject to Nevada's gambling laws, while the 3rd Circuit in Philadelphia said in April that Kalshi's contracts are not subject to New Jersey's.
PREDICTING CORNER KICKS ISN'T SWAPS
Gibbons said "swaps" generally refer to financial measures, indices and instruments that people use when hedging against risks, rather than gaming-related contracts.
Gambling regulation "lies at the heart of the state's police power," she said, and Congress has given states primary responsibility to decide what forms of gambling can take place within their borders.
The judge also said the Commodity Exchange Act's "core purpose" was to protect the national interest by providing a means to manage and assume risk, and to obtain pricing information.
"It is, therefore, difficult to see how determining the probability that a certain number of corner kicks will be taken in a given soccer game — or that a 30-leg parlay will hit — would serve (to) advance those goals," Gibbons wrote.
Friday's decision vacated a preliminary injunction issued by a Tennessee federal judge against enforcement of that state's gambling laws, and upheld the denial of a similar injunction against Ohio by a federal judge in that state.
The office of Ohio Attorney General Andy Wilson did not immediately respond to requests for comment. A spokesman for Tennessee Attorney General Jonathan Skrmetti had no immediate comment.
Gibbons was appointed to the appeals court by Republican President George W. Bush. The panel also included Circuit Judges Eric Clay and Rachel Bloomekatz, appointed respectively by Democratic Presidents Bill Clinton and Joe Biden.
(Reporting by Jonathan Stempel in New York; Additional reporting by Chris Prentice; Editing by Bill Berkrot)
