Don't Bet Against Restrictive Covenants: Ex-DraftKings Exec Loses Non-compete Appeal

A federal appeals court on Thursday rejected a former DraftKings executive's appeal of an injunction that severely restricted the type of work he can do now that he has joined its sports betting rival, Fanatics.

As DraftKings' former senior vice president of growth, Micheal Hermalyn oversaw its relationships with its largest VIP customers. Last year, Hermalyn moved to California and resigned on Feb. 1 ahead of the Super Bowl to join Fanatics, which launched its own sportsbook. Fanatics hired him to help build its own nascent team catering to VIP clients.

DraftKings sued, accusing Hermalyn of violating his non-compete and non-solicitation agreements, including poaching some employees, and misappropriating trade secrets.

In April, Judge Julia Kobick of the U.S. District Court for the District of Massachusetts issued a preliminary injunction severely restricting the work Hermalyn could perform for Fanatics. In particular, Judge Kobick enjoined him for 12 months, starting when he began his new job on Feb. 1, from providing services relating to any aspects of DraftKings' business that he was involved in or for which he had received confidential information. 

In particular, Judge Kobick cited evidence that Hermalyn used unauthorized means to transfer DraftKings documents to himself in the days before resigning from DraftKings, some of which he accessed while staying at the home of Fanatics CEO Michael Rubin.

Hermalyn appealed and filed suit in California seeking to have the agreement invalidated under California law. He argued that California law should apply because he lives there now and that's where the Fanatics subsidiary he heads is based, giving the state a greater interest in the matter.

Earlier this year, a California state court judge declined to issue a preliminary injunction, citing the Massachusetts lawsuit. However, the judge concluded that Hermalyn would likely prevail under California law. 

The U.S. Court of Appeals for the First Circuit rejected Hermalyn's bid to have California law applied to the dispute over his non-compete agreement with DraftKings, which would have rendered it unenforceable, and instead held Massachusetts law governed, which generally allows non-competes for higher-level employees like Hermalyn. Thus, the trial court's injunction stands. 

The takeaway? In addition to a federal courts' rejection of the Federal Trade Commission's rule against non-competes, this decision shows courts are still willing to uphold restrictive covenants when they are reasonable and appropriate for the specific employee.