By Justine Goeke, Jacob Spencer and Madelyn Mae La France, Gibson, Dunn & Crutcher LLP
On April 30, 2024, a federal district court issued a preliminary injunction restraining the former head of DraftKings’ sports-betting VIP business, Michael Hermalyn, from working for the VIP business of DraftKings’ rival Fanatics. The decision by Judge Julia Kobick of the U.S. District Court for the District of Massachusetts is a sweeping victory for DraftKings in its ongoing trade secret and noncompete lawsuit against Mr. Hermalyn, who decamped to Fanatics just days before the Super Bowl.
How Did We Get Here?
On February 1, 2024, Mr. Hermalyn departed from his position at DraftKings and began working as the head of the VIP business at Fanatics. That same day, Mr. Hermalyn filed a lawsuit against DraftKings in Los Angeles Superior Court, alleging that he had established California residency a few days earlier and seeking to invalidate his noncompete agreements under California law—notwithstanding the Massachusetts forum selection and choice of law provisions in his contracts with DraftKings. On February 5, DraftKings countersued Mr. Hermalyn in the District of Massachusetts, alleging that Mr. Hermalyn violated his noncompete, non-solicit, and nondisclosure agreements by leaving to take a “nearly identical role with Fanatics,” soliciting two DraftKings’ VIP employees, and “stealing DraftKings’ trade secrets and other confidential information to use for Fanatics’ benefit.”
DraftKings moved for a temporary restraining order, which the Court granted on February 8. The TRO prohibited Mr. Hermalyn from using or disclosing DraftKings’ confidential information and soliciting DraftKings employees or customers but did not restrain Mr. Hermalyn from working for Fanatics.
On March 14, following a period of expedited discovery, DraftKings moved for a preliminary injunction. Mr. Hermalyn opposed the motion and moved to dismiss on forum non conveniens grounds or alternatively to stay the case pursuant to the Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976), in favor of the first-filed California state court action.
After hearing oral argument on April 2, Judge Kobick concluded that an evidentiary hearing was necessary to make credibility determinations regarding disputed facts contained in the preliminary injunction submissions, including disputes over whether Mr. Hermalyn stole DraftKings confidential documents through a variety of unauthorized means in the leadup to his departure and conflicting accounts from Mr. Hermalyn and current DraftKings employees regarding his attempts to solicit them to join him at Fanatics. At an evidentiary hearing on April 16, six witnesses before the Court, including Mr. Hermalyn, the DraftKings employees whom he allegedly solicited to join Fanatics, and a forensic expert retained by DraftKings to examine Mr. Hermalyn’s DraftKings devices.
Preliminary Injunction Ruling
On April 30, the Court granted DraftKings’ motion for a preliminary injunction and denied Mr. Hermalyn’s motion to dismiss in a 60-page, nearly 20,000-word ruling. The Court concluded that Massachusetts law rather than California law applies to the dispute, noting the choice of law provisions and forum selection clauses in Mr. Hermalyn’s agreements with DraftKings. The Court held that Mr. Hermalyn’s noncompete, non-solicit, and nondisclosure agreements with DraftKings are enforceable, and that Mr. Hermalyn breached or likely breached each of them. The Court also found that DraftKings was likely to succeed on the merits on each element of its claims under the Defend Trade Secrets Act and Massachusetts Uniform Trade Secrets Act for misappropriation of trade secrets.
The Court further found that Mr. Hermalyn was not credible, describing his testimony as “evasive,” and “[a]t best…highly misleading.” For example, the Court noted that Mr. Hermalyn “insist[ed] in his sworn affidavit that he ‘did not visit Fanatics’ Los Angeles office—or any Fanatics office—prior to accepting Fanatics VIP’s offer of employment,’” but “fail[ed] to disclose that he was using Fanatics wireless network [to access DraftKings’ confidential documents] because he was staying at the home of the Fanatics CEO.” As a whole, the Court wrote, “the evidence submitted at this stage in the proceedings suggests that Hermalyn has struggled with candor to the Court.”
The Court declined to bar Mr. Hermalyn from working at Fanatics entirely but expanded the scope of the restrictions in the TRO by severely restricting the roles he may perform. The Order prohibits Mr. Hermalyn from (1) using or disclosing any DraftKings’ confidential or trade secret information; (2) soliciting any DraftKings’ employees until February 1, 2025; (3) working for Fanatics (or any other competitor) in the United States in any role related to areas where he worked for DraftKings or received DraftKings’ confidential information, also until February 1, 2025; and (4) destroying DraftKings’ confidential or trade secret information.
What’s Next?
On May 3, 2024, Mr. Hermalyn filed a notice of appeal to the U.S. Court of Appeals for the First Circuit. If the appeal is unsuccessful, the injunction will remain in place through a future trial or until the expiration of the contractual restrictions.
The Massachusetts case is DraftKings Inc. v. Michael Hermalyn, No. 1:24-cv-10299-JEK.
