Underdog sues Tennessee over prediction markets after Sixth Circuit Kalshi ruling

Underdog has filed a federal lawsuit in the U.S. District Court for the Middle District of Tennessee in Nashville, arguing that Tennessee cannot use state gambling laws to regulate prediction markets. For high-risk operators and their PSPs, the point is simple: the fight is now about whether event contracts sit under CFTC oversight or under state gambling enforcement.

1. Underdog’s complaint names Attorney General Jonathan Skrmetti and members of the Tennessee Sports Wagering Council as defendants, The Tennessee Journal reported. The company says Tennessee’s enforcement effort creates a “direct and imminent threat” to its business and users.
2. The filing says Underdog faces a “Hobson’s choice” in which either outcome would cause irreparable harm. In the company’s words, the threat of enforcement leaves it with two bad options, and both would damage the business.
3. The lawsuit lands after a late-September decision by the U.S. Court of Appeals for the Sixth Circuit that upheld Tennessee and Ohio regulators’ ability to use state gambling laws against prediction market platforms. Kalshi argued its products were swaps regulated exclusively by the Commodity Futures Trading Commission (CFTC), but Circuit Judge Julia Smith Gibbons rejected that position.
4. In that ruling, the court said Kalshi had not shown that its sports contracts met the Commodity Exchange Act (CEA) definition of a swap because they were not tied to events with the kind of financial, economic or commercial consequences contemplated by the law. The court also said that even if the contracts were swaps, the CEA would not stop Ohio or Tennessee from enforcing their gambling laws.
5. The broader issue is still the same one that keeps popping up in this space: whether event contracts are financial products under CFTC supervision or gambling products under state rules. The CFTC added another piece to that debate on October 9, when it issued an interim final rule excluding traditional gambling products, including sportsbook wagers and casino games, from the federal definition of a swap, and submitted two rules to the White House Office of Management and Budget.