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From the Internal Revenue Service’s (IRS’s) release of 2025 tax inflation adjustments to approaching Corporate Transparency Act (CTA) deadlines and a new Centers for Medicare & Medicaid Services (CMS) final rule establishing an appeals process for Medicare beneficiaries, we have recently seen significant legal developments.
To ensure that you stay abreast of these changes, we have highlighted some noteworthy developments and analyzed how they may impact your estate planning, elder and special needs law, and business law practices.
Estate Planning
IRS Releases 2025 Lifetime Exemption and Annual Gift Exclusion Amounts, Retirement Account Contribution Limits
Rev. Proc. 2024-40 (Oct. 22, 2024), Notice 2024-80 (Nov. 1, 2024)
On October 22, 2024, the IRS issued Revenue Procedure 2024-40, providing the annual inflation adjustments for tax provisions to be used by individual taxpayers for the 2025 calendar year. The adjustments include the following:
- The estate, gift, and generation-skipping transfer tax exemptions for 2025 are $13,990,000, an increase from $13,610,000 for transfers in 2024.
- The annual exclusion for gifts is $19,000 for calendar year 2025, an increase from $18,000 for 2024.
- For 2025, the first $190,000 of gifts to a spouse who is not a citizen of the United States (other than gifts of future interests in property) are not included in the total amount of taxable gifts made during that year, an increase from $185,000 for 2024.
On November 1, 2024, the IRS released Notice 2024-80, providing annual inflation adjustments for retirement accounts. For 2025, the annual contribution limit for employees who participate in 401(k), 403(b), governmental 457 plans, and the federal government’s Thrift Savings Plan is $23,500, an increase from $23,000 in 2024. However, the limit on annual contributions to an IRA is $7,000 ($8,000 for those 50 and older) for 2025—the same as the contribution limit for 2024.
Takeaways: These adjustments reflect the decreased inflation rate during 2024 compared to 2023. The increase in basic exclusion amount means that an individual will be able to transfer $380,000 more free of transfer tax liability in 2025 than they could in 2024. The $19,000 annual exclusion amount for gifts represents the fourth increase in four years: the exclusion amount for gifts was increased to $18,000 in 2024, following increases to $17,000 in 2023 and $16,000 in 2022 after remaining at $15,000 from 2018 through 2021. Estate planning attorneys should work with clients to determine if they should take advantage of the planning opportunities provided by these increases, especially in light of the scheduled sunset of the enlarged exemption amounts at the end of 2025.
United States’s Estate Tax Collection Claims Time-Barred
United States v. Dill, No. 6:22-cv-1487-CEM-RMN, 2024 WL 4486186 (M.D. Fla. Aug. 22, 2024)
The Estate of Gladys R. Dill (Estate) filed an estate tax return on December 18, 2006. On the same date, the Estate filed a notice of its election under I.R.C. § 6166 of an extension of time to pay the Estate’s taxes in installments. In 2010, the Estate was unable to make one of the installment payments but did not request an extension of time to make the payment until May 24, 2011. The United States denied its request for an extension of time, and an administrative appeal of the denial was rejected. As a result, the § 6166 extension terminated on March 6, 2012. The Estate failed to contest the termination in the Tax Court within 90 days as required under I.R.C. § 7479(b)(3), and thus the termination became final on June 5, 2012. On August 20, 2012, the United States issued a Notice and Demand for Payment of the Entire Tax Liability, but the Estate did not pay the amount due.
Nine years and 364 days later, on August 19, 2022, the United States filed a lawsuit against the Estate to collect the amount due. The Estate asserted that it was entitled to summary judgment in its favor regarding the United States’s claims seeking to collect the unpaid estate taxes. It argued that those claims were time-barred under I.R.C. § 6502(a)(1), which states that collection of estate taxes is subject to a 10-year statute of limitations—typically commencing on the assessment date. I.R.C. § 6503(d) suspends the commencement of the limitations period during the § 6166 extension of time for payment of the estate tax. The parties disagreed about when the suspension of the limitations period under I.R.C. § 6503(d) ended and the statute of limitations began to run. The Estate asserted that the statute of limitation began to run on June 5, 2012, when the termination of the § 6166 extension became final. The United States claimed that the statute of limitations began to run on August 20, 2012, the date of its notice and demand for payment pursuant to I.R.C. § 6166(g)(3)(A) (“[I]f any payment . . . under [Section 6166] is not paid on or before the date fixed for its payment . . . , the unpaid portion of the tax payable in installments shall be paid upon notice and demand from the Secretary.”).
The court ruled that whether the statute of limitations is suspended as a result of a § 6166 extension is governed by I.R.C. § 6503(d), which states: “The running of the period of limitation for collection of any tax . . . shall be suspended for the period of any extension of time for payment granted under the provisions of section . . . 6166.” Under the “incredibly simple and straightforward” language of that section, the statute of limitation is suspended only as long as the § 6166 extension is in place and is no longer suspended once the § 6166 extension terminates. United States v. Dill, No. 6:22-cv-1487-CEM-RMN, 2024 WL 4486186, at *3 (M.D. Fla. Aug. 22, 2024)
The court held that because the termination of the § 6166 extension became final on June 5, 2012, the statute of limitations began to run on that date. The court ruled that the United States’s action to collect the unpaid estate taxes was time-barred because its action was not filed until August 19, 2022, two months after the 10-year limitations period had ended.
Takeaways: The court’s decision in Dill clarifies that the 10-year statute of limitations for collection of estate tax is suspended during the period of a § 6166 extension of time and begins to run when the termination of the § 6166 extension is final by operation of law, that is, upon the failure of an estate to contest the termination of the § 6166 extension by petitioning the Tax Court within the required 90 days. Although the United States is required to provide notice and demand for payment pursuant to I.R.C. § 6166(g)(3)(A), “that statute does not discuss or even allude to the statute of limitations” or its suspension. Id.
Co-Trustee of Revocable Living Trust That Is Residuary Beneficiary of Estate Has Standing to Object to Petition by Personal Representative’s Attorney for Fees
Wilson v. In re Estate of Loftin, No. 3D23-0179, 2024 WL 4219383 (Fla. 3rd DCA Sept. 18, 2024)
Thomas Wilson, co-trustee of a revocable living trust that was the residuary beneficiary of an estate, appealed two orders granting a petition for payment of administrative expenses to the attorney of Jorian Loftin, the personal representative of the estate, in which the court had determined that Wilson did not have standing to object to the petition. In a per curiam opinion, the court reversed, finding that Wilson had standing to object to the petition under Fla. Stat. § 733.6171(5), which states that an “interested person” has standing to object to fee requests of the personal representative’s attorneys. Fla. Stat. § 731.201(23) defines an interested person as “any person who may reasonably be expected to be affected by the outcome of the particular proceeding involved” and as the trustee of a trust “in any proceeding affecting the expenses of the administration of a decedent’s estate.” The court found that under the plain language of those statutes, Wilson, as co-trustee, had standing to object to the petition for administrative expenses such as attorney’s fees and costs filed by Jorian’s attorney. Because the parties had agreed upon the entitlement of fees, the court limited the objection to the reasonableness of the fees sought by Jorian’s attorney.
Takeaways: The definition of interested person may be expansive to extend standing to various parties. In this case, the trustee of a revocable living trust that is a residuary beneficiary of a decedent’s estate is properly considered an interested person because they may reasonably be affected in any proceeding regarding the expenses of the administration of that estate. As a result, the trustee is an interested party who has standing to object to a petition for payment of those expenses.
Elder Law and Special Needs Law
CMS Issues Final Rule Enabling Patients with Traditional Medicare to Appeal a Hospital’s Reclassification of Status from Inpatient to Outpatient Receiving Observation Services
Medicare Program: Appeal Rights for Certain Changes in Patient Status, 42 C.F.R. pts. 405, 476, and 489 (Oct. 11, 2024)
On October 11, 2024, CMS issued a final rule establishing an expedited appeals process for Medicare beneficiaries who meet other eligibility requirements and are admitted to hospitals as inpatients but are later reclassified during their hospital stays from inpatients to outpatients receiving observation services. The result of such a reclassification is a denial of coverage for the hospital stay under Medicare Part A. A change in status could negatively affect those who subsequently need care in a skilled nursing facility (SNF) because a three-day Medicare-approved inpatient hospital stay is required for Medicare to cover SNF care.
Under the final rule, eligible beneficiaries may file an appeal with a Beneficiary & Family Centered Care-Quality Improvement Organization (BFCC-QIO), which will independently review their patient records to determine if the inpatient admission satisfied the criteria for Medicare Part A coverage. If the beneficiary files an expedited appeal of a reclassification before leaving the hospital, the BFCC-QIO will issue its decision within one day after receiving the beneficiary’s patient records. The final rule also establishes a standard appeals process for beneficiaries who do not file an expedited appeal, which involves longer timeframes for filing and decisions by the BFCC-QIO. The final rule establishes a retrospective appeal process for status changes for beneficiaries with hospital admissions on or after January 1, 2009.
Takeaways: The final rule implements a court order issued in Alexander v. Azar, 613 F. Supp. 3d 559 (D. Conn. 2020), aff’d sub nom., Barrows v. Becerra, 24 F.4th 116 (2d Cir. 2022), a 2011 class action lawsuit requiring the Secretary of the US Department of Health and Human Services to create additional appeals processes for beneficiaries who have had Medicare Part A benefits denied for hospital inpatient services and SNF care as a result of a hospital’s reclassification of their status. The CMS projects that it will implement the appeals processes in early 2025. Improper reclassification can have massive financial and health consequences for those in the midst of a healthcare crisis. This final rule is decades in the making, and practitioners should educate themselves on the process to ensure the best client outcomes.
Children Who Brought Action Against Memory Care Facility for Wrongful Death of Mother Not Bound by Arbitration Agreement Between Mother and Facility
Maxwell v. Atria Mgmt. Co., LLC, 325 Cal. Rptr. 3d 778 (Cal. Ct. App. Sept. 19, 2024)
Trudy Maxwell, an elderly resident of the memory care unit of Atria Park of San Mateo, a senior living facility, died August 29, 2022, after drinking industrial strength cleaner served to her by an Atria Park employee. Her children as individuals, including her son James Maxwell (James III), and James III acting as successor in interest to Trudy’s estate, filed an action against Atria Park and certain individuals (collectively Atria Park) for damages arising from wrongful death, negligence, and elder abuse.
Before her death, Trudy had executed a durable power of attorney (DPOA) naming her husband, James, as the attorney-in-fact and James III as the successor attorney-in-fact. Trudy’s daughter Marybeth held a medical power of attorney (MPOA) that authorized her to select or discharge healthcare providers and institutions. James III provided the MPOA to Atria Park. However, in September 2020, James III signed the residency agreement and related documents for Trudy’s admission to Atria Park as a responsible person but not as her attorney-in-fact under the DPOA. In June 2020, he executed a separate arbitration agreement with Atria Park as Trudy’s attorney-in-fact under the DPOA applicable to “any and all claims and disputes related to or arising out of [Trudy’s] residence at [Atria] that may be asserted by either party against the other party as well as any claim or dispute.” Maxwell v. Atria Mgmt. Co., LLC, 325 Cal. Rptr. 3d 778, 784 (Cal. Ct. App. Sept. 19, 2024).
Atria Park filed a motion to compel arbitration of all claims based on the arbitration agreement. The lower court denied Atria Park’s motion, finding in part that James III did not have the authority under the DPOA to execute the arbitration agreement because he was not authorized to make healthcare decisions on Trudy’s behalf and that the agreement was part of Atria Park’s admission process. The court also determined that the arbitration agreement did not bind Trudy’s children with regard to their individual wrongful death claims.
On appeal, the California Court of Appeals noted that in a recent case, Harrod v. Country Oaks Partners, LLC, 544 P.3d 1138 (Cal. Mar. 28, 2024), the California Supreme Court expressly declined—in a footnote—to announce a rule concerning whether an attorney-in-fact under a DPOA who was not authorized to make healthcare decisions or enter into a contract for services with a healthcare facility can enter into an arbitration agreement with the healthcare facility when a different person has authority to make healthcare decisions under a MPOA. The court determined that before the question raised—but not answered—in Harrod could be addressed, a variety of other findings were needed, including whether the arbitration agreement had been validly executed by James III as the successor attorney-in-fact under the DPOA in the absence of documentation of the death of Trudy’s husband (whom Trudy named as attorney-in-fact) when it was provided to Atria Park and whether James III had voluntarily executed the arbitration agreement. As a result, the court remanded the case to the trial court to address those issues and then reconsider the validity of the arbitration agreement in light of Harrod.
However, the court found that the trial court had correctly determined that wrongful death claims brought by Trudy’s children in their individual capacity were not arbitrable. The arbitration agreement applied only to disputes between the parties to the agreement, that is, Trudy and Atria Park. The court agreed with the trial court that wrongful death claims are not derivative of Trudy’s causes of action but are new causes of action that are personal and independent of survivor claims.
Takeaways: Elder law practitioners should remind clients that under CMS regulations, long-term care facilities may not require a resident or their representative to sign an agreement for predispute binding arbitration as a condition of admission to or as a requirement to continue to receive care at the facility. Further, any agreement for binding arbitration must be thoroughly and clearly explained to the resident or their representative to ensure they understand the agreement and to ensure transparency. Lastly, agents acting on behalf of a principal, whether under a durable power of attorney, medical power of attorney, or other agency arrangement, must follow the specifics outlined in such documents to fully vest legal authority and prevent unnecessary consequences.
Guardian Authorized by Court to Create Special Needs Trust Was Not Authorized to Create Residuary Clause Naming Herself as Remainder Beneficiary
In Re Hector M. Hernandez Supplemental Needs Trust, No. 366172, 2024 WL 4486764 (Mich. Ct. App. Oct. 14, 2024)
In 2014, Hector Hernandez suffered a stroke, became quadriplegic, and was awarded $2 million from a related medical malpractice settlement. The circuit court ordered the funds to be placed in a special needs trust (SNT) for Hector’s benefit. Hector’s sister, Luisa, who was also his guardian, hired an attorney to draft the SNT and act as trustee. The trust instrument stated that it was formed to supplement government benefits for which Hector may be eligible and not to supplant them, that he would not have access to the principal or income of the SNT, and that he had no power to direct the trustee to distribute income or principal to him. His sister was named the residuary beneficiary in the SNT. The probate court authorized the trust and subsequently approved the distribution of the trust funds in December 2020. Although Hector, who had been divorced since 2012, had three adult children, they were not notified of any proceedings. When Hector died in 2012, the trustee petitioned for a final accounting of the trust funds, and the probate court ordered the distribution of the remaining funds to Luisa.
Hector’s children subsequently filed a petition to vacate the probate court’s order allowing distribution of the remaining trust funds to Luisa. They filed for summary judgment on the basis that Luisa and the probate court had unlawfully created the residuary clause. The probate court granted summary judgment in the children’s favor because they had not been notified of the earlier proceedings related to the formation of the SNT. It also found that the residuary clause could not be deemed Hector’s will because he had not signed it, and Luisa had failed to provide clear and convincing evidence that Hector intended to leave Luisa the remaining funds in the trust. As a remedy, the probate court modified the residuary clause to designate Hector’s estate as the remainder beneficiary and directed the distribution of the remaining balance to the personal representative of Hector’s estate. Luisa appealed.
The Michigan Court of Appeals agreed with the probate court that pursuant to Michigan statutes, notice of a proceeding for a protective order to protect the property of incapacitated persons must be given to their “spouse, parents, and adult children.” Because the probate court’s authorization of the SNT was a protective order under Michigan statute and the trustee had not notified Hector’s adult children, the probate court correctly concluded that the proceeding to authorize the SNT had been improper.
Further, the court ruled that when the circuit court approved the medical malpractice settlement, it had ordered Luisa to create an SNT pursuant to 42 U.S.C. § 1396p(d)(4)(A) for Hector’s benefit. Although Luisa had the authority to create the SNT, she did not have the authority to determine who would receive Hector’s property upon his death. Therefore, the provision of the SNT naming Luisa as the residuary beneficiary was void and unenforceable.
In addition, although the residuary clause of the SNT may have been enforceable if Luisa could have demonstrated that it met the statutory requirements of a will, the SNT instrument had not been signed by Hector as required by law. Luisa failed to show by clear and convincing evidence that Hector intended the residuary clause to allocate his property upon his death.
The court also determined that the probate court had properly modified the residuary clause to allocate the assets remaining in the SNT to Hector’s estate. Under Mich. Comp. Law § 700.7410, “a trust terminates to the extent . . . the purposes of the trust have become impossible to achieve.” Because the SNT was created to supplement any government benefits Hector may be eligible to receive, its purpose became impossible to achieve upon Hector’s death. Therefore, the probate court had properly modified the void residuary clause to reflect that Hector had died without a will.
Takeaways: This case highlights the importance of proper notice in probate proceedings to interested parties, including proceedings for protective orders to protect the property of incapacitated persons. In addition, it underscores the inability of the probate court’s approval of the residuary clause to cure Luisa’s lack of compliance with the circuit court’s order, which had authorized her only to create the SNT, not to determine where Hector’s property should go at his death. This case also emphasizes the need for estate planning documents to meet state law requirements for allocating property at death.
Notably, Hector’s trust was entitled the “Hector Hernandez Supplemental Needs Trust.” However, a supplemental needs trust, also called a third-party special needs trust, is funded not by the beneficiary but by a third party. Article I of the SNT at issue provided that “[a]ll provisions of this Trust shall be interpreted to qualify this Trust under 42 USC § 1396p(d)(4)(A) and the Special Needs Trust Fairness Act of 2013 . . . .”. Therefore, despite the title of the trust instrument, the trust was a first-party or self-settled SNT, providing a reminder that the name of a trust has no impact on its legal effect.
Medicaid Beneficiary’s Direct Transfer of Undivided 50 Percent Interest to Permanently Disabled Daughter Not Subject to Transfer Penalty
M.S. v. Middlesex Cnty. Bd. of Soc. Servs., OAL DKT. NO. HMA 07196-24, 2024 WL 4585320 (N.J. Adm. July 26, 2024)
M.S. (Mother), a 75-year-old woman, transferred real property to her disabled daughter (Daughter) and her son (Son) as joint tenants with rights of survivorship in connection with Medicaid planning. Daughter was receiving disability benefits at the time of the transfer and continued to receive them afterward. Son was Mother’s caregiver. The Middlesex County Board of Social Services (MCBSS) found Mother eligible for Medicaid benefits as of June 1, 2023, but imposed a 420-day transfer penalty due to the transfer of $161,760.93, consisting of the 50 percent undivided interest in Mother’s home transferred to Daughter for less than fair market value. This resulted in a July 24, 2024, effective date for Medicaid benefits. MCBSS did not assess a transfer penalty to Son’s 50 percent undivided interest in the home after determining that his interest was excludable pursuant to N.J.A.C. § 10:71-4.10(d)(4) (caretaker exception). Mother requested a hearing, which was transmitted to the New Jersey Office of Administrative Law. Mother asserted that the transfer of real property was exempt from penalty under 42 U.S.C. § 1396p(c)(2)(B)(iii), N.J. Admin. Code § 10:71-4.10(d)(2), N.J. Admin. Code § 10:71-4.10(e)(5), and New Jersey case law, including Sorber v. Velez, 2009 U.S. Dist. LEXIS 98799 at *6 (D.N.J. Oct. 23, 2009).
The administrative judge rejected MCBSS’s argument that only transfers made to an irrevocable trust established for the sole benefit of a disabled child are eligible for an exemption from the transfer penalty rules. Rather, the administrative judge determined that it was “syntactically implausible” to read the “solely for the benefit” language in 42 U.S.C. § 1396p(c)(2)(B)(iii) to apply to transfers directly to a Medicaid applicant’s disabled child. M.S. v. Middlesex Cnty. Bd. of Soc. Servs., OAL DKT. NO. HMA 07196-24, 2024 WL 4585320, at *4 (N.J. Adm. July 26, 2024). The administrative judge further relied on Sorber v. Velez and other New Jersey cases supporting Daughter’s position that “42 U.S.C. § 1396p(c)(2)(B)(iii) has the effect of exempting any transfer of resources made directly to an applicant's blind or disabled child, regardless of whether the transferor makes any special arrangements to ensure that the transfer is for the child’s sole benefit.” Sorber v. Velez, at *6. The administrative judge determined that the general rule is that transfers to permanently disabled children are not penalized. According to the prior cases, as long as the transfer was solely and directly to the disabled child and under her direct control, the transfer was not subject to penalty.
As joint tenants with a right of survivorship, Son and Daughter both had an indivisible 50 percent interest in the transferred primary residence, with each person’s interest passing to the other upon death. Because the transfer involved two exceptions to the transfer penalty, the two distinct parts, each of which was a 50 percent interest, came together to form the basis for a whole. Thus, because distinct exceptions applied to each grantee who received the transfer simultaneously, Daughter’s 50 percent interest in Mother’s residence was excluded as a countable asset, and no transfer penalty should be applied to the amount transferred to Daughter.
Takeaways: Medicaid restricts certain asset transfers in the five years preceding a Medicaid application. However, federal law permits several allowable transfers that are exempt from the transfer of asset restriction. The two at issue here, transfers of assets to a disabled child and the transfer of a home to a caregiver child, are bedrock Medicaid planning strategies used by elder law attorneys throughout the country. The court upheld the two transfers on distinct statutory grounds. This case provides an example of good advocacy by an elder law practitioner on behalf of an elderly client. The transfer to the disabled daughter, whether conveyed directly or in a compliant trust, was expressly allowed in the federal statute. The 420-day penalty represented a significant risk to the health of the mother, the Medicaid applicant, who may not have had the resources to pay medical services during the transfer penalty period and was improperly denied Medicaid benefits because of an agency’s misreading of federal law.
Business Law
Reminder: CTA Deadline for Reporting Companies Existing Before 2024 Is January 1, 2025
The CTA became effective January 1, 2024. All entities meeting the definition of a reporting company formed or registered to do business after January 1, 2024, but before January 1, 2025, must file their initial beneficial owner information (BOI) report within 90 days after formation or registration. However, reporting companies created or registered to do business before January 1, 2024, must file their BOI report before January 1, 2025. Reporting companies formed or registered after January 1, 2025, must file their BOI report within 30 days after their formation or registration.
Takeaways: The Financial Crimes Enforcement Network has provided a Small Entity Compliance Guide to assist small businesses in complying with CTA reporting requirements. WealthCounsel members may visit the Corporate Transparency Act webpage on the member website for additional information.
Federal Trade Commission Releases Final Rule on Negative Options
Negative Option Rule, 16 C.F.R. pt. 425 (Oct. 16, 2024)
On October 16, 2024, the Federal Trade Commission (FTC) issued a final “click-to-cancel” rule applicable to negative option arrangements whereby a company automatically charges a consumer for a product or service unless the consumer affirmatively acts to cancel the arrangement. The final rule was promulgated pursuant to section 5 of the FTC Act (15 U.S.C. § 57a(a)(1)(B)), which prohibits unfair or deceptive practices. The final rule applies to negative option sellers, broadly defined as persons selling, offering, charging for, or otherwise marketing a good or service with a negative option feature. The rule prohibits misrepresentations of material fact by negative option sellers in marketing negative option programs to consumers. In addition, it imposes several requirements on negative option sellers.
The following are among the final rule’s requirements for negative option sellers: (1) they must provide clear and conspicuous disclosure to consumers of important information regarding negative options, including the amount charged for the goods or services, whether the charges will be on a recurring basis, the deadline by which the consumer must act to prevent or stop the charges, and how to find a simple cancellation method; (2) they must obtain consumers’ unambiguous affirmative consent to a negative option feature separately from any other part of the transaction; and (3) they must provide consumers with a simple and easy-to-find mechanism for cancellation of the negative option feature through the same medium (online, telephone call, or in person) used to obtain their consent.
Takeaways: Most provisions of the final rule are effective 180 days after the final rule’s publication in the Federal Register; however, the provision prohibiting misrepresentations by negative option sellers will be effective within 60 days. The rule clarifies the obligations of negative option sellers and allows the FTC to seek civil penalties and consumer redress for violations. Several states have passed laws imposing similar requirements on negative option sellers, including California, which enacted Assembly Bill No. 2863 on September 24, 2024, effective July 1, 2025. The FTC’s final rule will supersede only state laws that are inconsistent with it and provide less protection.
First Circuit Court of Appeals: In Case Involving Former Employee Now Residing and Working in California, California’s Statute Voiding Noncompete Agreements Does Not Override Massachusetts Law Permitting Them
DraftKings, Inc. v. Hermalyn, No. 24-1443, 2024 WL 4297652 (1st Cir. Sept. 26, 2024)
Michael Hermalyn, a New Jersey resident, worked for DraftKings, headquartered in Massachusetts. During his employment, he signed a noncompete agreement prohibiting him from competing with DraftKings for one year after the termination of his employment. The noncompete agreement contained a choice of law provision stating that Massachusetts law applied. Hermalyn later left his job at DraftKings, moved to California, and began to work at Fanatics, one of DraftKing’s competitors. DraftKings sued Michael in a Massachusetts federal district court, seeking to enforce the noncompete agreement. The court rejected Michael’s contention that California law applied. Rather, it applied Massachusetts law and entered a preliminary injunction enjoining Michael from competing with DraftKings for one year.
On appeal, the United States Court of Appeals for the First Circuit noted that Massachusetts law allows noncompete agreements to be enforced against higher-level employees for no more than one year. In contrast, California bans most noncompete agreements, regardless of where and when the contract was signed and whether the employment was maintained outside of California. The court determined that Massachusetts law should apply, finding that Michael had failed to show that California’s public policy interest in refusing to enforce its noncompete ban eclipsed the parties’ agreement to apply Massachusetts law. According to the court, Michael’s reliance on Oxford Global Resources, Inc. v. Hernandez, 106 N.E.3d 556, 564 (Mass. 2018)—a case in which the court found that California had a materially greater interest than Massachusetts in a dispute involving a noncompete agreement because the employee had executed, performed, and then breached the agreement in California by leaving the Massachusetts employer and joining a competitor based in California—was misplaced. In contrast to the facts in Oxford Global, Michael had traveled to DraftKing’s Massachusetts headquarters at least 25 times over two years and had not performed any of his work for DraftKings in California. Further, Michael had failed to show that California’s interest in pursuing its policy interest reflected by its ban on noncompete agreements was materially greater than Massachusetts’s policy interest in limiting, but not banning, the enforcement of noncompete agreements.
In addition, the court rejected Michael’s contention that even if Massachusetts law applied to the noncompete agreement, the federal district court should have excluded California from the scope of the preliminary injunction pursuant to Cal. Bus. & Prof. Code § 16600.5(b), which purports to prohibit an employer from enforcing “a contract that is void under this chapter regardless of whether the contract was signed and the employment was maintained outside of California.” The court again emphasized that California’s policy could not override the policy adopted under Massachusetts’s law. Further, the court noted that online sports betting is prohibited in California: If Michael was allowed to compete with DraftKings, he would necessarily interact with clients outside of California. Therefore, “his requested California carveout will give him a way to skirt the countrywide preliminary injunction’s one-year noncompete ban” and “would entirely undercut that injunction's effectiveness.” DraftKings, Inc. v. Hermalyn, No. 24-1443, 2024 WL 4297652, at *6 (1st Cir. Sept. 26, 2024). Accordingly, the court affirmed the preliminary injunction.
Takeaways: As noted in September’s monthly recap, a Texas federal district court recently imposed a nationwide injunction on the enforcement of the FTC’s Non-Compete Clause Rule, which would have prohibited most noncompete clauses in the employment context. Although there has been a growing trend of disfavoring the enforcement of noncompetition agreements against workers, state law varies widely, with many states continuing to allow them at least under some circumstances. Attorneys advising employers should stay informed of the law and encourage clients to review their noncompete agreements regularly to ensure compliance.
