Andrew Stauber of Wilmer Hale
Against a growing trend of legislation and broader efforts seeking to limit or eliminate post-employment noncompetition restrictions, recent Massachusetts and First Circuit decisions in a dispute between DraftKings and one of its former executives highlight that not all efforts to enforce a noncompete will be a bust, even where an employee moves to California for a new job.
On September 26, 2024, in a decision penned by Circuit Judge O. Rogeriee Thompson, a First Circuit panel affirmed the April 30, 2024 issuance of a preliminary injunction by Judge Julia Kobick of the District of Massachusetts. The injunction barred former DraftKings executive Michael Hermalyn from, among other things, competing with DraftKings in connection with his new, similar role with DraftKings’ direct competitor, Fanatics. The injunction’s affirmation by the First Circuit is a significant development with national implications, and it ought to give pause to those who believe that fleeing to California is a winning ticket to evade enforcement of a noncompetition agreement.
Background
The case involves Michael Hermalyn, who, according to Judge Thompson, “had a plum job with Massachusetts-headquartered DraftKings” as head of its VIP customer program, until he quit to join Fanatics, a direct competitor. While at DraftKings, Hermalyn lived in New Jersey and worked out of the company’s New York offices, visiting Boston regularly. In January 2024, Hermalyn sought and ultimately procured an offer of employment with Fanatics to head up its LA office and run its nascent VIP customer program. Before he announced his resignation from DraftKings, Hermalyn took a trifecta of steps to establish California residency: he leased an apartment, obtained a driver’s license, and registered to vote.
On February 1, 2024—10 days before the Super Bowl—Hermalyn accepted the offer from Fanatics, announced his resignation from DraftKings, and filed suit in California state court, seeking a declaration that his noncompetition agreement—which contained a Massachusetts choice-of-law clause—was unenforceable under California law. DraftKings responded swiftly, suing Hermalyn in Massachusetts federal court, seeking, among other things, to enjoin him from breaching the covenants that restricted him from competing with DraftKings for one year after separation from employment. Following an evidentiary hearing, Judge Kobick issued an injunction applying Massachusetts law and enforcing Hermalyn’s noncompete. Hermalyn promptly appealed to the First Circuit.
Analysis
Given the absence of any dispute that Hermalyn breached his obligations, the First Circuit’s decision focused on the narrow question of whether California or Massachusetts law should control. As Judge Thompson noted at the outset of her decision, “Massachusetts and California aren’t exactly on the same page when it comes to non-compete agreements.”
Hermalyn argued that—pursuant to a 2018 Massachusetts Supreme Judicial Court case, Oxford Resources Group v. Hernandez—he should be able to parlay his newly minted status as a California resident and worker into winning the employee-friendly protections of California noncompete law. Among other things, Hermalyn pointed to California’s recent expansion of its laws to protect employee mobility (e.g., SB 699), including amendments codifying penalties for employers who enter into or seek to enforce invalid noncompetes, arguably including those with employees who subsequently relocated to California (i.e., exactly the fact pattern before the court in DraftKings).
The First Circuit panel squarely rejected all of Hermalyn’s arguments that California law was his trump card, and endorsed the application of Massachusetts law. First, unlike the employee in Oxford, who at all relevant times lived in California, Hermalyn worked outside of California both when he signed his noncompete and while working for DraftKings. Second, though the court acknowledged California’s strong policy interest in promoting employee mobility, it ruled that California’s interest was not “materially greater” than Massachusetts’s as codified in the 2018 Massachusetts Noncompetition Act (which was enacted just days before the Supreme Judicial Court’s decision in Oxford and not discussed in that case). Accordingly, the First Circuit affirmed Judge Kobick’s application of Massachusetts law to the dispute.
The court also rejected Hermalyn’s request to exclude California from the nationwide scope of the injunction, recognizing that if Hermalyn were allowed to compete from California, the entire noncompete would be nullified.
Conclusion
With many recent state (and even federal) efforts to ban or limit post-employment noncompetes, it is not surprising that many view as a long shot any bet on enforcing them. This decision demonstrates that noncompetes may remain enforceable and that elaborate schemes to evade them may collapse like a house of cards.
