New York-based prediction market operator Kalshi has suffered a significant legal setback as a federal judge ruled that the platform’s ongoing legal battle with the state of Massachusetts must proceed in a state court rather than a federal one. This ruling marks a procedural win for Massachusetts Attorney General Andrea Campbell, who seeks to prevent the company from offering sports-related contracts in the state.

State Court Will Likely Be Less Favorable to Kalshi

The ruling, issued by Judge Richard G. Stearns of the US District Court for Massachusetts, effectively shuts down Kalshi’s attempt to change the jurisdiction of the case to federal court. The conflict will now be settled in the Superior Court for Suffolk County, where state gambling laws will likely take priority. The ruling is not subject to appeal, marking a substantial twist in another legal battle for the emerging prediction market sector.

Campbell’s office took legal action against Kalshi in September, stating that the company’s contracts enabled users to trade on the outcomes of sports games, effectively amounting to illegal gambling. According to Kalshi, its activities fall under the purview of the Commodity Exchange Act (CEA). This distinction means they are regulated by the Commodity Futures Trading Commission (CFTC), which it argues takes precedence over state oversight.

Kalshi’s lawyers contended that the case should remain in federal court since federal law completely preempts states from applying gambling statutes to contracts traded on CFTC-regulated exchanges. However, Judge Stearns dismissed that argument, noting that this law did not fully shield Kalshi from legal challenges by individual states.

Prediction Platforms Face Significant Resistance

This court decision could pave the way for other state attorneys general to challenge Kalshi and similar platforms under state gambling laws. While Massachusetts is the first state to take direct legal action against the company, regulators in Nevada, New Jersey, and Maryland have already challenged the platform in federal court, where Kalshi won an injunction in two of the cases.

Kalshi’s setback highlights the growing friction between state gambling regulators and the federally supervised prediction markets. Some states, such as Pennsylvania and Nevada, have warned that prediction markets operate as “unlicensed sportsbooks” under the guise of financial instruments. Regulators claim such platforms erode existing gaming regulatory frameworks, which rely on strict licensing, frequent checks, and partnerships with sports leagues.

Despite this latest defeat, Kalshi has vowed to continue defending what it describes as a lawful and innovative financial product. Prediction platforms also enjoy substantial political support, as Donald Trump Jr. occupies advisory positions with Kalshi and Polymarket. As prediction markets remain focused on expansion, the legal battle in Massachusetts could shape their future across the USA.