The Smoking Gun in Sports Event Contracts Litigation
How a shaky “event vs. outcome” split threatens state victories and strengthens Kalshi’s appeal chances
Are the states finally turning the tide in prediction market litigation? After starting 0-2 with losses in Nevada and New Jersey, the states notched a win in Maryland. Then, Judge Gordon reversed himself in another Nevada case (Nadex d/b/a crypto.com) and the MA case was remanded to state court. Kalshi managed another victory in CA against the tribes, avoiding a preliminary injunction, but soon faced another setback when Judge Gordon leveraged the Nadex ruling and dissolved the original Nevada injunction. This leaves New Jersey as the only jurisdiction where Kalshi prevailed–though that case may yet lead to a significant win in the Third Circuit.
The Third Circuit’s Shadow
Unsurprisingly, every lower court ruling finds its way into the Third Circuit appeals docket. First, the state cited Nadex; Kalshi countered with the Blue Lake Rancheria (the tribes’ case); the state struck back with Kalshi (the dissolution of the preliminary injunction in Nevada). Validation matters–in social media, academia, business and especially in law. Both sides jockey for advantage by citing decisions across circuits.
Here’s the catch, though: Both of the state’s citations come from Nevada, specifically Judge Gordon. He has now authored three opinions, giving his words outsized influence. Legal victories often ride the wave of momentum, and right now that momentum leans toward the states–largely due to Judge Gordon’s Nevada rulings. His reasoning could shape the future of sports gambling in America.
Reading Between the Lines
Yet, when scrutinized, those Nevada decisions feel… forced. Ideally, judges set aside personal preferences and follow the law. Cynically, some decide first and backfill with case law. Is it possible that Judge Gordon dislikes Kalshi and perhaps even subconsciously shapes his rulings? To be clear, Kalshi’s story is certainly muddled, and much of its business model is questionable. Polymarket suffers similar flaws, though Shayne Coplan at least avoids pretense. Still, Kalshi’s inconsistent statements don’t negate its potential to prevail on the federal preemption argument.
For states to prevail in the fight against prediction markets, they must win on preemption. That requires developing arguments around a minimum of three statutory components:
Event vs. outcome
Financial, economic, or commercial consequence
Excluded commodity
History vs. Text
Does historical context matter? The states seem to think history favors them, but we disagree. The federal preemption “dog” has been barking for decades–from Congress to the CFTC, from legal practitioners to academia. On history, Kalshi seems to hold the upper hand.
History only goes so far, though. Ultimately, the statute’s text governs. This week, we begin dissecting Judge Gordon’s distinction between “event” and “outcome.” It’s one of the Jenga blocks propping up his tower–and under scrutiny, it appears ready to topple.
We’ll make our case through:
The practitioner view
The CFTC view
The “smoking gun” - 2000 proposed CFTC rulemaking1
Significant line-drawing problems
The Practitioner View
Is the distinction between “event” and “outcome” tenuous? We think so. Andrew Kim wasn’t convinced either (when the Nadex decision came out):
Practitioners looking at this language, even before Dodd-Frank, did not believe “event” and “outcome” were two different things either: For example, Paul Architzel, the architect of the CFMA and retired partner and senior counsel at WilmerHale, in 2006:
A broad interpretation of “excluded commodity” might include betting transactions on sporting and other events. Wagers on sporting events might satisfy the definition because, absent chicanery, the occurrence or contingency is not within the control of the parties to the relevant contract and the outcome may be “associated with an economic consequence,” i.e., a payout to the winner. A narrower interpretation would require the associated financial commercial or economic consequence to be other than a payment to the winning counterparty on the contract itself. However, even under the more restrictive reading, it could be argued that there are general economic consequences that could be associated with the outcome of high-visibility sporting events. (emphasis added)
Or, Michael Philipp, retired partner at Morgan Lewis, in 2007:
Parsing the literal language of the statute, it appears that the definition of an excluded commodity includes an occurrence, read—an “event,” or a contingency, read — a possibility or probability of an event, associated with a “financial, commercial or economic consequence,“ read—an outcome that has an economic impact. Does that open the door to commodity futures or options contracts based on a wide variety of corporate events, political or social events, or entertainment or sports events that have an economic consequence? (emphasis added)
In the scholarly analysis, these practitioners didn’t meaningfully separate “event” from “outcome.”
Andrew Kim also flagged a factual error: In dissolving Kalshi’s injunction, Judge Gordon claimed the statute does not include the word “event.” In fact, it appears twice, once in the main header and again in the sub header:
The state’s victory may feel satisfying, but it rests on thin ice. As Kim noted in this video, this distinction is a trap for the states.
The CFTC View
2008 - CFTC Requests Public Input on Possible Regulation of “Event Contracts”:
During the past several years, the CFTC has received numerous requests for guidance involving the trading of event contracts. These contracts typically involve financial agreements that are linked to events or measurable outcomes and often serve as information collection vehicles. (emphasis added)
2008 - The Event Markets Concept Release:
A significant number of event contracts are structured as all-or-nothing binary transactions commonly described as binary options. Binary event contracts typically pay out a fixed amount when an outcome either occurs or does not occur. (emphasis added)
2021 - Former Commissioner Brian Quintenz:
The statutory definition of a commodity includes “…an occurrence, extent of an occurrence, or contingency…that is 1) beyond the control of the relevant parties to the contract…and 2) associated with a financial, commercial, or economic consequence.” Since practically any event has at least a minimal financial, commercial, or economic consequence, all events are commodities. Because of this definition, any contract on the outcome of a future event would be considered a commodity futures contract, and, pursuant to the Commodity Exchange Act (CEA), is required to be traded on a registered Designated Contract Market (DCM). (emphasis added)
Across decades, the CFTC consistently treated “event” and “outcome” as intertwined. This casts serious doubt on Judge Gordon’s reasoning surviving appeal.
The “Smoking Gun” - 2000 proposed CFTC rulemaking
In June 2000, the CFTC proposed some rulemaking (PDF):
Also included in this category are contracts that are settled in cash based upon the outcome of a contingency, such as a recurring or nonrecurring event, a specific incident, a natural phenomenon or the unambiguous results of some other condition that gives rise to a hedgeable risk. It is not intended to include contracts based upon a cash-settlement price determined through cash-market trading of any physical commodity or financial instrument, but rather contracts based on the objectively determined results of an outcome, occurrence, or event that is beyond the control of the parties involved in the contract or the entity where trading occurs. (emphasis added)
For the most part, the proposed rules ended up being withdrawn. So, why is this pivotal?
Contemporaneous: It predates the CFMA’s signing and offers us a window into the CFTC’s thinking at the time.
Aligned Language: Mirrors the excluded commodity definition later codified in the CFMA and echoed in Dodd-Frank.
Authorship: The contact listed was Paul Architzel–the same architect (PDF) who later reinforced this interpretation in his industry publication (see the discussion above).
Together, these points lead to one conclusion: The CFTC, and by extension, Congress (the CFTC’s new regulatory framework is what ultimately became the CFMA) did not view “event” and “outcome” as distinct. This discovery strengthens the case for federal preemption–and may soon surface in litigation.
Significant Line-drawing Problems
Judges dislike arguments without a limiting principle. If “event” is not an “outcome,” and sports event contracts are not swaps, what happens to election contracts or other contracts that resolve on outcomes of events? Judge Gordon never truly answered that question. That silence is a substantive opportunity for prediction markets and Kalshi is already exploiting it whenever it can.
Oct 16 - Letter Response (PDF) to New Jersey (re: Nadex) (Third Circuit)
Kalshi focused almost entirely on the event vs. outcome distinction. They made a dictionary point, cited the CFTC (2024 proposed rulemaking on event contracts and the 2008 Event Contracts Concept Release), and advanced an internal statute-consistency argument. Their most compelling point, arguably, was the one that catered to common sense:
Nadex’s holding would create intractable problems. Many quintessential swaps could be framed as turning on outcomes; almost any event is the outcome of another event. The rise in corn prices underlying a swap could be reframed as the outcome of a drought. The default underlying a credit-default swap could be reframed as the outcome of a downturn. The CFTC’s exclusive jurisdiction does not turn on this purely semantic distinction.
Oct 31 - Response to Nevada’s Motion to Dissolve (PDF).
Dec 2 - Letter response (PDF) to New Jersey (re: Kalshi) (Third Circuit)
In its letter, Kalshi repeated the dictionary point, continued to cite the 2024 rulemaking, dropped the 2008 concept release and highlighted various conflicts:
Hendrick (Op.11) adopts Nadex’s flawed holding that an “outcome” cannot be an “event” or “contingency.” This extratextual position is contradicted by the CFTC. See 89 Fed. Reg. 48,968, 48,969 (June 10, 2024) (“event contracts are” a type of derivative “based on the outcome of an underlying occurrence or event”). It is also contradicted by dictionaries. See, e.g., Event, Random House Webster’s Unabridged Dictionary (2d ed. 2001) (“the out come, issue, or result of anything”); Contingency, Merriam-Webster’s Collegiate Dictionary (11th ed. 2003) (“something liable to happen as an adjunct to or result of something else”); see ECF No. 85. And it is irreconcilable with state gambling laws. E.g., NRS § 463.0193 (defining wagers on “sporting events” to include wagers on outcomes).
→ Curious omission: Kalshi dropped the common-sense line-drawing argument it made in October. We believe that argument exposes the core problem more effectively than dictionaries or fragmented statutory parsing. In any event, Kalshi went right back to it:
December 3 - Hot Off the Presses - Kalshi’s Connecticut Complaint (PDF)
Setting aside Kalshi’s sports-event contracts, DCP’s cease-and-desist letter suggested that all of Kalshi’s event contracts are unlawful because Connecticut law “prohibits gambling,” defined as “risking any money, credit, deposit or other thing of value for gain contingent in whole or in part upon lot, chance or the operation of a gambling device,” and Kalshi’s actions do not “fall within any of the excepted activities to the prohibition on gambling.” Id. at 1 2 (quoting Conn. Gen. Stat. § 53-278a). DCP’s theory is that all event contracts amount to unlawful gambling, even though the CEA clearly authorizes event contracts and subjects them to the CFTC’s exclusive jurisdiction.
This is bait! SBCAmericas pointed out that Massachusetts’ cease-and-desist targets only sports event contracts, but that’s not the point. The real issue, as Andrew Kim flagged, is the trap: a line-drawing issue the states are walking straight into. States and tribes may be celebrating, not realizing that if sports event contracts are not swaps, then most (if not all) event contracts are not swaps either. That logic hands jurisdiction over commodity futures trading (for event contracts) to the states–and wait a minute, wasn’t the whole point of the Commodities and Futures Trading Commission Act of 1974 to prevent exactly that kind of state encroachment into federal territory?
This is quicksand. States/tribes need to get out of that thinking and shift into gaming/economic purpose arguments immediately. Otherwise, they may win some battles, but they will likely lose the war.
What About Judge Gordon’s Analysis?
Unanswered limiting principle questions: Judge Gordon never truly addressed the implications of his event vs. outcome analysis on election markets–or other event contracts. That could mean he considered it and didn’t like the implications, or he simply just didn’t go there.
Appellate pressure: The key question is whether the Third, Fourth, Ninth Circuits or SCOTUS will confront this simple inquiry. If any does, it could undermine the foundation of Gordon’s analysis.
Where the Balance Could Shift
Potential tilt back to DCMs: If appellate courts focus on the apparent lack of a meaningful limiting principle and engage with the election markets (or other event markets) comparator argument, the balance could shift toward Kalshi and other DCMs.
Two more hurdles remain: Even then, the prediction markets must still win on:
Financial, economic, or commercial consequence
Excluded commodity2
We’ll tackle those two in future posts.
A Caution for State-side Proponents
Avoid premature victory laps: States, tribes and attorneys aligned to those positions should set aside their dislike of Kalshi (to the extent that may be a factor) and consider the federal jurisdiction implications holistically, basing them on legal analysis alone.
The bigger picture: If states, tribes, the AGA and the like press too hard on federal preemption and lose, they may lose more than they could afford. Perhaps it’s time to consider the possibility that they might not regain sports betting (including Nevada), but if prediction markets are denied what they never had in the first place (nationalized sports gambling), they would still have their casinos–and in the absence of sports wagering, some demand may return to casino floors. That’s not as good an outcome as keeping sports betting, but it’s better than the casinos competing with sports betting on federally regulated exchanges.
Strategic takeaway: Winning on a brittle distinction risks losing long-term differentiating ground (state-regulated casino gambling). The law needs a coherent limiting principle, not semantic slicing that collapses under the election markets (or other event markets) comparator.
At bottom, the fight over sports event contracts is less about semantics and philosophy than about the structural integrity of federal jurisdiction. Judge Gordon’s attempt to pry “event” from “outcome” creates a line-drawing problem that courts cannot ignore, especially when election markets loom as the obvious comparator. History, statutory text and common sense all point in the same direction: Congress never intended to split hairs here. If higher courts confront that reality, the states’ momentum may evaporate and Kalshi’s federal preemption argument could regain traction.
In the end, the real “smoking gun” may be that the states’ strategy risks collapsing under the weight of its own distinction.
To the best of our knowledge, this has not been mentioned anywhere else, yet. But so many briefs have been filed, it is possible that it was buried somewhere and we missed it. If so, let us know, and we’ll gladly correct the record.
Technically speaking, prediction markets need to win either the swap or the excluded commodity argument, and not necessarily both. Given how similarly the relevant statutes are constructed, we believe it’s likely that a win for one will translate to a win for the other.