Prediction Markets Enter Their Next Legal Battle

by: Chloé Nelson and Brian Schaller

The legal risk in prediction markets is no longer confined to the companies operating them. Minnesota has made offering these products a felony, and its law reaches the companies that process payments, verify locations, supply data, and advertise the platforms. A private plaintiff, relying on an old state statute that lets any person recover another person's gambling losses and collect triple that amount, has sued not just the platforms, but the exchanges, clearinghouses, and trading firms that provide liquidity. For companies doing deals with prediction market operators, this is an important shift.

At the same time, the preemption fight over how much control states have over prediction markets has become less predictable than when we discussed it in our earlier post about these platforms.[1] The federal appellate courts have now split on whether the Commodity Exchange Act ("CEA"), which the Commodity Futures Trading Commission ("CFTC") administers, preempts state gambling law, and New Jersey has asked the Supreme Court to resolve that split.[2] A CFTC registration is therefore not functioning as a national license, and the same contract may be lawful in one state and actionable in the next.

Another development is that states are no longer limited to applying their existing gambling statutes. One state has enacted a new criminal prohibition written specifically for prediction markets, and another has imposed a targeted excise tax instead of a prohibition. But existing law still does much of the work: attorneys general are suing under existing law, and one gaming regulator used an injunction obtained under existing law to force a platform onto third-party geofencing, with six figures a day at stake after the platform missed the deadline.

Below we discuss where the courts have landed recently, Minnesota’s ban on prediction markets and how far that ban reaches beyond the exchange, the other tools states are using, the private lawsuits, where the CFTC rulemaking stands, and what we think companies transacting in this space should be asking now.

The Courts Are Split

The core question is simple: when a federally registered exchange offers a contract on a sports outcome, does federal law override state gambling law? Courts are now landing in different places on that question, sometimes within the same month. The split turns less on the product itself than on two questions: whether a court treats these contracts as swaps in the first place, and how much weight it gives to the states' traditional authority over gambling. Even where courts agree the question is close, they do not agree on who gets protection while it is sorted out.

In April 2026, a divided Third Circuit panel upheld an order blocking New Jersey from applying its gambling laws to Kalshi's sports contracts, holding that Kalshi had shown a reasonable chance of success on both field and conflict preemption.[3] The Ninth Circuit went the other way in August 2026, holding that Kalshi was unlikely to establish that its sports event contracts are “swaps” shielded from state regulation and clearing the way for Nevada to apply its gambling laws.[4]

A third appeal is pending: the Sixth Circuit denied Kalshi a preliminary injunction against Ohio regulators, calling the preemption question serious and close rather than settled but finding the arguments evenly balanced at that stage, which left Ohio free to keep enforcing its gambling laws.[5]

District courts have divided the same way. Prediction market operators have lost in New York[6] and in Utah,[7] where a court granted the state summary judgment in August 2026 and held that federal law does not preempt Utah's gambling laws, allowing Utah regulators to apply those laws to prediction market operators for now. In Wisconsin, a court refused the CFTC’s own request to shield the operators.[8] Prediction market operators have won in New Jersey,[9] Tennessee,[10] and Minnesota,[11] and a federal court in Arizona preliminarily blocked enforcement there at the CFTC’s request.[12] Appeals are now pending in several circuits.

The courts are dividing at different points in the analysis. Some courts, like the Third Circuit, read the CEA's definition of a "swap" broadly, concluding these contracts fall inside it, and find federal law controls. The Ninth Circuit divided at the threshold instead, holding that sports event contracts are likely not swaps at all and that the CFTC’s own rule barring the listing of gaming-related transactions cuts against treating them as federally sanctioned. A third group of courts assumes these contracts are swaps and still finds no preemption, reasoning that the CEA preserves a role for state law and that Congress did not clearly displace state gambling authority.

Because the outcome depends on these framing choices rather than on the product itself, a platform's legal exposure depends on which court it lands in, not on what it offers. That has a real practical consequence: there is no reliable national answer to point to when considering whether to do business in or with prediction markets, and we do not expect a consensus soon.

Minnesota Went the Furthest, and Its Law Reaches Advertisers and Vendors

Most states have responded to prediction markets by applying their gambling statutes already on the books and asking courts to treat event contracts as bets, which is what produced the litigation described above. Minnesota instead wrote a statute aimed specifically at prediction markets. In May 2026, Governor Tim Walz signed the first outright state ban on prediction markets, codified at Minn. Stat. § 609.7615.

Two things make Minnesota’s approach unique. First, the new law defines a prediction market by the subject matter of the contract, rather than by how it trades or settles, listing categories such as sports, elections, government decisions, lawsuits, deaths, pop culture, and even whether someone will say a particular thing. Because the definition turns on the topic of the contract rather than on how the platform is licensed, there is an argument that a CFTC registration alone may not take a product outside of the Minnesota law’s scope. Second, it makes certain conduct a felony and reaches well beyond the exchange itself. Companies that process payments, verify a user’s location, supply data, or act as counterparties[13] can all be covered where those services are provided to the prediction market. Advertising is a separate felony, covering anyone who markets products that promote prohibited transactions. Depending on how broadly this is interpreted, this could reach influencers, affiliate partners, advertising agencies, publishers and platforms. The statute does not reach individual users.

The CFTC sued the day after the bill was signed, and on July 27, 2026, a federal court blocked the law from taking effect against CFTC-registered exchanges while the case proceeds.[14] But the ruling is narrow. The court found that the law probably conflicts with federal authority as to some contracts and said plainly that it may not be preempted "in all respects." The Court’s examples are instructive: a contract on a Senate election has obvious economic consequences and looks like a financial instrument, so it conflicts with federal authority, while a contract on which couple wins a reality dating show does not conflict. The takeaway from this Court’s ruling is not that state bans will always fail. It is that a court may see a single platform as offering some contracts that federal law likely protects, and others that it likely does not. 

Private Lawsuits May Be the Most Consequential Development

The newest front is private litigation. Unlike the state and federal matters discussed elsewhere in this post, these private action cases do not depend on a regulator deciding to act, and they offer a potential route by which a company that is not an operator may be exposed to liability.

Proposed class actions were filed against DraftKings in Massachusetts federal court in late July[15] and early August[16] 2026, alleging that its prediction product is effectively its sportsbook offered in states where it holds no license. DraftKings says its offering complies with federal law. Nothing has been decided.

A South Carolina suit filed in July 2026 is more unusual and worth understanding. The plaintiff relies on an old state statute, S.C. Code Ann. § 32-1-20, that lets any person sue to recover someone else's gambling losses and collect triple that amount. The Plaintiff named not just the platforms but also the exchanges, clearinghouses, and trading firms that provide liquidity.[17] Whether the claim will succeed is unclear. The lesson is that in some states these statutes may allow private plaintiffs to sue without waiting for a regulator to act, and those lawsuits can potentially reach service providers and counterparties over which a gaming authority has no direct authority.

States Are Using More Than One Tool

Minnesota may be the strongest example, but the broader point is that states are not relying on any single approach to challenge these products. Attorneys general are suing directly: Rhode Island's Attorney General sued Kalshi and Polymarket in May 2026, seeking a declaration that their sports contracts are gambling under state law, plus an injunction and disgorgement of profits. New York's Attorney General went further, filing a special proceeding on July 31, 2026, seeking restitution, disgorgement, treble the company's gains, and a $100,000 penalty for every unauthorized offer of sports wagering. The CFTC has said New York seeks billions in compensatory damages pending an accounting.

Legislatures outside Minnesota have taken up the question, though most have not finished, and not all of them are moving toward prohibition. Other states are choosing revenue over prohibition: New Jersey introduced bills that would have banned election, disaster, and death markets, then narrowed them in committee to a 9% surtax. Kentucky and Illinois have opted for taxes as well.

Kentucky took a different route, imposing a 14.25% excise tax on prediction market operators’ transaction fees, effective January 2027, which the CFTC has challenged, claiming it is designed to push prediction market platforms out of the state.

Nevada shows yet a third approach. After a court ordered Kalshi to stop offering certain contracts in the state, regulators found their own investigators could still place trades from within Nevada. Rather than face contempt, in a July 2026 joint stipulation order, Kalshi agreed to install third-party geofencing by August 12, 2026, or pay $120,000 per day until it did. The lesson from Nevada is that compliance mechanics can carry legal consequences: once a court orders a company to stay out of a state, blocking users becomes a legal obligation, and a geofence that does not actually work creates its own penalties no matter how the jurisdictional fight pans out.

Meanwhile, the CFTC has moved affirmatively against the states to defend what it describes as its exclusive jurisdiction over these contracts, suing Arizona, Connecticut, Illinois, Kentucky, Minnesota, New Mexico, New York, Rhode Island, and Wisconsin, and filing briefs backing that position in several appeals. That has generally worked in the operators' favor, but not always. The CFTC won preliminary relief in Arizona,[18] where a federal judge blocked the state from bringing criminal charges against prediction market operators, and won partial relief in Minnesota.[19] In Wisconsin,[20] a court held the CFTC had not shown these contracts are even "swaps" under the CEA, calling the CFTC's reading of that definition so broad that it was "difficult to imagine any agreement, contract, or transaction that this definition would not cover." Support from the CFTC helps operators, but it does not resolve the preemption question.

The CFTC Is Still Writing the Rules and Testing Its Authority

The CFTC has been building a framework in stages. In March 2026, it issued a staff advisory to exchanges on listing and monitoring event contracts, along with an advance notice signaling possible new rules. In June it moved to actual rule text. A JJune 10, 2026 proposal would establish how the agency decides whether a contract falls into one of the categories Congress told it to scrutinize, including gaming, terrorism, and war, and if so, whether the contract is contrary to the public interest. It would also define "gaming," the term that determines whether sports contracts are covered. A second proposal on June 25, 2026 would add reporting requirements for certain event contracts, which is largely administrative but shows the agency building out day-to-day oversight rather than only defending its turf.

Neither proposal is final, and the first is already contested. When the comment period closed in July 2026, 44 state attorneys general filed a letter arguing the agency lacks authority over sports contracts and should start over. In a separate letter in August 2026, a group of senators asked the agency to restrict contracts tied to wildfires. Whatever the CFTC finalizes will almost certainly be challenged, so the rulemaking is unlikely to resolve the preemption question on its own.

The Commission has not limited itself to rulemaking. Twice this summer it invoked its emergency authority under the Commodity Exchange Act to direct Kalshi to keep operating despite state court orders. In July, after a Michigan court ordered Kalshi to void and refund executed trades, the CFTC ordered the company to fulfill them instead. Kalshi had already unwound the trades, told the court it was in an "impossible position," and ultimately followed the state court. In August, the agency issued a similar order after New York moved for a restraining order that, by its terms, would have barred Kalshi from offering event contracts to anyone, not only to New Yorkers. Whether the Commission can direct a registrant to disregard a state court order is unresolved, and neither order decides it. The practical point is that federal and state directives can now point in opposite directions at the same time, and companies in the middle must choose.

Key Takeaways

The open question is still which set of rules applies, but the risk has changed shape since we last visited this topic. States are now writing laws aimed directly at prediction markets and reaching the companies that support them, courts are reaching opposite conclusions on the same legal question, and private plaintiffs have started suing on their own. With a genuine split among the federal appellate courts, this is likely headed to the Supreme Court, and possibly to Congress. We do not expect these questions to be resolved quickly. In the meantime, companies transacting with these operators should expect the same product to be treated differently from one state to the next and should build diligence processes and commercial agreements that can absorb that variation.

[1] Our previous post explains, in simple terms, what prediction markets are. We recommend reading our previous post before proceeding.

[2] Petition for Writ of Certiorari, Flaherty v. KalshiEX, LLC, No. 26-299 (U.S. Sept. 2, 2026)

[3] KalshiEX, LLC v. Flaherty, 172 F.4th 220 (3d Cir. 2026)

[4] KalshiEX, LLC v. Assad, No. 25-7516 (9th Cir. Aug. 28, 2026)

[5] KalshiEX, LLC v. Schuler, No. 2:25-CV-1165, 2026 WL 657004 (S.D. Ohio Mar. 9, 2026)

[6] Kalshiex LLC v. Williams, No. 25 CIV. 8846 (AT), 2026 WL 2017466 (S.D.N.Y. July 13, 2026)

[7] KALSHIEX LLC v. Cox, No. 2:26-CV-00151-RJS-CMR, 2026 WL 2241564 (D. Utah Aug. 4, 2026)

[8] United States of America v. Wisconsin, et al., No. 26-C-749, 2026 WL 2474512 (E.D. Wis. July 29, 2026)

[9] KalshiEX, LLC v. Flaherty, 172 F.4th 220 (3d Cir. 2026)

[10] Kalshiex LLC v. Orgel, No. 3:26-CV-00034, 2026 WL 474869 (M.D. Tenn. Feb. 19, 2026)

[11] United States v. Minnesota, No. 26-CV-2661 (KMM/DTS), 2026 WL 2150211 (D. Minn. July 27, 2026)

[12] KalshiEX LLC v. Johnson, 832 F. Supp. 3d 954 (D. Ariz. 2026)

[13] A counterparty is a firm that takes the opposite position in users' trades as a business, quoting both a buy price and a sell price so a user can trade right away instead of waiting for another user who wants the opposite outcome. Market makers and liquidity providers often play this role. Minnesota's statute reaches those who do it "regularly or continuously." Minn. Stat. § 609.7615, subd. 2(3)(iv).

[14] United States v. Minnesota, No. 26-CV-2661 (KMM/DTS), 2026 WL 2150211 (D. Minn. July 27, 2026)

[15] Chan v. DraftKings Inc. et al, Docket No. 1:26-cv-13442 (D. Mass. filed Jul 28, 2026)

[16] Gordon v. DraftKings, Inc., No. 1:26-cv-13525 (D. Mass. filed Aug. 3, 2026)

[17] Hughes v. DraftKings Inc., No. 2:26-cv-06768 (C.D. Cal. filed July 16, 2026)

[18] KalshiEX LLC v. Johnson, 832 F. Supp. 3d 954 (D. Ariz. 2026)

[19] United States v. Minnesota, No. 26-CV-2661 (KMM/DTS), 2026 WL 2150211 (D. Minn. July 27, 2026)

[20] United States of America v. Wisconsin, et al., No. 26-C-749, 2026 WL 2474512 (E.D. Wis. July 29, 2026)

Originally published by InfoLawGroup LLP. If you would like to receive regular emails from us, in which we share updates and our take on current legal news, please subscribe to InfoLawGroup’s Insights HERE. This summary does not constitute legal advice.