California generally bans non-compete agreements “regardless of where and when the contract was signed,” and “whether … the employment was maintained outside of California.” Practically speaking, California prohibits all employers from enforcing these agreements.
A new decision raises interesting questions in this area. In DraftKings Inc. v. Michael Hermalyn, Hermalyn resigned as senior vice president of DraftKings, a Massachusetts-based company, and began working for Fanatics, a California company. While employed with DraftKings, Hermalyn signed a valid non-compete agreement governed by Massachusetts law. However, after moving to California and accepting a position with Fanatics, Hermalyn contested the enforceability of the agreement. DraftKings later sued Hermalyn in federal court to enforce it.
The California state court deferred deciding Hermalyn’s claim. However, the federal appellate court ruled against him, finding that Massachusetts law applied. In comparing each state’s non-compete laws, the court noted that Massachusetts clearly and unambiguously opted not to mimic California’s ban. Rather, Massachusetts enforces non-competes against higher-level employees like Hermalyn who, unlike lower-level staff, often have business-sensitive information and deep ties with third parties associated with the employer. In the court’s view, Hermalyn failed to prove that California’s interest in prohibiting non-compete agreements was “materially greater” than the interest in Massachusetts.
After the DraftKings decision, out-of-state non-compete agreements may be enforceable even if a former employee accepts employment in California. This development is important for California employers who hire employees from other states. To lessen the risk of liability under non-compete and related agreements, these employers should require applicants to disclose all such agreements with former employers and carefully analyze the likelihood of enforcement in the Golden State.
