Underdog has initiated a lawsuit against Tennessee officials after receiving an order to cease its sports event contracts, a move that jeopardizes both its prediction markets and fantasy sports license. The legal action follows a recent determination by the Sixth Circuit Court of Appeals, which dismissed Kalshi's efforts to protect its contracts from Tennessee and Ohio gambling regulations. Though Underdog acknowledges this legal setback, it maintains that it must safeguard its right to appeal as questions surrounding federal authority progress toward the U.S. Supreme Court.
The core of Underdog's argument rests on the assertion that the Commodity Exchange Act grants the Commodity Futures Trading Commission (CFTC) exclusive control over federally regulated markets. This, it contends, bars the state of Tennessee from imposing its gambling laws on Underdog's contracts related to sports events. In its complaint, Underdog is seeking a declaratory judgment alongside a permanent injunction to prevent the enforcement of the state’s order.
Earlier this month, the Tennessee Sports Wagering Council issued a cease-and-desist letter to Underdog, referencing the Sixth Circuit’s ruling. The letter classified Underdog’s sports contracts as “wagers” under the Tennessee Sports Gaming Act, emphasizing that operation of such wagers necessitates a license from the council. The council demanded an immediate cessation of the contracts and warned of penalties ranging from $10,000 to $25,000 per violation, civil penalties, and the potential for escalation to law enforcement.
Continued operations would place Underdog's fantasy sports license in jeopardy, according to the council.
In its legal filing, Underdog insists that its fantasy sports operations are separate from the contracts managed through its exchange and brokerage activities. It argues that Tennessee's actions represent an attempt to misuse its licensing authority to regulate activities solely under federal purview.
In January 2026, Tennessee had previously issued a cease-and-desist order to Kalshi, demanding the discontinuation of its sports contracts, the cancellation of pending agreements with Tennessee residents, and the refunding of those customers. This led Kalshi to legal action, which resulted in a preliminary injunction that initially blocked enforcement until further review. However, subsequent appeals from Tennessee and a related case from Ohio saw the Sixth Circuit affirm that Kalshi’s contracts did not meet the criteria for swaps under CFTC authority.
The Sixth Circuit further clarified that even if they did, the Commodity Exchange Act does not preempt state gambling laws as they apply to the contested contracts.
Underdog's current complaint leans heavily on the Sixth Circuit's decision while linking this new action to the potential for further appellate review. It argues for its right to secure an appealable order while awaiting Supreme Court deliberations on these issues. In the complaint, Underdog also highlights a recent proposed CFTC rule that would redefine event contracts in a way that aligns with the definition of a swap, while simultaneously establishing exclusions for specific casino-style gambling products.
This clarification aims to differentiate between contracts traded on regulated exchanges versus wagers accepted by licensed gambling operators.
Additionally, Underdog maintains that withdrawing from Tennessee would violate its federal obligations to ensure fair market access and orderly trading. Citing past CFTC interventions in disputes involving Kalshi in states like Michigan and New York, the company argues against measures disruptive to market operations.
Underdog’s lawsuit in Tennessee is part of a broader trend, as it has already challenged seven states, including Connecticut, Massachusetts, New Mexico, Ohio, Washington, and Wisconsin, citing similar arguments regarding federal derivatives regulation.
The Tennessee complaint also details an ongoing federal initiative, referencing CFTC lawsuits that address state enforcement actions in Arizona, Connecticut, Illinois, Kentucky, Minnesota, New Mexico, New York, and Wisconsin.
A Supreme Court decision seems imminent, as differing appellate court rulings on the jurisdiction of sports event contracts have arisen. The Third Circuit has upheld Kalshi’s preliminary injunction in New Jersey, recognizing sports contracts as swaps and emphasizing federal preemption over state laws; New Jersey has called on the Supreme Court to settle the matter. The conflicting rulings in both the Ninth Circuit and Sixth Circuit highlight the urgent need for clarity on regulatory jurisdiction.
The NFL and attorneys general from 39 states, along with the District of Columbia, have urged the justices to review the New Jersey case, citing the need for federal oversight on sports integrity amid concerns regarding states’ powers over sports wagering. Additionally, Robinhood and Crypto.com have also sought the Supreme Court's input on this regulatory debate.
