Employer Prevails in First Test of California's Newest Noncompete Law
In the first known case to challenge California's legislative attempt to void noncompete agreements even for employees who do not live or work in California, the First Circuit Court of Appeals upheld the application of Massachusetts law, ignoring the California law's mandate.
For decades, noncompete agreements have been almost entirely unenforceable in California. At the end of 2023, the California legislature expanded its ban on noncompetes to encompass contracts entered outside of California by enacting California Business and Professions Code section 16600.5. Under this new law, noncompete provisions are unenforceable "regardless of where and when the contract was signed," and employers are prohibited from attempting to enforce such noncompete provisions "regardless of whether the contract was signed and the employment was maintained outside of California."
On February 1, 2024, a then-senior vice president of DraftKings resigned his position to join a California-based competitor. At the time, the former employee lived and worked in New Jersey for DraftKings. Because DraftKings' headquarters is in Massachusetts, his noncompete agreement required the application of Massachusetts law.
The day after he resigned and joined the competitor, the former employee sued DraftKings in California, claiming California residency. In what he called "a test case for California's new statutes reinforcing the state's decades-old prohibitions on anticompetitive post-employment restrictive covenants," he asked the California court to invalidate his noncompete agreement with DraftKings. DraftKings later sued to enforce the noncompete in Massachusetts federal court. In the California case, the court restricted the former employee's use of DraftKings' confidential information (including customer lists) but deferred action on the enforceability of the noncompete.
A short time later, in one of the first tests of the scope of California's new law, the Massachusetts court rejected the argument that California's law and public policy trumped Massachusetts's interest in the dispute. The court applied Massachusetts law as provided by the noncompete and issued a temporary restraining order that barred the former employee from competing with DraftKings anywhere in the United States for a year.
In an accelerated appeal, the First Circuit upheld the application of Massachusetts law to the former employee's noncompete. Applying Massachusetts choice-of-law analysis, the First Circuit determined that the former employee failed to prove that "California's public policy eclipses the parties' clear and unambiguous agreement to apply [Massachusetts] law." The First Circuit concluded that the noncompete was a valid and enforceable agreement, even though the former employee relocated to work in California.
This is just the first test of California's new law. It remains to be seen whether in other cases, each with their own unique facts, the potentially nationwide impact that California's law has on noncompete provisions will withstand scrutiny by courts in other states.
