New Jersey’s Case Against Kalshi Questioned by Federal Judges Citing Broad ‘Swap’ Law

The Central Question: What Exactly is a “Swap”?

The entire legal dispute hinges on the definition of a single word: “swap.” Kalshi operates as a Designated Contract Market (DCM) under the federal Commodity Futures Trading Commission (CFTC). The company argues its sports-related event contracts are a form of “swap,” or derivative. As such, they fall under the exclusive jurisdiction of the federal government, a principle known as preemption.

New Jersey, in contrast, argues that Kalshi’s products are nothing more than illegal sports betting in disguise. In March, the state’s Division of Gaming Enforcement (NJDGE) ordered the company to halt its operations. That move prompted Kalshi to file the lawsuit that is now before the appellate court.

The state’s legal team argued that Congress never intended for the definition of a “swap” to create a “massive sea change in gambling regulation.” They contended that Kalshi’s interpretation would effectively turn every casino and sportsbook in the country into a “federal felon” for operating outside the CFTC’s framework.

The judicial panel, however, appeared unconvinced by New Jersey’s narrow interpretation of the law. Chief Judge Michael A. Chagares repeatedly noted that the statutory definition of a “swap” is, in fact, “quite broad.” When the state’s attorney argued that the definition should be limited to instruments that are “inherently financial,” Judge David J. Porter was quick to point out that any such limitation is “not in the statute.” This line of questioning suggested the judges believe their role is to apply the law as written by Congress, not to create new limitations.

A Battle Over Federal Supremacy

The legal arguments delved deep into the complex world of federal preemption. Kalshi’s lawyers argued that the federal government has “occupied the field” of regulating trading on DCMs. This legal doctrine suggests Congress intended to leave no room for state-level interference in this specific area.

New Jersey countered with a powerful legal principle: the “presumption against preemption.” They argued that gambling has been a traditionally state-regulated activity for centuries. Therefore, Congress would have to make an exceptionally clear statement to override that long-standing precedent.

However, the judges seemed to find Kalshi’s arguments on “conflict preemption” more compelling. This doctrine applies when it is impossible for a company to comply with both state and federal law. Kalshi’s legal team presented a powerful case on this front. They highlighted several direct conflicts, including:

• Age Limits – Kalshi, under federal rules, can serve customers 18 and older. New Jersey, however, requires a minimum age of 21 for sports betting.
• Geographic Restrictions – state law would require Kalshi to accept wagers only from within New Jersey. This directly conflicts with the federal requirement that a national exchange provide impartial access to all customers across the country.

“How could we accept bets only from people within New Jersey?” Kalshi’s attorney asked, highlighting the impossibility of complying with 50 different sets of state rules on a national platform. The judges appeared to recognize this operational conflict as a significant legal hurdle for the state’s position.

Reading the Bench: A Skeptical Judiciary

Throughout the hearing, the judges’ questions and comments revealed a clear skepticism toward New Jersey’s position. Chief Judge Chagares repeatedly returned to the idea that if the law’s broad definition of a “swap” creates unintended consequences, it is the job of Congress, not the courts, to fix it.

Judge Porter, meanwhile, pressed the state’s attorney to draw a clear line between a sports bet and a swap, a line the state struggled to define. At one point, to test the boundaries of federal power, a judge even posed a hypothetical about a ping-pong match between the judges themselves.

Legal observers in the courtroom took note of the tone. Andrew Kim, a lawyer who attended the hearing and wrote about it for the Next Event Horizon newsletter, noted that “the wind seems to be at Kalshi’s back.” He observed that the judges were, at various times, “nodding along” with the arguments presented by Kalshi’s attorney.

“Chaos in U.S. and Global Markets”

The implications of the court’s eventual decision are immense. Kalshi has argued that a ruling in favor of New Jersey would not just “strangle a growing industry.” It could also “open the door to states picking and choosing which futures and derivatives contracts are legal.”

The company warned this scenario “puts at risk the $730 trillion global derivatives market that underpins the economy.”

New Jersey is fighting to protect its own significant interests. The state is a leader in the legal sports betting market. A ruling that carves out a large and growing segment of that market for federal oversight would represent a significant loss of both regulatory control and tax revenue.

The case has become a critical front in the broader “Prediction Wars,” as major players like Polymarket, FanDuel, and DraftKings are all exploring their own entries into the space.

A Long Road Ahead

While the tone of the oral arguments may have favored Kalshi, a final decision is not expected to be swift. The case is far from over. Legal experts predict that regardless of the Third Circuit’s ruling, the losing party is likely to appeal. This could potentially send the case all the way to the U.S. Supreme Court.

In the meantime, Kalshi is operating in New Jersey under a preliminary injunction granted by a lower court. The company is not waiting for a final legal resolution to advance its business. It has recently launched new markets on the NFL and forged partnerships with data providers.

The legal battle in the Third Circuit is a critical chapter in the ongoing fight to define the future of wagering in America. It is a conflict that will ultimately determine whether a new wave of federally regulated innovation is unleashed or if the states’ long-standing authority over all forms of gambling will be reaffirmed. As Andrew Kim put it, “we have a long road ahead of us.”