Kalshi must lock out state users after major court loss

The Sixth Circuit ruled Sept. 25 that Ohio and Tennessee can apply their gambling laws to Kalshi's sports contracts.

The court rejected Kalshi's argument that complying state by state would conflict with its duties as a federally regulated exchange, and it pointed to geofencing as a workable way to satisfy both.

That second appellate win for states hits the demand Eilers & Krejcik Gaming models as most exposed, the 69% of Kalshi's retail sports demand that comes from states without legal online sportsbooks.

Two routes to the same result

The unanimous panel held that Kalshi had failed to show its sports contracts meet the Commodity Exchange Act's definition of a swap, the premise behind its claim to exclusive CFTC oversight.

It then added an alternative holding that even if the contracts were swaps, federal commodities law would leave Ohio and Tennessee gambling statutes in force.

That second finding gives states within the circuit two separate paths to win, since a later ruling in Kalshi's favor on the swap question would leave the preemption conclusion standing.

Legal question Kalshi’s position Sixth Circuit ruling Practical consequence Are the sports contracts “swaps”? Yes, bringing them within the CFTC’s exclusive-jurisdiction framework Kalshi failed to show the contracts meet the relevant swap definition Kalshi cannot rely on the swap classification to block state enforcement If they are swaps, does federal law preempt state gambling law? Yes No — Ohio and Tennessee laws can coexist with federal regulation Even a later win on the swap question would not automatically eliminate state authority Can state-by-state compliance coexist with DCM rules? No; geographic segmentation conflicts with national-market obligations Yes State-specific access controls remain legally possible What happens now? Kalshi sought protection from enforcement Ohio denial affirmed; Tennessee injunction vacated Both states regain room to enforce while litigation continues

The court affirmed an Ohio ruling against Kalshi, vacated the preliminary injunction that had shielded it from enforcement in Tennessee and sent both cases back to the lower courts.

Like the earlier rulings in this fight, the decision comes at the preliminary-injunction stage. It now governs federal courts across Ohio, Tennessee, Michigan and Kentucky.

Kentucky sued Kalshi and Polymarket earlier this year, and Michigan's state-court case runs on its own track.

The court's answer on Kalshi's geofencing

Kalshi argued that its obligations as a designated contract market, including impartial access and national order matching, made compliance with Ohio's geographic restrictions and Tennessee's laws impossible.

The panel read those federal requirements as applying to whatever markets an exchange chooses to list, which leaves room for contracts offered in some states and withheld in others.

It pointed to companies that already use geofencing to meet federal exchange rules and state gaming laws at the same time. Kalshi told the court that segmenting access by geography would be technically difficult, time-consuming, and expensive, and the judges answered that “expensive does not mean impossible.”

In Michigan, a Sept. 1 state-court injunction requires Kalshi to keep covered sports contracts unavailable to users located in the state, verified through a qualifying third-party geolocation provider.

Violations carry penalties of up to $500,000 a day. The Kalshi app keeps working there, and its sports markets disappear for anyone standing inside the state line.

Where Kalshi's sports demand sits

EKG's July model estimates that 69% of Kalshi's retail sports demand comes from states without legal online sportsbooks, with California and Texas alone accounting for 44%.

EKG builds those figures from surrounding indicators, since Kalshi keeps its state-level trading data private. The same research estimates prediction markets displaced only 2% to 4% of sportsbook handle in the most competitive legal betting states, pointing to growth driven mainly by customers in places closed to licensed sportsbooks.

Sports carries the business, with more than 90% of Kalshi's trades and 95% of its revenue in 2025 tied to sports contracts, according to figures cited in the Ninth Circuit's August opinion. As a sizing exercise, restrictions covering half of that non-sportsbook footprint would cover a geography that holds about 34.5% of EKG's modeled retail sports demand.

California falls within the Ninth Circuit, which ruled against Kalshi's preemption argument in Nevada on Aug. 28. Texas belongs to the Fifth Circuit, which has yet to rule on the question.

Geography / exposure Share of EKG-modeled Kalshi retail sports demand Why it matters States without legal online sportsbooks 69% Core geography where prediction markets had an access advantage over conventional sportsbooks California + Texas 44% Two especially important non-sportsbook states States with legal online sportsbooks 31% Kalshi competes more directly with licensed sportsbooks Illustrative: half of non-OSB footprint restricted 34.5% Shows how quickly state-by-state limits could affect a large share of modeled demand EKG-estimated sportsbook substitution in competitive legal states 2%–4% Suggests much of prediction-market growth came from expanding access rather than simply stealing sportsbook share Ohio and Tennessee already allow sports betting

Both states legalized sports wagering and regulate it with a minimum age of 21, geographic limits, licensing, taxes, and consumer protections, rules Kalshi currently operates outside of.

The Sixth Circuit's opinion noted that states collected more than $3.2 billion in sports-gambling tax revenue in fiscal 2025. Their position is that sports contracts are welcome in both states under the same rules licensed sportsbooks follow.

The largest sportsbook operators have tapped the same regulatory arbitrage, with DraftKings saying DraftKings Predictions now serves California and Texas, where its sportsbook remains unavailable.

FanDuel says FanDuel Predicts offers sports contracts in states where online betting is illegal and will pull them once a state legalizes conventional sportsbooks. Both companies copied the federal route Kalshi opened, and both already run the state-by-state compliance systems the Sixth Circuit described.

EKG counted $31.1 billion in US sports prediction-market execution volume through Sept. 20 in the third quarter, and it reports Polymarket's US exchange reaching roughly 22% of sports contract volume in September. EKG now ranks state-by-state contraction of the addressable market as the industry's top near-term policy risk.

The appellate map and the calendar

The Third Circuit sided with Kalshi in New Jersey in April, finding it had a reasonable chance of proving federal law preempts state gambling rules.

The Ninth Circuit ruled the other way in Nevada, and the Sixth Circuit has now joined it for Ohio and Tennessee, leaving the split at two circuits against Kalshi and one in its favor. A Fourth Circuit appeal involving Maryland remains pending and could reshape that count.

New Jersey asked the Supreme Court on Sept. 2 to resolve the split. Kalshi's response, originally due Oct. 8, is now due Nov. 9 after a Sept. 22 extension, and the Court has yet to decide whether to hear the case.

The first concrete test of the Sixth Circuit ruling runs through Tennessee, where regulators regained their enforcement position once the injunction was vacated.

Circuit State dispute Current preliminary-injunction result What it means for Kalshi Third Circuit New Jersey Favorable to Kalshi Kalshi showed a reasonable chance that federal law preempts state gambling restrictions Ninth Circuit Nevada Against Kalshi Court rejected Kalshi’s swap/preemption theory for the sports contracts at issue Sixth Circuit Ohio + Tennessee Against Kalshi Court rejected both the swap theory and, independently, the preemption argument Fourth Circuit Maryland Pending Could change the appellate balance again Supreme Court New Jersey petition Review not granted Kalshi response currently due Nov. 9 What a national exchange looks like from here

If the Supreme Court takes up the split and adopts the Third Circuit's reading, sports contracts could stay available nationwide under one federal rulebook. A Fourth Circuit ruling in Kalshi's favor would strengthen that case before the justices act.

Kalshi would then compete with DraftKings, FanDuel and Polymarket on liquidity, pricing and product design, and EKG's projection of $279 billion in 2027 sports prediction-market execution volume would rest on a national market.

If Sixth- and Ninth-Circuit reasoning spreads, Kalshi faces a state-by-state permissions matrix. Some states could bar sports contracts outright, while others could demand licenses, a 21-and-over threshold, taxes, or local geolocation checks.

Markets split by geography also split the pool of eligible traders, which could thin liquidity and push Kalshi toward different contract catalogs from one state to the next.

Kalshi would remain a CFTC-regulated exchange offering economic and political markets across the country, with its sports business tracing the same borders sportsbooks already work within.

Kalshi's sports edge came from running one federal market while sportsbooks answered to dozens of state regimes. Two appeals courts have now tied that geography to state law, and the Sixth Circuit named the tool that could redraw it.

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