Within the fast-paced world of digital sports entertainment and gaming, few names carry as much weight as DraftKings and Fanatics. As excitement towards the Super Bowl builds, tension between these industry giants peaked as they each seek to protect their valuable trade secrets and reputations. A recent move by a former executive, Michael Hermalyn, from DraftKings to rival company Fanatics sparked legal action, with DraftKings promptly seeking a temporary injunction to prevent potential misuse of confidential information during the event.
The U.S. District Court of Massachusetts granted DraftKings’ request, underscoring the importance of safeguarding proprietary information, particularly during such a crucial period in the sports betting calendar. While not fully prohibiting Hermalyn’s new employment with Fanatics, the ruling bars him from using any confidential data or soliciting DraftKings customers. This order will remain effective until a preliminary injunction hearing which is scheduled for April 2.[1] Additionally, the judge’s decision to expedite discovery, including a deposition for Hermalyn, underscores the gravity and urgency of the situation.
Background
The online sports betting industry is highly competitive, with the Boston headquartered company, DraftKings, renowned for its fantasy sports, mobile betting, and iGaming platforms being an industry leader. Michael Hermalyn, a senior executive, played a crucial role in DraftKings’ success, overseeing VIP customer engagement and retention.
However, Hermalyn’s tenure at DraftKings was tarnished by allegations of misconduct despite being generously compensated.[2] DraftKings accuses Hermalyn of misusing corporate funds for personal expenses and funneling them to his friend’s business without proper disclosure. Additionally, accusations of inappropriate conduct towards female employees, such as unwelcome physical contact and inappropriate remarks, have emerged, prompting DraftKings to investigate. On January 26, 2024, DraftKings initiated disciplinary action, but Hermalyn abruptly resigned on February 1, 2024, after nearly two decades with the company.[3] He immediately joined rival company Fanatics, raising concerns of unfair advantage and breach of contractual obligations.
Both parties took legal action, with Hermalyn filing a lawsuit in California to void noncompete agreements in his DraftKings contract to join Fanatics.[4] Meanwhile, DraftKings countersued in federal court in Massachusetts, accusing Hermalyn of accessing trade secrets during a meeting with Fanatics executives days before his departure from DraftKings.
Allegations by DraftKings
The saga began in February 2023 at last year’s Super Bowl when DraftKings claims Hermalyn secretly met with Fanatics’ CEO to explore job opportunities. Throughout the following months, he purportedly displayed insincere interest in his role at DraftKings while covertly encouraging his team to explore opportunities at Fanatics. Concurrently, he persuaded DraftKings to pay him and his team millions to stay.
On January 29, 2024 Hermalyn allegedly misled DraftKings by claiming unavailability due to a friend’s bereavement, but instead traveled to Fanatics’ Los Angeles offices.[5] Geolocation data and call logs revealed that during this time, he traveled to California and visited Fanatics’ offices, where he accessed DraftKings’ Google workspace from a non-company device. He downloaded the “(Master) SB 2024” spreadsheet, which only 21 DraftKings employees, out of thousands, are authorized to access.[6]
Moreover, he is accused of trying to establish California residency to challenge his non-compete agreements during this brief visit. On February 1, 2024, the day he resigned, Hermalyn filed a comprehensive 26-page complaint in California Superior Court. These extensive filings suggest potential prolonged coordination with Fanatics and its legal team, possibly spanning weeks or months, to circumvent his non-competition obligations to DraftKings.[7]
As a senior executive at DraftKings, Hermalyn had access to valuable trade secrets, including VIP player lists, research and development strategies, partnership details, employee information, and insights from confidential meetings. This information could benefit Fanatics by aiding in customer recruitment, leveraging partnerships, soliciting employees, and mimicking DraftKings’ strategies. In the gaming industry, customer loyalty is key, and Hermalyn knows how to keep VIP clients engaged. His departure and theft of secrets were allegedly timed to exploit DraftKings’ reputation during the Super Bowl for Fanatics’ gain.
Defense by Michael Hermalyn
Yet, DraftKings contends that records show Hermalyn accessed four DraftKings documents before his resignation.[8] Hermalyn argues that his professional experience and relationships are his own and not exclusive to DraftKings. He denies any misuse of information and claims DraftKings’ allegations lack substance.
Regarding the documents accessed, DraftKings’ own description of these documents undermines their significance, aiding Hermalyn’s defense. For instance, the 2021 presentation concerning a loyalty program was never implemented and contained outdated information, rendering it not valuable. Additionally, DraftKings has failed to establish that information regarding the “Master SB 2024” events and DraftKings clients was not publicly available.
Hermalyn vehemently denies downloading or using DraftKings’ information improperly.[9] He asserts compliance with proper departure procedures, returning all company property and collaborating with legal counsel to ensure no DraftKings documents remained in his possession. He also states he refrained from using or sharing any DraftKings information with Fanatics or third parties. Before resigning, he took deliberate steps to ensure he no longer possessed any DraftKings property, including segregating personal and company information and acquiring a new phone.[10] These actions allegedly demonstrate his commitment to fulfilling his obligations and avoiding impropriety.
Currently serving as president of Fanatics VIP, the sports betting division of the company, Hermalyn alleges that DraftKings’ non-compete agreements excessively restrict his ability to work. He challenges DraftKings’ agreements as overly broad and contrary to California law.[11] It is undisputed that Hermalyn never resided or worked in Massachusetts, nor was he ever based out of DraftKings’ Massachusetts office. He lived in New Jersey and worked remotely from New York for a Massachusetts-based company.[12] Therefore, he argues that Massachusetts is the wrong venue.
Trade Secrets Misappropriation Claim
DraftKings alleges that Michael Hermalyn unlawfully misappropriated its trade secrets under both the federal Defend Trade Secrets Act (DTSA) [13] and the Massachusetts Uniform Trade Secret Act (MUTSA)[14]. To establish this claim, DraftKings must demonstrate that (1) the information constitutes a trade secret, (2) the trade secret has independent economic value from its secrecy, (3) DraftKings took reasonable steps to maintain its secrecy, and (4) Hermalyn misappropriated the trade secret.[15]
The alleged trade secrets include vital documents such as a spreadsheet outlining plans for entertaining key partners at the 2024 Super Bowl, a presentation pitching DraftKings to potential partners, a PowerPoint detailing a loyalty program for VIP players, and a weekly report tracking business development deals and strategies. Business contact information compilations are generally granted trade secret protection.[16]
Also, the information accessed by Hermalyn holds critical importance for DraftKings in maintaining and expanding its business with key stakeholders, especially high-net-worth customers and strategic partners. This significance is particularly heightened during major events like the Super Bowl, where industry players compete for these essential relationships. In the hands of a competitor, this information could be used to undermine DraftKings’ market position by exploiting its partnerships. DraftKings operates in the fiercely competitive market in which its strong VIP relationships are the “lifeblood of its business.”[17] So, this confidential information likely has independent economic value from its secrecy.
DraftKings has also implemented robust measures to protect its trade secrets, including confidentiality agreements, information security policies, and technological safeguards. Upon joining the company, every employee must sign a confidentiality agreement. The company enforces strict Information Security Policies governing technology usage, email systems, password management, and employee training. In addition to implementing standard security measures like password protecting company laptops, firewalls, and two-factor authentication, DraftKings significantly limits employees who can access the very documents Hermalyn stole.[18]
To prove misappropriation, DraftKings need only show that Hermalyn acquired one of its trade secrets through improper means, or disclosed or used a trade secret without consent.[19] Improper means includes theft or a breach of duty to maintain secrecy.[20] Despite acknowledging and agreeing to stringent confidentiality terms, Hermalyn breached his obligations by accessing DraftKings’ workspace from an external, non-DraftKings device while in California. Furthermore, DraftKings emphasizes the timing of Hermalyn’s actions as evidence of bad faith. Hermalyn’s download of commercially sensitive documents near the Super Bowl and at a rival company’s location are viewed as particularly egregious, as they could provide Fanatics with an unfair advantage in the highly competitive sports gaming industry.
Court Order
In response, the court issued a temporary restraining order against Hermalyn. This order imposes several restrictions aimed at preventing Hermalyn from using or disclosing DraftKings’ confidential information, soliciting business from the company’s clients, or engaging in activities that could harm DraftKings’ interests. Furthermore, Hermalyn is directed to return all DraftKings’ confidential information in his possession within three days. These restrictions will remain in effect until the court rules on DraftKings’ motion for a preliminary injunction, expected to occur in April.
Jurisdiction Issues and Other Claims
Further issues revolve around Hermalyn’s residency and the location where the case should be resolved. While Hermalyn was employed by DraftKings, he primarily resided in New Jersey and paid property and income tax there. Before that he previously lived in New York and is registered to vote in New York.[21]
DraftKings argues that the case should be resolved in Massachusetts per the contract signed by Hermalyn. During a brief visit to California from January 29 to January 31, 2024, Hermalyn took several actions to establish residency, including signing a lease, obtaining a driver’s license, purchasing a car, registering to vote, scheduling a doctor’s appointment, and exploring summer camp options. This series of events suggests a rapid and possibly calculated attempt to establish California residency and evade jurisdiction enforcing non-competition agreements, “in less time than the average trip to Disneyland.”[22]
The Court initially sided with DraftKings, noting Hermalyn’s recent move to California and his lack of work for DraftKings while there. Despite Hermalyn’s assertion of his right to pursue new opportunities per California law, he previously entered into Confidentiality Agreements governed by Massachusetts law.
[1] See TRO, DraftKings, Inc. v. Hermalyn, No. 1:24-cv-10299-JEK (D. Mass. Feb. 8, 2024), ECF Doc. 44.
[2] See Verified Complaint at 27, DraftKings Inc. v. Hermalyn, No. 1:24-cv-10299 (D. Mass. Feb. 5, 2024), ECF Doc. 1 (deceiving DraftKings, Hermalyn allegedly faked loyalty while securing lucrative million-dollar compensation).
[3] See Verified Complaint at 29, DraftKings Inc. v. Hermalyn, No. 1:24-cv-10299 (D. Mass. Feb. 5, 2024), ECF Doc. 1 (pending conduct evaluation, DraftKings reduced Hermalyn’s compensation and title, effective January 26, 2024); Julie Manganis, Exec Barred From Using DraftKings Info At New Fanatics Job, Law360 (Feb. 8, 2024, 6:37 PM EST), https://www.law360.com/massachusetts/articles/1795615?nl_pk=93d0899e-eff7-4b39-97ae-b24690bc4bc0&utm_source=newsletter&utm_medium=email&utm_campaign=massachusetts&utm_content=2024-02-09&read_more=1&nlsidx=0&nlaidx=0&detected=1 (resigning abruptly February 1, Hermalyn joined competitor Fanatics after working at DraftKings since 2000).
[4] See Julie Manganis, Exec Barred From Using DraftKings Info At New Fanatics Job, Law360 (Feb. 8, 2024, 6:37 PM EST), https://www.law360.com/massachusetts/articles/1795615?nl_pk=93d0899e-eff7-4b39-97ae-b24690bc4bc0&utm_source=newsletter&utm_medium=email&utm_campaign=massachusetts&utm_content=2024-02-09&read_more=1&nlsidx=0&nlaidx=0&detected=1 (contending jurisdiction, the case bounces between California Superior Court and U.S. District court of Massachusetts)
[5] See Verified Complaint at 21, supra 2 (showing email notifying executives of brief leave due to friend’s passing).
[6] See Id.
[7] See Id. at 5.
[8] See Def. Hermalyn’s Opp. to Pls.’ Mot. for TRO at 14, DraftKings, Inc. v. Hermalyn, No. 1:24-cv-10299-JEK (D. Mass. Feb. 7, 2024), ECF Doc. 33
[9] See Id. at 16-17.
[10] See Id. at 2,5.
[11] See Id. at 7.
[12] See Id. at 4 (“There is no dispute that Hermalyn never resided or worked in Massachusetts”).
[13] 18 U.S.C. §§ 1836
[14] M.G.L. c. 93 §§ 42–42G
[15] See Mem. of Law in Supp. of Pls. Mot. for TRO at 7, DraftKings Inc. v. Hermalyn, No. 1:24-cv-10299-JEK (D. Mass. Feb. 5, 2024), ECF Doc. 4; See also 18 U.S.C. §§ 1836(b)(1), 1839(3)
[16] See id. at 8 (citing EMC Corp. v. Pure Storage, Inc., 2016 WL 7826662, at *6 (D. Mass. Aug. 19, 2016)) (noting compilations of business contact information are “routinely granted trade secret protection”).
[17] See id. at 8.
[18] See id. at 9.
[19] See Mem. of Law in Supp. of Pls. Mot. for TRO at 10 (citing Builder Servs. Grp., Inc., 2023 WL 4685943, at *4 (D. Mass. July 21, 2023)).
[20] See Id.
[21] Verified complaint at 24.
[22] Id. at 24-25.
