The Landscape of Noncompete Provisions Continues to Evolve
On August 20, 2024, in Ryan LLC v. Federal Trade Commission, the Northern District of Texas struck down the FTC’s noncompete rule, declaring it unlawful. The court held that the FTC had exceeded its statutory authority and criticized the rule as an arbitrary and capricious blanket prohibition. Revisit our blog post from earlier this year for more information on the FTC noncompete ban.
While these lawsuits continue to challenge the FTC’s ban on non-competes, an interesting decision has been issued by the United States Court of Appeals for the First Circuit related to the enforceability of noncompete agreements based on a choice of law provision.
DraftKings, Inc. v. Michael Hermalyn
In DraftKings, Inc. v. Michael Hermalyn, the defendant was a former marketing executive for DraftKings. The defendant was the subject of a noncompete provision that applied Massachusetts law which permits non-competes for executives. The defendant resigned his position and took a similar position in Los Angeles, California. DraftKings attempted to enforce the noncompete provision in its contract. The District Court ruled in favor of DraftKings and prohibited the defendant from competing with DraftKings even though the defendant would be employed in California. The defendant appealed to the First Circuit arguing that Massachusetts law did not govern because the Defendant was a California resident and subject to California law (even though the employment agreement between the parties required Massachusetts law to apply). Even if Massachusetts law applied, the defendant asserted that a carve out should be made for California because of California’s public policy concerning non-competes.
Decision & Implications
The First Circuit agreed with DraftKings and held that Massachusetts law applied. In other words, the First Circuit found that the defendant failed to articulate why California’s public policy supersedes the express agreement between the parties to apply Massachusetts law. The First Circuit also found that the defendant’s new employment could not be performed entirely within the state of California necessitating the application of Massachusetts law.
Considering the First Circuit’s decision, employers should review applicable noncompete provisions concerning the choice of applicable law. Courts will still review circumstances such as the location of employment, scope of employment and facts involving the employee’s new role when deciding whether to uphold the enforceability of the noncompete provision.
Staying Ahead of Changes with Noncompetes
Roenan Patt is the vice-chair of Levin Ginsburg’s litigation group and has extensive experience in noncompetes Should you have any questions about navigating these changes, feel free to contact Roenan or any of our other Litigation attorneys through our website.
Levin Ginsburg is a full-service law firm that prides itself on being counselors for all types of businesses and individuals. Regardless of your need, our attorneys exercise great care in being thorough, organized, and efficient in serving our clients, not just their matters.
