An injunction temporarily limiting the functions Michael Hermalyn can perform for Fanatics will remain in effect, the First Circuit Court of Appeals has ruled. On Thursday, the three-judge panel for the appeals court upheld a Massachusetts federal court’s decision to issue the preliminary injunction ordering Hermalyn to abide by the terms of the non-compete clause in his contract with former employer DraftKings.
Hermalyn and DraftKings both sued each other in the aftermath of his departure from DraftKings to take on a role as President of VIP at Fanatics. DraftKings has accused him of exploiting customer relationships and knowledge he developed during his tenure there in violation of the non-compete clause.
The injunction doesn’t prohibit Hermalyn from continuing to work for Fanatics. However, it does require him not to contact any of the customers he worked with at DraftKings nor to disclose any of DraftKings’ confidential information. It will last for the duration of the original non-compete agreement, which is until Feb. 1, 2025—one year from the date of his departure from DraftKings.
This portion of the legal battle between the two parties hinges on matters of jurisdiction. DraftKings has its headquarters in Massachusetts, which allows non-compete clauses with a few restrictions. However, Fanatics is in California, which has a near-total ban on such language in contracts.
Each party filed its lawsuit in the jurisdiction most favorable to it: DraftKings in Massachusetts and Hermalyn in California. However, DraftKings successfully had Hermalyn’s lawsuit transferred to Massachusetts federal court. The injunction emerged from the suit in which DraftKings is the plaintiff.
The ‘Oxford Exception’ Doesn’t Apply
Hermalyn’s contract with DraftKings stipulated that it was governed by the laws of Massachusetts, and a court would typically respect that by default. However, Massachusetts courts have sometimes made exceptions to address public policy concerns.
One such exception also related to California’s prohibition on non-compete clauses. Hermalyn’s appeal of the injunction relied heavily on that precedent, Oxford Global Resources, LLC v. Hernandez.
Judge Ojetta Thompson, penning the First Circuit’s decision, explained that three conditions all need to be true for the Oxford exception to apply:
- The application of one state’s law would be contrary to a fundamental policy of the other’s,
- The latter state has a “materially greater interest” in the matter, and
- The latter state’s law would naturally apply without an agreement to the contrary.
Judge Thompson writes that Hermalyn’s claim fails the second test because his case differs from Oxford in two important ways.
The defendant in Oxford lived in California and worked there while employed by the plaintiff. He then left that company to work for another that was also in California. So, although the plaintiff in that case, like DraftKings, was headquartered in Massachusetts, all of the events relevant to the case took place in California.
Conversely, Hermalyn lived in New Jersey and New York while working for DraftKings and traveled to Massachusetts for work “at least 25 times,” according to court documents.
Judge Thompson also finds it relevant that Massachusetts had no policy about non-compete clauses at the time of the Oxford ruling. So, the interest in upholding policy was lopsided in California’s favor at that time. Since then, in 2018, Massachusetts passed a law establishing its own restrictions on such clauses, meaning both states have a similar interest in that regard.
No Carve-Out for California
Because of the fundamental differences between Hermalyn’s case and Oxford, the First Circuit found the lower court hadn’t erred in applying Massachusetts law.
In Hermalyn’s appeal, his legal team also argued that even if the non-compete was valid, it should apply only outside California.
The First Circuit disagreed with that argument for similar reasons. To those points, Judge Thompson added that the nature of Hermalyn’s job is such that excluding California would render the non-compete clause and injunction meaningless.
Although Fanatics is also a sports apparel and memorabilia company, Hermalyn’s role is with its sportsbook and specifically involves interacting with high-value customers and maintaining their loyalty.
However, sports betting is illegal in California. Therefore, any customers Hermalyn might interact with cannot be in California when they make a transaction with Fanatics Sportsbook.
Thompson concludes:
Clearly his requested California carveout will give him a way to skirt the countrywide preliminary injunction’s one-year noncompete ban. And returning to his trio of cases with all this in mind, we note that none covers a situation like ours — where lopping a state off a USAwide preliminary injunction on a one-year noncompete would entirely undercut that injunction’s effectiveness.
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