Prediction Markets Encounter Fresh Legal Tests in Federal and State Courts
Federal appeals in First and Seventh Circuits plus NY Supreme Court and SCOTUS filings test prediction market jurisdiction. Utah filed criminal charges against Kalshi executives with up to 75 years possible; DraftKings, FanDuel, and Polymarket restricted contracts in UT and MI. Kalshi added $2500 deposit caps for ages 18-20.
SCCG Take — Parallel cases will clarify CFTC preemption limits against state gaming rules. Operators must weigh compliance costs and market exits in contested jurisdictions while litigation proceeds.
U.S. prediction market operators face mounting legal pressures through parallel federal appeals and state enforcement actions testing CFTC authority against gaming laws.
Federal Appeals Test Jurisdictional Boundaries
The U.S. Circuit Court of Appeals for the First Circuit scheduled oral arguments Wednesday in Robinhood Derivatives' appeal of a dismissal by Judge Richard Stearns. The suit sought declaratory and injunctive relief against Massachusetts gaming regulators and the attorney general over regulation of sports-event contracts.
Daniel Wallach, a gaming attorney, wrote on LinkedIn: “For now, the appeal concerns threshold justiciability questions, not the broader question of whether federal law displaces Massachusetts’ authority to regulate sports event contracts as sports wagering. But you never know what might pique the appellate court’s curiosity.”
The Seventh Circuit granted Kalshi’s petition to appeal a Wisconsin federal court denial involving Ho-Chunk Nation IGRA claims. Wallach wrote: “The Seventh Circuit’s consideration of the issue could have significant implications for the intersection of federal prediction market regulation and tribal sovereignty.”
The New York Supreme Court ordered Kalshi to show cause on state gaming subpoenas, with response due December 7 and hearing set for December 14. Paul Clement, former U.S. Solicitor General, requested a 28-day extension to December 9 for a Supreme Court opposition filing, with decision expected January 11.
State Enforcement Prompts Operator Pullbacks
Utah Attorney General Derek Brown filed charges against Kalshi and co-founders Tarek Mansour and Luna Lopes Lara. The counts include one pattern of unlawful activity (second-degree felony), 12 online gambling promotion counts (third-degree felonies), and one general gambling promotion (Class A misdemeanor). Conviction on all could mean up to 75 years in prison for the founders.
Brown said: “Gambling is illegal in Utah, whether you place the bet, run the game, or promote it. Calling it a prediction market doesn’t change what it is and being federally registered doesn’t put a company above the law.”
FanDuel and DraftKings ended sports, politics, and novelty contracts in Utah. Polymarket halted new sports-event contracts for Michigan users as of October 26.
Kalshi capped deposits at $2,500 per month for traders aged 18 to 20. Luana Lopes Lara, COO and co-founder, said the move reduces problem trading among young adults ahead of midterms.
As reported by CDC Gaming, the disputes center on UIGEA carveouts for CFTC-regulated markets versus state and tribal authority under IGRA.
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