DraftKings Case Shows Limits of California Noncompete Ban Reach

California’s power to void worker noncompetes signed in other states isn’t as sweeping as some employers feared after a Boston federal appeals court upheld a disputed contract between DraftKings and a former executive.

Despite the state’s strongly worded prohibitions on noncompete contracts, California policy didn’t override the law in Massachusetts, which was the chosen venue for legal disputes in the DraftKings Inc. contract, the US Court of Appeals for the First Circuit decided Sept 27. That’s despite the marketing executive Michael Hermalyn moving to Los Angeles before taking a new job with competitor Fanatics Inc.

The decision reinforces the legal limits on California efforts—under state law changes that took effect Jan. 1—to extend its longstanding ban on noncompetes to contracts struck elsewhere. But the scope of its power over such agreements is likely to vary from case to case.

“The fear was California was literally exporting its ban to all 50 states,” said Thomas A. Muccifori, an attorney at Archer & Greiner PC in New Jersey. “Clearly this case represents a defense to that.”

The enforcement of employee noncompetes traditionally has been governed by states, and a federal court decision blocking the Federal Trade Commission’s nationwide ban on noncompetes keeps the issue primarily rooted in state law for now.

California is one of four states that deems nearly all noncompetes void, with exceptions for shareholders selling a business. Massachusetts is one of at least 11 states plus Washington, D.C., that ban the contracts for hourly or low- to middle-income workers, while also setting other parameters for what’s considered reasonable. But many states have limited legislative mandates on noncompetes and have left it to the courts to decide which contracts are enforceable.

It’s possible that courts in states without a detailed noncompete statute could be more likely to defer to a stronger state law such as California’s, said Dawn Mertineit, an attorney with Seyfarth Shaw LLP in Boston.

The First Circuit “goes out of its way to talk about the Massachusetts Noncompetition Agreement Act,” she said. “That really is at least part of the analysis as to why California does not have a materially greater interest in this dispute.”

It’s also notable that the federal district court in Massachusetts didn’t automatically defer to a California court, despite Hermalyn filing his petition to void the noncompete there before DraftKings brought its case, Mertineit said.

Fact-Specific Inquiry

The facts of Hermalyn’s case suggest he might not have been moving to California for the new job, but simply to escape the noncompete, said Kevin M. Passerini, an attorney at Blank Rome LLP in Philadelphia. For one, California hasn’t made online sports betting legal, so it seems likely Hermalyn would be living in Los Angeles but largely working on marketing efforts outside the state.

“That maneuver was what a lot of us practitioners feared executives would do” under the new California law, Passerini said—temporarily moving to California to void a noncompete signed elsewhere so they could take a position with a competing business.

Courts might resolve a noncompete dispute differently if the employee has moved into California for work that’s clearly connected to that state, such as working in person at a Silicon Valley tech company’s headquarters, he said.

“Choice of law analysis is designed to be a fact-sensitive inquiry,” said Christopher M. Terlingo, an attorney and colleague of Muccifori’s at Archer & Greiner.

This makes it difficult to predict which way disputes will go and also less likely that a higher court will review and resolve conflicting court decisions, he said.

The DraftKings case could yet produce conflicting court rulings. Before the company sued in Massachusetts to enforce its noncompete, Hermalyn petitioned a California state court in L.A. to invalidate it. The state court hasn’t reached a decision on the merits, but DraftKings is appealing its ruling that it had jurisdiction to hear the case.

“We may see a decision in the California case where the judge invalidates or purports to invalidate the noncompete,” Mertineit said. “We could see some more litigation there and some confusion.”

Despite all the initial consternation about the California law change, there hasn’t been an avalanche of cases challenging the policy, and the DraftKings dispute is likely the first to reach a federal appeals court, the attorneys said.

That might be because moving to California in an attempt to void a noncompete is expensive and time-consuming—an endeavor that only highly paid professionals or executives could afford, Terlingo said.

Acknowledging Limits

California lawmakers passed the expansion of the state’s noncompete ban in 2023, taking effect in early 2024.

The expansion included creating civil penalties for California employers that ask employees to sign the contracts, even if they don’t try to enforce them. The state also banned any contract restricting employees’ job mobility, potentially covering non-recruitment or overly broad nondisclosure agreements, as well as requiring employers to notify current or former employees who previously signed noncompetes that those contracts are void.

The provision empowering state courts to void noncompetes regardless of when or where they were signed raised a lot of eyebrows among employers and their lawyers who doubted the state had that legal authority.

The legislators and staff who wrote the bills had doubts as well.

“The drafting committee for these statutes conceded that while they ‘express[ed] California’s strong desire to enforce its public policy,’ they ‘cannot dictate to courts outside of its jurisdiction,’” the First Circuit said in a footnote to its decision.

Despite that acknowledgment, California lawmakers’ attempt to advance their policy beyond state lines probably didn’t win Hermalyn any sympathy in the Massachusetts courts, Mertineit said.

“They kind of pissed off some of the judges here in the First Circuit,” she said. “Judges don’t like to be told that one state can trump all other states.”