Kalshi's Legal Ruling Highlights Missteps in Defining Sports Betting Contracts

Kalshi’s Legal Setback Underscores Advertising Missteps

In a surprising turn of events, the Ninth Circuit has firmly labeled Kalshi's contracts as sports betting, echoing what the company’s own promotional materials have claimed all along. Judge Ryan Nelson opened the Ninth Circuit's detailed opinion by quoting Kalshi’s assertion of being “the first app for legal sports betting in all 50 states.” It’s a harsh lesson in how an advertising slogan can turn into evidence against a company’s argument in court.

Kalshi had long maintained that its sports contracts operated as financial derivatives rather than traditional bets, which would ideally shield it from state gaming regulations. However, the court did not buy this narrative. In a unanimous decision, the three-judge panel ruled that Kalshi's sports event contracts functionally qualify as sports bets. This designation means they fall outside the jurisdiction of the Commodity Futures Trading Commission (CFTC) and into the realm of state gambling laws—particularly in Nevada, where the app is based.

It’s not just semantics at stake here. The ruling directly contradicts a previous decision from the Third Circuit, which sided with Kalshi, arguing that the potential economic impact of a sports event should categorize it as a federally regulated swap. In contrast, the Ninth Circuit saw through Kalshi’s attempts to rebrand betting as “event contracts,” asserting that redefining a wager doesn’t change its fundamental nature. Judge Nelson pointedly noted, “placing sports bets, even when called by another name, is still gambling,” making it clear that the court prioritizes substance over labels.

Ongoing Litigation and State Enforcement

The Ninth Circuit’s ruling also has significant implications for Kalshi’s operations in Nevada. While a final ruling on the legality of Kalshi's overall business model has yet to be reached, the panel’s decision on the preliminary injunction allows Nevada to enforce its gambling regulations during the ongoing litigation. Kalshi hoped to pause these laws while contesting them, but the court found that the company hadn’t established a robust case for preemption under federal law.

The implications are profound. The extensive opinion indicates that Kalshi's contracts are likely violating existing CFTC rules, which could hinder future business operations. This decision sets a binding legal precedent across the Ninth Circuit, affecting states like California and Washington—key markets where Kalshi has aimed to establish its services without navigating complex gambling licenses. The court's preference for clarity over ambiguity challenges Kalshi's foundational business approach.

The Challenge of Classifying Sports Event Contracts

Kalshi’s distinction between traditional sportsbooks, which take bets against customers, and its own model, allowing direct trades between users, has not convinced the Ninth Circuit. Brian Quintenz, a board member at Kalshi and former CFTC commissioner, expressed his disappointment over the ruling’s lack of clarity, arguing that trading against other users is fundamentally different from betting against a house. Yet, the court’s response was unyielding: they maintained that the essence of the contracts has not changed simply because the mechanics differ.

The court noted that, despite using financial terminology like “contracts” and “trading,” the reality remains that sports betting is still betting. The judges underscored that contractual jargon doesn’t mask the underlying risk: customers are still wagering based on the uncertain outcomes of sports events. This substance-over-label philosophy could reshape how regulatory bodies perceive similar platforms in the future.

The High Stakes of Kalshi’s Business Model

The ramifications of losing its sports trading segment could be dire for Kalshi. According to the Ninth Circuit, sports trading accounted for over 90% of Kalshi's trades and nearly all of its revenue in 2025. While the court has delayed a decision regarding electoral markets, it's clear that sports betting is the backbone of Kalshi's financial viability. If the Ninth Circuit's rationale spreads, Kalshi might be forced to suspend sports trading wherever state regulations are enforced, leading to a cumbersome licensing process that could undermine its business model.

Moreover, the potential state-by-state compliance could fracture what Kalshi has touted as a national exchange. Rather than functioning like a unified market, the platform could resemble a patchwork of regional operations, complicating liquidity and user experience. Notably, states have varying rules on age limits for sports betting, which raises significant concerns, especially given that a sizable number of Kalshi's users are aged 18-20.

The Road Ahead for Kalshi and the Potential for Supreme Court Review

With a split legal landscape now established, the likelihood of the Supreme Court stepping in grows. Kalshi has options for seeking further review, but both legal uncertainty and the pressure of operating under conflicting laws complicate its strategy. As more cases emerge, Kalshi must navigate between two starkly different regulatory realities, risking operational continuity.

If the Supreme Court ultimately sides with Kalshi, the repercussions could ripple through the entire industry, offering a federal green light for similar platforms while potentially undermining state regulations. Conversely, a loss would solidify state and tribal authorities' power over sports betting, forcing Kalshi to adapt significantly or risk obsolescence.

The Ninth Circuit ruling hasn't eliminated prediction markets, but it has shaken the foundations of how these platforms can operate legally. Kalshi might still have a few avenues to pursue, but they now face a formidable judicial opinion that directly challenges their marketing narrative, making the stakes for the next phases of this battle more significant than ever.

Featured image: Kalshi / Canva

The original article can be found on ReadWrite.