Tennessee court will decide if CFTC authority stops state enforcement

Underdog filed its complaint in the US District Court for the Middle District of Tennessee on Tuesday, naming Attorney General Jonathan Skrmetti and members of the Tennessee Sports Wagering Council as defendants. The company had received a cease-and-desist order from the state, which threatened fines, civil penalties, criminal investigation, and revocation of its fantasy sports operator licence if it did not stop offering sports-event contracts.

Tennessee is the seventh state Underdog has sued. The previous six — Washington, Connecticut, Massachusetts, New Mexico, Ohio, and Wisconsin — have produced no resolution that binds anyone outside the jurisdiction where it was issued. That is the structural problem here, and no individual filing changes it.

The Sixth Circuit ruled in late September that state gaming regulators in Tennessee and Ohio may apply state gaming laws to prediction market platforms. Underdog is now asking a district court, one level below the circuit that just ruled against its position, to block enforcement anyway. The company's argument is that CFTC registration and the interim rule on sports-event contracts create federal preemption that overrides the Sixth Circuit's reading. That argument was available before the Sixth Circuit ruled. The circuit considered the preemption question and declined to accept it.

Underdog's complaint describes a "Hobson's choice" in which both compliance and non-compliance cause irreparable harm. That framing is legally useful for establishing injunctive relief standing, but it does not resolve the underlying preemption question. A district court granting a preliminary injunction would be acting against its own circuit's recent guidance. That happens, but it is uncommon, and the standard for irreparable harm is harder to meet when the regulatory threat has been building across seven states over several months rather than arriving without notice.

The CFTC's interim rule and proposed classification of sports-event contracts matter here, but not in the way Underdog's filings imply. An interim rule establishes agency intent; it does not automatically preempt state law. Federal preemption under the Commodity Exchange Act requires either an express preemption clause or a conflict sufficiently direct that state compliance is impossible alongside federal compliance. State gaming regulators are not arguing that prediction market operators must violate federal law — they are arguing that CFTC jurisdiction does not reach what they classify as gambling. That is a jurisdictional question, and the Sixth Circuit's September ruling suggests at least one federal appellate court finds the state classification plausible.

The S&P Global survey finding that 70% of prediction market users trade sports-event contracts explains why the states are pressing this fight. The commercial weight of the market is in sports. A ruling that definitively preempts state authority in that category would effectively remove regulatory control from the states that have the strongest political interest in retaining it. Those states are not going to accept a district court injunction as the end of the matter.

The Supreme Court has declined to take up prediction market cases so far. Until it does, each ruling is local. Underdog wins an injunction in Nashville, Tennessee appeals, the Sixth Circuit affirms its September position, and the company is back where it started — except with another circuit split if a different appellate court rules the other way, which is the only development that would force the Supreme Court's hand.