The FTC’s recently issued Final Rule banning non-competes for most workers prohibits an employer from (1) threatening to enforce a non-compete against a worker, (2) advising the worker that, due to a non-compete, they should not pursue a particular job opportunity, or (3) telling the worker that the worker is subject to a non-compete.[1] The FTC asserts that these type of representations can have an in terrorem effect on workers who are unaware and unable to vindicate their legal rights against exploitative employers, thereby causing an adverse effect on competition. The Final Rule contains an exception, however, for enforcement or attempted enforcement of non-competes where an employer has a “good-faith” belief that the provisions of the Final Rule do not apply.[2] Where this exception applies, however, remains an open question.

The Final Rule’s good-faith exception states that “it is not an unfair method of competition to enforce or attempt to enforce a non-compete clause or to make representations about a non-compete clause where a person has a good-faith basis to believe that this [Non-Compete Clause Rule] is inapplicable.”[3]

According to the FTC, the good faith exception of § 910.3(c) was added out of an abundance of caution “to ensure that the final rule does not infringe on activity that is protected by the First Amendment and to improve clarity in § 910.2(a).”[4]

 The FTC included a similar version of the good faith exception in the proposed rule issued last January, and represents the agency’s attempt to balance its regulation of anti-competitive activity with an employer’s protected speech and right to petition under the First Amendment.

The foundation for the good faith exception is the United States Supreme Court’s Noerr-Pennington doctrine, which grants antitrust immunity under the First Amendment to parties petitioning the government for relief, even if the relief may tend to restrict competition.[5] Protected speech under the Noerr-Pennington doctrine extends to litigation activities and pre-litigation communications.

The good faith exception, the FTC contends, is intended to ensure that the Final Rule does not infringe upon an employer’s actions towards its employees that may be protected under the First Amendment. By adding the good faith exception, the FTC recognizes that an employer has First Amendment rights to make subjectively truthful statements concerning the employer-employee relationship, and to petition the courts to enforce the employee’s contractual obligations, even if the employer’s belief is found to be incorrect or the lawsuit is unsuccessful. The Final Rule makes clear, however, that the good faith exception does not protect willful misrepresentations about whether a non-compete covered by the rule is enforceable.[6]

So, what does that mean for employers?

The FTC has not suggested an instance in which an employer may have a good faith basis to believe that the Final Rule may be inapplicable.  Presumably, such a good-faith basis may exist where the FTC rules that a restrictive covenant other than an express non-compete (such as a non-solicit or non-disclosure clause) is ultimately deemed a functional non-compete under the new rule, but the employer can demonstrate that it had reason to believe otherwise.[7] The exception may also come into play in those instances where the rule is not clear on the scope of a definition or exception. For example, it is unclear whether partners or members with an ownership stake in a business are considered “workers” covered by the final rule. The rule does not specifically address that issue other than to state that “sole proprietors” can be considered “workers”. The FTC’s comments indicate that such partners, members, or other holders of ownership stakes “may” be covered by the sale-of-business exception, assuming their noncompete agreements are tied to the sale of their ownership stake in the business.  Whether or not a partner or business owner who retains an ownership interest in the business can be held to a noncompete after they stop working for the business is unclear. Given that the FTC has not provided any guidance on the good faith exception,  employers must proceed with caution.

One area exists, however, where the FTC has stated no good-faith basis exists:  the FTC expressly stated that pending legal challenges to the rule’s validity are insufficient to provide cover to employers.

The FTC’s proposed version of the non-compete rule cautioned that the good-faith exception would not apply “where the validity of the rule . . . has been adjudicated and upheld.” However, the prior version of the text appeared to provide a temporary safe harbor to employers during pending litigation, but the agency ultimately declined to adopt that language into the Final Rule, believing that it would create confusion while challenges to the non-compete ban were ongoing.[8]

The FTC clarified its stance in the Final Rule by stating that “the absence of a judicial ruling on the validity of the final rule does not create a good-faith basis for non-compliance.”[9] Therefore, unless the rule is stayed or invalidated by the courts, the FTC’s stance is that there is no good-faith for non-compliance with the Final Rule simply because litigation is pending.


[1] 16 C.F.R. § 910.2(a), 89 Fed. Reg. 38404 (May 7, 2024).

[2] 16 C.F.R. § 910.3(c).

[3] 16 C.F.R. § 910.3(c).

[4] 89 Fed. Reg. 38441 (May 7, 2024).

[5] See E.R.R. Presidents’ Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961); United Mine Workers of Am. v. Pennington, 381 U.S. 657 (1965).

[6] 89 Fed. Reg. 38441 (May 7, 2024).

[7] See 16 C.F.R. § 910.1.

[8] 89 Fed. Reg. 38441 (May 7, 2024).

[9] 89 Fed. Reg. 38341 (May 7, 2024).

On May 31, 2024, the Governor of Colorado signed House Bill 24-1324, titled “Attorney General Restrictive Employment Agreements,” putting into place a law to toughen protections for employees who are subject to abusive contracts ostensibly requiring repayment to employers for education and training expenses upon termination of employment, commonly referred to as “TRAPs” (Training Repayment Agreement Provisions). This new law is expected to go into  effect August 7, 2024.

This amendment is following the trend of state crackdowns on the use of post-employment restrictions with employees, and more recently, a rule adopted by the FTC which bans the use of non-competes nationwide with limited exceptions. Previously, in August 2022, Colorado enacted additional amendments to its existing laws further restricting non-competition and non-solicit provisions in employment agreements, introducing income threshold requirements, strict notice provisions, and harsh monetary penalties for failure to comply with the law’s requirements.

While the general concept of having an employee repay costs associated with specialized training—distinct from standard, on-the-job training—before the employer can realize the return on its investment is not inherently unlawful, Colorado’s newest law attempts to curb potential abuses by employers who use TRAPs to exact repayments or employ penalties that are not reasonably tethered to the actual training expenses incurred by the employer.  Such overreaches typically present when an employer (a) attempts to collect amounts in excess for the investment cost in training the employee, (b) seeks repayment well after the training was completed and therefore, investment realized, (c) demands repayment where training provided did not result in transferrable skills to another employer and/or do not lead to certification for the employee, or (d) imposes burdensome repayment terms.  

Colorado allows TRAPS within certain parameters, including that the training is separate and apart from typical on-the-job training, the costs are reasonable, and the recovery by the employer decreases over the term of employment as the employer recoups the initial investment made. The new Colorado law expands upon previous restrictions for TRAPs, and increases penalties for overbroad or abusive any agreements that violate the law. Significantly the new bill:

  • Considers TRAPs to be a “consumer credit sale” under Colorado Consumer Credit Code (similar to student loans), which imposes specific requirements and enforcement mechanisms;
  • Grants the Attorney General enforcement authority and the ability to promulgate rules to implement and enforce the new bill;
  • Provides that the Attorney General, or an aggrieved worker, may recover three (3) times the amount of the attempted recovery by the employer, in addition to the $5,000 penalty provided by existing law, plus attorneys’ fees, costs, and interest.

This new law significantly increases the risk for employers who use TRAPS and acts as a rather fervent disincentive for employers to include draconian repayment provisions that are not reasonably tied to the education or training provided to the employee. Employers who seek to include repayment provisions in their employment agreements for Colorado employees should carefully review this law, as well as the Colorado statute governing non-competes Colo. Rev. Stat. § 8-2-113, to ensure compliance and to avoid severe penalties. 

Finally, employers should consider the recent rule adopted by the FTC (effective September 4, 2024) banning non-competes, but for limited exceptions, and its language applicable to training and training reimbursement that may, in certain circumstances, ban TRAPS if they function as non-competes.  And employers should assess the viability of training programs and the cost of such programs under the FTC rule if the benefits to an employer for such investment cannot be reasonably realized and/or violate this new Colorado law.

Are nonprofit health care entities exempt from the Federal Trade Commission’s (FTC) Final Rule banning non-competes in worker agreements? The answer is not cut and dry. While the FTC’s authority generally stops at the doors of nonprofit entities, the FTC has warned in its Final Rule that it intends to vigorously enforce the ban wherever it can claim jurisdiction. The FTC has also emphasized this may include self-styled nonprofit and not-for-profit entities, which include most hospital systems in America.[1]

The FTC Act generally covers corporations, which are “organized to carry on business for its own profit or that of its members[.]”[2] According to the American Hospital Association statistics cited by the FTC’s Final Rule, 58% of all U.S. hospital systems claim tax-exempt status as nonprofits and 19% of all U.S. hospital systems identify as state and local government hospitals—the latter of which are also considered generally outside the FTC’s jurisdiction under the State Action Doctrine.[3] Accordingly, the majority of hospitals in America will likely claim exemption from the FTC’s Final Rule banning non-competes.

However, in its Final Rule, the FTC went out of its way to “dispel [the] misunderstanding” health care entities claiming tax exempt status as nonprofits are categorically beyond the FTC’s jurisdiction.[4]  Indeed, the FTC asserts that “[m]erely claiming tax-exempt status in tax filings is not dispositive.”[5]  Rather, the FTC states that it applies a double-layered approach by examining: (1) “whether the corporation is organized for and actually engaged in business for only charitable purposes”; and (2) “whether either the corporation or its members derive a profit.”[6] Under this approach, a corporation’s ‘‘tax-exempt status is certainly one factor to be considered,’’ but this status ‘‘does not obviate the relevance of further inquiry into a [corporation’s] operations and goals.’’[7]

In support for this approach, the FTC in its Final Rule cites to what it claims are longstanding FTC precedent and judicial decisions supporting this jurisdiction. For instance, the FTC notes that it has exercised jurisdiction over a physician-hospital organization—consisting of a 100 private physicians and one nonprofit hospital—claiming tax-exempt status as a nonprofit because such organization engaged in business on behalf of its for-profit physician members.[8] Similarly, the FTC has exercised jurisdiction over an independent physician association—consisting  of private, independent physicians and private, small group practices—claiming tax-exempt status as a nonprofit when such association was organized for the pecuniary benefit of its for-profit members by contracting with payers, on behalf of its for-profit physician members, for the provision of physician services for a fee.[9]

In addition, the FTC notes that Fifth Circuit and Ninth Circuit have held certain nonprofit hospitals and other related entities lose their tax-exempt status for partnering with and ceding their control to a for profit partner—effectively “conferring impermissible private benefit.”[10] Lastly, the FTC argues that the IRS has also rejected claims of nonprofit tax-exempt status for entities that pay unreasonable compensation, including percentage-based compensation, to founders, board members, their families, or other insiders.[11] Based on the foregoing, the FTC concludes that several nonprofit health care entities will be in many circumstances subject to the Final Rule’s purview.

Assuming it survives any legal challenge, the Final Rule will go into effect on September 4, 2024. However, several lawsuits—including one in the Northern District of Texas and another in the Eastern District of Pennsylvania—have already been filed questioning the constitutionality of the final rule under the Major Questions Doctrine, the Non-Delegation Doctrine, and the Chevron Doctrine. Should the Final Rule survive these challenges, any attempt by the FTC to exercise its jurisdiction over nonprofit entities will also likely face legal challenge.

In the meantime, nonprofit and not-for-profit entities, including nonprofit health care entities, should work closely with legal counsel to determine whether they are in fact impacted by the FTC’s non-compete ban given the FTC’s anticipated approach to determining non-profit status.


[1] 89 Fed. Reg. 38342, 38356.

[2] 15 U.S.C. § 44.

[3] 89 Fed. Reg. 38342, 38449.

[4] 89 Fed. Reg. 38342, 38356.

[5] 89 Fed. Reg. 38342, 38357.

[6] Id.

[7] Id.

[8] Id. (citing In the Matter of Preferred Health Servs., Inc., FTC No. 41-0099, 2005 WL 593181, at *1 (Mar. 2, 2005)).

[9] Id. (citing In the Matter of Boulder Valley Individual Prac. Assoc., 149 F.T.C. 1147, 2010 WL 9434809, at *2 (Apr. 2, 2010)).

[10] Id. (citing Redlands Surgical Servs. v. Comm’r, 242 F.3d 904, 904-05 (9th Cir. 2001) and St. David’s Health Care Sys. v. United States, 349 F.3d 232, 239 (5th Cir. 2003)).

[11] Id. (citing Fam. Tr. of Mass., Inc. v. United States, 892 F. Supp. 2d 149, 155-156 (D.D.C. 2012); I.R.S. G.C.M. 39, 674 (Oct. 23, 1987); and Bubbling Well Church of Universal Love, Inc. v. Comm’r, No. 5717-79X, 1980 WL 4453 (T.C. June 9, 1980)).

We are thrilled to announce the release of the Chambers Trade Secrets 2024 Global Practice Guide, a comprehensive resource providing the latest insights and legal updates in the field of trade secrets law. Authored by leading experts in the industry, including Seyfarth Shaw LLP’s very own Robert Milligan and Dawn Mertineit, this guide is an invaluable tool for professionals navigating the complex landscape of trade secrets, computer fraud, and non-compete agreements.

One of the highlights of this year’s guide is the USA Trends & Developments section, where Robert and Dawn have made significant contributions. This section provides readers with a comprehensive overview of the heightened scrutiny on restrictive covenants in 2023, particularly non-compete agreements, by both federal agencies and state legislatures. It discusses the implications of significant regulatory changes, such as the FTC’s rule banning most non-competes, and highlights state-level initiatives, including California’s stricter laws. Moreover, it emphasizes the increasing importance of safeguarding trade secrets amidst evolving legal landscapes and remote work dynamics, urging employers to prioritize robust protection strategies and navigate potential litigation risks effectively.

For those seeking the most up-to-date information on trade secrets law, the Chambers Trade Secrets 2024 Global Practice Guide is an essential resource. Whether you are a legal practitioner, business owner, or academic researcher, this guide offers unparalleled insights and analysis to help you navigate the complexities of trade secrets litigation and protection.

To access the Chambers Trade Secrets 2024 Global Practice Guide and delve into the latest trends and developments in the field, click here.

While the two federal actions in Texas challenging the FTC’s non-compete ban have garnered much of the attention to date, a challenge of the FTC’s rule brought by a small tree trimming business in Pennsylvania is now in the spot light as the federal court there has indicated that it will issue a ruling by July 23rd.

Earlier this month, the Plaintiff ATS filed its Motion to Stay the Effective Date of the Non-Compete Rule in the Eastern District of Pennsylvania.

The FTC then sought additional time to brief Plaintiff’s motion and yesterday the Court issued the following briefing schedule:

THE FTC SHALL FILE ITS RESPONSE IN OPPOSITION TO ATS’ MOTION FOR PRELIMINARY INJUNCTION (ECF NO. 10) ON OR BY JUNE 4, 2024;

ATS SHALL FILE ITS REPLY IN SUPPORT OF ITS MOTION ON OR BY JUNE 25, 2024;

SHOULD THE COURT DEEM A HEARING ON ATSS MOTION NECESSARY, A TENTATIVE HEARING DATE IS SCHEDULED FOR JULY 10, 2024 AT 12:00 P.M.

THE COURT WILL ISSUE A DECISION ON THE MERITS OF PLAINTIFF ATS’ MOTION FOR PRELIMINARY INJUNCTION (ECF NO. 10) BY JULY 23, 2024.

The Texas federal court in the Ryan case has indicated that it will issue a decision on the Plaintiffs’ challenge of the non-compete ban by July 3, 2024.

Accordingly, we may be looking at differing decisions depending upon how the courts’ rule, leading to further employer confusion and consternation with the looming September 4th effective date of the FTC’s non-compete ban.

The FTC’s Final Rule banning non-competes in worker agreements contains a noteworthy exception that its provisions “do not apply where a cause of action related to a non-compete clause accrued prior to the effective date.”[1] The “existing cause of actions” exception, codified as Section 910.3(b), is a new addition that was not included in the FTC’s proposed rule issued last January. According to the FTC, Section 910.3(b) was added to the Final Rule in response to commenters who raised concerns that an invalidation or rescission of existing non-competes would be impermissibly retroactive, present due process concerns, and/or constitute an impermissible taking under the Fifth Amendment.[2]  However, it unclear whether this provision satisfactorily addresses these concerns, and it may have raised new concerns of its own.

The plain language of the exception suggests that parties may continue to bring suit for violations of then-existing non-competes after the Non-Compete Rule’s Effective Date, so long as the violation occurred prior to the Effective Date. Certain statements provided by the FTC in the Final Rule appear to support to this interpretation. As stated in the Federal Register, “Section 910.3(b) specifies that the final rule does not apply if a cause of action related to a non-compete provision accrued prior to the Effective Date. This includes, for example, where an employer alleges that a worker accepted employment in breach of a non-compete if the alleged breach occurred prior to the effective date.”[3]

However, other statements by the FTC indicate, rather, that the Commission considers the Effective Date as the cutoff date after which any enforcement action related to then-existing non-competes are prohibited, even if the cause of action accrued prior to the Effective Date.  For example, the FTC declared in the Federal Register that it “adopts § 910.3(b) . . . to be clear that the final rule does not render any existing non-competes unenforceable or invalid from the date of their origin. Instead, it is an unfair method of competition to enforce certain non-competes beginning on the effective date.[4]  No reference is made here excepting causes of action accruing before the Effective Date.

If the FTC intends to foreclose all suits arising from alleged prior violations of employee non-competes from the Effective Date forward, as it statements suggest, there is a marked tension between the FTC’s intended purpose and the plain language of the final rule.

This tension can conceivably be reconciled by interpreting the exception as a concession by the FTC to allow for existing non-competes claims that have accrued and been filed before the Effective Date to continue.  However, to read the additional requirement to file suit into the text contravenes what it means for a cause of action to “accrue.” The United States Supreme Court, for one, has held that a cause of action accrues “when the plaintiff has a complete and present cause of action,” and “when the plaintiff can file suit and obtain relief.”[5]

Under the doctrine articulated by the United States Supreme Court in Auer v. Robbins, deference is typically granted to an agency’s reasonable interpretations of its own genuinely ambiguous regulations unless “plainly erroneous or inconsistent with the regulation.”[6] We believe that the Final Rule’s use of the phrase “cause of action . . . accrued” in the final rule is unambiguous, however, and a contrary interpretation by the FTC would not be protected by Auer deference if challenged in court, particularly after the Supreme Court severely limited the doctrine’s applicability in Kisor v. Wilkie.[7]  

Notwithstanding questions regarding the proper interpretation of the existing causes of action exception, the exception may, by its existence, lend some credence to those who oppose the Final Rule on constitutional grounds. The FTC has given a preview[8] of its arguments as to why it believes the existing causes of action exception insulates the final rule to constitutional challenges for impermissible retroactivity, unlawful takings, and lack of due process.  The question is –  will this exception be enough to allow the Final Rule to survive constitutional challenge on these grounds?

Until the FTC provides further guidance with respect to the existing causes of action exception, it remains uncertain whether a party may face the FTC’s ire for enforcing or attempting a non-compete after the Effective Date for behavior that occurred prior to the Effective Date.  Of course, if the Final Rule is stayed or struck down before the Effective Date, we may never see whether this becomes an issue in practice.  What we anticipate seeing, however, is a flood of litigation in the lead up to the Final Rule’s Effective Date to enforce non-competes whose enforcement will become “unfair” on the Effective Date.


[1] 16 C.F.R. § 910.3(b).

[2] 89 Fed. Reg. 38349 (May 7, 2024).

[3] 89 Fed. Reg. 38341 (May 7, 2024).

[4] 89 Fed. Reg. 38345 (May 7, 2024) (emphasis added).

[5] Wallace v. Kato, 549 U.S. 384, 388, 127 S. Ct. 1091, 1095, 166 L. Ed. 2d 973 (2007) (internal quotations omitted).

[6] Auer v. Robbins, 519 U.S. 452, 117 S. Ct. 905, 137 L. Ed. 2d 79 (1997).

[7] See Kisor v. Wilkie, 588 U.S. 558, 574, 139 S. Ct. 2400, 2415, 204 L. Ed. 2d 841 (2019) (“First and foremost, a court should not afford Auer deference unless the regulation is genuinely ambiguous.); see also Auer v. Robbins, 519 U.S. 452, 117 S. Ct. 905, 137 L. Ed. 2d 79 (1997).

[8] 89 Fed. Reg. 38440-41 (May 7, 2024).

Last year on the Policy Matters podcast, the team explored the fundamentals of non-compete agreements and examined what the adoption of the FTC’s proposed non-compete rule could mean for employers. Today, host Leon Rodriguez is joined by Daniel Hart and Dawn Mertineit to discuss the groundbreaking rule set to shake up non-compete agreements in the workplace, slated for enforcement starting September 4, 2024. Join the speakers as they unpack the rule’s broad implications, mounting legal challenges it faces, and constitutional uncertainties looming over its implementation.

Click here to listen to the full episode.

Dawn Mertineit, partner in Seyfarth’s Trade Secrets, Non-Competes & Data Privacy practice, authored an article titled, “The FTC’s non-compete ban: What to know and how to respond” on International Employment Lawyer.

Another notable limitation is contained in the final rule’s definition of a non-compete. Non-competes do not include clauses that only prohibit a worker from accepting work or operating a business outside the United States. In landing on this definition, the FTC considered various public comments expressing concerns about a final rule that would have an extraterritorial impact. Among those concerns were comments highlighting (1) the potential exacerbation of a shortage of science and technology workers if employers in other countries could more easily poach American workers; (2) other countries’ relatively weaker protections for trade secrets; (3) the greater challenge in litigating trade secret misappropriation claims in some other jurisdictions; and (4) the potential conflict between the rule and certain other statutes or multilateral agreements, such as the Protecting American Intellectual Property Act of 2022 or the World Trade Organization’s Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS”).

While the FTC did not find all the aforementioned concerns to be validated, it nonetheless chose to limit the rule’s application to work performed in the United States. Thus, the final rule (if it goes into effect—more on that below) expressly limits the definition of a non-compete to agreements “that prevent workers from seeking or accepting work in the U.S. or operating a business in the U.S.” In other words, even for workers who do not meet the definition of a “senior executive” or are not otherwise covered by an exception to the rule, an employer can impose a non-compete if it only prevents the worker from accepting a role or operating a business abroad (subject to jurisdictional-specific statutory requirements and common law governing the scope of restrictive covenants, of course). That said, the rule seemingly would still apply to foreign workers to the extent it prevents them from working or operating a business in the United States.

To read the full article, click here.

All bets are off in a Boston-based dispute between DraftKings Inc. and one of its former vice presidents. On April 30, 2024, the District of Massachusetts granted DraftKings a twelve-month preliminary injunction preventing its former Senior Vice President of Growth, Customer, Michael Hermalyn, from violating his restrictive covenants with DraftKings or misappropriating its confidential information.

Background

DraftKings is an online sports and gaming platform based in Boston, Massachusetts. Hermalyn worked as a Senior Vice President at DraftKings until his resignation on February 1, 2024. His role involved developing and maintaining relationships with “VIP” (high-value) customers. As a senior-level employee, Hermalyn had access to detailed information and documents about DraftKings’s key customers, plans for developing celebrities and influencers, and employee compensation.

When he began his employment with DraftKings, Hermalyn executed a Nonsolicitation, Nondisclosure & Assignment of Inventions Agreement whereby he agreed that, for a period of twelve months after his employment with DraftKings, he would not work with or solicit DraftKings’s customers, clients, vendors, or employees as well as any prospective customers, clients, vendors, or employees about whom he learned confidential information. He further agreed to maintain the confidentiality of DraftKings’s information and, upon resignation, immediately surrender such information back to DraftKings. Finally, in exchange for a multimillion-dollar equity grant, Hermalyn agreed to a noncompetition agreement that prohibited him from competing with DraftKings anywhere in the world for a period of twelve months after his resignation. The agreements provided that they were governed by Massachusetts law.

At the start of 2024, Hermalyn discovered he was under investigation by DraftKings for workplace misconduct. He immediately contacted the CEO of Fanatics, a top competitor of DraftKings, to ask about applying for a Vice President position with them. Throughout January 2024, he met with Fanatics’s CEO and executive team to discuss the transition.

On January 26, following DraftKings’s investigation, Hermalyn learned he would be put on a performance improvement plan, receive reduced compensation, and lose his Senior Vice President title, hospitality perks, and executive assistant. The next day, Hermalyn again met with Fanatics’s CEO and was offered a job.

On a January 30 call with DraftKings employees, Hermalyn indicated he was in New Jersey with his family grieving a friend’s passing. He was actually in Los Angeles, staying at the house of Fanatics’s CEO. Hermalyn began moving his lease, driver’s license, car, voting registration, and doctor’s appointments to California in plans of moving there. From January 29-January 31, he did not attend meetings or respond to emails regarding his job at DraftKings.

On February 1, 2024, Hermalyn formally accepted the role of President of Fanatics VIP and Head of Fanatics’s Los Angeles office. The role involved virtually identical “VIP” work as did his job with DraftKings.

DraftKings alleges that, throughout January, Hermalyn improperly transferred and downloaded its proprietary information, starting one day after he contacted Fanatics. The documents at issue include a slide deck described as DraftKings’s “playbook” for its VIP operations, a pitch deck for prospective partners, a compensation spreadsheet regarding thousands of employees, and a spreadsheet describing hundreds of DraftKings’s business partners. DraftKings alleges Hermalyn then engaged in a cover-up, deleting his browsing history, the Dropbox application (which was unauthorized by DraftKings), and scores of files from his work computers. DraftKings also contends that, around the same time, Hermalyn solicited two DraftKings employees who were part of his VIP team. Hermalyn denies all of DraftKings’s allegations.

Both parties took the dispute to the courts. Hermalyn filed suit in California state court, seeking declaratory and injunctive relief to invalidate his restrictive covenants with DraftKings. Four days later, after Hermalyn assumed his Fanatics position, DraftKings initiated an action in the District of Massachusetts, seeking a temporary restraining order. The Court granted the TRO.

DraftKings then moved for a preliminary injunction while Hermalyn moved to dismiss or stay the suit. The Court granted the preliminary injunction, finding DraftKings had established a sufficient likelihood of success on the merits of its claims that Hermalyn had breached his restrictive covenants and misappropriated DraftKings’s trade secrets.

Restrictive Covenants

As to Hermalyn’s noncompetition agreement, the Court emphasized that Hermalyn was a “highly compensated senior executive with access to some of the company’s most confidential information” who was “uniquely positioned” to misuse DraftKings’s trade secrets. As a result, the noncompetition agreement was no broader than necessary to protect DraftKings’s legitimate interests. However, the Court found the global reach of the noncompete overbroad, reducing it to a nationwide scope.

The Court found the non-solicitation agreement similarly enforceable, finding it necessary to prevent the misuse of DraftKings’s confidential employee and customer information. The Court held an evidentiary hearing to weigh the credibility of the DraftKings employees Hermalyn allegedly solicited, and the Court found them credible while concluding, when compared to the employees’ testimony and the documentary evidence, “Hermalyn has struggled with candor to the Court.” Therefore, DraftKings had demonstrated a likelihood of success on its claim that Hermalyn wrongfully solicited its employees. However, the Court found insufficient evidence to indicate breach of the non-solicitation agreement as it pertained to DraftKings’s customers.

Finally, the Court also sided with DraftKings as to Hermalyn’s breach of his non-disclosure agreement. It determined that, at a minimum, evidence indicated Hermalyn had failed to immediately surrender confidential DraftKings materials back to the company, instead storing files on unauthorized file-sharing websites or across devices. Overall, DraftKings had sufficiently supported its breach of contract claims to justify injunctive relief.

Misappropriation Claim

The Court similarly found that DraftKings had established the information at issue constitutes a trade secret and had taken reasonable measures to ensure its confidentiality. The Court stressed the economic value of business strategy and relationship information contained in many of the documents. Hermalyn did not dispute the reasonableness of DraftKings’s protective measures, and the Court found this element of the misappropriation claim “easily satisfie[d]” given DraftKings’s use of confidentiality agreements, encrypted laptops, and other protections.

The Court also found DraftKings had sufficiently demonstrated that Hermalyn used improper means to obtain and disclose the trade secrets. Specifically, Hermalyn transferred various documents to himself, in part by using company devices and programs beyond their authorized use. Two alleged trade secrets documents had, in fact, been accessed while in the home of Fanatics’s CEO. The Court noted the various “memory lapses, evidentiary gaps, and inconsistencies in Hermalyn’s account of his interactions with DraftKings’s confidential documents” that led it to discredit his arguments.

Given the strong risk of harm to DraftKings by allowing a direct competitor to unfairly leverage its proprietary information, the Court issued a preliminary injunction precluding Hermalyn from violating his restrictive covenants for twelve months following his February 1, 2024 resignation or from misusing DraftKings’s confidential information. Hermalyn immediately moved to appeal the order.

Hermalyn’s Arguments

Hermalyn made various arguments that were rejected by the Court. First, he argued that California law should apply to his restrictive covenants, but the Court rejected his argument that, as the place Hermalyn purported to move to mere days before his resignation, California had a more significant relationship to the dispute. Second, he sought dismissal on forum non conveniens grounds. However, the parties had agreed to a forum selection clause that Hermalyn had not argued was invalid. Public interest factors did not favor disregarding an enforceable forum selection clause based on Hermalyn’s minimal connections to California. Finally, Hermalyn sought a stay of the case under Colorado River abstention. Hermalyn had filed his own suit in California state court to deem his restrictive covenants invalid. He asked that the Court stay the Massachusetts action pending resolution of the California action. However, the Court noted that the California case would not resolve all of the claims at issue in the Massachusetts case, as required for abstention, because trade secrets and common law claims would remain at issue.

Meanwhile, as discussed briefly by the federal court, the Los Angeles County Superior Court has yet to rule on Hermalyn’s request for a preliminary injunction, allow discovery, or discuss any jurisdictional issues that may be raised. Thus far, Hermalyn has lost his initial motion for a temporary restraining order in California state court, and the case remains in its early stages.

Conclusion

Even at this early stage of the proceedings, the Court openly expressed its skepticism of Hermalyn’s account. As technology has made it easier than ever to assess what company documents were accessed and how, including on what network (within what CEO’s house, no less), employers have substantial ability to monitor and address misconduct and misappropriation.

Plaintiff Fujikura Composite America, Inc. (“Fujikura”) is one of the most prominent golf club shaft designers and manufacturers. Per Fujikura, in the 2022-2023 PGA Tour season, half of all PGA tournaments were won by a player using a Fujikura shaft.

On May 1, 2024, in the United States District Court for the Southern District of California, Fujikura sued Alexander Dee, a former golf shaft engineer, and his new competing business, Aretara Golf. Fujikura alleges that Dee took certain shaft prototypes with him when he left his employment and used those prototypes to create competitive Aretera shafts that bear technical, branding, and visual similarities to unreleased Fujikura shafts. Fujikura claims to have analyzed Aretera shafts through an electron microscope and determined that certain shafts had identical features to some Fujikura shafts. Fujikura claims that Dee and Aretera misappropriated its trade secrets and that Dee breached his non-disclosure obligations to Fujikura.

While only one side of this story has been told so far, Fujikura’s allegations illustrate why non-compete agreements provide necessary protection for some businesses and why non-disclosure agreements and trade secret laws are sometimes insufficient. Presumably, to prove its case Fujikura will need to find actual evidence that Aretera had access to and used Fujikura’s prototypes. On the other hand, if Dee was subject to an appropriate non-compete agreement, Fujikura would be more likely to obtain an injunction precluding Dee from working at Aretera and developing competing products without the necessity of proving actual misappropriation and disclosure of Fujikura information.

Some states, like California where this lawsuit is pending, have already made the determination that non-competes are invalid except for certain limited exceptions. The vast majority of other states, however, have balanced interests differently and in many instances opted to allow non-compete agreements provided that such agreements are used with appropriate employees and drafted no broader than necessary to protect the employer’s legitimate business interests. This scenario stands as yet another example why the FTC’s wholesale ban on non-compete agreements is divorced from the reality that many businesses experience.