Underdog sues Tennessee after state threatens its fantasy sports license

Underdog has sued Tennessee to stop the state from shutting down its sports event contracts, after regulators threatened penalties, a criminal referral and the license of its separate fantasy sports business.

The company filed suit on Oct. 13 in the US District Court for the Middle District of Tennessee, naming Attorney General Jonathan Skrmetti and officials of the Tennessee Sports Wagering Council, DeFi Rate reported. Four days earlier, the council had sent Underdog a cease-and-desist letter demanding that it immediately stop offering sports event contracts in the state.

The letter put more than the exchange at risk. Underdog Sports, an affiliate, holds a Tennessee fantasy sports license, and the council warned that it could be revoked over the prediction market dispute. "Any enforcement action by Tennessee would be meritless," the lawsuit says, according to CDC Gaming.

Underdog's argument

Underdog says its contracts fall under the exclusive jurisdiction of the Commodity Futures Trading Commission, which regulates its exchange and its brokerage, and that federal law shields them from Tennessee's gambling statutes. It is asking for a declaratory judgment and a permanent injunction against enforcement.

The company began offering event contracts in Tennessee on Aug. 28, after buying Aristotle Exchange and its clearinghouse in March. Underdog itself is being acquired by IG Group, Casino.org reported. Tennessee is the seventh state it has sued over sports contracts, after Washington, Connecticut, Massachusetts, New Mexico, Ohio and Wisconsin.

An uphill fight in the Sixth Circuit

Underdog is suing on difficult ground. On Sept. 25 the Sixth Circuit vacated the injunction that had protected Kalshi from Tennessee enforcement. It found that sports event contracts likely are not swaps under the Commodity Exchange Act, and that federal law would not stop Tennessee and Ohio from enforcing their gambling laws even if they were. That ruling binds the federal courts in Tennessee.

Underdog's complaint acknowledges the precedent and says the company is preserving its rights to appeal. Kalshi has asked the Sixth Circuit to rehear the case, citing the CFTC's new rulemaking on event contracts, but the petition does not restore its injunction while it is pending.

Why it matters for traders

For now, Tennessee can enforce its gambling law against sports contracts, and the state has also sent cease-and-desist orders to Kalshi, Polymarket and Crypto.com. Traders in Tennessee may see sports markets restricted on more platforms unless a court intervenes. Markets on economics and politics are not part of this dispute.

The threat to a fantasy license is a new pressure point. Several prediction market operators also run state-licensed businesses, and regulators in Ohio have warned licensees about working with unlicensed sports contract providers. Our guide to whether prediction markets are legal in your state tracks the main cases.

What happens next

The court has yet to rule on Underdog's request to keep operating while the case proceeds. The broader question is before the Supreme Court, where New Jersey has asked the justices to resolve the split between the Third Circuit, which sided with Kalshi, and the Sixth and Ninth Circuits, which sided with the states.