jili tutorial

Underdog’s Five-State Legal Blitz: A Deep Dive into the Battle Over Prediction Markets

By jili tutorial · September 11, 2026

Underdog’s Five-State Legal Blitz: A Deep Dive into the Battle Over Prediction Markets

Introduction

Just days after surrendering its daily fantasy sports (DFS) licenses in seven states, Underdog has gone on the offensive. The operator filed lawsuits against five states on September 8, seeking a permanent injunction to block state gaming laws from reaching its prediction‑market products. This move marks a decisive escalation in a regulatory war that pits state gambling authorities against a growing industry that argues its contracts are federally regulated commodities. Here, we unpack the legal arguments, the strategic pivot behind Underdog’s actions, and what this fight means for the future of sports betting in the United States.

The Lawsuits and Core Argument

Underdog sued Massachusetts, New Mexico, Ohio, Wisconsin, and Washington. In each complaint, the company asks the court to declare that applying state gambling laws to its prediction‑market business would violate the U.S. Constitution’s Supremacy Clause. This clause establishes that federal law takes precedence over conflicting state law. Underdog’s central claim is that its event contracts fall under the exclusive jurisdiction of the Commodity Futures Trading Commission (CFTC), meaning states cannot regulate them as sports betting.

Why These Five States?

All five are already involved in litigation or enforcement actions against other prediction‑market operators. By filing first, Underdog establishes standing – it can argue that it faces a credible threat of similar action. The company is effectively seeking a preemptive ruling before any state can fine or shut down its operations.

Strategic Pivot: From Daily Fantasy Sports to Prediction Markets

Abandoning Seven DFS Licenses

Earlier, Underdog withdrew its DFS operations from Maryland, Massachusetts, Michigan, Mississippi, New Jersey, Ohio, and Pennsylvania. Many observers interpreted this as a retreat. In reality, the move may have been a calculated step to clear the legal path for prediction markets. By exiting those states’ DFS licensing frameworks, Underdog reduces its exposure to state gambling regulations that could conflict with its new business model.

Timing With the NFL Season

The lawsuits arrive just as the NFL season – the most lucrative period in the U.S. sports betting calendar – kicks off. This timing is no coincidence. Underdog wants to protect its prediction‑market revenue during the high‑volume weeks when engagement peaks. The company likely expects a surge in trading on CFTC‑regulated exchanges for NFL‑related event contracts.

DFS vs. Prediction Markets: What’s the Difference?

Underdog started as a DFS operator but now views prediction markets as a far larger growth opportunity. Sacrificing seven DFS licenses signals a major corporate bet on the new product line.

The Regulatory Conflict: Federal vs. State Authority

The CFTC’s Role in Sports Event Contracts

The CFTC oversees futures, options, and swaps – including event‑based contracts like those offered by prediction markets (e.g., Kalshi, Polymarket). Underdog argues that its contracts meet the legal definition of “commodity interests” and therefore fall under federal rather than state jurisdiction. If the courts agree, states would be barred from enforcing gaming laws against these products.

The Supremacy Clause Argument – A Simple Example

Imagine a federal law says “the price of corn futures can only be regulated by the CFTC.” A state then tries to ban corn‑futures trading as illegal gambling. Under the Supremacy Clause, the state law would be preempted. Underdog makes the same argument for sports event contracts: because the CFTC already regulates them (under the Commodity Exchange Act), states cannot step in.

Courts have reached opposing conclusions on this question:

This inconsistency creates uncertainty for companies like Underdog. The operator’s senior vice president of government affairs, Stacie Stern, told SBC Americas that “everyone can see what’s happening in our industry: it’s a mess. We need the Supreme Court to decide whether we’ll have one enforceable federal standard or state‑by‑state regulation.”

The Supreme Court Wildcard

Last week, New Jersey petitioned the U.S. Supreme Court to decide whether federal commodities law prevents states from regulating sports event contracts offered through CFTC‑regulated exchanges. That case – if accepted – could finally resolve the split. Underdog’s lawsuits are designed to add pressure and possibly consolidate the issue before the high court.

Broader Industry Implications

Impact on Traditional Sports Betting

The American Gaming Association (AGA) has raised alarm that prediction markets are eating into state‑regulated sports betting. The AGA estimates that Americans will legally wager $29.5 billion with regulated sportsbooks during the 2026 NFL season – virtually unchanged from last year. The trade group blames the explosion of prediction markets for the stalled growth of traditional sportsbooks. If Underdog wins its cases, state‑regulated operators could see even more market share drain away to federally‑backed exchanges.

What’s Next for Prediction Markets?

In the meantime, Underdog is betting that the courts – and perhaps the Supreme Court – will see its prediction markets as a commodity exchange, not a gambling operation.

Conclusion

Underdog’s five‑state legal offensive is not a spontaneous reaction but the culmination of months of strategic repositioning. By surrendering DFS licenses and suing states that have already shown hostility to prediction markets, the company is forcing a federal showdown. With the NFL season generating billions in wagering activity, the stakes could not be higher. As Stacie Stern put it, “We’ve worked with regulators, we respect them, and we didn’t want to sue, but sometimes it’s the only way to resolve a dispute.” Whether the courts agree will shape the future of sports event trading in America for years to come.