McMahon rules Novig sports contracts are sports betting not swaps

Judge Colleen McMahon had seen a four-game NFL parlay sitting in the evidence file. The potential payout was more than 111 times the original stake. She was not inclined to call it a swap.

In a 35-page ruling issued Tuesday, the US District Court judge for the Southern District of New York denied Novig's request for a preliminary injunction against the New York Attorney General and state gaming regulators. Novig's parent, Ludlow Exchange LLC, holds a CFTC designation as a contract market. The company had argued that federal commodities law preempts New York's ability to enforce state gambling rules against its peer-to-peer sports contracts. McMahon looked at the parlay, looked at the Commodity Exchange Act, and wrote that the court is not required to disregard common sense.

The legal argument Novig brought is one the industry has been building toward for two years: sporting outcomes can qualify as events or contingencies under federal commodities law, therefore contracts referencing them are CFTC-regulated derivatives beyond state reach. McMahon accepted part of that framing — she acknowledged sporting outcomes can in principle qualify under the CEA — and then cut it off. The contracts as actually structured, she found, do not carry the inherent financial or commercial consequences that would make them swaps. What they carry is a point spread, a player prop, and a parlay. She said so directly.

That distinction matters more than the headlines suggest. McMahon did not rule that sporting outcomes can never underlie a federally recognized derivative. She ruled that these contracts, as Novig designed and offered them, look like sports betting. The question for every other operator in this space is whether their product design survives the same scrutiny. Kalshi and Robinhood have spent months arguing that federal preemption is categorical — that CFTC designation forecloses state enforcement regardless of product structure. McMahon's reasoning cuts against that position, though it does not bind courts in other circuits or directly govern those disputes.

Here is where I think the consensus is reading this wrong. The attention has gone to McMahon's refusal to call sports contracts swaps, as if the significance is doctrinal. I think the operational weight is elsewhere. Novig can still operate outside New York. It can seek a state license. What it cannot do is use federal designation as a shield while designing a product that a federal judge describes, without apparent difficulty, as conventional sports betting. That ceiling on the preemption argument is now in a 35-page opinion that every state attorney general in an active dispute has already downloaded.

I am adjusting for my own tendency to weight the downside scenario. Even so: the Ninth Circuit has already upheld Nevada's position against Kalshi. McMahon has now declined to block New York's enforcement position against Novig. Two federal courts, two circuits, two operators, same directional answer. The operators are not losing on technicalities. They are losing on the merits of how their products are classified. The market for sports event contracts as a preemption play is mispriced toward optimism, and I think it moves lower from here.