# Third Circuit KalshiEX v. Flaherty

**Type:** Federal appellate court decision  
**Case Number:** No. 25-1922 (3d Cir.)  
**Decision Date:** April 6, 2026  
**Court:** U.S. Court of Appeals for the Third Circuit  
**Jurisdiction:** New Jersey, Pennsylvania, Delaware  

## Overview

First federal appellate court to hold that the Commodity Exchange Act (CEA) likely preempts state gambling laws as applied to sports-related event contracts traded on CFTC-licensed designated contract markets (DCMs).

## Decision Details

**Holding:** CEA likely preempts state gambling laws for sports event contracts on DCMs through both field preemption (comprehensive federal derivatives regime) and conflict preemption (frustration of Congressional objective to eliminate state regulatory patchwork).

**Opinion Structure:**
- Majority: Judge Porter (author), Chief Judge Chagares
- Dissent: Judge Roth
- Status: Preliminary injunction ruling (reasonable likelihood of success, not merits determination)

## Key Legal Findings

**Swap Definition:** The court interpreted CEA Section 1a(47)(A) expansively to cover "any agreement, contract, or transaction that provides for any payment or delivery that is dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence." Sports outcomes qualify because they affect sponsors, advertisers, television networks, and franchises.

**Preemption Grounds:**
1. Field preemption: Congress created comprehensive federal regime governing derivatives markets
2. Conflict preemption: State enforcement would frustrate Congressional objective of eliminating regulatory patchwork

## Dissent Arguments (Judge Roth)

- Kalshi's products are "virtually indistinguishable from the betting products available on online sportsbooks"
- Presumption against preemption should apply with "special force" in gambling regulation
- DCM trading is a "subfield" insufficient to support field preemption
- CEA savings clauses are "fundamentally incompatible with complete field preemption"
- **Rule 40.11 Paradox:** CFTC Rule 40.11(a)(1) PROHIBITS DCMs from listing gaming contracts, which undermines CFTC's conflict preemption argument—if CFTC itself bans gaming contracts, CFTC isn't protecting gaming contracts from state law

## Regulatory Context

This decision creates the first circuit split on prediction market preemption:
- Third Circuit: Sides with CFTC preemption (April 2026)
- Ninth Circuit: Cold reception to CFTC arguments (April 2026)
- Massachusetts SJC: Oral argument with CFTC amicus + 38-state coalition (May 4, 2026)

## Legal Analysis Coverage

Extensive commentary from major law firms:
- Paul Weiss (CLS Blue Sky Blog)
- Holland & Knight
- Vinson & Elkins
- Lowenstein Sandler
- Skadden
- CNBC coverage
- Justia (full opinion text)

## Implications

**For Centralized Prediction Markets:** First appellate precedent supporting DCM preemption defense against state gambling enforcement.

**For Decentralized Governance Markets:** The broad swap definition could classify conditional governance markets (like MetaDAO's TWAP-settled markets) as federally-protected financial instruments rather than state-regulated gaming products. However, the Rule 40.11 paradox creates uncertainty about whether gaming-adjacent products are protected.

## Timeline

- **2026-04-06** — Third Circuit issues 2-1 decision holding CEA likely preempts state gambling laws for DCM sports contracts
- **2026-04-06** — First federal appellate court to side with CFTC preemption argument
- **2026-04-06** — Judge Roth dissent introduces Rule 40.11(a)(1) paradox argument

## Related Entities

- [[kalshi]]
- [[cftc]]
- [[polymarket]]

## Sources

- KalshiEX LLC v. Flaherty, No. 25-1922 (3d Cir. April 6, 2026)
- Paul Weiss legal analysis (CLS Blue Sky Blog)
- Holland & Knight, Vinson & Elkins, Lowenstein Sandler, Skadden commentary