Novig Challenges State Gambling Laws with Federal Lawsuits to Protect Prediction Markets

Just days after unveiling its federally regulated sports prediction market, Novig has broadened its legal confrontation with state regulators, initiating four federal lawsuits against the states of New York, Massachusetts, New Mexico, and Washington. This strategic legal move, executed between August 6 and August 8, follows the Commodity Futures Trading Commission’s (CFTC) approval of Novig as a Designated Contract Market (DCM).

The lawsuits question whether state authorities can apply their gambling laws to federally regulated prediction markets or if such regulation is solely under the jurisdiction of the CFTC, thanks to the Commodity Exchange Act. The timing of Novig’s federal approach is noteworthy, as all four involved states have pursued temporary restraining orders or preliminary injunctions against these markets within their state courts.

Extending Legal Actions Beyond New York

Novig's latest lawsuits build upon an August 5 complaint filed in New York, seeking a federal court's intervention to bar the state from enforcing its gambling regulations against the company’s sports event contracts. Novig asserts that these contracts represent federally regulated derivatives rather than sports bets, thus falling under the CFTC's authority. The immediacy of their claim stems from prior legal actions by New York against companies like Kalshi and Coinbase Financial Markets.

To bolster its position, Novig outlines various safeguards incorporated into its platform, such as an age restriction of 21, limits on deposits and trading, tools for self-exclusion, identity verification procedures, and comprehensive market surveillance aimed at preventing insider trading.

Single Legal Strategy Across Four States

Though the lawsuits cite different state laws, they share a common legal framework. In Massachusetts, Novig argues that Attorney General Andrea Campbell and the Massachusetts Gaming Commission have incorrectly categorized federally regulated event contracts as sports betting. The complaint points out that Massachusetts has previously issued a preliminary injunction against Kalshi and insists that any entity entering the sports market must comply with local regulations—an assertion Novig challenges on the grounds that federal law takes precedence.

The complaint filed in Washington contends that the Washington State Gambling Commission's guidance improperly declares prediction markets as unauthorized, which Novig disputes, pointing out that federal oversight by the CFTC is exclusive.

In New Mexico, Novig is contesting Attorney General Raúl Torrez's legal action against Kalshi, which accuses the exchange of unlawful sports betting practices, arguing that the state erroneously classifies federally regulated contracts as forms of illegal gambling.

Claim of Exclusive CFTC Authority

The core argument across all four lawsuits asserts that sports event contracts traded on federally designated exchanges qualify as “swaps” according to the Commodity Exchange Act, making them solely under CFTC jurisdiction. This argument incorporates a historical perspective on the CFTC’s purview, maintaining that Congress intended to prevent states from imposing individual regulations on federally regulated derivatives markets. Novig also references recent federal rulings involving Kalshi to support its stance.

Additionally, the ongoing rulemaking by the CFTC regarding prediction markets is pivotal. The agency previously indicated in a proposed rule that sports event contracts tied to aggregate outcomes of professional and college sports would likely not contradict public interest considerations, assuming exchanges uphold sufficient safeguards for market integrity.

Threats from State Enforcement

Without intervention from federal courts, Novig claims it faces untenable choices: either cease operations in key states or risk severe civil and potential criminal consequences. The company articulates that Washington might seek restitution, disgorgement, and even criminal charges, similar to those pursued against Kalshi. Massachusetts could impose civil and criminal fines, while New Mexico’s legislation exposes it to public nuisance claims along with civil liabilities.

According to Novig, the ramifications of these risks amount to irreparable harm, as the doctrine of sovereign immunity would obstruct any recovery of losses even if the court ultimately ruled in Novig’s favor.

New York — The First Field Test

As Novig extends its legal strategy across multiple states, the New York case is emerging as the primary procedural challenge. In this instance, Novig is seeking an emergency preliminary injunction before any enforcement has commenced against it, a tactical step that highlights the urgency of its legal claims.

Recently, the New York Attorney General’s Office objected to Novig’s ex parte request for a temporary restraining order, arguing the company must allow the state an opportunity to respond before the court decides on the injunction. The Attorney General's Office informed the court that Novig's failure to provide prior notice effectively turned the request into an attempt to acquire an ex parte order, which they believe should not be considered by the court.

The filing draws attention to Judge Torres's prior denial of a similar request from Kalshi, suggesting a possibility of procedural constraints for Novig as well.

Federal Courts Pave the Way for Prediction Market Regulation

Instead of waiting for state courts, Novig is pushing for federal judges to resolve the pressing issue: Can states regulate sports event contracts on federally approved platforms? New York is poised to offer the first glimpse into judicial attitudes regarding this significant question, with Judge Torres now facing the challenge of whether to grant emergency relief based on the urgency of Novig's claims.

Featured image: Canva / Novig

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