Underdog sues Tennessee to block cease-and-desist over its prediction market

This is a federal lawsuit seeking to stop Tennessee: Underdog filed on 13 October 2026 in the United States District Court for the Middle District of Tennessee, Nashville Division, asking the court to prevent the state from enforcing a cease-and-desist order that would shut down its prediction market. The company argues that the federal derivatives regime administered by the Commodity Futures Trading Commission (CFTC) preempts state gambling laws and therefore nullifies the threat of sanctions and the possible revocation of its fantasy sports operator license. Byline: Renata Quiroga, Corresponsal de mercados de apuestas.

What Underdog filed and who it named as defendants

The complaint, filed 13 October 2026, names as defendants the State of Tennessee, the Attorney General of Tennessee, and the members of the Tennessee Sports Wagering Council. In the complaint Underdog asserts that the threat to enforce certain state statutes violates the Supremacy Clause of the U.S. Constitution and that those actions intrude on the CFTC’s exclusive jurisdiction over derivatives transactions on federally designated contract markets.

Underdog includes this exact allegation in its pleading: “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.”

Tennessee’s cease-and-desist order does more than ask for the prediction service to close: it also threatens fines, civil penalties, criminal investigations, and the possible loss of a license to operate fantasy sports. Good To Know Tennessee, the group that pushed the public warning, spelled out the possibility of those measures against Underdog.

The legal context: the Sixth Circuit’s ruling in the Kalshi case

The litigation arrives with a recent precedent that complicates Underdog’s strategy. On 25 September 2026 the Sixth Circuit Court of Appeals decided a similar case brought by Kalshi, concluding that Kalshi did not prove its event contracts met the federal definition of swaps. The court also held that, even if a product could fall under the federal definition, state gambling laws might still apply.

That second holding creates an extra hurdle for Underdog: showing that federal derivatives regulation alone displaces state action is not automatic under the Sixth Circuit’s test. The 25 September ruling rejects the same line of argument Underdog now advances in the federal court in Nashville.

Underdog’s legal strategy against the Kalshi doctrine

Underdog seeks to distinguish its platform from Kalshi’s or, alternatively, to persuade the court that the issue requires a different interpretation of federal derivatives law. The company has asked for a preventive injunction ordering Tennessee to refrain from applying gambling statutes to its prediction market while the court determines whether its contracts fall under the CFTC regime.

Alongside the Tennessee complaint, Underdog filed a similar challenge in Connecticut in September. Kalshi itself continues to pursue appeals: the company is contesting an August ruling that denied it a preliminary injunction in Connecticut.

Risks and penalties Underdog faces in Tennessee

The cease-and-desist order that prompted the suit is not merely administrative. Good To Know Tennessee and state authorities have pointed to concrete possible consequences:

• monetary fines and civil penalties;

• criminal investigations of the operation if deemed in violation of state law;

• revocation or suspension of the license to operate fantasy sports in Tennessee.

Those threats are the immediate driver of the lawsuit: Underdog seeks temporary protection to keep its platform running while it is decided whether the CFTC has exclusive jurisdiction over its contracts.

Implications for prediction markets and state regulators

The dispute highlights a regulatory tension central to the U.S. market today: the line between prediction contracts on events and financial products defined as derivatives. If a federal court grants Underdog’s injunction, Tennessee’s ability to demand immediate compliance with its rules could be limited. If the court denies the request, the state may proceed with administrative penalties and other actions set out in its cease-and-desist order.

This legal fight also shifts the role of actors: the CFTC appears in Underdog’s argument as the federal authority that, in the company’s view, should regulate these transactions; federal courts are now the forum to resolve the federal-versus-state regulatory tension.

What operators and platform providers are doing now

For operators, platform providers and regulatory advisers the complaint underscores two practical priorities: robust legal documentation that defines the product’s nature and containment strategies for hostile state markets. For compliance teams the immediate lesson is to prepare litigation defense and operational plans that permit pausing markets in specific jurisdictions without risking the platform’s global continuity.

The course of the case in the United States District Court for the Middle District of Tennessee and the related appeals involving Kalshi will be decisive for future regulation of prediction markets in the U.S. I will continue to follow the next judicial steps and any decisions issued by the courts and the CFTC.