Novig loses court shield, and New York gambling laws strike back

Sports event-contract exchange Novig was denied preliminary protection from New York's gambling laws on Nov. 10, with a federal judge concluding that the sports contracts at issue remained subject to state rules despite its federal exchange designation.

The opinion goes beyond whether those contracts qualify as swaps under federal commodities law. The judge reasoned that even assuming they do, New York could still apply its gambling rules to the betting activity.

Novig filed a notice of appeal to the US Court of Appeals for the Second Circuit that same day, challenging the denial of its preliminary-injunction request.

The dispute separates permission to operate a federally designated exchange from protection against state sports-betting requirements.

According to the opinion, the Commodity Futures Trading Commission (CFTC) designated Novig as a contract market on June 16, and Novig announced availability of New York sports contracts on Aug. 4.

Two grounds for denying protection

At this preliminary stage, US District Judge McMahon first concluded that Novig's sports contracts fell outside the Commodity Exchange Act's definition of swaps.

The judge accepted that sporting outcomes could qualify as events or contingencies. Applying her contextual reading of the statute, she found that Novig's contracts lacked the required inherent financial, economic or commercial connection.

Federal designation of the exchange left the court to decide the classification of the particular contracts.

The opinion also considered the alternative assumption that the contracts are swaps.

McMahon reasoned that even then, the CFTC's exclusive jurisdiction left room for some state rules affecting an exchange. She distinguished federal control over the licensing and operation of designated contract markets from the incidental application of New York gambling laws to betting conducted on them.

That creates a second obstacle for Novig's federal-shield argument, which is that establishing swap status alone would leave the opinion's separate reasoning about the survival of state gambling law to be addressed.

The judge also rejected Novig's argument that complying with both federal and state law was impossible. She pointed to pursuing state licensing and using geographic controls while operating the exchange. The court described those steps as possible routes to compliance.

A similar alternative reasoning was used in the Sixth Circuit's Kalshi litigation. The new development is its application to Novig's request for protection against New York officials.

The Nov. 10 order denies interim relief and leaves Novig's federal exchange designation in place. Its disposition is limited to the preliminary-injunction motion, while a nationwide ban, a nationwide shutdown directive, and a final merits judgment all fall outside its scope.