Ninth Circuit Creates Prediction Markets Split

The Ninth Circuit has ruled that the Commodity Exchange Act (“CEA”) does not preempt state gaming regulation of sports event contracts on prediction markets. The decision conflicts with a Third Circuit ruling from earlier this year, deepens an increasingly fragmented regulatory landscape for prediction markets, and makes Supreme Court review all but inevitable.

The Nevada Gaming Control Board ordered a major prediction market platform to stop offering sports event contracts, calling them unlawful wagering under state gaming regulations. A Ninth Circuit panel unanimously held that Nevada’s order should not be enjoined, since the state’s regulations likely were not preempted by the CEA.

Two provisions drove the analysis.  First: CEA § 1a(47)(A)(ii), a Dodd-Frank enactment that brought “swaps” within the CFTC’s exclusive jurisdiction. That provision defines “swaps” as transactions “dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.” The panel held that sports event contracts are not “swaps” under the CEA. The outcomes on which those contracts turn—whether a certain team wins the World Series, how many touchdowns a quarterback throws, or how many points a team scores—are not “occurrences” or “events,” the court reasoned. In addition, several state and tribal statutes expressly govern gambling, and the panel doubted Congress meant for broad CEA terms like “occurrence” or “event” to implicitly preempt regulation of sports event contracts. A contrary reading, it warned, would turn even in-person sports bets into CEA-regulated swaps. The court also questioned whether sports event contracts actually help traders hedge risk.

The court then turned to 17 C.F.R. § 40.11(a), which bars any swap that “involves, relates to, or references . . . gaming.” A separate provision, § 40.11(c), lets designated platforms self-certify that a new contract complies with all CEA and CFTC rules, subject to later CFTC review. The panel held that sports contracts constitute gaming, and thus are barred outright. The self-certification process, it reasoned, cannot override that express prohibition.

The panel also largely declined to engage with the CFTC’s pending rulemaking on prediction markets, which would define “gaming” to include sports event contracts and subject them to public-interest review. That rule is not yet final, the court noted, even though the agency says the proposal simply codifies its longstanding practice of discretionary review.

The ruling complicates an evolving regulatory landscape and clashes with the Third Circuit’s opinion, which took what the concurrence called a “more literalist approach to textualism” in enjoining as preempted New Jersey’s gambling laws. New Jersey has since petitioned the Supreme Court to resolve that question. Similar appeals are pending in the Fourth and Sixth Circuits. Prediction market regulation thus is fast emerging as a lead candidate for Supreme Court review. 

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