Underdog's federal preemption case splits from seven-state fight

Tennessee's attorney general, Jonathan Skrmetti, received a federal lawsuit on Tuesday that reads, on its surface, like six others Underdog has already filed. The company argues that the CFTC's regulatory authority over event contracts displaces state gaming law, that any enforcement action would be meritless, and that the choice Tennessee has left it — comply and shut down, or resist and face criminal investigation — constitutes irreparable harm either way. Seven states, seven complaints, one theory.

The problem with that framing is that it obscures what is actually happening in this litigation, which is not a coordinated federal strategy but a reactive holding action. Underdog is not winning these cases. It is buying time in each jurisdiction while waiting for a resolution that only one institution can provide, and that institution — the Supreme Court — has declined to take up prediction market jurisdiction so far.

The Sixth Circuit's ruling in late September is the structural fact that makes Tennessee different from the earlier six. That circuit court said explicitly that state gaming regulators in Tennessee and Ohio may use state law against prediction market operators. Underdog is now suing in a district that sits inside the Sixth Circuit. It is asking a lower court to enjoin enforcement under a legal theory that the appellate court above it has already found insufficient to override state authority. That is not a strong posture. That is a motion designed to force Tennessee to pause while Underdog looks for a circuit split or a change in the CFTC's posture.

Whether the CFTC's proposed classification of sports event contracts as a distinct regulatory category will create that change is the open question. The agency has moved — an interim rule, a proposed classification — but state regulators are treating federal guidance as advisory rather than preemptive, and the courts have so far agreed with them often enough that the pattern is becoming a precedent.

Here is where I think the consensus read is wrong. Most of the commentary on this litigation treats the state-by-state legal campaign as a sign that prediction markets are losing. I read it differently. Underdog has now established active federal litigation in seven jurisdictions simultaneously. Each filing preserves federal jurisdiction, creates a discovery record, and adds to the circuit-level inconsistency that makes Supreme Court review more likely over time. The S&P survey data adds a dimension the legal coverage keeps missing: seventy percent of prediction market users are trading sports contracts, forty-two percent of the broader population recognises the category, and the largest operators have built that awareness through advertising that five states have now effectively blocked through Google's policy update. The market is not theoretical. It is large enough that a definitive adverse ruling would be a significant regulatory event, not a niche enforcement action.

That scale changes the political economy of how Congress and the CFTC respond. A regulatory framework that eliminates a product used by tens of millions of people is harder to sustain quietly than one that affects a narrow financial instrument. Underdog's litigation strategy may be losing in circuit courts, but it is accumulating the kind of factual record — user numbers, market size, advertising reach — that tends to matter when legislators decide they need to act before the courts do.