Prediction Markets at a Crossroads: The Continued Jurisdictional Battle Over Event Contracts

February 2026 has marked a pivotal stretch in the escalating legal battle over prediction markets in the U.S. In a flurry of legal and regulatory activity, the Commodity Futures Trading Commission (CFTC) publicly declared it would defend its "exclusive jurisdiction" over event contracts, even as state regulators in Nevada, Massachusetts and Tennessee pressed forward with enforcement actions against leading platform Kalshi – with divergent outcomes in federal and state courts. Most recently, on February 19, 2026, a federal court in Tennessee sided with Kalshi, granting a preliminary injunction and finding that its sports event contracts are likely swaps subject to exclusive federal jurisdiction – deepening the divide among courts nationwide.

These developments have magnified a fundamental question that has divided courts, regulators and commentators: Are sports-related event contracts federally regulated derivatives subject to CFTC exclusivity as the broad statutory language suggests, or is state-regulated gambling subject to traditional police powers?

This Holland & Knight alert examines the legal arguments on both sides, analyzes the recent judicial and regulatory developments, and assesses the implications for the emerging prediction market industry.

The CFTC's Preemption Theory

CFTC Chair Michael Selig publicly announced the agency's intention to defend prediction market platforms against state enforcement, warning state regulators that the agency will fight to support its position.

The agency formalized its position with an amicus brief filed in the U.S. Court of Appeals for the Ninth Circuit in support of Crypto.com, which faces enforcement action by the Nevada Gaming Control Board over its sports event contracts. In that brief, the CFTC articulated a sweeping preemption theory: Event contracts offered on CFTC-registered designated contract markets (DCMs) are swaps under the Commodity Exchange Act (CEA), and "states cannot invade the CFTC's exclusive jurisdiction over CFTC-regulated designated contract markets by re-characterizing swaps trading on DCMs as illegal gambling."

The Statutory Interpretation Dispute

At the heart of this jurisdictional conflict is the statutory definition of a "swap" under 7 U.S.C. § 1a(47). The CFTC's textual argument centers on the statute's repeated use of the word "any" – covering agreements dependent on the "occurrence, nonoccurrence, or the extent of the occurrence" of an event. The agency contends that the score of a sporting event is an uncertain occurrence that fits squarely within this definition, and excluding such contracts "would reintroduce precisely the regulatory fragmentation Congress deliberately displaced" when it granted the CFTC authority over swaps in the Dodd-Frank Act.

This interpretation, which finds support in the statute's plain text, would bring binary event contracts, including those tied to sports outcomes, within the CEA's framework, triggering exclusive federal jurisdiction under 7 U.S.C. § 2(a)(1)(A). CFTC Chair Selig characterized state enforcement efforts as a "power grab" that undermines the CFTC's regulatory primacy, asserting that "[t]hese products are commodity derivatives and squarely within the CFTC's regulatory remit."

The States' Counterargument

States have advanced a competing interpretation that emphasizes the CEA's "gaming" exclusion and limits of federal power. Under 7 U.S.C. 7a-2(c)(5)(C)(i)), certain transactions may be excluded from the CEA's coverage if they involve "gaming" under state law. States argue that sports-related event contracts fall within this exclusion and that their traditional police power over gambling – a power predating the U.S. Constitution – cannot be displaced, absent an unmistakably clear statement from Congress.

This argument draws on the U.S. Supreme Court's anti-commandeering and clear-statement principles, as well as the presumption against preemption in areas of traditional state regulation. States contend that Congress did not intend the CFTC to oversee what they characterize as sports betting dressed up as derivatives trading – though this reading must be reconciled with the CEA's notably broad definitional language.

The Nevada Litigation: A Test Case for Federal Preemption

The same day the CFTC announced its support for the platforms, the Ninth Circuit handed Kalshi a significant defeat. In a one-sentence order, the appeals court denied Kalshi's request for an administrative stay that would have kept its sports event contracts safe from Nevada gaming regulators while its broader challenge to state authority proceeds.

Nevada argued that Kalshi's sports contracts destroy the public trust and confidence in gaming products and that "[a]bsent the controls that the gaming laws impart, accountability and recourse for harms dissipate" – though it does not address the regulatory protections already provided by CFTC-registered platforms.

With the stay denied, Nevada moved swiftly, filing a civil enforcement action in state court. Kalshi immediately removed the case to federal court, arguing that its sports contracts are governed by the CEA and the question of federal preemption raises serious questions that "have divided the federal courts." The removal strategy reflects Kalshi's preference for a federal forum to adjudicate its preemption defense – a forum the company presumably views as more sympathetic to its statutory arguments. As expected, the next day, Nevada filed an emergency motion to remand the matter to state court. The response and reply are due February 20 and February 23, 2026, respectively, and the hearing on the emergency motion is scheduled for February 24. If the case is remanded to state court, Kalshi would likely face a temporary restraining order, which could force the company to exit Nevada unless further appellate rulings intervene first. In that scenario, Kalshi could potentially seek emergency relief from the Supreme Court.

The Nevada action follows a November 2025 decision by the U.S. District Court for the District of Nevada, which dissolved a preliminary injunction that had protected Kalshi's sports offerings. The court found that Kalshi's contracts amounted to an "attempt to evade state regulation … [and] upsets decades of federalism regarding gaming regulation, is contrary to Congress' intent behind the CEA, and cannot be sustained" – a characterization that will likely face close scrutiny on appeal, given the statutory text at issue.

The Massachusetts Litigation: A Competing Judicial Perspective

Though Kalshi suffered a setback in Nevada, the Massachusetts Appeals Court granted the company a stay of an injunction that would have barred it from offering sports-related event contracts in the state – a divergent outcome that illustrates the unsettled state of the law.

Massachusetts had sued Kalshi in September 2025, alleging that the platform was evading sports gambling laws and regulations and offering wagering products disguised as event contracts. The Superior Court rejected Kalshi's argument that its contracts are CFTC-regulated swaps rather than sports bets, calling the position "overly broad," and granted an injunction set to take effect on March 8, 2026.

The Appeals Court, however, stayed the injunction and ordered expedited briefing, noting it expressed no "view on the merits or the disposition of this litigation." The case is widely expected to reach the Massachusetts Supreme Judicial Court, potentially producing an authoritative state-court ruling on the preemption question.

The contrasting procedural postures in Nevada and Massachusetts highlight a critical feature of this litigation landscape: Different courts are reaching different conclusions on the same fundamental legal questions. The Massachusetts stay, in particular, suggests that the platforms' preemption arguments have sufficient merit to warrant further appellate consideration – creating precisely the kind of interjurisdictional conflict that often attracts Supreme Court review.

The Tennessee Litigation: Another Win for Federal Preemption

On February 19, 2026, the U.S. District Court for the Middle District of Tennessee granted Kalshi's motion for a preliminary injunction, delivering another significant victory for the platform and the federal preemption theory. The case arose after the Tennessee Sports Wagering Council (SWC) sent Kalshi a cease-and-desist letter demanding that it stop offering sports event contracts to Tennessee customers, void pending contracts and refund deposits – threatening fines, civil injunctive relief and criminal referral for operating as an unlicensed sportsbook under the Tennessee Sports Gaming Act.

Kalshi sued three Tennessee officials in their official capacities and the SWC, seeking declaratory and injunctive relief. The court found that Kalshi was likely to succeed on the merits on two critical questions. First, the court concluded that Kalshi's sports event contracts are likely "swaps" under the CEA's broad definition, rejecting Tennessee's argument that sports outcomes are not "events" within the statute's meaning. The court reasoned that "a three-hour-long game, and the Titans' winning that game, are both occurrences of events" and noted that the statute's use of "potential" financial consequence sets a deliberately broad threshold. Second, the court found that conflict preemption likely applies, concluding that 1) it would be impossible for Kalshi to comply simultaneously with federal impartial-access requirements and Tennessee's state-specific restrictions, and 2) Tennessee's enforcement would stand as an obstacle to the CEA's objective of uniform regulation of derivatives markets.

The court also presumed irreparable harm, relying on a U.S. Court of Appeals for the Sixth Circuit precedent holding that constitutional injuries, including Supremacy Clause violations, warrant such a presumption. The court dismissed the SWC from the case on Eleventh Amendment grounds but entered the injunction against the individual state officials and ordered Kalshi to post a $500,000 bond. Notably, the court acknowledged the district-level split, observing that courts in New Jersey and the initial Nevada ruling had sided with Kalshi, while courts in Maryland and the subsequent Nevada ruling had ruled against it, underscoring that no appellate court has yet resolved the question.

Federalism Concerns and Political Dimensions

The CFTC's intervention has provoked sharp pushback from state officials invoking federalism principles, with more than 36 states filing amicus briefs asserting states' rights to regulate sports gambling in a related case pending in the U.S. Court of Appeals for the Fourth Circuit.

The breadth of state opposition is politically significant, though it does not resolve the underlying statutory interpretation question. Courts must ultimately interpret the text Congress enacted, and the CEA's definition of "swap" is notably expansive. While states invoke the presumption against preemption, this canon has limits when applied to clear statutory language.

On Capitol Hill, a coalition of U.S. senators sent a letter urging CFTC Chair Selig to "abstain from intervening in pending litigation involving contracts tied to sports, war, or other prohibited events."

This exchange highlights a tension in the CFTC's position: The agency simultaneously claims exclusive jurisdiction while acknowledging that classification questions may require judicial resolution. The distinction between jurisdiction over the marketplace and classification of products may prove difficult to maintain if courts conclude that certain products fall outside the CEA's scope altogether.

Analysis: The Path Forward

Recent events underscore the fragmented and uncertain legal landscape facing prediction markets – markets that proponents argue offer meaningful benefits for price discovery and information aggregation. The Tennessee ruling adds another favorable data point for Kalshi and the federal preemption theory, but it deepens rather than resolves the split among district courts. With nearly 50 active cases addressing the oversight of event contracts – involving multiple platforms across jurisdictions from New York to Nevada to Tennessee – courts at every level are now grappling with fundamental questions of federalism, preemption and statutory interpretation.

Key Unresolved Questions

Several legal questions remain unsettled and will likely require appellate resolution:

1. Statutory Scope. Does the CEA's definition of "swap" encompass binary event contracts tied to sports outcomes, or do such contracts fall within the statute's gaming exclusion?
2. Preemption Standard. If sports-related event contracts are swaps, does the CEA's grant of "exclusive jurisdiction" to the CFTC preempt state gaming laws as applied to those contracts? What weight should courts give to the presumption against preemption in this traditional area of state regulation?
3. Deference Considerations. In the post-Loper Bright landscape, how much weight should courts give to the CFTC's interpretation of its own statutory authority? The agency's aggressive assertion of jurisdiction may face skepticism from courts newly empowered to interpret statutory terms de novo. Notably, the Tennessee court engaged in its own independent textual analysis of the CEA's definition of "swap" – consistent with the de novo posture that post-Loper Bright courts are expected to adopt.
4. Substance Over Form. When should courts look beyond the formal structure of a contract (as a "swap" on a registered DCM) to assess whether it functions as a gambling product subject to state regulation?

Implications for Practitioners

The CFTC's decision to intervene forcefully on behalf of the platforms sets up a high-stakes confrontation between federal and state authorities. For practitioners advising prediction market platforms, the CFTC's support is significant, and the Tennessee ruling provides additional judicial authority for the federal preemption theory – though the current patchwork of state enforcement actions continues to create compliance uncertainty. For those advising state regulators, the CFTC's position, the Tennessee court's reasoning on conflict preemption and the textual arguments supporting federal preemption counsels careful consideration of enforcement priorities.

Ultimately, the scale and complexity of this litigation, combined with the circuit splits now emerging, suggests that Supreme Court review may be necessary to resolve the jurisdictional boundary between federal derivatives regulation and state gambling laws. The Tennessee decision only reinforces the need for appellate clarity. A clear resolution would benefit all stakeholders by providing the regulatory certainty this evolving industry needs. Until then, the prediction market industry will continue to navigate a patchwork of conflicting legal obligations, though the growing weight of judicial authority supporting the platforms' textual arguments suggests that the federal preemption question remains very much alive.

If you have questions about how these developments may affect your business or need assistance navigating and exploring the evolving regulatory landscape and the complex intersection of gaming law, prediction markets, commodities regulation and related emerging issues, please contact the author or another member of Holland & Knight's Gaming Practice.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.