On September 26, 2024, the First Circuit Court of Appeals ruled against extending California’s strict noncompete ban to agreements executed outside of California and governed by another state’s law. This decision highlights the limitations of California’s noncompete statute—Cal. Bus. & Prof. Code §§ 16600-16607—which broadly prohibits noncompete agreements, save for narrow exceptions like in the sale of a business. While California’s statute seeks to invalidate non-competes “regardless of where and when the contract was signed” and “whether . . . the employment was maintained outside of California,” the court, in DraftKings, Inc. v. Michael Hermalyn, declined to apply the California law, holding that Massachusetts law governed the dispute.
The case involves Michael Hermalyn, a former marketing executive for DraftKings, a sports betting company based in Massachusetts. Hermalyn, a New Jersey resident, left his position at DraftKings to work for its competitor, Fanatics, in Los Angeles. Before resigning, he had signed a noncompete agreement that was governed by Massachusetts law, a state where reasonable non-competes for higher-level employees are allowed. Unlike California, Massachusetts permits noncompete agreements for higher-level employees under certain circumstances, aligning it with at least 11 other states and Washington, D.C.
DraftKings sued Hermalyn in Massachusetts federal court, alleging that his new role with Fanatics violated the one-year noncompete. The District Court agreed with DraftKings, enforcing the noncompete and issuing a preliminary injunction that prevented Hermalyn from competing with DraftKings in the United States for one year. Hermalyn appealed, arguing that California’s law should apply and that, even if Massachusetts law governed the noncompete, California should be excluded from the scope of the injunction.
On appeal, the First Circuit rejected Hermalyn’s argument that Massachusetts law should not apply. The court analyzed the noncompete laws of both states and noted that Massachusetts, unlike California, enforces reasonable noncompete agreements for senior employees who are often entrusted with sensitive business information. Given this policy distinction, the court found that Hermalyn failed to demonstrate that California’s public policy should override the parties’ agreement to apply Massachusetts law.
Furthermore, the First Circuit dismissed Hermalyn’s alternative request to exclude California from the scope of the District Court’s injunction. The court noted that, given the fact that online sports betting is illegal in California, Hermalyn’s new position would inevitably require him to interact with clients outside of the state. As a result, carving out California from the injunction would undermine its effectiveness.
This decision underscores that California’s law banning noncompetes does not provide a blanket escape for employees seeking to evade agreements made in other states. Despite California’s robust efforts to void noncompete agreements, employees who sign such agreements in other states cannot simply move to California to avoid their contractual obligations. However, the outcome of this case may have been different if Hermalyn’s new role were limited to activities within California.
In conclusion, this case serves as a reminder that employees should carefully review any employment agreements that include a noncompete provision to understand its enforceability and limitations. The labor and employment attorneys at Jaburg Wilk routinely review and advise employees on employment agreements.