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.