Every argument a prediction market makes about its own legal position arrives at the same place. The exchange holds a federal designation, therefore state gambling law should not reach it. That argument is an inference, and it has to be, because the Commodity Exchange Act contains exactly one sentence using the words preempt and gaming together, and that sentence describes venues a designated contract market is not. Three courts read it within five months of 2026 and drew three different conclusions from its silence, and on 2 September 2026 the question left the courts of appeals for the Supreme Court.
One sentence in the Act names gaming, and it is not about the exchange
The provision is 7 U.S.C. section 16(e)(2). It opens plainly: the chapter "shall supersede and preempt the application of any State or local law that prohibits or regulates gaming or the operation of bucket shops". Then it names the two situations where that happens. Subparagraph (A) covers an electronic trading facility excluded under section 2(e) of the Act. Subparagraph (B) covers an agreement, contract or transaction excluded under sections 2(c) or 2(f), or under sections 27 to 27f, or exempted under section 6(c).
Follow the cross references and the shape appears. Section 2(e), in 7 U.S.C. section 2, is the provision under which only an eligible contract participant may enter a swap away from a designated contract market, so subparagraph (A) is a rule about venues that are not exchanges, serving institutions rather than retail traders. Subparagraph (B) is a list of things carved out of the Act altogether. An exchange listing yes and no contracts to the public sits in neither. The one place where Congress wrote gaming next to preempt, it aimed the sentence away from the exchange, and everything the category relies on beyond that point is read into the Act rather than out of it.
The same subsection carries a twin that runs the other way
Immediately above sits section 16(e)(1)(B)(i), a non preemption clause: nothing in the chapter supersedes the application of any federal or state statute to a transaction "that is not conducted on or subject to the rules of a registered entity or exempt board of trade". It protects state law off the exchange and says nothing about what happens on it.
That silence did most of the work in the decision the category won. In KalshiEX, LLC v. Flaherty, No. 25-1922, decided on 6 April 2026, the Third Circuit affirmed a preliminary injunction against New Jersey by two votes to one. Writing for the majority, Judge Porter reasoned that the Act does have a limiting principle in section 16(e)(1)(B)(i), but that designated contract markets are registered entities, so the limiting principle does not apply to them. The negative implication carried the point.
Judge Roth read the identical pair of clauses and drew the opposite inference. The Act contains both a preemption and a non preemption provision, in her reading, and neither covers trading on designated contract markets, so the presumption against preemption should decide. One statute, one day, opposite readings of the same two sentences.
There is a second express clause, and it is about insurance
The section has another preemption provision almost nobody quotes. 7 U.S.C. section 16(h) says a swap shall not be considered to be insurance and may not be regulated as an insurance contract under the law of any state. New Jersey put it to work: its petition for a writ of certiorari, filed on 2 September 2026, argues that the insurance clause "would be pure surplusage if Congress had intended to occupy the entire field", leaning on the principle from Cipollone v. Liggett Group that enacting a provision defining a statute's preemptive reach implies matters beyond that reach are not preempted.
The structure is worth sitting with. Congress wrote express preemption into this section twice. Once for gaming, pointed away from the exchange. Once for insurance, pointed at swaps. It never wrote a third one pointing at state gambling law as applied to an exchange.
Utah read the clause the way the exchange asked it not to
On 4 August 2026 United States District Judge Robert J. Shelby granted summary judgment to the state in KalshiEX LLC v. Cox, No. 2:26-cv-00151, District of Utah, denied the preliminary injunction as moot and closed the case. It is a final merits judgment on preemption rather than an injunction ruling, and the two are worth keeping separate.
The interesting part is how the express clause got there. Kalshi argued that section 16(e)(2) had nothing to do with its contracts because the clause reaches only transactions away from an exchange. The court turned that around. Section 2(d) of the Act lists section 16(e)(2) among the provisions that govern or apply to a swap, so the clause is not confined to off exchange activity: it applies to swaps and names the cases where state gaming law falls, and sporting event contracts on an exchange are not among them. Had Congress wanted to confine the clause, the decision says, "Congress knew how to do so. It did not."
The court then applied the tiebreak that decides most close preemption questions. Where the text is susceptible of more than one plausible reading, courts ordinarily accept the reading that disfavours preemption, a rule the decision draws from CTS Corp. v. Waldburger. A position that depends on winning a coin toss with the thumb on the state's side of the scale is weaker than the public messaging around this category suggests.
Kalshi filed a notice of appeal to the Tenth Circuit on 5 August 2026 and asked Judge Shelby to hold off state enforcement meanwhile, which Utah opposed, as Jim Spiewak reported for KUTV on 11 August 2026.
The Ninth Circuit granted the preemption point and moved the fight to the product
Three weeks later, on 28 August 2026, the Ninth Circuit decided KalshiEX, LLC v. Assad, No. 25-7516, in an opinion by Judge R. Nelson joined by Judge Bade, with a concurrence by Judge Lee. The panel affirmed the dissolution of a preliminary injunction against Nevada as to sports contracts and remanded the election contracts for separate consideration.
What makes it unusual is that it gave the exchange the preemption principle and took away the product. On the panel's reading, section 2(a)(1)(A) does expressly preempt state regulation of swaps traded or executed on a designated contract market. The question is then whether these contracts are swaps, and the panel concluded they likely are not, because a sports bet lacks the direct nexus between the underlying event and an economic consequence that the definition assumes. Reading it broadly enough to cover them, the opinion says, would mean Congress had hidden an elephant in a mousehole.
On the way past, the panel cited section 16(e)(2) as the example of Congress choosing more explicit language when it wants to, before holding that no magic words are required. Even the court ruling against the exchange treated the gaming clause as the marker of clear drafting.
Two courts asked where the definition stops and neither got an answer
At oral argument in Utah on 25 June 2026 the court asked whether there is any limiting principle on what could be designated an event contract, offering as examples the sale of a vehicle between private parties and the outcome of an abduction. The decision records the answer: Kalshi responded only that it would not offer such a contract, and identified no restraint other than the Commission's ability to define swaps and review derivative contracts. The Ninth Circuit reached the same doorway from the other side, holding that the broad reading of the swap definition has no limiting principle.
This part of the litigation belongs to us rather than to lawyers. Two federal courts asked the category to describe its own outer boundary, and the answer available on the day was a statement of intent. We would not list that. It is sincere and it is not a standard, because a standard is something a stranger can apply to your book without asking what you had in mind. We wrote down a short never list and five design tests in March 2026 for this reason, and the reason has now appeared in a transcript. A limiting principle published in advance costs nothing. The same principle improvised under oath costs a case.
The exclusion list you already publish is the answer one court was looking for
The Utah decision contains a detail deserving more attention than it has had. Rejecting the claim that complying with both federal and state law would be impossible, the court pointed at Kalshi's own contract specifications: each carries an appendix of trading prohibitions, some specific to named groups. The decision walks through them, listing current and former players, coaches and staff, beneficial owners, officials, caddies, tournament sponsors, race directors, timing personnel, employees of official tyre or fuel suppliers, and immediate family of several of these. Its conclusion was that adding another category of prohibited participant does not appear to be onerous.
Read as an operator rather than as a defendant, that is a compliment with a cost attached. The exclusion machinery built for market integrity is public, and a court has now held it up as evidence that the exchange can also exclude by jurisdiction. What you can demonstrably do, you can be expected to do.
Impartial access was read as a rule about money, not about maps
The other structural defence is 17 CFR 38.151(b), the impartial access requirement, which exchanges have argued makes geographic exclusion legally impossible. The Utah court read the Commission's own explanation instead. In the 2010 rulemaking on core principles for designated contract markets at 75 Fed. Reg. 80572, the Commission wrote that access should be based on the financial and operational soundness of a participant rather than discriminatory motives, and added in a footnote that the requirement exists to avoid membership standards focused on high net worth. Every stated purpose is financial. The decision's summary is the line worth remembering: impartial access is a rule for fair play, not one about who is allowed on what playground.
The court acknowledged that other judges have read the same rule geographically, naming the Arizona and Middle Tennessee decisions, so this is contested rather than settled. The direction of travel over one month is still hard to miss. The Ninth Circuit rejected the impossibility argument too, and in Washington the King County court treated the provision as an ordinary non discrimination rule when it sorted the book by category rather than closing the venue.
One judge hung the result on a regulation the Commission is rewriting
Judge Lee's concurrence is the most forward looking page in any of these opinions. He notes that the Special Rule at 7 U.S.C. section 7a-2(c)(5)(C)(i) says the Commission may find contracts involving gaming contrary to the public interest, which reads as discretion rather than a categorical bar, so perhaps some sports events could form part of a swap trade. He sets the question aside because 17 CFR 40.11 bars gaming contracts and, in his words, while the Commission has proposed revising that regulation, it remains in the books and controls the outcome of the appeal.
That is a holding with a shelf life. The proposal published on 12 June 2026 as Federal Register document 2026-11854 rewrites the definition the concurrence leaned on, and we have looked at what the new definition of gaming would measure and at the categories it pushes out of the test. When the rule text changes, that argument has to be made again.
The question going to the Supreme Court is not the question the clause answers
On 2 September 2026 New Jersey Attorney General Jennifer Davenport announced a petition for certiorari, filed with Solicitor General Jeremy M. Feigenbaum as counsel of record, seeking review of the Third Circuit decision. The question presented reads: "Whether the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act preempted States from regulating sports bets that occur within their jurisdictions if those bets are offered on markets registered with the Commodity Futures Trading Commission."
Notice what is missing. It does not ask what section 16(e)(2) means. It asks what an entire statute did by implication, which is the question district courts have been answering differently all year. Both sides also reach for the same congressional statement outside the Act: 15 U.S.C. section 3001(a)(1), in which Congress said states have the primary responsibility for determining what forms of gambling may legally take place within their borders.
The Court has not acted on the petition and grants review in a small share of cases, so nothing here is a prediction. What can be said as of 3 September 2026 is that the split now runs between two federal courts of appeals, and that the operating problem we described in August 2026 has not improved. It has been promoted.
What a venue should be able to say about its own legal footing
None of this asks an exchange to concede anything on the merits. It asks for written answers to a few questions, starting with which sentence of the Act you are standing on and whether it is express or inferred.
- What is your limiting principle, written down? Not what you would decline to list, but the test that decides.
- How fast can you add a category of excluded participant? Know the number of days and who signs.
- What is your geographic exclusion capability and its measured accuracy? Including false positives, VPN handling, and who holds the vendor contract.
- Is your classification map per contract or per company? The Ninth Circuit remanded election contracts separately, so protection is turning out to be contract by contract.
- What happens to open positions if access to a state disappears? A resolution terms question, and part of what we have called venue risk.
A protection you have to argue for is not a foundation you can build on
We are for these markets, and none of this says the exchanges are wrong on the law. The Third Circuit agreed with them in April 2026, and a Supreme Court that takes the case could agree too. The point survives either outcome. A category whose regulatory footing rests on what a statute did not say has handed the writing of its own standard to whoever gets the last word, and in 2026 that has been a different institution every few weeks.
The exclusion lists, the limiting principle, the geographic controls and the classification map cost the same whether review is granted or denied. A venue holding them can describe itself accurately when asked. A venue without them is relying on a reading of silence that two federal courts of appeals now disagree about. Standards written in advance are cheap. The ones written during an appeal are not.