Key Highlights:
- Judge McMahon rejected Novig’s argument that federally designated exchange status places its sports contracts beyond New York gambling regulation.
- The court found Novig had not shown its contracts were swaps under the relevant statute and compared its product to traditional sports betting.
- Novig filed a notice of appeal to the Second Circuit on Nov. 10, following other decisions denying interim injunctions in related cases.
Judge Rejects Novig’s Challenge to New York Gambling Regulation
Judge McMahon rejected Novig’s argument that operating a federally designated exchange was enough to shield its sports contracts from state gambling regulators. She found that Novig had not established a likelihood of success on the merits, challenging the premise that federal exchange designation automatically places sports-related contracts outside the reach of state gambling laws.
Why the Court Found Novig’s Contracts Were Not Swaps
McMahon agreed that sporting outcomes qualify as an “event or contingency” under the relevant statute. However, she concluded that Novig’s contracts also had to satisfy a separate requirement: the event needed to be associated with a potential financial, economic or commercial consequence, considered in the context of a law designed to manage price risk.
Novig presented hypothetical examples of businesses using sports contracts to hedge risks, but McMahon wrote that the company had not provided a real-world example. Instead, she found that Novig marketed its product to recreational bettors.
“From the perspective of the customer, there is no qualitative difference between Novig’s product and FanDuel’s traditional sports bet,” McMahon wrote.
McMahon also identified an alternative basis for denying relief. Even if Novig’s contracts qualified as swaps, she said the statute would not displace New York’s ability to apply its gambling laws to betting activity conducted on the exchange.
CFTC Rules Face Sharp Judicial Criticism
The opinion criticized actions taken by the Commodity Futures Trading Commission in October. Those actions included an interim final rule excluding sportsbook bets and casino-style gambling from the definition of swaps, as well as a proposed rule that would include sports event contracts.
The CFTC’s interim final rule draws a structural distinction between exchange contracts and traditional sportsbook wagers. Under the agency’s approach, exchange contracts trade between participants at market-set prices and are centrally cleared, while traditional bets are placed against a sportsbook.
McMahon rejected that distinction as decisive under the statutory test. The two rules “are inherently contradictory and cannot be reconciled,” she wrote, declining to defer to the agency. She also noted that proposed regulations have no legal effect.
The judge separately criticized the CFTC’s Aug. 11 emergency order directing Kalshi to continue operating while New York pursued restrictions. She wrote that it “smacks of a collusive effort between a regulator and regulatee to generate a claim for conflict preemption”—the argument that federal requirements override incompatible state law.
The CFTC had defended its intervention as necessary to preserve orderly national derivatives markets. The agency argued that regulation on a state-by-state basis threatened the functioning of those markets.
Novig Appeals to the Second Circuit
The decision follows the Second Circuit’s Nov. 3 denial of injunctions pending appeal in Kalshi’s New York and Connecticut cases, as well as Coinbase’s Connecticut case. That short order denied interim relief but did not decide the appeals themselves.
Novig has already pursued its next legal step, filing a notice of appeal to the Second Circuit on Nov. 10. The appeal will continue the dispute over whether sports event contracts offered through federally designated exchanges are subject to state gambling regulation and whether federal derivatives law overrides conflicting state requirements.
Why This Matters
The ruling highlights a central regulatory dispute over sports event contracts: whether their exchange-based structure and federal designation distinguish them legally from conventional sports bets. McMahon’s decision indicates that market trading, central clearing and federal oversight may not be sufficient to prevent state gambling laws from applying when the contracts function, from a customer’s perspective, like recreational wagers.
The case also places renewed attention on the CFTC’s differing rules and its intervention in related litigation. Because Novig has appealed, the Second Circuit may provide further guidance on the relationship between federal derivatives regulation, state gambling authority and sports-related financial contracts.
Frequently Asked Questions
What did Judge McMahon decide about Novig’s sports contracts?
She found that Novig had not shown a likelihood of success on the merits and concluded that its contracts did not satisfy the statutory requirements for swaps.
Why did the court compare Novig with FanDuel?
McMahon found that Novig marketed its contracts to recreational bettors and wrote, “From the perspective of the customer, there is no qualitative difference between Novig’s product and FanDuel’s traditional sports bet,”
What happens next in the case?
Novig filed a notice of appeal to the Second Circuit on Nov. 10. The appeal will address the dispute over federal exchange regulation and New York’s authority to apply its gambling laws.
