Just ask Michael Hermalyn, a former DraftKings executive who tried to jump ship to work at Fanatics, DraftKings’ main competitor.
An opinion from the First Circuit Court of Appeals shows that non-compete agreements remain enforceable, at least when it comes to high level executives.
Before getting into the specifics of this case, it’s important to note that the original point of non-compete agreements was to protect HIGH LEVEL employees from jumping ship and stealing real company state-secrets. By state secrets I mean something like the formula for Coke versus Pepsi.
Things went sideways when companies started requiring low-level employees to sign non-compete agreements and then began enforcing those agreements against the low-level employees, despite the fact that the low-level employees did not possess any company-state secrets. I once defended a non-compete enforcement action against a guy who cut concrete. A laborer. The other side claimed they had some super-secret sauce for cutting concrete. 🤯 It’s cases like that that contribute to the non-compete enforcement epidemic in this country.
However, that is NOT the situation between DraftKings and its former employee. This case is a solid example of those times when a non-compete may make sense, and an appellate court noting the use of non-competes for HIGH LEVEL executives.
What Happened?
Hermalyn, who left DraftKings to join its rival Fanatics, was accused of violating his non-compete and non-solicitation agreements. He allegedly misappropriated trade secrets and attempted to poach employees from DraftKings. A U.S. District Court judge in Massachusetts issued an injunction, restricting Hermalyn’s work at Fanatics for 12 months, particularly in areas where he had knowledge of DraftKings’ confidential information.
Hermalyn’s appeal sought to apply California law, which tends to invalidate non-compete agreements. However, the First Circuit Court of Appeals upheld the Massachusetts court’s decision, ruling that Massachusetts law applied, where non-competes are enforceable for high-level employees like Hermalyn.
The parties agreed that if Massachusetts law applied, then Hermalyn breached his non-compete agreement
The court’s opinion opens with the following:
“Massachusetts and California aren’t exactly on the same page when it comes to noncompete agreements.” 🤣
In upholding enforcement of the non-compete the First Circuit Court of Appeal stated the following:
“Given this tableau — involving (among other features) two states passing laws reflecting different but careful balances of conflicting forces in the noncompete area (after the usual pushand- pull of politics), with Massachusetts opting not to mimic California’s ban and instead generally allowing noncompetes for higher-level employees like Hermalyn (who unlike lower-level employees often have business-sensitive info and deep ties with company customers).”
So, the point here is that non-competes aren’t dead when it comes to high level executives that have real company sensitive information.
When it comes to low-level employees, there is still an epidemic with bogus enforcement actions, although the tide is turning ever so slowly.