By: Former DraftKings’ Employee Loses Bet On California’s No Non-Compete Law
In what might be the first published case discussing California’s newest anti-non-compete laws, Cal. Bus & Prof. Code § 16600.5(a) & (b), DraftKings successfully obtained a preliminary injunction and defeated the appeal of that order against its former employee to bar him from competing.
DraftKings, a Massachusetts headquartered entity, sued its former employee to enforce a non-compete agreement after the former employee quit his job at DraftKings, moved to the Golden State to take a similar job with the California-based Fanatics and sued DraftKings in California to attempt to stop the enforcement of the non-compete. DraftKings commenced its action in a Federal District Court in Massachusetts for breach of the non-compete agreement and other claims. It sought, and won, a Preliminary Injunction against the employee working for the competition for one-year in the United States (rejecting DraftKings’ request for a worldwide injunction).
The employee pursued an immediate “interlocutory” appeal to the United States Court of Appeals for the First Circuit. The Court of Appeals upheld the District Court’s decision, holding that the employee was bound by Massachusetts’ law even though the Massachusetts Supreme Court had previously deferred to California law in a similar case. See Oxford Glob. Res., LLC v. Hernandez, 106 N.E.3d 556 (Mass. 2018). In Oxford, the employee had signed a non-compete under Massachusetts law while living and working for the former employer in California, and the Massachusetts Supreme Court concluded that California had a materially greater interest than Massachusetts to enforce California’s public policy over non-compete agreements in that case. The Oxford court also found significance in the fact that Massachusetts did not have much statutory law at that time. However, in Draftkings, the Court concluded that the employee’s residence (not California), his work for Massachusetts’ headquartered DraftKings, his frequency of travel to Massachusetts, and because Massachusetts passed its own law to regulate non-competes, provided sufficient reasons to conclude that Massachusetts’ law (that the employee had agreed to) should be applied, and that under Massachusetts’ law, the non-compete was to be enforced.
Even though California’s law asserts that the location of the signing of the contract is not relevant, the Court of Appeals relied heavily on the fact that the employee was a New Jersey resident (not California) when he worked at Draftkings and signed the Non-Complete, which called for enforcement under Massachusetts’ law, and then, later, quit to move to California to work for a competitor.
This case illustrates the importance of the “race to the courthouse” when a non-California former employer is confronted with the need to either attempt to enforce a non-compete or, conversely, where an employee or the employee’s new employer wants to invalidate a non-California non-compete. Even if a California court ultimately concludes that the employee’s non-compete is not enforceable, the employee and his current employer may be confronted with competing and conflicting orders from different jurisdictions and the potential consequences of violating an injunction. Ultimately, each state that allows for non-competes and the Federal Courts within them will make decisions about whether California’s public policy against non-competes will prevail over other states’ laws that may allow for non-competes.
California and Non-California employers should consult with counsel, such as the team from CDF, when evaluating whether to take legal action related to non-competes signed by former employees, especially non-compete agreements signed under the laws of other states.