Underdog Exchange Takes Legal Stand Against States Over Prediction Market Regulations

Underdog's Legal Battles Begin

Underdog Exchange DCM, Inc., along with its affiliated entity, UDM, LLC, known as Underdog Predict, has filed federal lawsuits against the states of Ohio, Massachusetts, and Wisconsin. This legal move follows the company's recent decision to cease its daily fantasy sports operations in seven states. The regulators’ assertion that it can't operate prediction and fantasy sports concurrently in those areas sparked the conflict.

Over the weekend, @Underdog announced it will give up its daily fantasy sports licenses in seven states. @JerLevine reported the states told the company it cannot offer both its prediction markets and DFS competitions in their jurisdictions.https://t.co/uma0Rgm3kx

— RLinnehanSR (@RLinnehanSR) September 8, 2026

These legal actions target top state officials, including Ohio's Attorney General Andy Wilson and the Executive Director of the Ohio Casino Control Commission, Andromeda Morrison. Underdog argues that its dual classification—both as a designated contract market and a futures commission merchant—places it under the jurisdiction of the Commodity Futures Trading Commission (CFTC) according to the Commodity Exchange Act. This differentiation could profoundly influence the regulatory framework surrounding the company.

Ohio's Aggressive Regulatory Approach

Ohio's strict stance toward its competitors sets a significant precedent. For instance, last April, the Ohio Casino Control Commission proposed a staggering fine of $5 million against Kalshi, claiming it engaged in activities deemed unlicensed sports betting operations. Although Kalshi sought federal relief, an Ohio judge denied the request for an injunction that would prevent the enforcement of the state's actions during the ongoing litigation. This develops a pattern where Ohio's regulatory environment proves formidable, a challenge Underdog now finds itself grappling with.

In its legal filings, Underdog asserts it faces a similar existential threat. The company maintains that the enforcement actions from Ohio pose a direct risk to its operations. It describes its situation as a “Hobson’s choice”: either face extensive liabilities by continuing operations in Ohio or align with state laws that the company believes conflict with federal regulations. This pivotal moment could either reshape Underdog's business model or push it out of the Ohio market entirely.

Massachusetts and the Legal Crossfire

Massachusetts has also entered the mix, with Underdog naming prominent officials, such as Attorney General Andrea Joy Campbell and Massachusetts Gaming Commission Executive Director Dean Serpa, as defendants. This heated confrontation follows Massachusetts securing a preliminary injunction against Kalshi’s sports event contracts. Hence, it highlights an ongoing battle where one state’s regulations clash with the federal framework.

Underdog contends that these state actions contradict federal regulations and infringe upon the Supremacy Clause of the Constitution. They assert that event derivatives serve an essential function in price discovery and risk management, distinguishing them from conventional gambling operations. This situation isn't just a minor squabble; it signifies a broader clash between state interests and the federal definition of commerce in prediction markets.

A Fractured Legal Environment

The contrasting legal interpretations underscore a fragmented regulatory landscape. A recent Ninth Circuit ruling classified Kalshi's sports event contracts as bets rather than trades, subsequently enabling Nevada to enforce gambling regulations on those transactions. This directly contradicts an earlier ruling from the Third Circuit, which favored Kalshi by blocking New Jersey from imposing its actions. The inconsistency in preferences among various circuits could derail some companies while giving others undue advantages.

Furthermore, Wisconsin has surfaced as another battleground where Attorney General Josh Kaul has actively targeted platforms like Kalshi and Polymarket. Alleging they unlawfully facilitate sports betting operations, Kaul's office maintains that “disguising illegal activity doesn’t transform it into lawful conduct.” Such rhetoric reflects the fierce stance regulators are taking against these emerging platforms, reinforcing the perception of a legal crackdown.

The CFTC's Strong Stance

The CFTC’s involvement hasn’t gone unnoticed. The agency filed a lawsuit against Wisconsin officials, cautioning against any state-level disruption of federal market regulations. CFTC Chairman Michael Selig emphasized that non-compliance with federal oversight would lead to litigation actions from the CFTC itself. This suggests an impending showdown between federal expectations and state execution of gaming regulations.

This legal strife also impacts tribal interests, with federal courts permitting claims from the Ho-Chunk Nation against Kalshi. The allegation revolves around the assertion that accessible sports contracts may constitute Class III gaming on their lands. Here’s the thing: the involvement of tribal elements adds another layer of complexity to an already convoluted situation.

Implications for the Prediction Market Sector

Underdog's situation highlights a critical point in the evolution of prediction markets. As the company seeks a permanent injunction and clear legal declarations affirming that federal commodities law supersedes state gaming regulations, it raises important questions. What this means for you, especially if you're working in this space, is that the legal operating environment might drastically shift. If Underdog wins, it could catalyze a new wave of acceptance for prediction markets, while a loss may serve as a stark warning for other emerging players.

This fight is emblematic of larger tensions within the marketplace. With various states pursuing their own regulatory agendas, the future of innovation in the prediction market space hangs in the balance. The resolution of these lawsuits could redefine the boundaries of what’s permissible in online betting and prediction markets, making this a saga worth watching closely.

Featured image: Underdog

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