Last month, in DraftKings Inc. v. Hermalyn, the First Circuit Court of Appeals issued a decision concerning the application of California’s non-compete ban to agreements formed outside the state. Broadly, the decision indicates that California’s ban on non-competes does not apply where the non-compete originated in another state that has a stronger interest in the contract.
An east-coast-based employee, Michael Hermalyn, signed a one-year non-compete agreement with his former employer, Massachusetts-based DraftKings. The agreement stated that it was subject to Massachusetts law, which permits the enforcement of non-compete agreements in certain situations. After two-and-a-half years with DraftKings, Hermalyn quit the company and moved to Los Angeles to work for a competitor in California. Unlike Massachusetts, California law bans the majority of non-compete agreements and would have rendered Hermalyn’s non-compete with DraftKings unenforceable. Thus, the question was whether the Massachusetts non-compete agreement could be enforced against Hermalyn in California, given the contrasting law in Massachusetts.
Hermalyn initially filed suit against DraftKings in California state court, seeking to preemptively void the non-compete agreement. A few days later, DraftKings filed a separate lawsuit in Massachusetts federal court, eventually obtaining a preliminary injunction against Hermalyn that prevented him from competing against the company in the United States for one year. Hermalyn appealed the Massachusetts District Court’s decision granting the preliminary injunction to the First Circuit Court of Appeals. On September 26, the First Circuit affirmed the preliminary injunction, holding that the Massachusetts non-compete agreement should be enforced in California. The decision turned on the choice-of-law clause in the contract, which provided that Massachusetts law would apply regardless of where Hermalyn moved. Specifically, the court analyzed whether California’s interest in the dispute was so strong that it justified striking the parties’ Massachusetts choice-of-law clause from the contract.
The court held that California’s interest in the dispute was not “materially greater” than Massachusetts’, and therefore it would not upset the parties’ choice of law. In making its decision, the court emphasized two aspects of the case. First, Hermalyn had no connection to California when he executed the non-compete agreement and performed his work for DraftKings, which occurred in New Jersey, New York, and Massachusetts. Therefore, the effects of Hermalyn breaching the non-compete would only be felt outside of California. Second, Massachusetts has its own carefully considered statute concerning the enforcement of non-competes on the books. The Massachusetts Non-Competition Act (MNAA), enacted in 2018, limits the use of non-competes, albeit less drastically than California’s law. Unlike California’s statute, Massachusetts’ generally allows non-competes for highly-compensated employees like Hermalyn. The presence of Massachusetts’ own non-compete legislation demonstrated that the state had a competing interest in enforcing the contract.
Although the DraftKings case dealt with a specific set of facts, it has the potential to translate broadly. The case arguably stands for the proposition that an employee cannot escape an otherwise enforceable non-compete agreement by simply moving to (and working in) a state with different laws. Therefore, when hiring an employee from out-of-state, an employer should pay close attention to whether the employee is subject to a non-compete agreement that originates in another jurisdiction. Employers should consult with counsel regarding which jurisdiction’s law is likely to apply, and whether that law would permit enforcement of the non-compete against the employee.
