DraftKings v. Hermalyn: Trade Secrets

The First Circuit enforced a Massachusetts noncompete against an executive who fled to California, holding that moving to a noncompete-banning state does not automatically defeat another state's law.

For years, the conventional wisdom among departing executives was simple: if your noncompete is a problem, move to California, where noncompetes are largely void, and let the Golden State’s policy shield you. DraftKings Inc. v. Hermalyn, 118 F.4th 416 (1st Cir. 2024), complicates that escape plan. When a senior DraftKings executive resigned, signed on with a California-based rival, and argued that California’s noncompete ban freed him, the First Circuit was unmoved. It affirmed a preliminary injunction enforcing his Massachusetts noncompete (nationwide, California included), holding that relocating to a noncompete-hostile state does not automatically dissolve another state’s competing interest in enforcing the bargain an employee struck.

At a glance

Case: DraftKings Inc. v. Hermalyn, No. 24-1443, 118 F.4th 416 (1st Cir. Sept. 26, 2024).
Court: U.S. Court of Appeals for the First Circuit; panel of Judges Kayatta, Thompson, and Montecalvo.
Posture: Interlocutory appeal from a preliminary injunction entered by the U.S. District Court for the District of Massachusetts.
Holding: Massachusetts law governed the noncompete under the parties’ choice-of-law clause; California’s policy did not override it because Hermalyn failed to show California had a “materially greater” interest, and the injunction (reaching California) was properly entered.
Significance: Confirms that moving to California does not mechanically defeat an out-of-state noncompete; the choice-of-law inquiry is functional and fact-driven.

The facts: a high-value defection to a rival

Michael Hermalyn, then a New Jersey resident, was a senior executive at DraftKings, the Massachusetts-headquartered sports-betting company. His employment agreements contained noncompete and confidentiality covenants and a Massachusetts choice-of-law provision. Hermalyn left to join a California-based subsidiary of rival Fanatics, relocating to Los Angeles to take a leadership role in the competitor’s sports-betting business. Before and around his departure, DraftKings alleged, he accessed sensitive confidential materials.

DraftKings sued in Massachusetts federal court and won a preliminary injunction barring Hermalyn from competing against it in the United States for one year. (The district judge did reject DraftKings’s request for a worldwide injunction.) Hermalyn appealed on two theories. First, he argued the district court was wrong to apply Massachusetts law instead of California’s, which would have voided the noncompete outright. Second, he argued that even if Massachusetts law governed, the injunction should have carved out California, where the restriction is unenforceable as a matter of state policy. The First Circuit rejected both.

The choice-of-law framework: a functional, three-part test

Because DraftKings sued in Massachusetts federal court on diversity jurisdiction, Massachusetts conflicts rules decided which state’s law governed. Massachusetts usually respects the parties’ choice of law, and the exception Hermalyn invoked (drawn from the Supreme Judicial Court’s decision in Oxford Global Resources, LLC v. Hernandez, 106 N.E.3d 556 (Mass. 2018)) required him to show all three of the following: that applying Massachusetts law “would be contrary to a fundamental policy of” California; that California “has a materially greater interest than” Massachusetts in the issue; and that California’s law would control absent an effective choice by the parties. As the panel put it, the word linking those requisites is “and,” not “or.”

The panel decided the appeal on the middle requisite alone, assuming without deciding that Hermalyn could satisfy the others. Hermalyn’s lead argument was that Oxford had already held California’s interest “materially greater” than Massachusetts’s, so the same result had to follow here. The court disagreed on two grounds. First, the facts differed: the employee in Oxford had executed, performed, and allegedly breached his agreement in California, whereas the district judge found Hermalyn had worked for DraftKings from New Jersey and New York (never California), traveled to Massachusetts roughly once every six weeks, and that any harm from his breach would be felt in Massachusetts. Second, Oxford faulted Massachusetts for lacking a “statute akin” to California’s, but Massachusetts’s 2018 Noncompetition Agreement Act, enacted just days before Oxford and applicable only to noncompetes entered into on or after October 1, 2018, was not in play there. The court described the Act (quoting a Massachusetts Law Review article) as a “paradigm shift in favor of employees” that dramatically reduced the number of employees who can be bound, the product of roughly a decade of legislative study, including a rejected 2009 bill modeled on California’s ban. That history mattered because it showed Massachusetts had deliberately weighed California’s approach and declined to copy it, choosing instead to allow noncompetes for higher-level employees like Hermalyn. Against that backdrop, the court held that Hermalyn had not shown California’s interest to be, in the court’s words, not just “greater” than Massachusetts’s but “materially” so.

Why the injunction reached into California

Having upheld Massachusetts law as the governing rule, the court turned to geography. Hermalyn urged that the injunction at least exclude California, so he could compete there even if barred elsewhere. The panel refused, and its reasoning turned on a wrinkle in California law: California outlaws online sports betting. Because a big part of Hermalyn’s job was creating and keeping relationships with digital-gaming customers, working from Los Angeles would inevitably mean interacting with clients outside California, where online sports betting is legal. A California carveout, in other words, would have given him a way to skirt the countrywide injunction entirely. The court therefore held the district judge did not abuse her discretion by including California within the injunction’s range.

The result is not that California’s ban is meaningless. It is that the ban operates through a choice-of-law analysis that a relocating employee must actually win, not invoke by reflex. Where a valid out-of-state choice-of-law clause exists and the home state has its own legitimate enforcement interest, simply landing in California will not flip the switch.

Open questions

How far does this extend beyond Massachusetts? The court leaned on Massachusetts’s 2018 statute as evidence of a deliberate legislative balance; states without comparable legislation might fare differently in the “materially greater interest” weighing, as Oxford itself shows.
Would a California-filed suit change the outcome? Hermalyn litigated in Massachusetts federal court. Whether a California court applying its own conflict rules and public-policy statutes would reach the same result remains untested here.
Does the preliminary posture limit the holding? The ruling came on a preliminary injunction reviewed for abuse of discretion; a full merits record could sharpen or shift the analysis.

Implications

Choice-of-law clauses have teeth. A well-drafted Massachusetts (or other home-state) choice-of-law provision can survive an employee’s relocation to a noncompete-banning state.
Relocation is not a magic bullet. Moving to California does not automatically void an out-of-state noncompete; the employee must prevail on a functional, multi-factor analysis.
Reform statutes cut both ways. Massachusetts’s 2018 Act narrowed noncompetes in employees’ favor, but because the legislature weighed California’s ban and chose a balance instead, the Act strengthened the state’s claim that its own policy deserves respect.
Scope follows purpose. Courts will resist carve-outs that would let a defendant compete precisely where the restriction matters most, including the rival’s home turf.
Forum and timing matter. This was a Massachusetts-forum, preliminary-injunction decision; employers and employees should weigh where suit is filed and how early the fight occurs.

Frequently asked questions

Did moving to California free Hermalyn from his noncompete? No. The First Circuit affirmed a preliminary injunction applying Massachusetts law and enforcing the noncompete, including in California. The court held that Hermalyn failed to show California’s policy against noncompetes was a “materially greater” interest than Massachusetts’s interest in enforcing the agreement he signed.

Why did Massachusetts law govern instead of California’s noncompete ban? The parties’ contract chose Massachusetts law, and Massachusetts conflicts rules usually honor that choice. To escape it, Hermalyn had to satisfy all three prongs of the exception: that Massachusetts law would contravene a fundamental California policy, that California had a materially greater interest, and that California’s law would otherwise control. The court resolved the appeal on the second prong alone, assuming without deciding the others.

Does this mean California’s noncompete ban can always be avoided? No. The ruling is fact-specific and arose at the preliminary-injunction stage. California has a strong policy against noncompetes, and a different employee, contract, or set of facts could produce a different result. The case shows the analysis is functional, not automatic.