Renowned sports betting company DraftKings, is making headings in a landmark ‘non-compete’ case. The company alleges that Michael Hermalyn, in his role as its head of VIP operations, plotted to steal confidential information.  This information, it is alleged, was not just any data, but the company’s secrets, the core of its operations. Hermalyn, a senior executive who received compensation in the six-figure range from DraftKings to oversee VIP customer acquisition and retention, is accused of masterminding a secret plan over the past year. The plan was not just to steal and use confidential information, but also to solicit customers and employees and join Fanatics, Inc, a key competitor. This was in shameless violation of his agreement with DraftKings.

A US employment lawyer who wishes to remain unnamed provided an overview of the DraftKings case to Sigma News. He explained that the legal case is a significant one in the employment sector, particularly in relation to non-compete agreements.

The case revolves around DraftKings accusing Michael Hermalyn, a trusted employee with a binding contract, of attempting to steal confidential information. The company alleges that Hermalyn premeditated and planned to use this information to solicit customers and employees and join a key competitor, Fanatics, Inc. The lawyer highlighted that this case is particularly interesting because it involves a high-ranking executive who was compensated millions of dollars by DraftKings. The alleged plan to steal and use confidential information, if proven, would be a clear violation of Hermalyn’s agreements with DraftKings. He added that this case could have far-reaching implications for non-compete agreements, especially in states like California where such a violation of contract is generally seen as undesirable. The outcome of this case, he said, could potentially influence future employment law cases and the enforceability of non-compete agreements.

The plot

The scheme appears to have started as early as the February 2023 during Super Bowl, when Hermalyn clandestinely met with Fanatics’ CEO and leadership team to discuss changing his employment. It is alleged that over the summer of last year, he continued to act against his employer’s interests whilst feigning that he was “getting out of the industry”. Simultaneously he inappropriately started to encourage his subordinates to meet with the CEO of Fanatics about employment there. At the same time, he also started to put pressure on DraftKings to pay him and his team large retention payments, valued at millions of dollars. Hermalyn’s scheme came to a head on the eve of this year’s Super Bowl. While he falsely claimed to be mourning the loss of a friend from Pennsylvania, Hermalyn instead secretly travelled to the offices of Fanatics in Los Angeles. There, he negotiated an employment agreement with Fanatics and downloaded DraftKings’ confidential business plans for the Super Bowl while sitting in Fanatics’ office. During his trip, he fraudulently attempted to establish California residency during his 48-hour visit.

Non-compete law in California

California has a long history of being tough when it comes to non-compete agreements. Under , every contractual covenant that restrains anyone from engaging in a lawful profession, trade, or business of any kind is void, except under limited statutory exceptions. These exceptions include the sale of a business, the dissolution of a partnership, or upon the dissolution or termination of interests in a limited liability company. However, against DraftKings, filed in the Superior Court of Los Angeles on 1 February, brings a new perspective to the non-compete law in California. Hermalyn, who has worked in the betting and gaming space for 16 years, is challenging the sweeping provisions of his contract that prohibit him from being employed in the betting and gaming industry, engaging in any work pertaining to fantasy sports, betting and gaming, and various other industries, and from communicating with his former clients and co-workers. This case is particularly significant as it comes at a time when California’s non-compete law is undergoing a pivotal amendment set to be enacted this year. The amendment will include protection for employees, nurturing career mobility and endorsing fair employment practices. The stipulations introduced in the new amendment, for example, will oblige employers to recalibrate their legal strategies and approaches to employment. This case will undoubtedly have far-reaching implications for both businesses and employees alike in the state of California.

The aftermath

Hermalyn, it is alleged, did all this so that he could resign from DraftKings and try to invalidate his non-compete agreements in California. DraftKings has since filed a civil action in the US District Court in the state of Massachusetts. The company is seeking prompt injunctive relief barring Hermalyn (pictured above), from violating his agreements with DraftKings. The case of DraftKings vs. Hermalyn is currently ongoing and it is far too early to determine if the case will set a precedent. However, it does highlight the contentious nature of non-compete agreements, particularly in California where such agreements are generally disfavoured.

Other non-compete landmark cases

When it comes to non-compete employment agreements, there are two additional cases that serve as significant points of reference. These cases demonstrate the legal complexities surrounding noncompete agreements and the potential implications for employees and employers alike. They also highlight the importance of carefully considering the terms of such agreements before signing. It is always recommended to consult with a legal professional when dealing with these types of contracts.

• PepsiCo, Inc. v. Redmond (1995): This case involved a former PepsiCo employee who had accepted a position with a competitor, Quaker Oats. The court upheld the non-compete agreement, preventing the employee from sharing trade secrets.

• IBM v. Papermaster (2008): In this case, a high-ranking IBM employee who left to work for Apple. IBM sued, citing their non-compete agreement. The court initially sided with IBM and issued an injunction preventing the employee from working at Apple, but the case was later settled out of court.

Complexities of non-compete law

Non-compete agreements can have a significant impact on employees’ career trajectories and mobility. Here are some key points to consider:

Restrictions on Future Employment: Non-compete agreements can limit an employee’s ability to work for a competitor or start a business in the same industry. This can restrict their job opportunities and potentially stifle innovation.

Protection of Proprietary Information: Proponents argue that non-compete agreements are necessary to protect proprietary information and trade secrets. They can prevent employees from taking sensitive information to a competitor.

Negotiation Leverage: Employees subject to a non-compete agreement can negotiate a higher salary, more benefits, or other incentives as a condition of signing. This can lead to better compensation packages.

In summary, while non-compete agreements can offer certain benefits to both employers and employees, they can also impose significant restrictions on employees’ career options and mobility. The impact of these agreements can vary widely depending on the specific terms and the jurisdiction in which they are enforced. This case serves as a reminder of the cut-throat nature of the corporate world and of the gaming industry, where loyalty can sometimes be as fleeting as a sports season. As the legal proceedings of Hermalyn’s case unfold, the sports betting industry will be watching closely, waiting to see how this corporate drama plays out.