Underdog Sues Tennessee Over Cease-and-Desist Letter on Event Contracts

Underdog has sued Tennessee in federal court after the state issued a cease-and-desist letter over the company's event-contract exchange, asking a judge to block enforcement of state wagering laws against the platform.

The complaint was filed by Underdog Exchange DCM Inc. and UDM LLC, which does business as Underdog Predict, against Tennessee Attorney General Jonathan Skrmetti and the Tennessee Sports Wagering Council.

The council's cease-and-desist letter said Underdog's sports event contracts qualify as wagers under the Tennessee Sports Gaming Act and that sports wagering in the state requires a council licence.

It directed the company to stop offering the contracts to Tennessee customers, and warned of potential penalties and other enforcement measures for continuing to do so.

Underdog argues that it operates a Designated Contract Market (DCM) regulated by the Commodity Futures Trading Commission (CFTC), and that the Commodity Exchange Act (CEA) gives the federal regulator exclusive jurisdiction over trading on such markets.

On that basis, it says the CEA and the U.S. Constitution's Supremacy Clause prevent Tennessee from applying its wagering laws to the exchange.

The complaint seeks a declaratory judgment and permanent injunction.

The filing says Tennessee's sports-wagering system requires an operator licence, and that nine operators hold such licences.

Underdog also argues that its affiliate's Tennessee fantasy-sports licence is separate from the event contracts on its exchange, and that its fantasy contests are distinct products.

Legal Precedent

A September decision by the U.S. Court of Appeals for the Sixth Circuit, in consolidated cases involving Ohio and Tennessee, makes the company's argument harder to advance in Tennessee.

The court concluded that Kalshi had not shown its sports-related contracts were swaps within the CFTC's exclusive jurisdiction and that, even if they were swaps, the CEA did not prevent the states from applying their gambling laws.

That ruling is binding on federal courts in Tennessee.

It overturned an earlier ruling by U.S. District Judge Aleta Trauger, who had found that sports event contracts were swaps under the CEA.

The legal landscape is not uniform across the country: the Third Circuit sided with Kalshi in New Jersey, while the Ninth Circuit found federal pre-emption of state regulation for event contracts on federally regulated markets but upheld the denial of a preliminary injunction in Nevada.

Tennessee is the seventh state Underdog has sued in its effort to protect its prediction-market business.

The other states identified in the reporting are Massachusetts, New Mexico, Ohio, Washington, Wisconsin and Connecticut.

Related disputes have also reached the U.S. Supreme Court: three petitions are pending, including New Jersey's appeal in its Kalshi case and Robinhood's petition concerning Nevada.

Underdog is asking the Tennessee court to declare the state's wagering laws pre-empted as applied to its exchange and to permanently bar officials from enforcing them against the platform.

The company says the suit may be its last opportunity to seek an injunction in federal court before Tennessee acts against it.