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

Prediction market operator Underdog is suing the state of Tennessee after the state issued a cease-and-desist letter to the company pertaining to its 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.

The company is hoping to compel the court to grant it a declaratory judgment and a permanent injunction that would prohibit enforcement of Tennessee wagering laws. In part, that argument rests on the notion that the Commodity Exchange Act (CEA) grants regulatory authority of exchanges on which swaps are traded 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.

In theory, that decision appears to bode well for Underdog, but that ruling was overturned in September by the Sixth Circuit Court of Appeals, which noted that sports derivatives aren’t likely to qualify as swaps under the CEA.

The appeals court also ruled that even if sports event contracts are considered swaps, that doesn’t prevent Tennessee from enforcing its betting laws. That decision carries with it binding precedent to which other federal courts in Tennessee must adhere.

Prediction market operators have consistently argued that sports derivatives meet the swap standard set forth by the CEA and that they aren’t beholden to state gaming regulations, citing federal preemption. Conversely, states argue that the spirit of the CEA doesn’t make room for another form of sports betting and that the law doesn’t strip states of their ability to regulate betting-related activities.

And That Makes Seven

Tennessee is the seventh state sued by Underdog as the company looks to protect its prediction market turf — an industry in which it’s one of the fastest-growing outfits.

In the span of a week last month, Underdog sued Massachusetts, New Mexico, Ohio, Washington, and Wisconsin and then Connecticut. By moving “striking first,” Underdog prevents preemptive moves by the states and forces them to litigate their cases in open 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.