Underdog files Tennessee prediction markets lawsuit against AG and wagering council

Underdog filed its Tennessee prediction markets lawsuit on October 13, asking a federal judge to stop state officials from enforcing gambling law against the company's sports event contracts. The complaint was lodged in the U.S. District Court for the Middle District of Tennessee, Nashville Division, AGIMEG reported. It names Attorney General Jonathan Skrmetti and the Tennessee Sports Wagering Council as defendants, according to Casino.org.

The plaintiffs are Underdog Exchange DCM and UDM, which operates as Underdog Predict, per AGIMEG. Underdog, which is being acquired by IG Group, holds a Designated Contract Market designation from the Commodity Futures Trading Commission.

The cease-and-desist behind the filing

AGIMEG's reading of the complaint says the Council wrote to the company on October 9 demanding an immediate stop to its sports contracts. Tennessee's position is that the products are bets and require a license issued by the Council. The letter, in the account given in the filing, raised the prospect of sanctions and investigations, and of revoking a fantasy sports license held by Underdog Sports, an affiliate kept separate from the two plaintiffs. Underdog says those threats put its business and its relationships with users at risk of harm that a later payout would not repair.

Neither outlet quotes the complaint at length, so these details rest on their readings of the document rather than on the filing itself.

What Underdog wants the court to do

The company asked for a declaratory judgment that the contested Tennessee rules do not apply to it, and for a permanent injunction barring their enforcement. Its argument is that the Commodity Exchange Act gives the CFTC authority over exchanges where swaps are traded, which would make federal supervision exclusive for its event contracts, and that Tennessee's intervention conflicts with the constitutional rule that federal law prevails.

States read the same statute the other way. Casino.org summarizes their side as holding that the spirit of the Commodity Exchange Act leaves no room for a second form of sports betting, and that the law does not strip states of the power to regulate betting activity.

The Kalshi ruling in the way

On September 25 a Sixth Circuit panel dealt with Kalshi's disputes with Ohio and Tennessee at the preliminary-injunction stage. It concluded that Kalshi had not shown a likelihood of success on the claim that federal law blocks state gaming rules, upheld the denial of an injunction in Ohio, reversed the one that had been granted in Tennessee, and sent the cases back. AGIMEG notes that the ruling covered interim relief in Kalshi's cases and is not a decision on Underdog's complaint.

The backdrop is less favorable than it first looks. Earlier this year Judge Aleta Trauger of the same Nashville court ruled that sports event contracts are swaps under the Commodity Exchange Act, which in theory helped operators. The Sixth Circuit then said sports derivatives are unlikely to qualify as swaps, and that even if they did, nothing stops Tennessee from enforcing its betting laws. That decision binds other federal courts in Tennessee.

On the record as filed, Underdog's case rests on the preemption theory the appeals court treated as unlikely to succeed at the injunction stage. That is a reading of the two outlets' accounts, not a forecast of the outcome.

Seventh state on Underdog's list

Tennessee is the seventh state Underdog has sued. Within a week last month the company filed against Massachusetts, New Mexico, Ohio, Washington and Wisconsin, then added Connecticut. Casino.org describes the approach as striking first: it denies states the chance to move on their own and forces them to argue the question in open court.

The wider question is whether federal supervision of derivatives markets displaces state betting rules for these products, and that dispute runs through every one of the filings. Casino.org reports that the prevailing sentiment in legal and prediction market circles is that the Supreme Court will decide the fate of sports event contracts in the U.S., potentially at some point over the next several months.