Underdog Just Sued Five States. The Prediction-Market War Is No Longer Kalshi’s Fight.

Rapid Response / Legal Alert | September 11, 2026

For most of the prediction-market boom, one company has occupied the center of the legal fight.

Kalshi offered sports event contracts. States called them illegal sports bets. Kalshi responded that it operates a federally regulated derivatives exchange beyond the reach of state gambling regulators.

Now Underdog has entered the fight—and it did not start small.

On September 8, Underdog Exchange DCM and affiliated entity UDM LLC, which operates Underdog Predict, filed five separate federal lawsuits against regulators in Massachusetts, New Mexico, Ohio, Washington, and Wisconsin. Each action seeks declaratory and injunctive relief preventing state officials from applying their gambling laws to Underdog’s sports event-contract business.

That alone would be significant.

But the litigation comes immediately after Underdog made an equally consequential business decision: it began shutting down its fantasy-sports “Drafts” product in seven states after regulators took the position that the company could not maintain state fantasy licenses while also offering its federally regulated prediction-market products. Those states include Maryland, Massachusetts, Michigan, Mississippi, New Jersey, Ohio, and Pennsylvania.

Underdog was given a choice.

It chose prediction markets.

And now it is asking federal courts whether the states had the legal authority to force that choice in the first place.

Underdog’s legal argument begins with the Commodity Exchange Act, not state gambling law.

Underdog Exchange is registered with the Commodity Futures Trading Commission as a designated contract market and derivatives clearing organization. Its broader corporate structure separates that federally regulated exchange from affiliated consumer-facing businesses, including Underdog Predict.

The federal theory is straightforward in concept, even if the statutory analysis is anything but.

The Commodity Exchange Act gives the CFTC exclusive jurisdiction over specified derivatives transactions conducted on federally regulated markets. Prediction-market operators therefore argue that once an event contract falls within that federal system, a state cannot simply recharacterize the same transaction as an illegal wager and prohibit it under state gambling law.

Put more simply:

If federal law says the product is a regulated financial contract, can Ohio or Massachusetts say it is actually an illegal sports bet?

Underdog says no.

The states will say the question is backwards.

Gambling regulation has traditionally belonged to the states. Congress knows how to displace state authority when it wants to. And nothing in the modern derivatives laws, the states argue, clearly transformed federal commodities regulation into a nationwide sports-betting license.

That disagreement is now producing some of the most consequential federalism litigation in the sports industry.

Underdog is entering a legal battlefield on which the rules are far from settled.

In April, the Third Circuit sided with Kalshi in its dispute with New Jersey. The court concluded that allowing New Jersey to prohibit Kalshi’s sports event contracts would interfere with the federal regulatory system Congress created under the Commodity Exchange Act. In the Third Circuit’s view, Congress intended to replace a patchwork of state regulation for covered derivatives markets with federal oversight.

Then the Ninth Circuit went the other way.

In KalshiEX LLC v. Assad, decided August 28, the Ninth Circuit held that Kalshi had not shown that its sports event contracts were protected from Nevada gambling regulation. More significantly, the court concluded that the contracts before it were sports bets rather than “swaps” within the meaning of the Commodity Exchange Act and therefore did not trigger the federal exclusive-jurisdiction provision Kalshi relied upon. The court also pointed to the CFTC’s existing regulation concerning gaming-related event contracts.

New Jersey has already asked the Supreme Court to resolve the conflict.

That background makes Underdog’s five-case strategy particularly interesting.

The complaints were filed in federal courts feeding into the First, Sixth, Seventh, Ninth, and Tenth Circuits.

Five lawsuits therefore create five potential paths toward appellate law.

But they are not five equally blank slates.

Underdog’s Washington case sits inside the Ninth Circuit, where Kalshi v. Assad is now binding appellate precedent. Unless Underdog can materially distinguish its contracts, regulatory structure, or legal theory, that case begins with a significant obstacle.

The other jurisdictions offer different terrain.

And in New Mexico, something even more unusual is happening: the CFTC itself sued the state earlier this year, asserting that New Mexico was intruding on the Commission’s exclusive federal jurisdiction over event contracts.

So this is no longer simply private operators complaining about aggressive state regulators.

A federal regulator and multiple private companies are increasingly advancing one conception of the regulatory system, while states are advancing another.

Kalshi’s litigation largely asks who regulates a particular product.

Underdog adds another question:

What happens when a company operates businesses on both sides of the regulatory divide?

Underdog has deep roots in fantasy sports. Fantasy contests exist largely because states permit them under state-specific statutes, regulations, licenses, registrations, or enforcement frameworks.

Prediction markets are different. Underdog is betting—commercially and legally—on federal derivatives regulation.

Those two systems are now colliding.

Several states effectively told Underdog that it could not enjoy the benefits of a state fantasy-sports license while simultaneously operating a prediction-market business that the state regarded as illegal gambling.

Underdog responded by surrendering the fantasy licenses.

That decision is strategically important because it converts what can sound like an abstract preemption dispute into an immediate business problem.

Federal preemption is no longer merely about which regulator gets to send the cease-and-desist letter.

It can determine which products a company is economically capable of offering at all.

Suppose prediction-market operators eventually prevail on the central preemption issue.

Suppose the Supreme Court concludes that qualifying sports event contracts fall within exclusive federal regulation and states therefore cannot directly prohibit them as gambling.

That still may not end the dispute.

States possess substantial authority over the licenses they issue for other businesses.

A regulator may therefore argue:

We are not regulating your federally protected prediction contract. We are deciding whether a company engaged in that activity remains suitable to hold our fantasy-sports, sportsbook, casino, or other gaming license.

That distinction could become critically important.

There is a meaningful legal difference between directly regulating a federally governed transaction and imposing collateral consequences through a separate state licensing regime.

But there is also an obvious preemption question if those collateral consequences are simply another way of punishing conduct federal law protects.

The doctrine eventually may have to distinguish legitimate state licensing standards from an indirect end-run around federal supremacy.

Underdog’s business decision has brought that future fight into view much earlier than many expected.

There is another reason the five simultaneous lawsuits deserve attention.

Underdog is seeking prospective relief before regulators necessarily bring enforcement actions directly against it in every jurisdiction.

That means standing and ripeness will matter.

Underdog’s theory is essentially that state enforcement against Kalshi and other prediction-market businesses, combined with regulators’ positions toward Underdog’s own operations, creates a sufficiently imminent threat of enforcement to justify federal judicial intervention now. Industry reporting indicates that substantially similar allegations appear throughout the five complaints.

That matters because federal courts do not issue advisory opinions merely because a business would like regulatory certainty.

Underdog will need to establish an actual controversy suitable for adjudication.

The form of the lawsuits is also telling. The company is suing state officials and seeking prospective declaratory and injunctive relief, the classic architecture used when a private party asks a federal court to prevent state officials from enforcing an allegedly preempted or unconstitutional state law.

In other words, these cases are not merely about gaming law.

They sit at the intersection of federal preemption, sovereign immunity, federal equitable jurisdiction, standing, ripeness, administrative regulation, and state police power.

Prediction markets may look like a new industry.

The litigation is drawing on some very old constitutional architecture.

It would be a mistake to assume that federal registration ends the analysis.

The states’ strongest argument is intuitive and historically powerful: gambling has traditionally been regulated by the states.

The Supreme Court’s 2018 decision in Murphy v. NCAA did not federalize sports betting. It invalidated a federal law preventing states from authorizing it and effectively returned policy choices to the states.

State regulators can therefore argue that it would be extraordinary for Congress—through derivatives legislation enacted principally to govern financial markets—to have silently displaced that traditional state authority and created a nationwide sports-wagering regime.

The Ninth Circuit expressly found that concern relevant when rejecting Kalshi’s expansive reading of the Commodity Exchange Act, including by invoking the potential breadth of the federal theory and concerns associated with the major-questions doctrine.

Prediction-market operators respond that this characterization assumes the answer.

Their position is that these products are not state-regulated sports wagers merely because their payoff depends on a football game. They are federally regulated contracts traded within a congressionally established derivatives framework.

That leaves the courts with the classification problem at the center of everything:

Is legal character determined by what the instrument looks like to the customer—or by the federal market structure in which it is traded?

There may be billions of dollars riding on the answer.

Underdog’s five lawsuits may not remain a five-state story for long.

On September 11, Connecticut regulators issued cease-and-desist orders to nine prediction-market companies, including Underdog Predict, accusing them of unlawful sports wagering.

That development illustrates the practical problem perfectly.

While federal courts work through preemption arguments case by case, states continue enforcing their own gambling laws.

The industry is scaling faster than the judiciary can establish a uniform rule.

The sports-betting market after Murphy developed around a relatively understandable bargain.

States legalized wagering.

Operators obtained state licenses.

States imposed taxes, age restrictions, responsible-gaming obligations, integrity requirements, advertising rules, and limits on what kinds of wagers could be offered.

Prediction markets potentially disrupt that bargain.

If federally regulated exchanges can offer economically similar products without going through those state systems, licensed sportsbooks may find themselves competing against companies operating under materially different rules.

If states can regulate those products anyway, the supposed benefit of a nationally uniform federal derivatives market begins to disappear.

And if states can use unrelated licenses to punish participation in prediction markets, companies operating across fantasy sports, sportsbooks, casinos, financial technology, and event contracts may have to decide which regulatory ecosystem they value most.

Underdog already made its choice.

That may prove to be the most consequential part of the story.

Watch the five cases separately.

A favorable ruling in Massachusetts, Ohio, Wisconsin, or New Mexico could create another appellate path toward a conflict with the Ninth Circuit. An adverse Washington ruling may arrive much more quickly because existing Ninth Circuit precedent constrains the district court.

Watch New Jersey’s Supreme Court petition.

Watch the CFTC’s own litigation.

And watch state licensing agencies just as closely as the federal courts.

Because the prediction-market battle is no longer merely about whether Kalshi can call a sports bet a derivative.

It is about whether the United States can sustain two different regulatory systems offering increasingly similar sports products at the same time.

Underdog has now put five federal courts in position to answer that question.

And by surrendering part of the business that built the company, it has made clear that this is no longer just a legal theory.

It is a bet on which regulatory system will win.