Underdog files seventh state lawsuit as circuit split deepens

A cease-and-desist landed on Underdog's desk on October 9. Tennessee's Sports Wagering Council told the company to stop offering sports event contracts or face civil penalties, criminal investigation, and the loss of its fantasy sports licence. Underdog's answer, filed in federal court this week, is that Tennessee has no jurisdiction to send that letter in the first place.

The argument is familiar. Federal law governs swaps. Underdog's contracts are swaps. States cannot enforce their gambling statutes against a federally licensed exchange. Every prediction market operator fighting this battle has made some version of this claim, and the courts have been answering it differently depending on which circuit you are in.

That is the problem Underdog walked into. The Sixth Circuit, which covers Tennessee, ruled against Kalshi in September. The court found that sports event contracts likely do not qualify as swaps, and added that even if they did, federal preemption would not stop Tennessee or Ohio from applying their laws. Underdog is now suing in a circuit that already told its main competitor it would lose. Tennessee is the seventh state Underdog has sued — Connecticut, Massachusetts, New Mexico, Ohio, Washington, and Wisconsin came before this — but the jurisdictional ground in this one is visibly weaker than in most.

What makes this filing worth watching is not whether Underdog wins in Tennessee. It probably does not. The value is in what it signals about the broader litigation strategy. Underdog acquired Aristotle Exchange earlier this year specifically to compete in the prediction markets space. Companies that have spent real capital on that transition cannot afford to cede state markets quietly. Every lawsuit, even a losing one, extends the runway before enforcement bites, and keeps the pressure on Congress and the CFTC to resolve the underlying question before the courts do it for them.

The circuit split is genuinely unresolved. The Third Circuit sided with Kalshi in New Jersey. An Illinois federal judge blocked that state's enforcement against Kalshi this month, finding the contracts likely qualify as swaps. The Ninth Circuit went the other way for Nevada and California. The Sixth went the other way for Tennessee and Ohio. The Supreme Court has been asked to take the New Jersey case, with a coalition of thirty-nine state attorneys general and the NFL urging it to do so.

The reporting says the Supreme Court petition is just one more filing in a crowded docket. I don't think that's where this lands. Four circuits have now weighed in with contradictory answers on a question that determines the legal status of a multi-billion dollar industry. The Court does not ignore splits that clean. The more Underdog and others file losing lawsuits in Sixth Circuit territory, the more they are building a record that screams for resolution from above rather than below.

The CFTC's proposed rule — which would formally expand the swap definition to cover sports, politics, and cultural event contracts — was published last week and changes the calculus further. If the rule survives its comment period and takes effect, some of these circuit-level disagreements become moot. If it gets challenged in court, the split gets messier. Either way, the states filing cease-and-desist letters are not waiting to find out.