A federal judge in New York on Tuesday rejected Novig‘s bid for a preliminary injunction against the state’s attorney general and gaming regulators. At this early stage, U.S. District Judge Colleen McMahon concluded, the sports prediction exchange’s contracts are not swaps under the Commodity Exchange Act (CEA), a category that the Commodity Futures Trading Commission (CFTC), the federal derivatives regulator, oversees exclusively when the contracts trade on a federally designated exchange. That leaves New York free to require Novig to get a state gambling license or stop listing the contracts.
McMahon also gave no deference to the CFTC. In October the agency issued an interim final rule keeping sportsbook bets and other casino-style gambling outside the swap definition, alongside a proposed rule that would define sports event contracts as swaps. The two rules “are inherently contradictory and cannot be reconciled,” McMahon wrote in the ruling. The CFTC’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.
She went further on an Aug. 11 CFTC order directing Kalshi to keep operating as normal while New York pursued it. That order “smacks of a collusive effort between a regulator and regulatee to generate a claim for conflict preemption,” McMahon wrote. Conflict preemption is the claim that federal law overrides a state law because a company cannot obey both. Even if the court deferred to the CFTC, she added, Novig’s listings would be unlawful under the agency’s own current rule, 17 C.F.R. § 40.11, which bars listing event contracts that relate to gaming.
“If we use emergency orders or actions in this way, and yeah, it might be a sympathetic case now, but that’s how it’s gonna get normalized,” co-host Jessi Brooks said on Unchained’s DEX in the City in August, discussing the CFTC’s emergency orders for Kalshi.
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How the Judge Read ‘Swap’
The CEA covers contracts tied to an “event or contingency associated with a potential financial, economic, or commercial consequence.” McMahon sided with Novig on the first part, agreeing that the result of a game is an event. She sided with New York on the second, reasoning that the statute targets the hedging of price risk, not recreational betting. “From the perspective of the customer, there is no qualitative difference between Novig’s product and FanDuel’s traditional sports bet,” she wrote.
What Comes Next
The judge also rejected Novig’s claim that it could not obey both state and federal law, calling the argument “ridiculous.” Novig could seek a New York license and use geofencing to serve only customers physically in the state, she wrote.
The court docket lists a notice of interlocutory appeal, meaning an appeal taken before the case ends, filed the same day as the ruling.
The CFTC’s two October actions were first released on Oct. 9 and updated on Oct. 19, according to the opinion. The Second Circuit, which earlier this month declined to pause New York and Connecticut actions against Kalshi and Coinbase, has said a merits panel, the panel that will decide the appeal itself, will take up the same question.
Related Listen: Everyone Wants a DCM. Why Is Kalshi Still Losing? – DEX in the City
