DraftKings Dispute with Former Executive Presents Battle Over Choice of Law for Non-Compete Agreements | Seyfarth Shaw LLP

The continuing battle between DraftKings Inc. and its former government, Michael Hermalyn, stays contentious, with the District of Massachusetts’ choice to implement Hermalyn’s non-compete now appealed and argued to the First Circuit.

Background

DraftKings, a Boston-based on-line sports activities and gaming platform, employed Hermalyn as a Senior Vice President. He resigned in February 2024, consummating negotiations with DraftKings’ direct competitor, Fanatics, to take up a near-identical function there. Nonetheless, Hermalyn’s restrictive covenants with DraftKings instantly prohibit, amongst different issues, his acceptance of such a task. The agreements additionally present that they’re ruled by Massachusetts regulation. Maybe due to this, in early 2024, Hermalyn labored to transition his residence to California.

DraftKings alleges Hermalyn took with him “keys to the dominion”-level paperwork, together with a spreadsheet of lots of of enterprise companions and a playbook of DraftKings’s operations for extremely valued purchasers. The corporate contends Hermalyn’s switch to Fanatics and strikes towards California residency have been a part of a concerted scheme to misappropriate its confidential data, poach its staff, and escape legal responsibility by way of California’s stringent ban on non-competes.

The case includes competing litigations: Hermalyn filed swimsuit to nullify his restrictive covenants in California state court docket in Los Angeles whereas DraftKings efficiently moved for injunctive reduction to implement them in Massachusetts federal court docket.

Alternative of Regulation Battle

Procedural disputes have saved the California motion comparatively slow-moving. Nonetheless, the Courtroom doubtless should look at the not too long ago enacted § 16600.5 of the California Enterprise and Professions Code. Part 16600.5, aimed toward strengthening California’s already stringent non-compete ban, voids non-compete agreements “no matter the place and when the contract was signed.” Prior California regulation already allowed most employees who primarily reside and work in California to void provisions that might require the employee to adjudicate a non-compete dispute out-of-state (though there are some exceptions). See Cal. Labor Code § 925. Nonetheless, California courts have held that § 925 doesn’t management instances whose operative details arose outdoors of California or claims by plaintiffs who didn’t primarily reside and work in California on the related time.

Although the language of § 1660.5 seems unambiguous, whether or not that regulation can truly pack as important a punch as supposed is unclear, as non-compete disputes like this one typically contain a fancy array of choice-of-law and -forum questions. Courts haven’t but addressed whether or not California can truly regulate a contract negotiated in, carried out in, and ruled by the regulation of one other state with minimal, if any, connection to California (not less than till a person decides to decamp to California for a brand new employer), and the brand new regulation raises questions of Constitutional considerations in addition to comity considerations. But Hermalyn’s success rises and falls on whether or not he can set up that California’s anti-non-compete coverage ought to overtake Massachusetts’ enterprise protections, even when a Massachusetts enterprise contracted with an (initially Massachusetts-based) worker to pick Massachusetts because the governing regulation.

The First Circuit appeared skeptical of Hermalyn’s argument for making use of California regulation.[1] As an illustration, Choose O. Rogeriee Thompson pointedly famous: “It’s not clear to me why California’s coverage considerations have higher import than Massachusetts’s.” Likewise, Choose William Kayatta questioned the potential precedent set in invalidating the non-compete when the overwhelming majority of states enable such agreements in sure circumstances, asking whether or not all of those states “should create an exception that claims you’ll be able to compete in case you transfer to California.” DraftKings’ counsel seized on an analogous argument, contending a choice in favor of Hermalyn would invite gamesmanship to evade obligations imposed in Massachusetts. He described Hermalyn’s conduct as “egregious” and this case as being a “paradigmatic” instance “for why Massachusetts companies want safety from this type of factor.” DraftKings’ counsel additional argued that the 2 states are “coequal sovereigns in our system and every has handed a statute that displays the thought-about coverage judgments of their respective legislatures,” and that there’s “no foundation to say that California’s regulation trumps Massachusetts’s regulation just because California feels extra passionately about these points.”

The First Circuit thus seems poised to reject Hermalyn’s arguments and affirm enforcement of the non-compete. If correct, the California court docket should contemplate whether or not it could actually one way or the other take a differing strategy. As but, whereas the Los Angeles Superior Courtroom has (unsurprisingly) acknowledged Hermalyn’s case would doubtless prevail underneath California regulation, it denied Hermalyn’s request for an injunction, emphasizing that doing so would “have the impact of enjoining the proceedings within the Massachusetts case.” Such a choice, the Courtroom famous, would “require[] an distinctive circumstance that outweighs the risk to judicial restraint and comity rules.” It thus stays to be seen how the California court docket will in the end rule (particularly if the First Circuit affirms the trial court docket’s injunction prohibiting Hermalyn’s function with Fanatics), and what the influence will probably be of two doubtlessly conflicting selections on the applicability and enforceability of § 16600.5.

Conclusion

Hermalyn’s odds don’t seem nice within the First Circuit. DraftKings’ choice to swiftly transfer for reduction in its homebase, the place non-competes stay legitimate in the event that they meet sure necessities, has to date preserved Hermalyn’s obligations. Nonetheless, the California motion stays lively, and California has continued to bolster its non-compete ban. Whereas each the state and federal actions right here have famous Hermalyn’s argument dangers judicial overstep, it stays undecided whether or not or not California can statutorily void contracts made out of state. Dueling judgments could make this litigation the suitable check case for a better court docket ruling on California’s skill to successfully invalidate non-competes underneath the legal guidelines of the 46 states that (at present) allow them. Whereas the present case standing suggests DraftKings has the sting, any future bets stay dangerous given the unsettled nature of the home guidelines in these circumstances. We’ll hold you up to date on the motion as this case develops.

[1] Actually, the character of the commerce secret misappropriation allegations towards Hermalyn, lots of which the district court docket discovered credible, mixed along with his representations in response, which the district court docket discovered missing in “candor,” have performed him little favors.