A lawsuit between KalshiEx LLC (Kalshi) and New Jersey state gaming regulators in the Third Circuit is testing the balance between federal commodities regulation and state authority regarding sports betting.

Kalshi operates as a designated contract market registered with the Commodity Futures Trading Commission (CFTC), offering “event contracts” that allow users to trade on the outcomes of real-world events — including the results of sporting events. These contracts function similarly to bets: users pay to enter positions based on whether a particular event will occur (e.g., the Ravens winning the Super Bowl or the Mets clinching the National League East). Kalshi operates without a license under any state gaming framework.

This model has triggered concerns from multiple state regulators. In early 2025, the New Jersey Division of Gaming Enforcement issued Kalshi a cease-and-desist letter, asserting that its sports contracts constituted unauthorized sports wagering under state law. Kalshi responded by filing suit in March in the U.S. District Court for the District of New Jersey, seeking to enjoin the state from taking enforcement action. Kalshi argued that its event contracts, certified for trading on its CFTC-registered platform, are permitted under federal law and that New Jersey’s enforcement efforts are preempted by the Commodity Exchange Act (CEA).

In April, U.S. District Court Judge Edward Kiel granted a temporary restraining order and preliminary injunction against state regulators, temporarily blocking the state from taking enforcement action against Kalshi’s sports contracts. The court held that Kalshi’s event contracts “fall within the CFTC’s exclusive jurisdiction” and that the CEA preempts New Jersey’s attempt to classify them as unauthorized wagers under its Sports Wagering Act. The court also emphasized the potential reputational and business harm Kalshi would suffer from continued state threats of enforcement — noting that one partner had already declined to list its products in New Jersey. The decision is currently on appeal to the U.S. Court of Appeals for the Third Circuit.

In June, attorneys general (AG) from 34 states, the District of Columbia, and the Northern Mariana Islands filed an amicus brief urging the Third Circuit to reverse the district court’s ruling. Co-led by Ohio and Nevada, the brief centers on principles of federalism, statutory interpretation, and consumer protection.

The AGs argue that:

• Kalshi’s Products Are Indistinguishable From Sports Betting: The AGs reject Kalshi’s contention that it operates merely as an exchange for event contracts. They point out that Kalshi users place wagers on the outcomes of specific sporting events, and that Kalshi charges transaction fees akin to the “rake” taken by a poker room operator from each hand of poker. From the user’s perspective, the platform enables speculation on sports outcomes in ways that mirror traditional sports betting, and Kalshi’s own marketing materials have used terms like “bet” and “sports betting” to describe its offerings.
• Gambling Regulation Is a Core State Power: The brief traces the history of state gambling regulation, from 17th-century colonial prohibitions to modern regulatory regimes in Nevada, Ohio, and beyond. The regulation of gambling, including sports betting, “undeniably qualifies as an area of ‘traditional state responsibility,'” say the state AGs, and federal courts should hesitate before displacing that authority without an unmistakable mandate from Congress.
• Preemption Requires a Clear Congressional Statement: As noted in cases like Bond v. United States, a traditional canon of federalism requires Congress to “speak clearly” if it intends to preempt traditional state police powers. The AGs argue that the CEA contains no such clarity regarding preemption and, in fact, expressly contemplates continued state authority over conduct like gambling.
• Federal Commodity Regulation Is Not a Substitute for State Oversight: The AGs emphasize that the CEA’s exchange regulations were designed for financial derivatives, not consumer-facing sports wagers. The AGs assert that state regulations provide protections for vulnerable consumers, including licensing, exclusion programs, age restrictions, and dispute resolution mechanisms. Under Kalshi’s theory, these state-level safeguards would evaporate if companies simply structure wagers as CFTC-regulated contracts.

Why It Matters

Kalshi’s claims raise questions about the current state-based regulatory structure that governs most sports betting in the U.S. If the Third Circuit upholds the district court’s ruling, it could set a precedent for allowing actors not licensed by the states to bypass state gambling laws by operating under a federal commodities framework. Such a ruling could disappoint state-licensed operators who have invested heavily in compliance, licensing, and responsible gambling programs and impact competition by allowing companies to opt for lighter federal regulatory oversight instead.

For regulators and industry stakeholders alike, this case raises fundamental questions about the future of dual sovereignty in gaming regulation. Can states meaningfully enforce their licensing regimes if federal registration can immunize new entrants from state oversight? Or will courts hold that, even in the digital age, gambling remains a matter of traditional state concern? This litigation will be critical in shaping these outcomes.

Troutman Pepper Locke State Attorneys General Team

	Ashley Taylor – Co-leader and Firm Vice Chair Ashley is co-leader of the firm’s nationally ranked State Attorneys General practice, vice chair of the firm, and a partner in its Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group. He helps his clients navigate the complexities involved with multistate attorneys general investigations and enforcement actions, federal agency actions, and accompanying litigation.
	Clay Friedman – Co-leader Clay co-leads the firm’s State Attorneys General practice and is nationally ranked by Chambers USA for AG Government Relations and in Best Lawyers for Advertising Law. He has dedicated his entire career to state attorney general and federal work, serving for nearly a decade in a senior role and more than 25+ years in private practice. Clay focuses his practice on helping industry-leading companies mitigate the risks associated with state and federal regulatory investigations and associated litigation.
	Chris Carlson Chris advises clients on regulatory, civil, and criminal investigations and litigation. With a background as an assistant attorney general, he provides practical guidance to clients with matters involving state attorneys general and federal regulatory agencies.
	Lauren Fincher Lauren has vast experience handling state attorneys general investigations, navigating complex regulatory compliance matters, and providing strategic counsel in enforcement actions across various industries. She helps clients manage high-stakes regulatory matters and guides them through complex legal landscapes.
	Stephen Piepgrass Stephen leads the firm’s Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group, representing clients in single and multistate enforcement actions, including inquiries and investigations, as well as litigation involving state attorneys general and other state and federal governmental enforcement bodies. He has significant experience handling actions with federal agencies, including the CFPB and FTC, as well as single plaintiff and class action litigation for clients in highly regulated sectors such as financial services, health care, pharmaceutical, and education.
	Michael Yaghi Mike handles high-profile state attorneys general, FTC, and CFPB investigations by advising clients through these complex government inquiries. He assists clients through the entire life cycle of investigations, from regulatory enforcement through formal litigation.
	Samuel E. “Gene” Fishel Gene is a former regulator with two decades of experience who has overseen state privacy and cybersecurity regulation enforcement, led national, multistate attorneys general privacy investigations, and prosecuted computer crimes at the state and federal levels. He has served at the forefront of state attorney general and federal enforcement, and utilizes this experience to proficiently represent client interests.
	Jay Myers Jay assists clients in heavily regulated industries, including health care, energy, insurance, emerging industries, and data privacy. He provides both regulatory legal advice and government relations strategies. Jay’s past and current clients include Fortune 10 companies, startups, nonprofits, industry associations, and advocacy groups. Recognizing that state government matters are often complex and multifaceted, he utilizes regulatory guidance, government advocacy, or both in tandem to deliver tailored solutions for each client’s unique needs.
	Jessica Birdsong Jessica is an associate in the firm’s Regulatory Investigations, Strategy + Enforcement Practice Group. She received her J.D. from the University of Richmond School of Law, magna cum laude, where she served as associate articles editor of the Journal of Law & Technology.
	Blake R. Christopher Blake collaborates with clients on matters related to government contracting, investigations, and disputes. His senior-level government experience generates valuable insights and strategies for clients across a variety of industries.
	Nick Gouverneur Nick is an associate in the firm’s Regulatory Investigations, Strategy + Enforcement Practice Group. He received his J.D. from the University of Illinois College of Law, where he served as a member of the Journal of Law, Technology & Policy.
	Troy Homesley Troy is an accomplished litigator who has represented and defended clients across a wide range of complex, high-stakes disputes at both the trial and appellate levels. He has represented technology companies, business executives, law firms, investment funds, high-ranking federal officials, international non-profits, and asylum seekers. Troy draws on his broad litigation experience to advise clients before litigation arises, while claims are pending or threatened, and leading up to and through trial and appeals.
	Natalia Jacobo Natalia is an associate in the firm’s Regulatory Investigations, Strategy and Enforcement (RISE) practice, based on the West Coast. She routinely counsels clients on a variety of state and federal regulatory matters, with a particular emphasis on consumer protection and data privacy matters.
	Namrata Kang Namrata (Nam) is an associate in the firm’s Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group, based in the Washington, D.C. office. She routinely advises clients on a wide variety of state and federal regulatory matters, with a particular emphasis on state consumer protection laws relating to consumer financial services and marketing and advertising. Nam’s experience transcends multiple industries, including financial services, telecommunications, media, and sports betting.
	Michael Lafleur Michael is an associate in the firm’s Regulatory Investigations, Strategy, and Enforcement Practice Group. Based out of the firm’s Boston office, Mike has deep experience in litigation, investigations, and other regulatory matters involving state-level regulators and state attorneys general.
	Lane Page Lane specializes in federal and state regulatory investigations and complex civil litigation. He focuses on representing financial institutions and other businesses, with a particular emphasis on consumer protection and fair lending issues.
	Dascher Pasco Dascher is an attorney within the Regulatory Investigations, Strategy, and Enforcement practice, based in the Richmond office. She joined our firm after working in personal injury and medical malpractice for a Virginia trial law firm. Dascher brings varied legal experience to the firm with strong litigation and regulatory strategy capabilities.
	Kyara Rivera Rivera Kyara is an associate in the firm’s Regulatory Investigations, Strategy + Enforcement Practice Group. She received her J.D. from the University of Richmond School of Law, cum laude, where she served as publications and online editor of the Public Interest Law Review.
	Trey Smith Trey focuses his practice on representing and advising regulated utilities before state public utility commissions. He routinely helps clients obtain certificates of public convenience and necessity for transmission infrastructure. In this role, Trey works with his clients’ subject-matter experts to manage administrative proceedings, including by preparing initial filings; responding to discovery requests; drafting rebuttal testimony; and litigating any disputed issues.
	Daniel Waltz Dan helps clients navigate all aspects highly regulated relationships between industry participants and federal, state and local governments. Whether engaging with regulators, negotiating transactions or representing clients in the courtroom, he delivers solutions that help his clients achieve their strategic goals.
	Cole White Cole is a member of the firm’s Regulatory Investigations, Strategy and Enforcement (RISE) group. He has a decade of experience working in the attorney general community, having joined the firm from the Wyoming Office of the Attorney General, where he was assistant attorney general.
	Stephanie Kozol Stephanie is Troutman Pepper Locke’s senior government relations manager in the state attorneys general department.