First Circuit: Massachusetts Law Properly Applied in Noncompete Jurisdiction Dispute
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APPLIES TO All Employers with Employees in ME, MA, NH, PR, and RI |
EFFECTIVE September 26, 2024 |
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Discussion:
In DraftKings Inc. v. Hermalyn, the First Circuit Court of Appeals stated that Massachusetts law was correctly applied in upholding a noncompete provision in an employment agreement rather than the application of California law. Here, the defendant worked for DraftKings under an employment agreement which included a one-year noncompete clause. The employment agreement was governed by Massachusetts law. Eventually, the defendant quit his job with DraftKings and went to work in Los Angeles to work for DraftKings’ competitor Fanatics. DraftKings sued the defendant to enforce the noncompete. The defendant sought to have the noncompete voided under application of California law, while DraftKings sought enforcement under Massachusetts law.
Massachusetts generally allows noncompete agreements if they comply with certain restrictions, like a time limit of one-year. California generally bans noncompete agreements unless they fit within one of the few narrow exceptions, such as during a business sale or the breakup of a partnership. California applies its ban regardless of where and when the contract was signed and whether the employment was maintained outside of California. In reaching its ruling, the court looked at whether: (1) “application of” Massachusetts law “would be contrary to a fundamental policy of” California; (2) California “has a materially greater interest than” Massachusetts “in the determination of the … issue”; and (3) California is the state whose law would control “in the absence of an effective choice of law by the parties.” The court found the defendant could not satisfy the “materially-greater-interest” prong without looking at the other prongs.
In 2018, Massachusetts passed the Massachusetts Noncompetition Agreement Act (MNAA) which banned noncompete agreements for lower-level workers, limited them for higher level workers, and provided procedural protections to inform workers about the agreement they are signing. The court found that the legislative history of the MNAA showed that Massachusetts purposefully opted not to copy California’s near total ban on noncompete agreements. Therefore, the defendant was unable to show that California’s “interest” in pursuing its policy was “materially greater” than Massachusetts’. Since Massachusetts law controlled the noncompete agreement by its very terms, the noncompete provision was enforceable. This case highlights the importance of having legal counsel involved in reviewing, drafting, and enforcing noncompete agreements.
Action Items
- Have legal counsel review, draft, and enforce noncompete agreements.
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