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Polymarket Countersues New York Governor Kathy Hochul and AG Letitia James: A Comprehensive Guide to the Legal Battle

By jili tutorial · September 26, 2026

Polymarket Countersues New York Governor Kathy Hochul and AG Letitia James: A Comprehensive Guide to the Legal Battle

The prediction market platform Polymarket has escalated its conflict with New York state officials by filing a countersuit against Governor Kathy Hochul and Attorney General Letitia James. This action comes in response to a joint lawsuit from the state alleging that Polymarket operates an illegal gambling operation. The countersuit seeks to move the case to federal court and argues that New York’s gambling laws are preempted by federal commodities regulations. This guide breaks down the allegations, legal arguments, and broader implications for the prediction market industry.

Background: What Is Polymarket and How Do Prediction Markets Work?

Polymarket is a cryptocurrency-based platform that allows users to trade contracts on the outcome of future events, such as elections, sports games, and economic indicators. Unlike traditional sportsbooks that set odds, Polymarket operates as a centralized exchange where users place orders that are matched against each other. The platform generates revenue by charging a flat fee per transaction, regardless of the outcome. While Polymarket dominates the global prediction market industry, its U.S.-focused platform holds a smaller share due to regulatory constraints.

The platform is regulated by the Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act (CEA), which governs derivatives trading. This federal oversight is central to Polymarket’s legal defense.

The New York Lawsuit: Allegations of Illegal Gambling

State’s Claims

In their initial lawsuit, Governor Hochul and Attorney General James accused Polymarket of violating New York’s gambling laws by offering contracts on sporting events. According to the state, the platform meets the legal definition of gambling because the outcomes of its event markets are based on chance. The lawsuit cites an investigation by the Attorney General’s office that concluded Polymarket is an “illegal, unlicensed gambling operation” that allows participants as young as 18 to trade.

Statements from State Officials

Governor Hochul emphasized the risks to vulnerable populations:

“By running an unlicensed gambling operation, Polymarket has done more than just knowingly violate state law, they have put New Yorkers at risk, especially those underage who are most vulnerable to problem gaming.”

Attorney General James added:

“Our gambling laws exist to protect New Yorkers, prevent the potential harms of problem gambling, and ensure funding for educational and public benefit programs. By skirting New York’s laws, Polymarket is targeting the most vulnerable and depriving New York families of critical services and support.”

The state argues that Polymarket’s 18+ age threshold is lower than New York’s minimum gambling age of 21, further exposing young people to potential harm.

Polymarket’s Countersuit: Federal Supremacy and Market Structure

In response, Polymarket took two actions:

  1. Removal to federal court – The platform filed to transfer the lawsuit from state court to the U.S. District Court for the Southern District of New York.
  2. Civil complaint against Hochul and James – Polymarket alleges that the state’s enforcement of gambling laws against a federally regulated derivatives exchange would cause “imminent and irreparable harm” and that such enforcement is prohibited by Congress.

Core Arguments

Polymarket’s defense rests on three main points:

1. Federal Preemption Under the Commodity Exchange Act

Polymarket seeks a declaratory judgment that New York’s gambling laws are preempted by the CEA, which governs the platform’s operations under CFTC oversight. The company argues that Congress expressly prohibited states from imposing gambling regulations on federally regulated derivatives exchanges.

2. Distinction from Sportsbooks

The platform rejects the state’s characterization of its sports contracts as illegal sports betting. Polymarket attorneys wrote:

“Sportsbooks set odds based on proprietary information; event contracts are priced by supply and demand in a relevant market. Sports bettors typically place wagers against the ‘house,’ so sports bettors and sportsbooks are counterparties to the gambling transaction. But Polymarket US does not operate as a counterparty in the derivatives market. Instead, it operates as a transparent, centralized exchange matching orders of third parties.”

3. Revenue Model

Polymarket emphasized that it makes money solely through flat transaction fees, not from users’ losses:

“Polymarket US makes money by charging a flat fee for each transaction; unlike a sportsbook, it does not make money when a bettor loses, and it makes the same amount regardless of the outcome of a particular event.”

This structure, they argue, aligns more with a securities or commodities exchange than with a gambling operation.

State vs. Federal Jurisdiction

The central question is whether New York can enforce its gambling laws against a platform that operates under federal commodities regulation. Polymarket contends that the CEA explicitly preempts state laws that would interfere with derivatives markets. The state counters that gambling regulation is a traditional area of state authority and that Polymarket’s activities fall outside the scope of legitimate derivatives trading.

Definition of Gambling vs. Derivatives Trading

New York law defines gambling as betting on a game of chance. Polymarket argues that its event contracts are not bets but derivatives—financial instruments whose value derives from an underlying event. The distinction hinges on whether the outcome is determined by chance (gambling) or by market forces of supply and demand (trading). Polymarket’s flat-fee model and lack of counterparty risk further differentiate it from sportsbooks.

The Role of the CFTC

The Commodity Futures Trading Commission has previously taken action against Polymarket. In 2022, the platform settled with the CFTC for offering binary options without registration. However, Polymarket now operates under CFTC oversight and argues that this federal regulation preempts state gambling laws. The outcome of this case could set a precedent for how other prediction markets are regulated.

Implications for the Prediction Market Industry

This legal battle has significant ramifications:

Other U.S.-based platforms and international exchanges with American users will watch closely. If Polymarket succeeds in its preemption argument, it could open the door for more regulated event-based trading.

Conclusion

The Polymarket countersuit against New York Governor Kathy Hochul and Attorney General Letitia James represents a high-stakes clash between state gambling laws and federal commodities regulation. Polymarket argues that its transparent exchange model and CFTC oversight shield it from state enforcement, while New York maintains that the platform is an unlicensed gambling operation harming vulnerable users. The federal court’s decision on preemption will have lasting implications for the future of prediction markets in the United States.