Prediction markets suffered another legal setback on Friday, which could potentially strengthen the ability of states to regulate a fast-growing business that competes directly with traditional sportsbooks.

The Sixth U.S. Circuit Court of Appeals in Cincinnati ruled against prediction-market operator Kalshi on Friday, saying Ohio and Tennessee can apply their gambling laws to its sports-related event contracts.

At the preliminary-injunction stage, the court rejected Kalshi's argument that those contracts fall exclusively under federal commodities regulation and are therefore shielded from state gambling laws.

Kalshi did not immediately respond to Barron's request for comment.

The Third Circuit Court of Appeals in Philadelphia sided with Kalshi in April in a similar case involving New Jersey, saying federal law may block the state from regulating its sports contracts. The Ninth Circuit Court of Appeals in San Francisco went the other way in August in a separate Nevada case, ruling the state could regulate them. The Sixth Circuit has now taken the same position as the Ninth.

New Jersey has already asked the Supreme Court to review the Third Circuit ruling. If the court takes the case, it could decide whether prediction markets are mainly governed by federal rules or must also comply with state gambling laws like conventional sports betting.

Prediction markets allow individuals to speculate on the outcome of events through binary yes/no contracts, such as whether the Yankees will win the World Series or whether the Federal Reserve will raise its benchmark rate.

The ruling has implications beyond Kalshi and other prediction-market exchanges such as Polymarket. (Polymarket has a data sharing partnership with Dow Jones, the publisher of Barron's.)

Brokerages such as Robinhood Markets, Coinbase Global, and Webull all offer or facilitate sports-related event contracts through prediction-market exchanges, and have been caught up in similar legal disputes. The stocks showed little immediate reaction in extended trading.

Prediction markets have become a substantial business for Robinhood. In the second quarter, the company generated $156 million in event-contract revenue, exceeding its revenue from equities trading. Robinhood has warned investors that adverse court decisions could force it to stop offering certain event contracts in individual states or more broadly.

Robinhood did not immediately respond to Barron's request for comment.

The decision could also affect DraftKings and Flutter Entertainment, the owner of FanDuel. Prediction markets have increasingly competed with conventional sportsbooks by offering sports contracts even in states where online sports betting is restricted.

If states gain broader authority to regulate those contracts as gambling, that could protect DraftKings' and FanDuel's existing sportsbook businesses-although both companies have also been expanding their own prediction-market products.