Underdog Suing Tennessee Over State’s Effort to Enforce Gaming Regulations

Prediction market operator Underdog is suing Tennessee after state regulators issued a cease-and-desist order targeting its sports event contract platform.

In a complaint filed in the U.S. District Court for the Middle District of Tennessee (Nashville Division), Underdog, which is being acquired by IG Group (LON: IGG), named Tennessee Attorney General Jonathan Skrmetti and the Tennessee Sports Wagering Council (TSWC) as defendants.

On the grounds that it is a Designated Contract Market (DCM) regulated by the Commodity Futures Trading Commission (CFTC), Underdog argues that it has rights to offer event contracts on a national scale and that due to DCM designation and its status as a federally regulated entity, it’s not beholden to state gaming regulations, including those Tennessee is attempting to enforce.

Underdog is asking the federal court for a declaratory judgment and a permanent injunction to halt state enforcement actions. That argument relies heavily on federal preemption, asserting that the Commodity Exchange Act (CEA) grants exclusive regulatory authority over swap exchanges to the CFTC.

Can Underdog Win in Tennessee?

Broadly speaking, prediction markets have spotty track records of legal success in the various states. Earlier this year, a leading yes/no exchange scored a win in the Volunteer State when Judge Aleta Trauger of the US District Court for the Middle District Court of Tennessee ruled that sports event contracts are swaps under the CEA.

While that ruling initially seemed to favor Underdog’s position, the decision was overturned in September by the U.S. Court of Appeals for the Sixth Circuit. The appellate panel held that sports derivatives are unlikely to meet the statutory definition of a swap under the CEA.

Crucially, the Sixth Circuit also concluded that even if sports event contracts were deemed swaps, federal law does not strip states of their authority to enforce local sports betting regulations. That appellate ruling creates binding precedent that federal district judges in Tennessee must follow.

Prediction market operators continue to maintain that sports derivatives satisfy CEA swap standards and that state gambling laws are preempted by federal jurisdiction. State regulators counter that the CEA was never intended to shield sports wagering from state oversight, and that federal law preserves individual state authority over sports gambling.

Seven States and Counting

Tennessee represents the seventh state sued by Underdog as the operator moves aggressively to defend its prediction market offerings.

Within a single week last month, Underdog initiated legal action against regulators in Massachusetts, New Mexico, Ohio, Washington, Wisconsin, and Connecticut. By taking a proactive litigation stance, Underdog aims to head off enforcement orders and compel state authorities to defend their regulatory boundaries in federal court.

Regardless of Underdog-specific outcomes, the prevailing sentiment in the legal and prediction market communities is that the Supreme Court, potentially at some point over the next several months, will ultimately decide the fate of sports event contracts in the U.S.