KEY TAKEAWAYS
- A federal judge denied Novig’s request for a preliminary injunction against New York on Nov. 10.
- The judge’s order criticized the Commodity Futures Trading Commission (CFTC) for “contradictory”, “collusive”, and “calculated” actions in its rulemaking and its emergency order interventions.
- Novig immediately appealed the decision to the Second Circuit, which ruled against Kalshi in New York earlier in November.
A federal judge in New York rejected Novig’s petition for a preliminary injunction against state authorities on Tuesday, issuing an order that also criticized the Commodity Futures Trading Commission (CFTC) for “contradictory” and “collusive” actions.
In a 35-page opinion and order issued Nov. 10, U.S. District Court Southern District of New York Judge Colleen McMahon denied Novig’s motion for temporary relief against New York Attorney General Letitia James and members of the New York State Gaming Commission (NYSGC).
Novig sued James and the NYSGC in August shortly after launching its sports prediction market platform in the state, asking the court to block potential Empire State enforcement efforts.
Immediately after the court denied its injunction request, the company appealed the ruling to the U.S. Court of Appeals for the Second Circuit.
Judge says court will not ‘disregard common sense’
Judge McMahon agreed with New York authorities’ assertion that Novig’s sports contracts are not “swaps” as defined by the Commodity Exchange Act (CEA) and instead are equivalent to sports betting without a state license.
She denied Novig’s injunction petition, ruling that New York can apply its gambling laws by either requiring the company to obtain a state gambling license or by forcing it to shut down sports contracts in the state.
The judge pointed to Novig’s own words in the rationale for her decision.
“Novig and its CEO have loudly and repeatedly proclaimed that: ‘Our north star is to be the largest sports betting platform in the
world’,” wrote McMahon. “… The Court is not required to disregard common sense – Novig’s sports event contracts are sports betting.”
McMahon added that when Congress drafted the CEA, it did so to regulate financial activity like hedging against corn futures, “not consumers betting on Thursday Night Football.” Even if sports contracts were deemed to qualify as swaps, she opined, federal law would not necessarily override New York gambling law.
When a sportsbook is just a sportsbook
Novig argues that its contracts inherently differ from sports wagers because, among other things, the peer-to-peer trading model means there is no “house”, instead allowing users to buy and sell contracts against one another in a system wherein the prices change based on market activity.
McMahon dismissed that argument, writing that those nuances do not make the typical user experience or perception of sports prediction markets trading functionally different from betting on an against-the-house sportsbook.
She added in a footnote in her opinion that Novig makes its money, “not off the sucker who places a losing bet on a sports event, but by charging two suckers a fee for the privilege of betting against each other on its platform.”
McMahon: Novig contracts, FanDuel bets ‘identical’
Ultimately, the judge opined, Novig offers sports betting, even if the company and the CFTC call the product something different.
“The reader will be ‘shocked, shocked’ to learn that Novig’s sports event contracts bear more than a passing resemblance to sports betting,” read part of the opinion. “Consumers can place identical wagers on all of these event outcomes on traditional sports betting apps like FanDuel and BetMGM.
“From the perspective of the customer, there is no qualitative difference between Novig’s product and FanDuel’s traditional sports bet … Who is on the other side of the bet is simply not a difference that makes a difference.”
She wrote that if Novig really does want to operate nationally as a sports platform, “it can pursue an operating license in every state that permits sports betting”, noting that FanDuel offers its sportsbook product in 24 states.
NY judge: CFTC emergency order ‘smacks of a collusive effort’
McMahon also appeared to take aim at the CFTC within her Novig ruling.
First, she called the federal agency’s rulemaking contradictory, pointing to the fact that its Notice of Proposed Rulemaking asserted that CEA “swaps” include sports-event contracts, while its Interim Final Rule published the same day stated that casino-style products, including “sports-wagering contracts entered into on a sportsbook and casino games”, are not swaps.
McMahon added that “it is impossible to escape the conclusion” that traditional casino-style transactions would also classify as CEA swaps if the court were to accept Novig’s definition of the term. She added that the CFTC’s statements on sports transactions “are inherently contradictory and cannot be reconciled.”
“Furthermore, the Commission’s sudden change in its longstanding position that sports wagering activity is the province of states appears calculated to influence the outcome of the ongoing litigation on this very issue,” she added.
McMahon also criticized the emergency order issued by the CFTC in August, wherein the commission directed Kalshi to continue operating despite the state’s orders to stop. In Novig’s petition for an injunction in New York, the firm argued that the CFTC directive presented it with “an irreconcilable conflict between state and federal law.”
The judge wrote that the Kalshi order “smacks of a collusive effort between a regulator and regulatee to generate a claim for conflict preemption,” which her court rejected.
Second Circuit already ruled against Kalshi
Novig appealed McMahon’s ruling to the Second Circuit a week after a three-judge panel in the appeals court ruled unanimously that Kalshi was not entitled to a preliminary injunction in its own litigation with New York.
The circuit court also rejected Kalshi and Coinbase’s respective petitions in Connecticut.
The Second Circuit ruling, which followed similar rulings in favor of states from the Sixth and Ninth Circuits, opened the door for New York officials to pursue further enforcement actions against Kalshi.
