A federal court has blocked Arizona from enforcing its state gambling laws against prediction markets. In an order issued on May 5, 2026, the US District Court for the District of Arizona granted a preliminary injunction — a significant win for the Commodity Futures Trading Commission (CFTC or Commission) and the Department of Justice (DOJ) in their campaign to assert exclusive federal authority over event contracts traded on CFTC-registered designated contract markets (DCMs).[1] The court’s analysis rests independently on three preemption grounds: field preemption, obstacle preemption, and impossibility preemption.
Background
The case arose after the Arizona Department of Gaming sent a cease-and-desist letter to prediction market platform KalshiEX LLC (Kalshi), directing it to “cease gambling operations in Arizona” and threatening criminal charges. Kalshi sued in March 2026 on the grounds that the Commodity Exchange Act (CEA) vests the CFTC with exclusive jurisdiction over contracts trades on registered DCMs. Five days later, Arizona’s attorney general filed a twenty-count criminal information against Kalshi — the first criminal prosecution ever brought against a prediction market platform.
The CFTC and DOJ filed their own action against Arizona on April 2, 2026, arguing that the CEA preempts state enforcement of gambling laws against event contracts traded on DCMs. After consolidating the actions, the court granted the federal government a temporary restraining order and, on May 5, converted it into a full preliminary injunction barring Arizona from enforcing its gambling laws “through any criminal or civil enforcement actions related to event contracts listed on CFTC-regulated designated contract markets.”
The Court’s Analysis
The court framed the case as “a clash between two competing authorities” — the regulation of gambling as a traditional exercise of state police power, and Congress’s regulation of derivatives under the exclusive oversight of the CFTC — concluding that “federal law preempts state gambling laws insofar as they seek to regulate derivatives exchanged on markets regulated by the CFTC.”
- Event Contracts Are Swaps. The court addressed whether the event contracts at issue qualify as “swaps” under the CEA, which defines a swap as, among other things, any contract “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.”
Arizona argued that an “event” refers only to the sporting event itself, not the outcome, but the court rejected this distinction, holding that the statutory definitions are “broad enough to encompass the result of a contest in addition to the contest itself.” On the commercial consequence element, the court declined to require that the underlying event be “determined by a market,” noting that the CFTC and the Securities and Exchange Commission have consistently treated weather derivatives — which likewise have no intrinsic financial value — as swaps, and that event contracts “can be used to offset financial exposure” sufficient to establish the statutory link.
Field Preemption. The court found that the CEA’s grant of “exclusive jurisdiction” to the CFTC over “transactions involving swaps” triggers field preemption, agreeing with the Third Circuit in KalshiEX LLC v. Flaherty, 172 F.4th 220 (3d Cir. 2026),[2] that the “plain meaning” of “exclusive” jurisdiction “necessarily denies jurisdiction” to any entity besides the CFTC. The court further held that the CEA’s regulatory framework is “so pervasive” that it “left no room for the States to supplement it,” and that where a state “seeks to regulate conduct that has been subject to longstanding federal control, the presumption against preemption does not apply.”
- Conflict Preemption. The court also found that Arizona’s enforcement is independently preempted under conflict preemption. The state’s prosecution “stands as an obstacle” to Congress’s purposes because allowing states to prosecute DCM operators would create “the inconsistent regulatory patchwork that Congress intended to avoid.” Impossibility preemption also applies because CFTC regulations require DCMs to provide “impartial access” to their markets, yet Arizona law criminalizes event wagering without a state license, making simultaneous compliance impossible.
The Broader Litigation Landscape
The court acknowledged that the case “does not exist in a vacuum” and that its order “will likely be tested promptly by the Court of Appeals.” The Third Circuit held in KalshiEX LLC v. Flaherty that Kalshi demonstrated a “reasonable chance of success” on preemption grounds, affirming a lower court’s order blocking New Jersey regulators. A decision from the Ninth Circuit is imminent following oral argument in KalshiEX LLC v. Assad. At the district court level, the results have been split.[3]
The decision is part of a broader offensive by the CFTC under Chairman Selig’s leadership. Chairman Selig published a letter to the editor in The Wall Street Journal on May 1, 2026, defending the CFTC’s exclusive jurisdiction and warning that driving these markets offshore “put[s] our information streams at risk of manipulation by foreign adversaries.” The CFTC has now filed lawsuits against Arizona, Connecticut, Illinois, New York and Wisconsin seeking declaratory judgments affirming the Commission’s exclusive authority over event contracts, and Chairman Selig has stated that the agency will “continue to bring lawsuits whenever we see these impingements on our federal authority.”
