Underdog Sues Tennessee Challenging State Authority Over Prediction Markets

The legal battle for control over prediction markets has reached a new boiling point. Underdog, a prominent player in the sports betting and prediction market industry, has filed a federal lawsuit against the state of Tennessee. The company is challenging state efforts to regulate its offerings under local gambling laws, arguing that federal authority should take precedence. The complaint, filed in the U.S. District Court for the Middle District of Tennessee in Nashville, marks a significant stand against state-level oversight.

The lawsuit names Attorney General Jonathan Skrmetti and members of the Tennessee Sports Wagering Council as defendants. Underdog claims that the threat of state enforcement represents a direct and imminent danger to its business operations and its users. The company describes its situation as a "Hobson’s choice," where any path taken would result in irreparable harm. This case highlights the ongoing friction between individual state powers and centralized federal legislation in the evolving American betting landscape.

Numbers and facts

At the heart of the conflict is the classification of event contracts. Companies like Underdog and Kalshi argue these are financial products overseen by the Commodity Futures Trading Commission (CFTC). Conversely, state regulators view them as gambling. A late-September ruling by the U.S. Court of Appeals for the Sixth Circuit initially bolstered state positions. Circuit Judge Julia Smith Gibbons rejected the argument that sports contracts automatically meet the definition of swaps under the Commodity Exchange Act (CEA).

Underdog's legal filing uses strong language to describe the current regulatory climate:

"The threat of Defendants’ attempted enforcement of Tennessee law poses a direct and imminent threat to Underdog’s business and its users, and leaves Underdog with a ‘Hobson’s choice’ wherein both its options will cause irreparable harm." - Underdog Legal Complaint, Nashville District Court

Significantly, the CFTC issued an interim final rule on October 9 that excludes traditional gambling products from the federal definition of a swap. Meanwhile, the agency has submitted two additional rules to the White House Office of Management and Budget (OMB) to clarify oversight. The legal environment remains fractured; while U.S. District Judge Katherine Menendez in Minnesota recently ruled that some contracts fall under exclusive federal jurisdiction, Judge William Griesbach in Wisconsin issued a conflicting opinion just one day later.

Background

The expansion of prediction markets has triggered a wave of litigation across the United States. Beyond Tennessee, New York is also a primary battlefield, where Attorney General Letitia James is suing Kalshi to shut down its operations as an illegal gambling business. Platforms often rely on the CEA to bypass stringent state gambling commissions. For providers like Underdog, the stakes are high, especially as major firms like IG Group have expressed interest in acquisitions, and companies like Robinhood and Coinbase report growing engagement in the sector.

Furthermore, the CFTC has warned about manipulation risks in "mention markets," where participants wager on whether a public figure will use specific words or appear at certain events. A notable instance involved former White House teleprompter operator Gabriel Perez, who was ordered to disgorge $107,539.02 in profits and pay a $65,000 civil penalty for trading on President Trump mention contracts. Such incidents fuel critics who argue these markets are "functionally gambling," a sentiment echoed by the National Council on Problem Gambling (NCPG).

Why it matters for German players

For players in Germany, these U.S. legal disputes may seem distant, but they underscore the importance of clear regulation. In Germany, the legal situation is firmly established by the Interstate Treaty on Gambling 2021 (GlüStV 2021). Any entity offering sports betting or virtual slots must obtain a license from the Gemeinsame Glücksspielbehörde der Länder (GGL). Prediction markets, as operated by Underdog in the U.S., have little room for regulatory gray areas in Germany; they would be classified as either financial derivatives under BaFin or gambling under GGL oversight.

German players benefit from strict protections, including a 1,000 Euro monthly deposit limit monitored via the LUGAS system. Additionally, a 1 Euro per spin limit applies to virtual slots. Unlicensed offshore operators, often based in Curacao or Malta, do not provide these safeguards. The U.S. lawsuits demonstrate that a lack of clarity leads to protracted litigation, whereas the German model provides legal certainty through the GGL whitelist. German customers should avoid platforms not on this list to ensure they are legally protected in case of disputes.

What it means for GGL-licensed casinos

For licensed German casinos, the international debate validates their regulated approach. While U.S. entities fight over whether a bet is a financial product, German operators follow clear rules regarding taxation and player protection. The GGL strictly ensures that no manipulable bets or unauthorized event markets are offered. For operators, this represents a competitive advantage, as customers trust the government-verified fairness. However, the Underdog case also shows that innovation in betting continues to challenge existing laws globally. German providers must stay alert to how the GGL evaluates new betting forms to remain competitive with international trends without compromising high standards of player protection.