Underdog Launches Five-State Legal Challenge to Block State Gambling Laws on Prediction Markets

Underdog, a prediction markets platform, has escalated its regulatory battle by filing lawsuits against five states seeking permanent injunctions against the enforcement of state gambling laws. The operator targeted Massachusetts, New Mexico, Ohio, Wisconsin, and Washington on September 8, arguing that applying state gambling regulations to its prediction-market business violates the U.S. Constitution's Supremacy Clause.

The legal action represents a significant strategic pivot for the operator. Just days before filing suit, Underdog surrendered its daily fantasy sports (DFS) licenses in seven states: Maryland, Massachusetts, Michigan, Mississippi, New Jersey, Ohio, and Pennsylvania. While some observers characterized the retreat as a loss, the timing suggests a calculated maneuver to consolidate resources around prediction markets, which the company now appears to view as a substantially larger growth opportunity than its original DFS business.

Underdog's core legal argument centers on jurisdictional authority. The operator contends that its sports event contracts fall exclusively under the Commodity Futures Trading Commission's (CFTC) regulatory purview, meaning states lack the authority to regulate them as gambling products. This positioning directly challenges state gambling regulators' traditional authority over wagering products within their borders.

The five targeted states already face litigation or enforcement actions involving other prediction-market operators, providing Underdog with grounds to argue it faces imminent regulatory threat. This legal patchwork underscores a fundamental tension in American gambling regulation: whether federally regulated commodities markets are exempt from state gambling oversight.

The timing carries additional weight. Underdog filed suit as the NFL season commenced, the most lucrative period on the American sports betting calendar. The American Gaming Association has warned that prediction markets are rapidly cannibalizing state-regulated sports betting revenue, with the trade group estimating Americans will wager $29.5 billion with regulated sportsbooks during the 2026 NFL season, virtually unchanged from the prior year. The AGA attributes stalled growth to prediction market expansion, adding regulatory urgency.

Federal courts have reached conflicting conclusions on the jurisdictional question. Some rulings suggest sports event contracts fall under exclusive federal authority, while others uphold state regulatory power. This divergence has created regulatory fragmentation that multiple industry participants now seek to resolve through appellate action.

New Jersey has already petitioned the U.S. Supreme Court to determine whether federal commodities law prevents states from regulating sports event contracts offered through CFTC-regulated exchanges. Underdog's litigation strategy appears designed to generate additional test cases supporting a Supreme Court resolution.

Stacie Stern, Underdog's senior vice president of government affairs and partnerships, characterized the lawsuits as a necessary escalation. She emphasized the operator's preference for regulatory cooperation while acknowledging litigation as the only viable dispute resolution mechanism given jurisdictional confusion. Stern expressed hope that the Supreme Court will establish a uniform federal standard rather than perpetuating state-by-state regulatory fragmentation.

From a broader industry perspective, this litigation reflects the fundamental instability in prediction markets' regulatory status. Operators face conflicting signals from federal regulators (who view contracts as commodities) and state authorities (who treat them as gambling). CasinoAdvisor continues tracking this jurisdictional battle as a primary determinant of future market structure and competitive positioning.