The U.S. Court of Appeals for the Sixth Circuit ruled Friday that states have the right to regulate contracts for sports-related events on prediction market platforms, the second major legal defeat for the industry as a fight looms in the U.S. Supreme Court.
In a unanimous decision, the three justices said Ohio and Tennessee are allowed to apply their state gaming laws to Carsi’s sports-related event contracts.
“We find that Calci has not shown that its sporting event contracts meet the statutory definition of a ‘swap’ that would fall within the CFTC’s ‘exclusive jurisdiction,'” the opinion states.
Calsi and other prediction market platforms maintain that all event contracts are swaps, a type of financial derivative regulated by the Commodity Futures Trading Commission. However, states argue that the platforms’ sports-related offerings constitute gambling and should be regulated by sports betting laws.
The disagreement has sparked legal battles across the country, with states often suing platforms for operating what they say are illegal gambling operations, while exchanges are also suing states to block enforcement of local laws that say they should be federally regulated financial exchanges.
The CFTC sued nine states to defend the exclusive right granted by the Commodity Exchange Act to regulate event contracts. But a 6th Circuit panel rejected that idea.
“Even assuming that Carsi’s sporting event contract is a swap, we find that the CEA does not expressly or implicitly preempt the gambling laws of Ohio and Tennessee,” the opinion states. The ruling reverses a federal district court ruling in Tennessee that sided with Carsi and reaffirms a federal district court ruling in Ohio that sided with the states.
“Mr. Carsi unsuccessfully attempted to circumvent Tennessee law in order to avoid regulations and taxes related to sports betting,” Tennessee Attorney General Jonathan Scumetti said in a statement.
“Sports betting is highly regulated because it can cause significant harm. We are pleased to have thwarted Kalsi’s efforts to remove all safeguards and put Tennessee’s sports bettors at risk,” he added.
Kalsi spokeswoman Dani Lever said the platform disagreed with the decision, noting: “This ruling shows exactly why state-by-state patchworks don’t work.”
“Courts cannot agree on fundamental points. Some say federal law covers these contracts, others say it doesn’t. Some recognize that there is a real economic impact on sports, while others (falsely) argue that it doesn’t,” she added. “Markets break down when rules change across state lines, which is why Congress created a single federal regulator with nationwide rules.”
The CFTC did not respond to requests for comment. CNBC has also reached out to the Ohio Attorney General’s Office for comment.
The latest ruling means prediction market platforms have suffered two losses in legal battles at the Court of Appeal level. The Ninth Circuit Court of Appeals ruled last month that Nevada has the right to regulate sports-related event contracts, saying the contracts are sports betting and not swaps. Meanwhile, the U.S. Court of Appeals for the Third Circuit ruled in favor of New Jersey in April, stating that the CFTC has exclusive rights to regulate all swaps, regardless of the type of contract.
New Jersey appealed the decision in a motion to the Supreme Court earlier this month. It is unclear whether the Supreme Court will take up the case now or wait for further rulings from circuit courts on sports-related event contract issues.
Disclosure: CNBC and Kalsi have a commercial relationship that includes customer acquisition and minority ownership.
