---
type: source
title: "Third Circuit KalshiEX v. Flaherty: First Federal Appellate Court Holds CEA Preempts State Gambling Laws for Sports Event Contracts — Classifies as 'Swaps'"
author: "U.S. Court of Appeals for the Third Circuit (via Paul Weiss / Holland & Knight / Vinson & Elkins analysis)"
url: https://www.paulweiss.com/insights/client-memos/a-divided-third-circuit-holds-that-the-cftc-has-exclusive-jurisdiction-over-sports-related-event-contracts
date: 2026-04-06
domain: internet-finance
secondary_domains: []
format: legal-analysis
status: processed
processed_by: rio
processed_date: 2026-05-04
priority: high
tags: [prediction-markets, CFTC, preemption, swaps, CEA, Kalshi, regulation, Third-Circuit]
intake_tier: research-task
extraction_model: "anthropic/claude-sonnet-4.5"
---

## Content

**Decision:** KalshiEX LLC v. Flaherty, No. 25-1922 (3d Cir. April 6, 2026) — 2-1 opinion authored by Judge Porter, joined by Chief Judge Chagares. Dissent by Judge Roth.

**Holding:** CEA likely preempts state gambling laws as applied to sports-related event contracts traded on CFTC-licensed designated contract markets (DCMs). First federal appellate court to so hold.

**Key legal finding — "Swaps" classification:** The Third Circuit interpreted CEA Section 1a(47)(A) expansively. The "swap" definition covers "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." The court found sports outcomes easily qualify because they affect financial stakeholders including sponsors, advertisers, television networks, and franchises.

**Preemption grounds:** Both (1) field preemption — Congress created a comprehensive federal regime governing derivatives markets that DCM sports event contracts are part of — and (2) conflict preemption — state enforcement would frustrate Congress's objective of eliminating a patchwork of state regulation.

**Dissent (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" of futures trading insufficient to support field preemption
- Savings clauses in CEA are "fundamentally incompatible with complete field preemption"
- CFTC Rule 40.11(a)(1), which PROHIBITS DCMs from listing gaming contracts, itself undermines Kalshi's conflict preemption argument — if CFTC itself bans gaming contracts, CFTC isn't protecting gaming contracts from state law

**Status:** Preliminary injunction ruling only; the court found "reasonable likelihood of success," not merits determination.

**Context:** Same case that had Ninth Circuit (cold reception, April 2026) and Massachusetts SJC (CFTC amicus + 38-state coalition, May 4 oral argument) going in different directions. Third Circuit (New Jersey) now first appellate court to side with CFTC preemption.

**Coverage:** Paul Weiss (CLS Blue Sky Blog), Holland & Knight, Vinson & Elkins, Lowenstein Sandler, Skadden, CNBC ("New Jersey cannot regulate Kalshi's prediction market"), Justia (full opinion text available).

## Agent Notes

**Why this matters:** The Third Circuit's BROAD "swaps" definition has a critical and unexamined implication for MetaDAO's conditional governance markets. CEA Section 1a(47)(A) covers "payment dependent on the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence." MetaDAO's TWAP-settled governance markets easily fit this definition — they are financial products settling on a governance token price in response to a conditional governance event. If MetaDAO's markets are "swaps" under this reading, they would have FEDERAL (CFTC) jurisdiction and protection from state gaming enforcement. This is potentially BETTER for MetaDAO than the current assumption (that governance markets are regulated by neither CEA nor state gaming law).

**What surprised me:** The dissent's CFTC Rule 40.11(a)(1) argument — that CFTC itself prohibits DCMs from listing gaming contracts, which paradoxically undermines CFTC's claim to exclusive jurisdiction over gaming-adjacent products. This is the strongest counterargument I've seen to the CEA preemption theory. If the rule prohibiting gaming contracts exists, it implies the products are "gaming" and thus NOT protected by the preemption CFTC claims for its jurisdiction. This cuts against MetaDAO's potential "swap" classification path — unless MetaDAO's TWAP endogeneity makes it clearly NOT gaming under Rule 40.11.

**What I expected but didn't find:** Any discussion of governance/decision markets in the law firm analyses. Zero mentions of futarchy, MetaDAO, or TWAP settlement in any Third Circuit commentary across 8 major law firms.

**KB connections:**
- [[MetaDAO conditional governance markets may fall outside the CFTC event contract definition because TWAP settlement against internal token price is endogenous rather than an external observable event]] — DIRECTLY RELEVANT. This ruling may RESOLVE the regulatory track differently than the endogeneity analysis assumes: if MetaDAO's markets are "swaps" (financial products, not event contracts or gaming), the question isn't "are they event contracts?" but "are they registered swaps?"
- [[futarchy-based fundraising creates regulatory separation because there are no beneficial owners and investment decisions emerge from market forces not centralized control]] — the "swaps" classification creates a new track independent of both securities and gaming law
- [[the DAO Reports rejection of voting as active management is the central legal hurdle for futarchy]] — the securities law track is separate from the swaps/gaming track this ruling opens

**Extraction hints:**
1. "Third Circuit's expansive 'swap' definition may classify MetaDAO conditional markets as federally protected financial instruments rather than state-regulated gaming products" — high-value KB claim candidate, confidence: speculative-to-experimental
2. "CFTC Rule 40.11(a)(1) creates a paradox: if CFTC prohibits DCMs from listing gaming contracts, the field preemption argument that CFTC exclusively regulates 'the field' is weakened because gaming-adjacent products fall outside the field" — nuanced legal mechanism
3. Could update the TWAP endogeneity claim to add this new regulatory track

**Context:** Third Circuit is a 3-state court (NJ, PA, DE). The split: Third Circuit says CFTC preempts; Massachusetts Superior Court says states have concurrent authority; Ninth Circuit cold reception to CFTC's arguments. SJC oral argument tomorrow will be the biggest data point.

## Curator Notes (structured handoff for extractor)
PRIMARY CONNECTION: [[MetaDAO conditional governance markets may fall outside the CFTC event contract definition]] — but this ruling ALSO opens a new analytical path: governance markets as "swaps" rather than "not event contracts"
WHY ARCHIVED: First federal appellate court CEA preemption ruling; "swaps" definition broad enough to cover MetaDAO conditional markets; dissent introduces CFTC Rule 40.11(a)(1) paradox — important counterargument
EXTRACTION HINT: Focus on two things: (1) whether the broad "swap" definition reclassifies MetaDAO governance markets as federally protected financial instruments and (2) how the Rule 40.11(a)(1) dissent paradox affects the TWAP endogeneity claim's regulatory strategy
