CFTC federal preemption tested as seven states move against Underdog

Underdog's lawsuit against Tennessee, filed in the Middle District of Tennessee's Nashville division, is the seventh version of the same legal argument the company has now made across as many states. The argument is straightforward: the Commodity Futures Trading Commission regulates event contracts under the Commodity Exchange Act, and that federal authority displaces state gambling law entirely. What Tennessee calls unlicensed sports betting, Underdog calls a federally regulated financial instrument.

The states, so far, are not persuaded. Connecticut, Michigan, Nevada, New York, and Ohio have each moved to block prediction market operators, and Google has updated its advertising policy to bar Kalshi and its competitors from targeting residents in all five. That is a private company reading the legal map and making a business decision about where it is willing to stand.

The federal preemption argument is not new, and it is not weak. Under the Supremacy Clause, a valid exercise of federal regulatory authority over a subject matter does preempt conflicting state law. The CFTC's jurisdiction over commodity futures and swaps under 7 U.S.C. § 7a-3 is well-established. If event contracts on sporting outcomes qualify as commodity futures, the doctrinal logic follows. That is what the Kalshi litigation has been testing, and it is what the Ohio appellate result now complicates.

Here is where I part from the consensus read: the preemption argument is stronger in theory than the industry's current posture makes it in practice. Seven simultaneous suits in seven different circuits is not a coordinated legal strategy — it is a race to find one court willing to enjoin enforcement while the underlying question remains unresolved at the appellate level. The Ohio appeals court already declined to give Kalshi the relief it sought on rehearing. A company filing in Nashville the week after that result is betting on judicial geography, not legal clarity.

The Commodity Exchange Act was written to regulate financial markets. It was not written to consider whether a contract resolving on a basketball player's minutes per game is functionally a swap or a sports wager. That gap — between what the statute covers and what the industry is currently offering — is where enforcement discretion lives, and where state attorneys general are inserting themselves. Whether the CFTC has taken a definitive public position on sports-event contracts as the central contested category is not settled on the record available.

The S&P survey data adds a different kind of pressure. Seventy percent of prediction market users traded sports contracts. Thirty-three percent traded political outcomes. If the industry's strongest legal claim is that these instruments serve price discovery and information aggregation functions that justify federal regulatory protection, a user base that is functionally indistinguishable from a sports betting customer base makes that claim harder to sustain before a regulator or a court that is already skeptical.

The legal standard that governs here is whether a state law "stands as an obstacle to the accomplishment and execution of the full purposes and objectives" of federal law — the obstacle preemption test from Hines v. Davidowitz, carried forward through decades of commerce clause and regulatory federalism doctrine. Underdog wins if it can show that Tennessee's enforcement prevents the CFTC from achieving what Congress intended the CEA to achieve. It loses if a court concludes that Congress never intended the CEA to reach this product category at all.