Overview
Over the past several years, prediction markets have been at the center of an ongoing fight over the boundaries of state and federal regulatory authority. On July 31, for example, the State of New York sued Kalshi for $36 billion, arguing that Kalshi is an illegal gambling platform in violation of state laws.1 While courts continue to grapple with preemption and jurisdictional questions, individual plaintiffs, putative class-action plaintiffs, and regulators are increasingly testing a new theory: whether state consumer-protection laws provide an independent basis for challenging prediction market platforms.
Many prediction market operators have invested in extensive compliance programs focused on trading practices, but recent lawsuits and enforcement actions have started to scrutinize operators' advertising practices, disclosures, product descriptions, and consumer safeguards. These developments reflect a broader trend across the sports-betting and prediction market industries and may shape how consumer-protection theories are applied to these platforms going forward.
Evolution of Consumer Protection Theories in Sports-Betting Litigation
Since early 2025, consumer litigation targeting online sportsbooks, fantasy sports operators, and prediction market operators has expanded significantly. These cases (and similar regulatory actions) highlight how consumer protection theories are evolving, leading courts and regulators to examine a broader range of overlapping legal theories and potential liabilities.
1. Deceptive Promotions and False Advertising Claims
The first type of consumer litigation focuses on traditional deceptive-advertising theories. Plaintiffs have challenged promotional offers such as "risk-free" or "no sweat" bets, bonus bets, deposit-match programs, and similar marketing campaigns under statutes like the New Jersey Consumer Fraud Act (NJCFA),2 alleging that sportsbook operators' advertisements failed to adequately disclose certain promotion terms, such as playthrough requirements and expiration deadlines.3
These claims have gained some traction in the courts. For example, in late 2025, the court in Youngs v. DraftKings, Inc.4 declined to dismiss NJCFA and fraud claims challenging "risk-free" promotions under a deceptive-advertising theory, notwithstanding the existence of terms and conditions describing the promotion's limitations and requirements. At the same time, however, the Youngs court rejected a similar challenge to "no sweat" promotions, finding that the phrase constituted "mere puffery" rather than the type of factual representation allegedly conveyed by the term "risk-free."5
2. Claims Challenging Customer Engagement and Marketing Business Models
The second category of consumer litigation focuses more directly on business models and customer engagement practices. In actions filed in Pennsylvania and Massachusetts,6 plaintiffs alleged that sportsbook operators use targeted promotions, algorithms, behavioral analytics, AI-driven tools, and marketing strategies to identify and target consumers exhibiting signs of gambling addiction. These complaints assert violations of state laws prohibiting unfair or deceptive acts or practices (UDAP), such as Pennsylvania's Unfair Trade Practices and Consumer Protection Law (UTPCPL)7 and Massachusetts Chapter 93A, and also assert claims under common-law negligence, fraud, and unfair-business-practice theories.
Sportsbook operators have responded to such claims by arguing that gambling addiction is a known risk and that operators owe no duty to protect users from their own gambling habits. These arguments have had success, particularly in Macek v. DraftKings, Inc.,8 where the court granted a motion to dismiss claims including negligence and intentional infliction of emotional distress, emphasizing that Pennsylvania law does not recognize a duty of care owed by online sportsbooks to players who may be at risk of developing a gambling addiction, nor does it recognize any duty of care with respect to gamblers' emotional well-being. The Macek plaintiffs have since filed a notice of appeal with the Third Circuit.9
3. Product-Liability Theories
Plaintiffs have also sought to expand consumer protection theories by reframing online gambling products and wagering platforms as defectively designed products. In Massachusetts, plaintiffs have filed numerous cases against sportsbook operators10 alleging that certain features such as micro-betting, push notifications, VIP programs, instant funding mechanisms, and personalized engagement tools are designed in a manner that encourages excessive or compulsive gambling behavior. These complaints invoke traditional product-liability theories, including negligent design, defective design, and failure to warn, alleging that the challenged products are unreasonably dangerous or addictive.
4. "Illegal Product" Theory
The most significant recent development for prediction markets specifically is the emergence of an "illegal product" theory. Rather than alleging that consumers were misled about promotions or product design, plaintiffs have alleged that they were deceived about the legality or nature of the product itself. These claims, asserted under statutes such as California's Unfair Competition Law (UCL),11 California's Consumer Legal Remedies Act (CLRA),12
New York General Business Law §§ 349-350, NJCFA, and similar state consumer-protection laws, contend that sportsbook and prediction market operators falsely marketed allegedly illegal gambling products as lawful prediction markets, event contracts, or trading products.13
Expansion of Consumer Protection Claims to Prediction Markets
In response to the wave of legal challenges from state regulators, prediction market operators have largely grounded their defense in the federal regulatory framework, arguing that the event contracts they offer are not wagers, but federally regulated swaps or derivatives subject to the Commodity Exchange Act and oversight by the Commodity Futures Trading Commission. State-law claims seeking to characterize these products as sports gambling are therefore inconsistent with the federal regulatory framework.
State attorneys general, however, are adapting by incorporating into their enforcement actions the same consumer-protection theories asserted by private litigants. Recent actions by Massachusetts and Kentucky against Kalshi, Polymarket, and VGW14 combine well-worn allegations of unlawful online gambling with broader, more novel claims of consumer-protection violations under Massachusetts Chapter 93A, the Kentucky Consumer Protection Act,15 and similar UDAP statutes. These actions focus not only on questions of legality, but also on allegations concerning misleading product descriptions, consumer confusion, underage participation, self-exclusion failures, and disclosures relating to gambling-related risks. The inclusion of these consumer-protection theories may significantly expand the scope of potential regulatory and litigation exposure for prediction market operators, including those that already provide detailed disclosures regarding contract terms, trading mechanics, and associated risks.
For prediction market operators, the lesson is clear: even if courts ultimately resolve the gambling classification and preemption debates in favor of federally regulated exchanges, consumer protection claims are likely to remain a significant source of litigation and enforcement risk. Prediction markets should expect plaintiffs and regulators to continue advancing these theories, both individually and in combination, with future cases likely to involve allegations relating to advertising practices, consumer targeting, product design, and the legality or characterization of the underlying product. As a result, operators may consider evaluating consumer-protection compliance independently from gambling-law compliance, with particular attention to advertising, disclosures, age-verification procedures, self-exclusion protocols, internal controls, and practices relating to high-risk users.
Steptoe's Sports Integrity Team regularly advises companies navigating this evolving landscape, including by assessing regulatory and litigation risks, evaluating compliance programs, and developing strategies to address overlapping federal and state regulatory scrutiny.
2 New Jersey Consumer Fraud Act, 56:8–1, et seq.
4 Youngs v. DraftKings, Inc., et al., No. 2:25-cv-00179-SRC-JRA, ECF No. 65 (D.N.J. Nov. 19, 2025).
8 Macek v. DraftKings, Inc., et al., No. 5:25-cv-01995-JFL, ECF No. 44 (E.D. Pa. Mar. 23, 2026).
11 Cal. Bus. & Prof. Code § 17200, et seq.
12 Cal. Civ. Code § 1770, et seq.
13 Chan v. DraftKings Inc., et al., No. 1:26-cv-13442, ECF No. 1 (D. Mass. July 28, 2026); Chehal v. Robinhood Mkts., Inc., et al., No. 3:26-cv-03415, ECF No. 1 (N.D. Cal. Apr. 22, 2026); San Diego v. Blockratize, Inc. d/b/a Polymarket, et al., No. 1:26-cv-00973, ECF No. 11 (S.D.N.Y. March 23, 2026); Criswell v. FanDuel, Inc., et al., No. 3:25-cv-10473, ECF No. 17 (N.D. Cal. Feb. 26, 2026); In re Kalshi Sports Prediction Market Litigation, No. 1:25-cv-08585, ECF No. 1 (S.D.N.Y. Oct. 16, 2025).
