What Happens If the Supreme Court Rules That Sports Event Contracts Are Not Swaps?

This article continues a series of speculations about possible Supreme Court of the United States rulings on prediction market lawsuits. You can read the first article, which examines the ramifications of the Supreme Court deciding not to hear any appeals on the matter, here.

This entry in the series assumes that the Supreme Court has decided to review either Kalshi v. Assad or Kalshi v. Flaherty at minimum. The other assumption is that the majority opinion from that review finds that sports event contracts available on prediction market exchanges do not fit the definition of a swap under the Commodity Exchange Act.

This article is not intended to be a comprehensive summation of all the possible consequences of that decision. Instead, it offers an overview of the most immediate effects of such a ruling for the biggest stakeholders.

The first decision that could matter is which petitions the Supreme Court grants.

SCOTUS' choice of case(s) could signal upper hand in deliberations

At this point, the Supreme Court of the United States (SCOTUS) can hear an appeal of a U.S. Third Circuit Court opinion in Kalshi v. Flaherty and two separate petitions challenging the Ninth Circuit's ruling in Kalshi v. Assad. Which petitions SCOTUS grants, if not all, will frame the starting arguments for the review.

Linda Goldstein, a partner at CM Law, shared her perspective on this key decision.

"Flaherty starts with a Kalshi win but a state-friendly framing," Goldstein said. "The Third Circuit's decision is Kalshi's strongest. Because New Jersey lost, though, it is the petitioner and wrote the question presented. New Jersey also benefits from the 2–1 split below, which gives it a ready-made dissent to build on."

"Assad gives the states two separate ways to win. The contracts are not swaps under the Commodity Exchange Act, so the CFTC's exclusive jurisdiction never applies, and even if the contracts were swaps, current CFTC Rule 40.11(a) bars exchanges from listing contracts involving gaming."

"The second holding gives the states an off-ramp. The party defending a judgment can win on any ground that supports it. Nevada could tell the Court it doesn't need to decide what a swap is: even if Kalshi is right, its contracts violate a federal rule and can't claim federal protection from state law. The prediction markets would have to win on both issues, while Nevada would need to win on only one."

"As a practical matter, the choice of case matters most if the Court picks a single case and stays within its question. If it grants more than one petition or consolidates the cases, every issue would be before it, and the choice of case would matter much less."

Whether SCOTUS takes up Assad, Flaherty, or both, the assumption is that it will provide a definitive, final answer on whether sports event contracts (SECs) are swaps under the Commodity Exchange Act (CEA). That isn't a guarantee, though.

Could SCOTUS avoid the "are sports event contracts swaps" question entirely?

The decisions on appeal in both Assad and Flaherty address whether to grant or deny Kalshi preliminary injunctions against state officials trying to enforce gambling laws. That framing creates a path for SCOTUS to narrowly affirm or overturn those decisions.

"The lower courts have given the Court several ways to decide preemption without ever defining a swap," Goldstein commented. "The Sixth Circuit held that even if sports event contracts were swaps, the CEA’s exclusive jurisdiction language would not preempt state gambling law. A separate Ninth Circuit panel, in Blue Lake Rancheria, read the CEA’s express preemption narrowly. The Ninth Circuit in Assad held that current CFTC Rule 40.11 independently bars these listings as well."

Goldstein believes such a narrow ruling is unlikely, though. At the same time, one factor is the rulings' statements that sports event contracts are "likely" or "likely not" swaps under the CEA because the lower courts ruled on injunction requests rather than the merits.

"When a preliminary injunction turns on a pure legal question, the Supreme Court usually answers that question, and lower courts treat its reasoning as controlling regardless of hedged phrasing," Goldstein added. "A majority might keep the 'likely' language to hold votes together, but the practical effect would be much the same as a ruling on the merit."

Provided that SCOTUS does not sidestep the swaps definition question, a definitive ruling that SECs don't qualify might be read as a broad and immediate victory for state governments. However, the situation has more nuance.

Sports event contracts' status as gambling products could require further deliberation

SCOTUS' opinion that SECs are not swaps is not equivalent to a definitive statement that SECs are gambling. Kalshi and other prediction market exchange operators might still have options even if SCOTUS rules that SECs are not swaps.

"Swaps are only one route to preemption," Goldstein explained. "Kalshi could still argue that the contracts fall within the CFTC's exclusive jurisdiction as futures, options, or event contracts listed on a designated contract market, although the Nevada district court in Assad already rejected the futures theory. A 'not swaps' holding removes only one route unless the Court's reasoning closes off the others."

More litigation may be necessary to settle what SECs are, whether state governments can regulate them, and, if so, to what extent.

"The Court would not, and in a sense could not, hold that these contracts 'are gambling' under Nevada or New Jersey law because what constitutes gambling under state law is determined and defined by the states," Goldstein elaborated. "Operators could still raise state-law defenses, such as arguments that the contracts aren't wagers under the statutory definition. So even a clear federal holding leaves a state-by-state fight rather than settling the issue nationally."

However, a majority opinion that SECs aren't swaps wouldn't mean that Commodity Futures Trading Commission (CFTC) Chair Michael Selig merely has to apply another label to them and continue on as he has.

CFTC may not be able to just "rename" sports event contracts and proceed with exclusive jurisdiction arguments

While Selig is not a party to either Assad or Flaherty, he has sued several states to maintain what he sees as exclusive jurisdiction over regulating designated contract markets (DCMs). Swaps are not the only financial products that DCMs offer, so the possibility of calling a rose by another name arises.

Goldstein doubts the practicality of that approach, though.

"After Loper Bright Enterprises v. Raimondo (2024), courts don't defer to an agency's reading of a statute," Goldstein commented. "If the Court says the CEA's definition of a swap doesn't cover these contracts, the CFTC can't define its way back in, and the Ninth Circuit has already held that CFTC inaction cannot turn a non-swap into a swap. What the CFTC could do depends on what the opinion leaves open, but a rule cannot create preemption that the statute does not provide."

How to proceed would also depend heavily on the language of SCOTUS' majority opinion for DCM operators.

Kalshi, other exchange operators could have paths to continue offering sports event contracts

SCOTUS stating that SECs are not swaps would not mean that DCMs offering them would become implicitly illegal everywhere in the US instantaneously. Some states, like Illinois and North Carolina, have enacted frameworks that let DCMs do so in compliance with state law.

Goldstein believes that while DCM operators may want to be cautious, opportunities could still exist for Kalshi and others. Again, further litigation might come into play.

"First, I would want to see exactly what the Court held," Goldstein elaborated. "A ruling that the contracts are not swaps would not make them illegal everywhere. It would make each state's own law decisive, and the breadth of the Court’s reasoning would determine what paths remain. From there, I would look at the states that have already passed laws on these markets. I would not assume that quiet states will stay quiet. Litigation already spans at least 20 states, and a ruling would give every attorney general a template. Where there is no clear legal basis to operate, I would advise suspending sports contracts promptly rather than waiting for enforcement, at least until a state-by-state evaluation can be made based on each state’s gambling laws and the Court’s ruling."

Much of the litigation has focused on SECs. A clear ruling that they do not qualify as swaps might also make gambling regulators and law enforcement more aggressive in trying to restrict other types of trading on DCMs.

Could elections contracts and other markets be vulnerable to enforcement efforts?

The Third Circuit's ruling on Kalshi's injunction applies only to SECs. While Nevada has challenged the legality of elections-based event contracts, the Ninth Circuit did not weigh in on that issue when it denied the injunction.

However, a SCOTUS majority opinion that SECs are not swaps could give Nevada and other states' attorneys general a blueprint to expand their efforts to restrict DCM activity.

"Election contracts would still have to be fought on their own terms, and how far the ruling reaches would depend on the Court's reasoning," Goldstein said. "Kalshi can also argue that elections carry real financial consequences, through shifts in tax, trade, and regulatory policy, in a way that a game's final score does not. That fits more naturally within the definition of a swap."

"The outcome would turn on how the Court explains itself. If the majority says sports contracts are not swaps because they lack inherent financial consequences, election contracts would be exposed to the same argument. If the majority instead relies on the states' long-standing authority over sports betting, election contracts would be easier to distinguish. Either way, I would expect state attorneys general to test the limits quickly, especially ahead of major elections."

The more certain ramifications of a SCOTUS opinion that SECs are not swaps include Kalshi and other DCM operators needing to deal with state gambling regulators and law enforcement, potentially in courtrooms, and Selig potentially revising regulations concerning the definitions of swaps. State attorneys general would also likely have new considerations in how to apply and enforce gambling laws.

Beyond that, the consequences of a SCOTUS opinion in Assad or Flaherty, or both, will depend on the language the majority uses to explain why SECs are not swaps. Those decisions will guide how the main stakeholders move forward with their objectives across the US.