Underdog submitted a federal lawsuit against Connecticut on Tuesday in response to the state issuing cease-and-desist orders to operators of prediction markets.
According to the lawsuit, Underdog operated a federally regulated Designated Contract Market (DCM) that is not subject to state gaming regulation. This is effectively the disagreement that has defined the issues between local officials and prediction markets, who maintain they fall under the authority of the Commodity Futures Trading Commission (CFTC).
Underdog responds to Connecticut
Last week, Connecticut sent cease-and-desist orders to nine platforms offering prediction markets: Coinbase, crypto.com, Gemini, Novig, Polymarket, ProphetX, Robinhood, Underdog, and Webull. Gov. Ned Lamont (D) confirmed the action had been taken by the Connecticut Department of Consumer Protection (DCP) because of its belief that sports event contracts violated state gaming laws.
Underdog’s ensuing lawsuit claimed that the DCP and local officials “unlawfully” attempted to restrict sports prediction markets, which fall under different regulatory standards.
“This action seeks to prevent the Attorney General of Connecticut, the Commissioner of the Connecticut Department of Consumer Protection, and the Director of the Department’s Gaming Division from unlawfully exercising jurisdiction over, regulating, or terminating Underdog’s offering of lawful derivatives contracts on federally regulated markets,” the lawsuit read.
Underdog is seeking declaratory and injunctive relief, or a non-monetary decision that allows Underdog to continue offering prediction markets without fear of future interruption.
Conflicting opinions
Underdog argued that Connecticut’s attempt to block prediction markets was preempted by the Commodity Exchange Act and the U.S. Constitution’s Supremacy Clause, which entrusts the federal government with the ultimate say over conflicting state laws.
Connecticut isn’t backing down from its position. The DCP — which also sent a cease-and-desist to Kalshi in August — has now ordered 10 prediction market operators to shut down and subpoenaed at least 30 affiliate companies as part of its enforcement action.
"Our laws are clear: sports betting may only be offered by legal, licensed sportsbooks that adhere to our regulations and technical standards," said DCP Commissioner Bryan Cafferelli.
Equally, Underdog isn’t pivoting from its legal approach. It already sued Massachusetts, New Mexico, Ohio, Washington and Wisconsin this month, all in an attempt to maintain its right to offer sports event contracts.
This also comes at an important time for Underdog, which is hitching its success as a company to the growing momentum of the prediction industry.
Underdog all-in on prediction markets
Underdog launched in 2020. It quickly became known for its fantasy contests before it dabbled in legal sports betting, offering betting odds in North Carolina and receiving launch approval in Missouri.
The company later backed out of sports betting and surrendered its DFS licenses in seven states last week to put its full focus on prediction markets. Company CEO Jeremy Levine said that wasn’t his intention, but state lawmakers forced his hand by saying it couldn’t offer conflicting state and federally regulated products in the same jurisdiction.
Levine also touted the growth potential of prediction markets, which have already had a huge impact on Underdog.
“When we could only offer a sliver of the product, our customer handle was, doing the math in my head right now, well, a fourth what sportsbook’s customer handle is,” Levine said at the conference. “And prediction markets I think have even been higher because you get the trading dynamic and we’re seeing the climb happen rapidly in real time. So that’s super exciting.”
The Trade Handle Prediction Markets Take
Just as state officials have become emboldened in their ambition to regulate prediction markets, companies such as Kalshi, Polymarket, Novig, and Underdog have been willing to take state officials to court. Operators have the upper hand under current legislation since federal regulation preempts state authority, although several recent decisions have swayed in favor of the states. The rope is being pulled tighter at both ends, emphasizing the need for a universal ruling that sets the rules and regulations for the industry.