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Noncompete agreements have long been a point of contention in business. California’s strict stance on noncompete clauses aims to promote employee mobility and foster open competition. However, a recent First Circuit Court ruling in DraftKings Inc. v. Hermalyn has raised questions about the effectiveness of California’s latest noncompete law, especially when out-of-state agreements are involved. For business owners, understanding the implications of this case is crucial to protecting your company’s interests.
What the DraftKings Case Means for Your Business
In this case, a former executive of DraftKings, headquartered in Massachusetts, resigned and accepted a position with a California-based competitor. DraftKings sought to enforce a noncompete agreement signed in Massachusetts, which generally allows such agreements for high-level employees. Although California law (Section 16600.5 of the Business and Professions Code) voids most noncompete agreements, the First Circuit upheld Massachusetts law enforcement, blocking the executive from competing against DraftKings in the United States for a year.
This ruling highlights a key issue: while California’s new law attempts to void noncompetes for employees working in the state, it may not always override another state’s legal framework.
What Is Section 16600.5?
Section 16600.5 of California’s Business and Professions Code, enacted in 2024, expands the state’s restrictions on non-compete agreements to cover employees seeking work in California—even if they previously signed such contracts out of state. The law was designed to protect workers moving to California by invalidating noncompetes from other jurisdictions.
However, the DraftKings decision shows that this policy isn’t foolproof. The First Circuit ruled that Massachusetts had a greater interest in enforcing its noncompete laws for high-level employees, given that DraftKings is headquartered there.
How Can California Business Owners Protect Their Interests?
For business owners, especially those with out-of-state employees or executive-level staff, it’s essential to understand the potential limitations of California’s noncompete laws. Here are some key takeaways from the DraftKings ruling:
- Cross-State Agreements Can Prevail: Noncompete agreements signed outside of California may still be enforceable, depending on the circumstances. Courts may prioritize the state where the business is headquartered or where the employee initially worked.
- Tailor Noncompete Clauses: Ensure that your company’s noncompete agreements are drafted with clear, enforceable terms. Consulting with a knowledgeable business litigation attorney can help you navigate the complexities of interstate noncompetes.
- Monitor Legislative Changes: California’s legal landscape is always evolving. Keeping an eye on future amendments to Section 16600.5 and similar laws can help you stay compliant and protect your business.
Moving Forward: What Can California’s Legislature Do?
The DraftKings case demonstrates that while Section 16600.5 is a step toward protecting employee mobility, it may not be strong enough to override noncompete agreements from other states. To strengthen this law, California could focus on specific industries, such as tech, where the harm caused by noncompetes is more pronounced.
For business owners, this ruling underscores the importance of staying informed about legal developments that can impact their workforce and competitive edge.
Protect Your Business
If your business operates across state lines or employs high-level executives, it’s essential to stay ahead of legal challenges like non-compete agreements. Schedule an appointment here with our business litigation law firm today to review your contracts and ensure your company is protected.
