Novig Injunction Denial Adds to Prediction Market Defeats in New York District Court

The United States District Court for the Southern District of New York has again passed on an opportunity to enjoin New York officials from enforcing the state's gambling laws against a designated contract market operator. This time, District Judge Colleen McMahon rejected a request for a preliminary injunction against authorities in New York that Novig made.

A panel from the US Second Circuit Court of Appeals will review McMahon's opinion. Novig isn't the first exchange operator to press the issue after a judge from the Southern District of New York denied its motion for injunctive relief.

Judge says Novig failed to establish merit for injunctive relief

In her opinion, McMahon stated that sports event contracts on Novig do not meet the statutory definition of a "swap" under federal law. She added that even if they were swaps, federal statutes do not preempt New York from applying its gambling regulations to the contracts.

For those reasons, McMahon wrote, Novig failed to establish that it was likely to succeed on the merits of its lawsuit against New York Attorney General Letitia James and other state officials. The sports event contracts that McMahon discussed are at the center of the dispute.

Also in the opinion, McMahon addressed recent rulemaking from the US Commodity Futures Trading Commission (CFTC) regarding sports event contracts. Her reasoning shows why similar arguments could fall on deaf ears moving forward.

Judge says CFTC event contract rules are contradictory

In the opinion, McMahon references recent regulatory proposals from the CFTC that addressed event contract trading. The judge minced no words as to whether they carry any weight before the court.

"Finally, but hardly without significance, the Court need not defer to the CFTC' s preferred interpretation, see Loper Bright Enters. v. Raimondo, 603 U.S. 369, 401 (2024). In this case it would be particularly inappropriate to give the CFTC's position that Novig's contracts are swaps, but traditional sports bets are not, deference. Both sports event contracts and sports wagers are outcome dependent and have financial consequences for the contracting parties. As a result, the Interim Rule and the proposed rule, announced on the same day, 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. Litigation positions are not entitled to any deference at all."

Judge Victor Marrero, also of the Southern District of New York (SDNY), reached a similar conclusion on preemption and the nature of sports event contracts when he denied the CFTC a requested emergency injunction against James. These developments could characterize the SDNY as a necessary stop on the way to the Second Circuit for designated contract market (DCM) operators like Novig.

However, the Second Circuit hasn't been much more friendly to DCM operators' interests so far.

Second Circuit could further entrench circuit split on legal issues

The Second Circuit has already affirmed rulings denying injunctive relief for Coinbase and Kalshi against authorities in Connecticut and New York. In doing so, it has aligned itself with the Sixth Circuit and Ninth Circuit on the substantive issues within the context of these requests for courts to enjoin state officials.

However, those three courts are at odds with the Third Circuit on the legal categorization of sports event contracts and preemption of state law. The Third Circuit affirmed an injunction against New Jersey gambling regulators in April.

Thus, should the Second Circuit affirm McMahon's opinion in Novig's case, it would deepen that divide. That may in turn behoove the chances of the Supreme Court of the United States reviewing the New Jersey authorities' appeal from the Third Circuit.

In the meantime, James continues to be free to pursue legal action against sports event contract trading on DCMs. The prospects for any other operators receiving requested relief from the SDNY look more dim, too.