Underdog files federal suit to block Tennessee shutdown of prediction market

Underdog asked a federal court on October 13 to prevent Tennessee from enforcing an order that would stop its prediction market operations and threaten its fantasy sports licence. The company filed the complaint in the U.S. District Court for the Middle District of Tennessee, Nashville Division, naming the State of Tennessee, the Attorney General of Tennessee and members of the Tennessee Sports Wagering Council. Underdog says federal derivatives regulation — and exclusive CFTC jurisdiction over designated contract markets — pre-empts state gambling statutes.

What Underdog is seeking in the lawsuit

Underdog's complaint requests injunctive relief to block state enforcement actions that would shut down its prediction market product. The filing argues that Tennessee officials have issued a cease-and-desist order that threatens fines, civil penalties, criminal investigations and the potential revocation of the company's fantasy sports operator licence if it continues running prediction contracts in the state.

The complaint quotes the company's constitutional claim directly:

"By threatening to enforce the statutes referenced in (Paragraph) 103 or any other statutes, and any rules adopted thereunder, against Underdog, Defendants are violating the Supremacy Clause by intruding upon the CFTC’s exclusive jurisdiction to regulate derivatives transactions on federally designated contract markets."

Underdog also points to parallel litigation it brought earlier in Connecticut and frames the Tennessee filing as part of a broader strategy to secure federal pre-emption for prediction contracts.

Underdog lawsuit Tennessee: legal backdrop and named defendants

The lawsuit lists the State of Tennessee, the Attorney General of Tennessee and members of the Tennessee Sports Wagering Council as defendants. It challenges the legal basis for the state's cease-and-desist order and the related regulatory threats to the company's fantasy sports licence.

Underdog frames the dispute around two legal questions: whether its event contracts are "swaps" or other financial instruments under federal law, and whether a finding of federal jurisdiction would preclude state gambling enforcement. The company contends the Commodity Futures Trading Commission (CFTC) has exclusive authority over derivatives transactions carried out on federally designated contract markets, and that Tennessee enforcement would conflict with that federal regime.

Kalshi ruling complicates prediction market regulation in Tennessee and beyond

A September 25 decision from the United States Court of Appeals for the Sixth Circuit complicates Underdog's position. The Sixth Circuit rejected similar pre-emption arguments from Kalshi, ruling that Kalshi had not demonstrated its contracts met the federal statutory definition of swaps. The court also held that even if a platform's contracts qualified as swaps, state gambling laws could still apply.

That second finding matters to Underdog because it means proving federal oversight alone may not automatically block state enforcement. The Kalshi ruling therefore places a two-part burden on parties seeking pre-emption: show the contracts satisfy the federal definition of a swap, and then show that federal designation displaces state gambling regulation.

Legal observers say the Kalshi precedent will be central to how the Middle District of Tennessee evaluates Underdog's claims. The company has signalled it will lean heavily on the statutory and regulatory text governing the CFTC's jurisdiction.

Enforcement mechanics: the Tennessee cease-and-desist and licence threat

Tennessee's cease-and-desist order, as described in Underdog's complaint, carries multiple potential consequences for the business:

• immediate prohibition on offering the prediction market product to customers in Tennessee;

• fines and civil penalties for non-compliance; and

• referral for criminal investigation and the risk of losing a fantasy sports operator licence issued under state rules.

Underdog says those combined threats create irreparable harm that a federal injunction should cure while the constitutional questions proceed in court. The company also notes regulatory enforcement could chill innovation and push product changes that would not align with how the CFTC treats derivatives transactions on federally authorised platforms.

Parallel litigation and market implications

Underdog is not the first prediction-market operator to pursue this route. The company filed a similar challenge in Connecticut in September. Kalshi, another prediction market operator, is separately appealing an August decision denying it an injunction in a related matter. The interplay of these cases means multiple federal courts will be testing where the line sits between state gambling laws and federal derivatives regulation.

For operators and platform vendors, the core practical questions are straightforward and immediate: which regulatory regime applies to the sale of event-based contracts, and what compliance or licensing consequences follow in each state where customers are located? Those answers will determine whether operators keep products live, restrict offerings by geography, or pause services in states that issue enforcement actions.

What to watch next

Key dates and developments to monitor are the Middle District of Tennessee's scheduling order for Underdog's case, any emergency injunctive relief the court grants or denies, and further appeals that could push the dispute back to the Sixth Circuit. Watch also for how regulators respond: whether Tennessee proceeds with enforcement while litigation is pending, and whether the CFTC chooses to weigh in or assert jurisdiction in a way that clarifies the federal-state boundary.

Operators and vendors should prepare for regulatory uncertainty in US states where prediction markets and fantasy sports coexist. For reporting on regulation and market impact see our coverage of regulation and sports.