Kalshi Illinois Ruling Expands Circuit Split Over Whether Sports Contracts Are Swaps

Judge Martha Pacold of the United States District Court for the Northern District of Illinois ruled on Friday that Kalshi’s core sports event contracts likely qualify as swaps under the Commodity Exchange Act, and issued a preliminary injunction barring Illinois from enforcing its sports-wagering licensing and operational requirements against those contracts while litigation proceeds. The order leaves state wagering fees for later determination and narrows the legal question by requiring that any economic connection to sporting outcomes be "concrete and articulable" rather than merely speculative.

Why the Kalshi Illinois decision matters for kalshi sports swaps and federal preemption

The central legal consequence of Pacold’s decision is practical: if a sporting contract is a swap, the Commodity Futures Trading Commission has exclusive jurisdiction when those contracts trade on a designated contract market, which can preempt conflicting state rules. Pacold concluded the winner and championship contracts at issue likely meet the CEA threshold, allowing Kalshi to assert federal preemption against Illinois’ licensing and operational obligations for those contracts. She explicitly declined to treat all sports-related contracts as swaps.

The district court framed the preemption question this way: Illinois can’t rely solely on the fact that contracts trade on a CFTC-regulated exchange to impose its regulatory regime. "The upshot is that Illinois’s laws are not preempted just because they impact contracts traded on Kalshi’s website," Pacold wrote, while still finding that the specific contracts before her likely clear the statutory bar.

How Pacold’s test differs from the Third Circuit and the Ninth and Sixth Circuits

The decision places the Northern District of Illinois alongside the Third Circuit on the immediate outcome — that certain Kalshi sports contracts can be swaps — but it draws a narrower line than the Third Circuit’s reasoning in KalshiEX v. Flaherty. The Third Circuit held in April that the economic-consequence requirement is satisfied because sporting outcomes can affect sponsors, advertisers, television networks, franchises and communities, noting "The outcome of a sports event certainly can be associated with a potential financial, economic, or commercial consequence." The Third Circuit added that the analysis "need not go further."

Pacold went further. To demonstrate a sufficiently direct link, she used a best-of-seven championship series as an example: if a team leading 3–0 loses Game 4, another game is required, creating additional revenue opportunities for broadcasters, arenas and concession operators. At the opposite extreme she agreed with Coinbase Financial Markets that trivial props — for example a contract on the color of liquid dumped on a coach after a game — would not create the requisite concrete economic connection.

"Broad does not mean unlimited," Pacold wrote, explaining that consequences that are too "tenuous, remote, or peripheral" do not qualify.

Pacold did not set out categorical exclusions for sports props; instead she tethered the swap analysis to the strength of the financial or economic connection.

The competing appeals-court views: Sixth Circuit and Ninth Circuit take narrower lines on sports event contracts

The Sixth Circuit, in a Sept. 25 ruling addressing Kalshi’s challenges in Ohio and Tennessee, held that Kalshi’s sports event contracts are not swaps under the CEA. That court accepted that a sports outcome can be an "event" but found Kalshi’s asserted financial consequences — effects on broadcasters, sponsors or teams — too "attenuated, indirect, and speculative." The Sixth Circuit went further by concluding that even assuming the contracts were swaps, the CEA would not preempt Ohio’s or Tennessee’s gambling laws.

The Ninth Circuit reached a similar bottom-line result in August, rejecting the downstream-effects theory because it would risk making almost any event a swap. The Ninth Circuit also questioned whether some sports outcomes are the kind of "event" the statute contemplates and warned against reading the CEA as quietly giving the CFTC sweeping authority over traditional sports wagering.

Pacold’s ruling therefore creates an intermediate approach: downstream consequences can count, but only if they are sufficiently concrete and material.

What the ruling leaves unresolved and the role of the CFTC and Rule 40.11

Pacold separated the statutory swap question from whether federal rules permit listing particular sports contracts. Illinois argued some Kalshi listings may run afoul of the CFTC’s Rule 40.11, which addresses event contracts involving gaming and similar prohibited categories. Pacold accepted that Illinois "may have a case that Kalshi is impermissibly listing certain contracts," but she said that determination belongs to the CFTC rather than state regulators.

The distinction matters because the CFTC is actively revising Rule 40.11. The Commission told the Ninth Circuit it expects the new Rule 40.11 to become final "within the next two months," a timeline that could soon provide clearer guidance on which event contracts a regulated exchange may list.

Implications for market participants, platforms and pending Supreme Court petitions

The split among circuits means prediction-market operators, exchanges and service providers face legal uncertainty across state lines. Kalshi’s litigation in Illinois involved consolidated challenges by Kalshi, Coinbase Financial Markets and the CFTC and federal government. Coinbase joined the litigation after announcing a partnership to allow users to trade Kalshi-listed event contracts through Coinbase accounts.

The array of decisions has prompted multiple petitions to the Supreme Court. New Jersey seeks review of the Third Circuit’s pro-Kalshi ruling in Flaherty, with Kalshi’s response due 9 November 2026. Separate petitions from Robinhood Derivatives and Crypto.com | Derivatives North America seek review of Ninth Circuit decisions that allowed Nevada to enforce gaming laws against sports event contracts. The Supreme Court has not yet agreed to hear any case, but the competing petitions give the justices multiple routes to resolve the divide.

For now, Pacold’s injunction offers Kalshi interim protection in Illinois for the specific contracts at issue while leaving open both agency-level rulemaking and the broader circuit split that could push the issue to the Supreme Court.

What operators and platforms should watch next

Operators and platform vendors should monitor three immediate developments:

1. CFTC rulemaking on Rule 40.11 and related guidance on event contracts.

2. The Supreme Court’s docket decisions and the timing of responses to the pending petitions, including Kalshi’s November filing deadline in the Flaherty matter.

3. How other district courts treat Pacold’s reasoning if similar preliminary-injunction requests arise elsewhere.

The decision also signals that litigation strategy matters: the courts are dividing on whether to treat downstream economic effects as decisive or merely suggestive. Market participants will track both judicial outcomes and administrative action at the CFTC for a definitive framework.

For regulatory reporting and analysis see recent coverage in the regulation and news sections of this site for background on parallel litigation and CFTC developments.