Underdog Sues Tennessee as Prediction Market Fight Puts Fantasy License at Risk

Tennessee told Underdog to stop offering sports prediction contracts and threatened consequences that could extend beyond its prediction market business, prompting Underdog to file another lawsuit.

The company sued Tennessee officials Tuesday, challenging a cease-and-desist letter the Tennessee Sports Wagering Council issued four days earlier. According to the complaint, regulators demanded that Underdog immediately halt its sports event contracts. They threatened penalties, referral to law enforcement, and possible revocation of a separate affiliate’s fantasy sports license.

Underdog argues that its federally regulated contracts fall under the Commodity Futures Trading Commission’s exclusive jurisdiction, not Tennessee’s gambling laws. The state argues that the products are sports wagers that require a Tennessee sports betting license.

This confrontation is familiar for prediction markets, but Underdog faces a particularly difficult backdrop, as the Sixth Circuit Court of Appeals rejected similar arguments from Kalshi less than three weeks ago.

Tennessee targets more than the exchange

The lawsuit, filed in the U.S. District Court for the Middle District of Tennessee, names Attorney General Jonathan Skrmetti and officials from the Sports Wagering Council as defendants.

Underdog wants a declaration that federal commodities law prevents Tennessee from applying its gambling laws to the company’s event-contract business, along with a permanent injunction blocking that enforcement.

The fantasy sports threat adds another layer. Underdog Sports, a separate affiliate, holds a Tennessee fantasy sports license. According to the complaint, the council’s letter put that authorization at risk over the prediction market dispute.

That confrontation has consequences beyond whether Tennessee residents can trade sports contracts. A fight over the exchange could also affect an affiliated business operating under a state-issued license.

Underdog began offering event contracts in Tennessee on August 28, following its March acquisition of Aristotle Exchange and its associated clearing organization. Its federal registrations include a designated contract market, which operates an exchange, and a futures commission merchant, which facilitates customer trading.

Tennessee is challenging whether that federal framework displaces the state’s authority over sports wagering, not simply whether Underdog has federal registrations.

Kalshi’s loss creates an immediate obstacle

Last month, the Sixth Circuit vacated a preliminary injunction that had protected Kalshi from Tennessee enforcement. In the consolidated appeals, it also affirmed an Ohio court’s refusal to grant Kalshi similar protection.

The appeals court found that the sports event contracts likely did not qualify as “swaps” under federal commodities law. It also concluded that, even if they did, federal law would not prevent Tennessee and Ohio from enforcing their gambling laws. Those conclusions undercut the federal-preemption theory operators have used to challenge state restrictions.

Underdog’s complaint acknowledges the adverse precedent and says it is preserving its appellate rights while seeking protection from Tennessee enforcement. It is not entering the case as though the Sixth Circuit dispute never happened.

Kalshi is trying to reopen that fight. On Oct. 9, it petitioned for panel rehearing and rehearing by the full Sixth Circuit, arguing that the decision conflicts with other rulings and that new CFTC rulemaking warrants reconsideration. The petition itself does not overturn the September decision or restore Kalshi’s Tennessee injunction.

For Underdog, that means filing now both challenges Tennessee’s action and keeps its legal claims alive while the broader appellate dispute continues.

New CFTC action gives operators another argument

The federal regulatory position is also evolving.

Last week, the CFTC proposed clarifying that sports-related event contracts fall within the federal definition of swaps. The agency separately issued an interim final rule excluding qualifying casino-style gambling products from that definition.

That distinction matters because the treatment of sports contracts as swaps is central to the operators’ jurisdictional argument. A federal rule expressly addressing those products could become significant in the ongoing litigation.

Seven states, one recurring dispute

Tennessee brings Underdog’s state-by-state litigation campaign to seven jurisdictions. The company previously sued officials in:

• Connecticut

• Massachusetts

• New Mexico

• Ohio

• Washington

• Wisconsin

Those cases share the same basic question: Does federal regulation of an event contract exchange prevent states from treating its sports products as unlicensed gambling?

Courts remain divided. The Sixth Circuit’s position favors state enforcement, while the Third Circuit has sided with Kalshi in the New Jersey dispute. The Ninth Circuit has ruled against Kalshi in litigation involving Nevada regulators and California tribes.

The New Jersey case is now before the Supreme Court on a pending petition. The justices have not agreed to hear it, and review requests should not be confused with a forthcoming ruling.