Underdog Sues Tennessee as State Threatens Fantasy Sports License

Underdog has sued Tennessee regulators after receiving a cease-and-desist order targeting its sports prediction markets, with the state warning that continued activity could threaten the company's separate fantasy sports license.

The lawsuit, filed Oct. 13 in the U.S. District Court for the Middle District of Tennessee, names Attorney General Jonathan Skrmetti and Tennessee Sports Wagering Council officials as defendants.

The dispute follows an Oct. 9 letter directing Underdog to stop offering sports event contracts in the Tennessee sports betting market. According to the complaint, regulators warned of potential fines, civil penalties, criminal investigations, and revocation of an affiliated company's fantasy sports license.

Sports event contracts, offered by prediction market apps, allow customers to trade on sporting outcomes, with payouts determined by whether a specified event occurs.

Fantasy sports license under threat

The warning introduces an additional complication for Underdog, which operates both fantasy sports contests and prediction markets through separate businesses.

Underdog Sports holds a Tennessee fantasy sports license, while the lawsuit was brought by Underdog Exchange DCM and UDM, which operates as Underdog Predict.

The company argues that its prediction market activities fall under federal commodities regulation rather than Tennessee's sports betting laws.

Its complaint seeks a permanent injunction preventing state enforcement against those activities, alongside a declaration that Tennessee's actions violate the Constitution's Supremacy Clause.

The potential consequences extend beyond prediction markets. Tennessee regulators warned that an affiliate's fantasy sports license could also be revoked, even though the company maintains the two businesses are legally distinct.

Sixth Circuit ruling complicates lawsuit

Underdog's legal challenge follows a significant setback for Kalshi, another prediction market operator making similar arguments against state regulators.

On Sept. 25, the Sixth Circuit Court of Appeals ruled against Kalshi in cases involving Tennessee and Ohio.

The judges concluded that Kalshi had not demonstrated its sports event contracts qualified as swaps under the Commodity Exchange Act, which would potentially place them under the Commodity Futures Trading Commission's exclusive jurisdiction.

The court also found that even if the contracts qualified as swaps, federal commodities law would not prevent Tennessee or Ohio from enforcing their gambling regulations.

Underdog expands prediction market business

Tennessee is the seventh state Underdog has sued over prediction market restrictions, following Connecticut, Massachusetts, New Mexico, Ohio, Washington and Wisconsin, according to Legal Sports Report. The legal challenges come as Underdog expands its prediction market operations.

In March, the company announced its acquisition of Aristotle Exchange's federally registered exchange and clearinghouse, allowing it to develop its own trading platform. The acquisition expanded Underdog's role beyond providing customer access to other prediction market exchanges.

For now, the Tennessee dispute leaves Underdog fighting on two fronts: defending its federally regulated prediction market operations while facing potential consequences for its existing fantasy sports business.

The lawsuit has not resolved whether Tennessee can enforce its gambling laws against Underdog's sports contracts or take action against its fantasy sports license.