By Dr. Justin Davis, University of West Florida and Co-Editor of Legal Issues in Sports Betting
A recent case has gained attention because it threatens to cause significant changes in the sports gambling industry. The legal dispute between DraftKings and its former Senior Vice President of Growth, Michael Hermalyn, centers around a non-compete agreement Hermalyn signed upon his initial employment with the well-known sports betting company.
Hermalyn resigned from DraftKings in early 2024 and accepted a new position at Fanatics, a competing company, to serve as their President of VIP Relations. Upon his new employment, Hermalyn brought a suit against DraftKings attempting to void the non-compete, which he deemed to be illegal. DraftKings filed a countersuit alleging that Hermalyn was both stealing trade secrets of the company to pass along to his new employer and trying to solicit employees from DraftKings to join him at Fanatics. DraftKings was successful in its filing of a temporary injunction in a Massachusetts court, which resulted in tight restrictions on the types of services Hermalyn could provide to his new employer until the case is resolved. In response, Hermalyn has since appealed that decision from the Massachusetts court and argues that the CEO of DraftKings, Jason Robins, is putting together a coordinated effort to ruin his career.
Legality of Non-Compete Agreements
The initial issue revolves around the non-compete agreement. DraftKings holds that Hermalyn violated the mutually agreed upon binding non-compete clause of his contract. This non-compete was intended to prevent Hermalyn from working for any competitor for a specified period of time after leaving DraftKings. Of note, this agreement was signed in Massachusetts, a state where non-competes are generally enforceable. However, Hermalyn has argued that he moved to California because of the company. California is traditionally a state that largely prohibits non-compete agreements, so his position is that the clause should not be enforceable. He contends that his relocation to California was legitimate and that the state’s more employee-friendly laws should apply.
A main concern of the non-compete is related to trade secrets and confidential information. DraftKings has accused Hermalyn of taking confidential information and trade secrets of the company to Fanatics, which could harm DraftKings’ competitive standing. They contend that Hermalyn carefully coordinated his exit, along with intentionally taking proprietary information from the company to use against DraftKings at his new employer. Hermalyn has denied any wrongdoing and maintains he has not shared any proprietary information with Fanatics.
On top of these contract issues is the overlapping jurisdictional issue of the case. Hermalyn and Fanatics initially filed their suit in California, but DraftKings is pushing for the case to be heard in Massachusetts. A decision on the venue is a determinative factor in the case, given California’s more liberal approach, favoring employees and Massachusetts’s approach, which favors employers.
In the latest ruling, the California court sided with Hermalyn, ruling that because he had established residency in California, the case should proceed there. However, the court also denied Hermalyn’s motion to prevent DraftKings from enforcing the non-compete clause, suggesting that the matter still needs to be resolved in Massachusetts. DraftKings has appealed that court decision.
Implications on the Sports Gambling Industry
With the immense growth of sports gambling in the United States in recent years and the continued growth of the industry as a whole, this case could have significant implications regarding the use and enforceability of non-compete agreements. Specifically, the outcome of the case could set legal precedent and have an impact on issues such as employee mobility and larger corporate level strategy.
As for legal precedent, the findings of this case will likely establish how non-compete agreements are interpreted, accepted (or not), and/or enforced in the sports gambling industry. If the courts rule that California law applies despite Hermalyn going into the signed agreement in the state of Massachusetts, this will surely establish a strong foundation for other employees to also challenge non-compete clauses under more favorable state laws. This possible outcome could reshape the legal landscape of the industry and likely its hiring practices as well.
From an employee mobility standpoint, if the courts find in favor of Hermalyn it would clearly weaken the enforceability of non-compete agreements, especially in states like California that already limit such clauses. In that case, the market would likely see greater employee mobility within the sports gambling industry, opening the door for professionals in the industry to more freely move between competing companies without fear of retaliation. Of course, such a change would also force industry competitors to revisit their own internal strategies, as well as how and what information is shared to employees.
From this corporate level strategy side, a ruling in favor of Hermalyn would specifically cause companies to reconsider their approaches to talent acquisition and talent retention. Without the ability to rely on non-compete agreements, competitors in this industry would have to seek alternative means for recruiting and keeping their personnel. This might result in more emphasis on traditional internal managerial practices such as enhancing and maintaining a positive work environment, offering competitive compensation that adjusts with the industry over time, and working to ensure employee satisfaction to increase retention.
Potential X-Factor
A final curveball that has the potential to impact this case is the proposed rule by the Federal Trade Commission (FTC) in January of 2023 that would ban use of any non-compete agreements nationwide, deeming them unenforceable. If this federal rule does come to fruition, it would directly impact the current case between DraftKings and Hermalyn, effectively eliminating any of DraftKing’s legal claims against Hermalyn based on the non-compete clause.
This case and the potential rule changes being floated by the FTC could become the final factors forcing the sports gambling industry to change their approach, ultimately shifting away from non-compete agreements to protect their business interests. An alternative approach would be the use of other legal tools, such as non-disclosure agreements (NDAs) or intellectual property protections to safeguard the organization’s proprietary information.
As it stands, the dispute between DraftKings and Hermalyn is ongoing and intensifying. Based on the California court’s ruling in July 2024 and the resulting appeal by DraftKings, the next step is for an expedited trial which is scheduled to begin in late August of 2024. The focus of that trial will be on whether the one-year non-compete restriction that was in Hermalyn’s contract with DraftKings is enforceable under California law. The outcome of that trial or the appeals that may follow, will likely have a significant impact on the broader enforcement of non-compete agreements in the sports gambling industry going forward.
