Underdog has sued Tennessee in federal court after the state ordered the company to stop offering sports event contracts, setting up a new test of whether federal commodities oversight shields prediction-market operators from state wagering rules.
The complaint, filed Oct. 13 in the U.S. District Court for the Middle District of Tennessee’s Nashville Division, names Attorney General Jonathan Skrmetti and the Tennessee Sports Wagering Council. Underdog seeks a declaratory judgment and a permanent injunction preventing officials from applying Tennessee wagering laws to its contracts.
The council’s Oct. 9 cease-and-desist letter demanded that Underdog immediately stop offering the contracts in Tennessee. Regulators contend the products are wagers under state law and therefore require a council-issued sports-wagering licence. The letter threatened fines, civil penalties and a possible law-enforcement referral, according to NextPredict.
It also warned that Underdog Sports, an affiliate holding a Tennessee fantasy-sports licence, could lose that authorization. The affiliate’s fantasy business is separate from the federally regulated exchange that the cease-and-desist letter targeted.
Underdog began offering event contracts in Tennessee on Aug. 28, after acquiring Aristotle Exchange and its related clearing organisation in March. It operates a Commodity Futures Trading Commission-designated contract market and is registered as a futures commission merchant. The company says those registrations permit it to list contracts and arrange trades on other exchanges.
Its central argument is that the Commodity Exchange Act assigns oversight of the exchange and its contracts to the CFTC, giving it a right to offer event contracts nationally. Underdog says Tennessee is threatening to punish conduct that federal law authorises and that the CFTC alone may regulate.
Tennessee takes the opposing view. The council, which supervises and enforces the state’s sports-wagering laws, has told the CFTC that sports event contracts function as wagers: consumers buy contracts tied to one of two outcomes, such as the winner or loser of a game, and money is won or lost on the result.
Under the Tennessee Sports Gaming Act, interactive sports wagering can be offered only with a council licence. State law defines a wager as money risked on an unknown sporting outcome, while the council says accepting that money without a valid licence violates the law. Tennessee also requires sports-betting operators to observe consumer-protection measures, including a minimum wagering age of 21 and self-restriction tools.
Underdog’s case arrives after an unfavourable ruling for another prediction-market operator. On Sept. 25, the Sixth Circuit rejected Kalshi’s challenge to gambling regulations in Tennessee and Ohio, finding that Kalshi had not established that its sports contracts qualified as federally regulated swaps and rejecting its federal-pre-emption case.
Casino.org reported that the appeals court also held that, even if sports event contracts were swaps, that would not bar Tennessee from enforcing its betting laws. The ruling is binding on federal courts in Tennessee, creating a substantial obstacle for Underdog’s complaint. It conflicts with an April Third Circuit decision that backed Kalshi’s challenge to New Jersey regulators.
The Tennessee suit is Underdog’s seventh state challenge over its prediction-market business. The company sued Massachusetts, New Mexico, Ohio, Washington, Wisconsin and Connecticut before bringing the Tennessee case, and discontinued its Drafts fantasy product in seven states in September amid regulatory conflicts involving its prediction-market operations and fantasy licences.
The dispute is unfolding as the CFTC considers its own approach to the products. On Oct. 9, the agency proposed clarifying that sports-related event contracts fall within the federal definition of swaps, while separately issuing an interim final rule that excludes qualifying casino-style gambling products from that definition.
