Underdog sues five states over sports contracts after surrendering DFS licenses

A significant legal battle is brewing in the American online gaming sector that could fundamentally reshape the relationship between state authorities and federal regulators. Underdog, a prominent industry player, has taken the offensive by filing lawsuits against five US states. The core objective is to stop the enforcement of state gambling laws against products already regulated by the federal Commodity Futures Trading Commission (CFTC). These complaints, filed in federal district courts in Ohio, Massachusetts, Wisconsin, New Mexico, and Washington, seek a declaratory judgment that applying local gambling statutes to these services violates the Supremacy Clause of the US Constitution.

This legal escalation follows a strategic retreat from the Daily Fantasy Sports (DFS) market. Underdog recently surrendered its DFS licenses in seven states, including Massachusetts, Maryland, Michigan, Mississippi, New Jersey, Pennsylvania, and Ohio. This decision was prompted by state gaming boards informing the company that it could not operate both DFS and CFTC-licensed products under the same legal roof. Jeremy Levine, Underdog’s founder and CEO, confirmed that new entries in these states would cease following the NFL kickoff, although existing contests would be honored.

Numbers and facts

Underdog’s litigation focuses on the prediction market services, specifically sports event contracts. The company asserts that the CFTC holds exclusive jurisdiction over trading on designated contract markets (DCMs). Underdog has successfully completed the required CFTC approval procedures to facilitate these contracts. In the Massachusetts filing, the company highlights an enforcement action taken by the state’s attorney general against Kalshi, which resulted in a preliminary injunction that was later stayed during appeal. Underdog argues that similar enforcement against its operations would be meritless given its federal standing.

Stacie Stern, Underdog’s Senior Vice President of Government Affairs and Partnerships, emphasized the necessity of these lawsuits:

"We’re licensed by the federal government to offer markets, and we take our responsibilities as a federal exchange seriously and strictly comply with all regulations. Do we believe we are right on the law? Yes. Do we accept that these state gaming boards believe they are right on the law? Yes. We’ve worked with them, we respect them, and we didn’t want to sue, but sometimes it’s the only way to resolve a dispute. With cases and divergent rulings across the country, 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." - Stacie Stern, Senior Vice President at Underdog

Background

The dispute centers on whether sports-related prediction markets are gambling or financial derivatives. While traditional sports betting has been regulated state-by-state since 2018, event contracts often fall under federal financial oversight. Underdog views its offerings as derivatives subject to the CFTC, while states argue that any betting on sports outcomes remains within their regulatory purview. This friction has created a "mess" of conflicting rulings, prompting Underdog to seek a definitive federal standard to ensure business continuity.

Why it matters for German players

For players in Germany, this American legal conflict highlights the benefits of the clear national framework established by the 2021 Interstate Treaty on Gambling (GlüStV 2021). Unlike the US, where a product might be legal in one state but banned in another, Germany’s GGL provides a unified whitelist. German customers are protected by standardized limits, such as the 1,000 Euro monthly deposit cap via the LUGAS system and the 1 Euro stake limit for virtual slots. This prevents the regulatory chaos currently seen in the US and ensures that legal operators provide a safe environment nationwide.

What it means for GGL-licensed casinos

Licensed German operators benefit from the legal certainty provided by the GGL. While companies like Underdog are forced to abandon licenses due to conflicting state and federal mandates, German licensees can operate with the assurance that their permit is valid across all 16 federal states. The US situation serves as a cautionary tale about the challenges of introducing innovative products like prediction markets without early, clear legal classification, something that German regulators and operators must remain mindful of as the industry evolves.