For the past year, the regulatory fight over prediction markets has been waged primarily between two camps: the U.S. Commodity Futures Trading Commission (CFTC), which asserts exclusive federal jurisdiction over event contracts as regulated derivatives, and a growing number of states that characterize sports-linked event contracts as unlicensed sports betting. Recent developments have added a new dimension that operators and their distribution partners should be tracking closely. In recent weeks, a major U.S. city and thousands of individual consumers have raised legal claims that do not depend on resolving the federal-preemption question. Baltimore has sued Kalshi and Polymarket under its municipal consumer protection ordinance, the New York City Council has launched an investigation into the industry’s marketing practices, and a wave of consolidated consumer class actions is advancing through federal court.
Each of these actions proceeds on legal theories that are largely independent of the CFTC’s exclusive-jurisdiction dispute—and each raises distinct strategic considerations for the companies involved.
Baltimore’s Consumer Protection Ordinance Lawsuits
On August 13, 2026, Baltimore Mayor Brandon M. Scott and the Baltimore City Council filed two lawsuits in the Circuit Court for Baltimore City: one against Kalshi and its distribution partners and a second against Polymarket and its corporate entities. Both complaints, brought by City Solicitor Ebony Thompson, allege violations of Baltimore’s Consumer Protection Ordinance (CPO) rather than Maryland’s gambling statute. The city’s choice of vehicle is significant from a defense-strategy perspective: it sidesteps the federal preemption fight pending before the Fourth Circuit and attempts to bring these claims under a local regulatory framework that was not designed with prediction markets in mind.
The complaints allege that both platforms allow Baltimore residents to wager on game outcomes, point spreads, player statistics, and other propositions commonly offered by licensed sportsbooks, without holding the license required by the Maryland Lottery & Gaming Control Agency. The city contends that prediction market operators are subject to local consumer protection requirements regardless of how they characterize their products or whether they are subject to federal regulatory oversight. Whether that theory holds—particularly given the CFTC’s assertion of exclusive jurisdiction over event contracts—remains to be tested in court.
The two complaints differ in emphasis. The Kalshi complaint focuses on licensing and age-verification gaps, noting that Kalshi permits users as young as 18 to trade while Maryland requires sports bettors to be at least 21. The Polymarket complaint raises additional product-integrity concerns, alleging inadequate disclosure of risks and contending that the platform’s expanding product menu has features that the complaint characterizes as resembling a traditional sportsbook. Both complaints seek injunctive relief, restitution, disgorgement of profits, and civil penalties of up to $1,000 per CPO violation per day.
In response, Kalshi characterized the suits as an effort to relitigate issues already on appeal before the Fourth Circuit and stated that it operates under the exclusive jurisdiction of its federal regulator. Polymarket argued that prediction markets on CFTC-registered exchanges are governed by federal law. Both positions reflect a core defense theory—that CFTC oversight preempts state and local regulation of event contracts—but that theory has produced sharply divided results in the federal courts, with the Third Circuit siding with Kalshi and the Ninth Circuit reaching the opposite conclusion.
The prediction market suits mark the city’s third application of its municipal consumer protection authority to digital wagering or gaming products in eighteen months and reportedly make it the first U.S. municipality to sue prediction market operators directly. The pattern suggests that municipal enforcement is a growing trend that operators and distribution partners should factor into their regulatory planning.
New York City Council’s Marketing Practices Investigation
On August 12, 2026, New York City Council Speaker Julie Menin announced a formal investigation into the marketing and advertising practices of Kalshi, Polymarket, Coinbase, and Gemini’s Titan platform. Unlike the state’s parallel gambling-law suits, the Council’s inquiry is not examining whether event contract exchanges violate state gambling laws. Instead, it focuses on potentially deceptive trade practices, particularly how these platforms acquire and retain users, including minors. For operators, this kind of legislative investigation can create reputational pressure and lay the groundwork for new regulatory requirements even before any enforcement action is taken.
Speaker Menin sent detailed letters, running up to seven pages and posing more than three dozen questions, to each platform with a fourteen-day response deadline. The investigation centers on concerns, identified by the Council, that prediction market platforms employ marketing practices that may reach young consumers.
The investigation draws on a June 2026 Wall Street Journal analysis of more than 1,100 videos produced by content creators affiliated with Polymarket, which reportedly found that roughly 70% depicted trades on simulated websites without disclosing they were not real. The Council’s letters also ask about undisclosed influencer marketing, fictitious depiction of profitable trades, and the promotion of insider trading. The Council has indicated it will hold a public hearing and is evaluating whether new legislation or other measures are needed, noting that the marketing restrictions governing casinos and licensed online sports betting do not currently apply to prediction markets.
The platforms responded that they look forward to engaging with the Council. Polymarket separately disclosed that it is conducting an audit of active promotional content for compliance with its standards and applicable disclosure requirements. That kind of proactive compliance step can serve both as a risk-mitigation measure and as evidence of good faith in any subsequent enforcement proceeding.
The Private Class Action Track
A parallel wave of private consumer class actions has been building against Kalshi, Robinhood, Polymarket, and DraftKings since late 2025. According to Bloomberg Law, consumers have filed more than a dozen class action lawsuits against these platforms. The suits against Kalshi have been consolidated in the Southern District of New York while parallel Robinhood suits have been consolidated in the Northern District of California. These private actions introduce legal theories and factual allegations that go beyond the government-enforcement tracks described above—and they carry distinct implications for defense strategy.
The consolidated Kalshi complaint, brought on behalf of a proposed nationwide class, alleges that Kalshi operates an unlicensed sports gambling platform accessible to any U.S. resident over 18 and classifies sports bets as ‘event contracts” even in states where sports betting is prohibited. The complaint notes that regulators in Arizona, Connecticut, Illinois, Maryland, Montana, Nevada, New Jersey, Ohio, and Massachusetts have issued cease-and-desist orders or filed suit. Because the class seeks to aggregate claims on behalf of consumers across multiple states, the litigation could generate significant exposure even if the underlying legal theories overlap with those in the government-enforcement actions.
The Robinhood track introduces a theory not present in the government-enforcement actions: several plaintiffs allege that Robinhood allowed users to trade sports event contracts against margin using existing brokerage holdings, exposing customers to losses beyond their original deposits without adequate disclosure. One complaint alleges a named plaintiff lost approximately $400,000. These suits also assert claims under state gambling-loss recovery statutes—a cause of action distinct from the consumer protection and deceptive-practices theories in the Baltimore and New York proceedings—as well as general consumer protection laws such as California’s Unfair Competition Law and common-law unjust enrichment theories. The margin-disclosure allegations have particular relevance for distribution partners that offer event contracts alongside traditional brokerage products, as they suggest that regulators and private plaintiffs may scrutinize how these products interact with existing account features and margin frameworks.
How These Actions Differ from the Federal Preemption Dispute and Why That Matters for Defense Strategy
The federal-state jurisdictional fight over prediction markets remains unsettled. The Third Circuit sided with Kalshi on preemption in April 2026, but the Ninth Circuit created a direct circuit split on August 28, 2026, holding in KalshiEX, LLC v. Assad that Kalshi’s sports-event contracts likely fall outside the statutory swap definition and that Nevada may enforce its gambling laws. Municipal consumer protection claims and private class actions, however, do not depend on resolving that split. This means that operators defending on preemption grounds in one forum may simultaneously need a different defense strategy in another.
The Baltimore CPO claims and the consolidated class actions are not framed as gambling-law claims. They rest on theories of deceptive and unfair trade practices: misrepresenting product legality, failing to disclose manipulation and margin risk, or using fabricated marketing materials. Because these claims are distinct from the gambling-law question, a ruling on federal preemption in one track would not necessarily resolve claims in another. The New York City Council investigation similarly demonstrates that legislative inquiry into marketing practices can proceed independently of the gambling-law question.
Strategic Considerations for Prediction Market Operators, Distribution Partners, and Compliance Teams
These developments illustrate that legal and regulatory activity on the marketing and consumer-disclosure side of prediction markets is now proceeding independently of the federal preemption litigation. The range of enforcement theories in play (municipal consumer protection ordinances, state unfair trade practices statutes, federal class actions, and legislative investigations) calls for coordinated guidance across regulatory, litigation, and compliance disciplines. Companies in this space may wish to consider the following:
- Distribution partners face direct exposure. Baltimore’s Kalshi complaint names its distribution partners as co-defendants, and the consolidated Robinhood class actions proceed independently. Companies distributing event contracts through their own platforms operate in a distinct regulatory posture and have their own consumer protection and disclosure obligations that may be evaluated separately from those of the upstream operator. Experienced counsel can help distribution partners assess whether their existing compliance programs, contractual arrangements, and risk-allocation provisions are aligned with the range of enforcement theories now in play.
- Marketing content requires immediate, structured review. The New York City Council investigation focuses on promotional content, including content the platforms did not produce themselves. Operators should consider auditing affiliate, referral, and creator marketing programs for accuracy and adequate disclosure as well as consider whether existing content review processes and contractual controls over third-party promoters are sufficient to withstand regulatory scrutiny. A structured compliance assessment conducted under the protection of attorney-client privilege can provide both a defensible record and a clear remediation roadmap.
- Disclosure practices should be evaluated proactively, not reactively. The Baltimore Polymarket complaint and the Robinhood margin-trading suits both allege inadequate disclosure of manipulation, insider-trading, and margin risks that exist regardless of how the underlying product is characterized. Disclosure adequacy appears to be a unifying theme across federal, state, municipal, and private enforcement tracks. Companies that can demonstrate robust, current disclosure practices—developed with the benefit of legal counsel experienced in financial-services and consumer-protection regulation—will be better positioned both in litigation and in any regulatory dialogue.
- Private class action exposure requires early, independent assessment. The consolidated consumer suits introduce damages theories not present in the government-enforcement actions, including claims under state gambling-loss recovery statutes and allegations of undisclosed margin risk that reportedly resulted in six-figure individual losses. Because the Kalshi class action seeks to certify a proposed nationwide class, and the Robinhood suits have been consolidated separately in the Northern District of California, operators and distribution partners may face parallel private litigation tracks with distinct procedural timelines, discovery obligations, and settlement dynamics. Companies may choose to evaluate their exposure to these private claims independently of their government-enforcement defense posture—and consider whether early engagement with class action counsel could help shape the litigation before class certification decisions are made.
- Age verification warrants a fresh review. Both Baltimore complaints and the class actions highlight the gap between platforms’ 18-and-over access and states’ typically higher minimum ages for licensed sports wagering. Federal registration as a derivatives exchange may not foreclose scrutiny of age-gating practices under state or municipal consumer protection law. Operators may wish to assess whether their current age-verification protocols are defensible under the most restrictive applicable standard, not just the minimum required by their federal registration—an analysis that benefits from counsel familiar with the interplay between federal derivatives regulation and state consumer protection enforcement.
- A coordinated, multi-track defense strategy is essential and benefits from unified counsel. The Ninth Circuit’s August 2026 decision in Assad created a direct circuit split with the Third Circuit. Supreme Court review is now a realistic near-term possibility. A favorable ruling on federal preemption of state gambling law would not, on its own, necessarily resolve claims framed as deceptive marketing or inadequate risk disclosure under municipal ordinances or state consumer protection statutes. Operators may argue that federal oversight addresses these concerns; plaintiffs and municipalities contend they do not. Companies facing activity on multiple fronts (federal preemption appeals, state enforcement actions, municipal CPO suits, and private class actions) need a defense strategy that accounts for each track’s distinct legal theories, procedural postures, and risk profiles. A legal team with depth across regulatory compliance, complex commercial litigation, and government enforcement can help ensure that positioning in one forum does not create unintended exposure in another.
We will continue to monitor these developments, including the Baltimore litigation, the New York City Council investigation, and the consolidated consumer class actions, as part of our ongoing coverage of the prediction markets industry. Our team brings together practitioners in regulatory compliance, consumer protection litigation, and government enforcement who have been actively tracking these matters since the first wave of state-level challenges.