DraftKings’ Noncompete Clause Meets Supportive First Circuit

A former DraftKings Inc. executive’s attempt to circumvent a noncompete agreement and work at rival sports-betting company Fanatics is likely to fail, after the First Circuit expressed skepticism that California’s worker-friendly interests should come before Massachusetts’ business protections.

“It’s not clear to me why California’s policy concerns have greater import than Massachusetts’s,” Judge O. Rogeriee Thompson said during oral arguments Monday at the US Court of Appeals for the First Circuit.

DraftKings’ ex-VIP marketing chief Michael Hermalyn took a job at Fanatics despite having signed an agreement that he wouldn’t work for a competing business or solicit other employees until a year after his employment at DraftKings ended. DraftKings has also alleged Hermalyn stole company secrets and client files before joining Fanatics.

He claims that his move from New Jersey to California to become an employee at a California company should garner him protection under the state’s ban on most noncompete clauses.

But provisions of the contract said it would be subject to Massachusetts law, given that DraftKings is headquartered in the state.

“The big difference between California’s policy and Massachusetts’s policy is that California has expressly articulated an interest in inducing workers from out of state to come to California,” said Christopher Michel, a partner at Quinn Emanuel Urquhart & Sullivan LLP who represents Hermalyn.

“And Massachusetts has expressed a policy interest in balancing, and in some instances for a limited period of time, protecting the interest in one of its corporations,” Thompson said.

“Last I checked, Massachusetts and California were coequal sovereigns in our system and each has passed a statute that reflects the considered policy judgments of their respective legislatures,” said Thomas Dupree Jr., a partner at Gibson, Dunn & Crutcher LLP who represents DraftKings. There is “no basis to say that California’s law trumps Massachusetts’s law simply because California feels more passionately about these issues.”

A federal district judge in April blocked Hermalyn from working for any competing businesses, unconvinced by his argument that California law is applicable.

Hermalyn’s case comes as the US Federal Trade Commission issued a ban on most noncompete agreements. That ban wouldn’t apply to senior executives with policy-making roles currently covered by such agreements. The US Chamber of Commerce is currently suing to block the ban.

Choice of Law

Hermalyn resigned from DraftKings in February and accepted an offer to serve as president of a California-based affiliate of Fanatics and lead their Los Angeles office. He took steps to establish residency in California, including leasing an apartment, purchasing a vehicle, registering to vote, and scheduling doctors appointments in the state, he told the court.

Massachusetts precedent holds that a contract’s application of state law should be enforced unless the results is contrary to public policy.

California has “the most substantial interest of any state” in the dispute, and the court should honor the state’s policy against enforcing non-competes, Michel said.

Judge William Kayatta asked Michel what to do if 49 states held that non-competes are enforceable in certain circumstances because they’re beneficial to the economy. “You would say that all 49 of those states must create an exception that says you can compete if you move to California?” Kayatta asked.

“Each case has to be analyzed on its own facts,” Michel said, and the policy and geographic components of every dispute would be central to the decision.

“This is life in a horizontal federalist system,” Michel said.

Dupree said that accepting Hermalyn’s argument would create “a playbook for opportunistic individuals seeking to have their contractual obligations in Massachusetts lifted and circumvented. That can’t be the law.”

DraftKings argues Hermalyn tried to establish a sham residency and claims that Fanatics’ California presence was fabricated to attempt to get out of his contract. Hermalyn also downloaded sensitive company files before leaving for Fanatics, DraftKings alleges.

“This is the paradigmatic case for why Massachusetts businesses need protection from this sort of thing,” Dupree said.

The case is DraftKings Inc. v. Hermalyn, 1st Cir., No. 24-1443, oral argument 7/22/24.