Underdog ignores court ruling in fresh Tennessee legal challenge

Underdog's Tennessee lawsuit ignores the circuit that just ruled against it

Underdog filed its seventh state lawsuit on Tuesday, asking a federal court to stop Tennessee regulators from enforcing a cease-and-desist order issued on October 9. The order threatened civil penalties, a criminal referral, and revocation of Underdog's fantasy sports licence. The company's argument is the one the prediction market industry has been running for two years: sports event contracts are swaps under federal commodities law, federal jurisdiction is exclusive, and state gambling statutes cannot reach them.

The Sixth Circuit Court of Appeals disposed of that argument in September. The court overturned an injunction that had protected Kalshi from Tennessee's regulators, found that sports event contracts likely do not qualify as swaps, and held that even if they did, federal law would not prevent Tennessee or Ohio from enforcing their own statutes. Tennessee sits inside the Sixth Circuit. The precedent is not persuasive authority Underdog can distinguish — it is binding on the federal district court where this lawsuit will land.

Underdog's lawyers know this. The filing is not primarily a legal strategy for winning in Tennessee. It is part of a circuit split that the industry has been building, case by case, toward a Supreme Court petition. Illinois sided with Kalshi this month. The Third Circuit sided with Kalshi in New Jersey. Against those, the Sixth Circuit and Ninth Circuit have ruled for the states. Thirty-nine state attorneys general and the NFL have already urged the Supreme Court to take the New Jersey case. Every new lawsuit, even one filed into unfavourable circuit precedent, adds weight to the argument that the question is unresolved and the justices need to resolve it.

That is a coherent strategy. It is also one that costs Underdog its fantasy sports licence in Tennessee if the district court applies the Sixth Circuit's September ruling, which it almost certainly will.

The consensus read on Underdog's position is that the company is making a good-faith legal argument with a plausible federal hook. There are active markets pricing a Supreme Court grant on the New Jersey petition. The grant story is real, the circuit split is real, and the federal preemption claim is not frivolous in circuits that haven't spoken.

What the consensus underweights is the specific position Underdog is in right now. Kalshi, at least, had an injunction when it entered Tennessee's jurisdiction. Underdog is operating under a cease-and-desist order, in a circuit that has already ruled against the precise argument it is making, having acquired Aristotle Exchange earlier this year specifically to enter this business. The district court has no good-law reason to issue the injunction Underdog needs to keep operating while the litigation proceeds.

Mike Dreitzer, chairman of the Nevada Gaming Control Board, said something worth taking seriously when he appeared on the Indian Gaming Association's webinar on Wednesday. He was not making a legal argument. He was making a factual one: that a $10 contract on an NFL game and a $10 bet on the same game are the same transaction, that peer-to-peer structure does not exempt an activity from gambling law because poker and horse racing are also peer-to-peer, and that cash-out options have existed in licensed sportsbooks for years. None of those observations appear in any circuit's opinion. They do not need to — but they describe the gap between the legal theory the industry is running and the product the industry is actually offering.