DraftKings has settled its legal dispute with a former executive accused of taking trade secrets before joining rival sports betting company Fanatics. This high-profile legal saga has drawn attention to the challenges of non-compete agreements and employee mobility in a competitive industry.
Confidential Settlement Ends a Heated Legal Dispute
On Monday, attorneys for DraftKings, Michael Hermalyn, and Fanatics informed a federal court in Boston of their confidential settlement. The settlement resolves lawsuits filed in Massachusetts and California over Hermalyn’s controversial move to Fanatics, which has been expanding into the sports betting arena.
Hermalyn, who had been a senior vice president of growth at DraftKings, left the company on February 1, 2023, to head Fanatics’ Los Angeles office. DraftKings alleged that Hermalyn breached non-compete and non-solicitation agreements, misappropriated trade secrets, and attempted to recruit its employees. Fanatics and Hermalyn denied the allegations throughout the litigation.
Non-Compete Agreement at the Heart of the Dispute
At the core of the legal battle was a non-compete agreement that Hermalyn signed while at DraftKings. The Boston-based 1st U.S. Circuit Court of Appeals upheld a preliminary injunction in April that limited Hermalyn’s activities at Fanatics for 12 months. The court found that the agreement was enforceable, underscoring the strength of non-compete clauses in Massachusetts.
The injunction prohibited Hermalyn from engaging in work related to any aspect of DraftKings’ business that he had been involved with or where he had access to confidential information. However, the court stopped short of barring him from working at Fanatics entirely.
Despite the injunction, Hermalyn continued his employment at Fanatics, where he reportedly played a key role in developing its VIP client services. Fanatics, previously known for selling sports merchandise, entered the sports betting industry in 2022, aiming to disrupt the market dominated by DraftKings and other established players.
Complications from California’s Employee Protections
The case took an interesting turn in California, where Hermalyn filed a lawsuit challenging the validity of his non-compete agreement. California law generally disfavors non-compete clauses, viewing them as restrictions on employee mobility and competition.
A California judge sided with Hermalyn, finding that he was likely to prevail on the merits of his case under state law. However, the judge declined to issue a preliminary injunction, citing the Massachusetts court’s jurisdiction. This tug-of-war between state laws highlighted the complexities of navigating employee contracts across jurisdictions.
What the Settlement Means for Industry Dynamics
While the terms of the settlement remain confidential, it signals the end of a contentious battle that could have set important precedents for non-compete enforcement and employee rights. For DraftKings, the settlement likely secures an agreement from Hermalyn to adhere to specific contractual obligations.
Fanatics, on the other hand, avoids a protracted legal fight as it continues its push into the lucrative sports betting market. The company’s rapid expansion into this new arena has already raised eyebrows among competitors like DraftKings, which rely heavily on innovative strategies and VIP client retention to maintain their market share.
Key Takeaways for Businesses
This case underscores the importance of clear, enforceable agreements in safeguarding trade secrets and competitive advantages. Some points to consider:
- Jurisdiction Matters: Laws governing non-compete agreements vary by state. Companies should draft agreements with jurisdictional nuances in mind.
- Confidentiality: Protecting trade secrets is crucial. Companies should ensure robust policies are in place to guard sensitive information.
- Employee Mobility: Balancing employee rights and company interests remains a delicate challenge, especially in states like California.
