Developing A Manhattan Judge Ruled That Novig's Contracts "Are Sports Betting." Her Best Evidence Was a Rule the CFTC Wrote Last Month to Help the Exchanges.

Editor's note: TrueEdge Wire's owner also builds odds tools, including a paid add-on that shows exchange prices and names Novig among its venues, and earns affiliate commissions from sportsbooks. We have argued in this space against criminalising federally licensed exchanges. Read what follows with that in mind.

Judge Colleen McMahon of the Southern District of New York on Tuesday denied Novig a preliminary injunction against the state's attorney general and gaming commissioners, holding that the exchange's sports contracts "are not 'swaps' within the meaning of the Commodities Exchange Act, so New York can apply its gambling and sports-wagering laws." We downloaded the 35-page opinion and read all of it. The sentence that will be quoted for years is on page 29: "The Court is not required to disregard common sense – Novig's sports event contracts are sports betting."

That line is not the news. Courts in Nevada, Connecticut and the Sixth and Ninth Circuits have said versions of it. The news is how she got there. The single most useful piece of evidence in the opinion is a regulation the Commodity Futures Trading Commission issued in October, in the middle of this litigation, on the exchanges' side.

The rule that was supposed to help

On October 19 the CFTC published two documents on the same day. One was a proposed rule defining "swap" to include "sports-, politics-, cultural-, and weather-related" event contracts. The other was an Interim Final Rule codifying what the agency called its "longstanding position that casino-style gambling products, including sports-wagering contracts entered into on a sportsbook and casino games, are not swaps and do not fall within the CFTC's jurisdiction." We wrote about the pair when it was first released on October 9. The design was plain enough: bring the exchanges in, keep DraftKings out, and answer the objection that calling a point spread a swap would turn every sportsbook in America into an unregistered derivatives dealer.

Novig filed the rules with the court on October 12 as supplemental authority. McMahon read them and used them against it.

Only the Interim Final Rule has legal effect; proposed rules, she notes in a footnote, have none. So the one binding statement the agency has made is that a sports wager at a sportsbook is not a swap. Then she asks what separates that wager from Novig's contract, and observes that the agency never said: "The CFTC did not identify any differences between sports-related event contracts and sports-wagering contracts, such that one would qualify as a 'swap' while the other would not." Her own answer, on page 23: "From the perspective of the customer, there is no qualitative difference between Novig's product and FanDuel's traditional sports bet. The only difference is who is on the other side of the contract." And then the conclusion that should worry the agency most. The two documents "are inherently contradictory and cannot be reconciled," and the change of position "appears calculated to influence the outcome of the ongoing litigation on this very issue. Litigation positions are not entitled to any deference at all."

She closes the loop six pages later: since the CFTC has disclaimed any intention to regulate traditional sports betting, and since she sees no practical difference between the products, "the Commission must intend that New York can regulate the betting activity inherent in Novig's operation." The agency's carve-out for sportsbooks became the court's reason to treat the exchange as one.

What she looked at

The opinion does not argue in the abstract. McMahon opened Novig's app on November 5 and describes it. For last Sunday's Giants-Eagles game it offered "Game Lines," "Featured Parlays" and "Player Props." A featured parlay called "No One Saw This Coming" needed the Browns, Dolphins, Jets and Eagles to win; it carried "a whopping 111.11x payout," so that $100 would return $11,111.11 "in the highly unlikely event that all four of these teams won their games (they did not; in fact, they all lost)."

She quotes Novig's own marketing, from exhibits New York filed: "Our north star is to be the largest sports betting platform in the world." "The federal government legalized sports betting in all 50 states under a financial regulatory exchange framework." "Our mission is to democratize and financialize sports betting." She notes that Novig held a Colorado sportsbook licence in 2023 and handed it back. And on the hedging rationale that every exchange brief leans on, she writes that Novig "offers only hypotheticals, not a single real-world example of a business' hedging by purchasing a sports event contract." Congress, she says, wrote the statute to regulate "hedging against corn futures, not consumers betting on Thursday Night Football."

There is a footnote on the exchange model that Novig's lawyers will not enjoy: the company 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."

"Collusive," and a regulation still on the books

Novig also argued conflict preemption, pointing to a CFTC order of August 11 that directed Kalshi to keep its exchange operating as normal while New York sought a restraining order against it. McMahon's response is as harsh a sentence as we have read from a federal judge about the agency in this fight: the order "smacks of a collusive effort between a regulator and regulatee to generate a claim for conflict preemption."

She adds a point that has gone under-reported. The CFTC regulation currently in force, 17 C.F.R. § 40.11, still prohibits listing event contracts that relate to gaming. The June proposal to change that is, again, only a proposal. So under the agency's own effective rules, she writes, the supposed clash between federal and state law "is a mirage; in fact, they are complementary in that they both disapprove of unlicensed gambling via sports event contracts."

The geofence she recommends and the one the CFTC forbids

On page 34 the opinion calls Novig's impossibility argument "ridiculous" and lists what the company could do instead: get a New York licence, and "implement geofencing so that it serves only customers who are physically in New York."

Six days ago the CFTC told every exchange that lists event contracts to do the opposite. Its November 5 interpretation of the impartial-access rule gives exchanges 30 days to drop domestic location-based restrictions or explain why they cannot. The opinion's procedural history runs through November 5 and does not mention that document. We do not know whether it was put before the court. What we can say is that a federal judge has now told an exchange it may fence a state, within a week of its regulator saying fences must come down, and the Second Circuit will have both in front of it.

The line the exchanges should want kept

We think McMahon is right about the product and about the agency's tactics, and that still leaves something in this opinion for our side of the argument. She holds in the alternative, "in the event that a higher court disagrees with my assessment," that even if these contracts are swaps, the statute "proscribes state laws that impinge on the CFTC's authority to regulate the licensing and operation of DCMs." Her example is Minnesota, which in May made operating a prediction market a crime; a federal court there found that statute likely preempted in July. "States may not directly regulate the operation or licensing of DCMs themselves," she writes.

That is a narrower protection than the exchanges want and a real one. It says New York may demand a sports-wagering licence for sports wagering. It does not say a state may prosecute an exchange for existing. The difference between those two is the difference between New York's civil case and the criminal ones in Arizona and Utah.

The best argument against her, and where it stops

The Third Circuit read the same words in April and found that sports contracts "fit comfortably within the statutory definition." McMahon agrees with that court on the first half of the test, that a game's outcome is an "event or contingency," and parts with it on whether the event is "associated with a potential financial, economic, or commercial consequence." Her reductio is that Novig's reading would make swaps of "casual bets among friends on local ping pong matches." A defender of the exchanges would answer that the counterparty is not a trivial detail: a book sets a price and profits when you lose, an exchange matches two people and has no stake in who wins, and a market like that produces a price in a way a sportsbook does not.

We find that persuasive as policy and weak as statutory text, which is where she leaves it. The definition turns on the event, and the event is the same whoever holds the other side. The exchanges' stronger ground is the one the CFTC has not finished building: a final rule. Her whole treatment of the October pair rests on one document being law and the other being a proposal. If the swap definition is finalised, that asymmetry goes, and a court would have to confront an agency rule and not a litigating position.

What happens now

Novig filed its notice of appeal the same day, through Sullivan & Cromwell. A Second Circuit motions panel has already denied injunctions pending appeal to Kalshi and Coinbase in three consolidated cases; the opinion says a merits panel will take the question and no argument date is set. Gaming lawyer Daniel Wallach, quoted by The Block, counts 10 federal rulings on sports prediction markets within the Second Circuit, all for the states, and noted that Attorney General Letitia James "could literally cross the street and file a state-court civil enforcement action." She has not, as far as we can find. Casino.org notes that the ruling does not itself order Novig to close in New York. Neither Novig nor the state had commented in the coverage we read.

The same Tuesday, the chair of the Massachusetts Gaming Commission, Jordan Maynard, told a House subcommittee that "we basically have two sets of products that look exactly the same to the end user," InGame reported. A regulator in Washington and a judge in Manhattan reached for the same sentence on the same day.

What would prove us wrong about the October rules: a Second Circuit merits opinion that treats the Interim Final Rule as supporting the exchanges, or a final swap rule that explains the difference McMahon says nobody has explained. Until one of those arrives, the agency's own regulation is the states' best exhibit.