Zambelli Fireworks Manufacturing Co. v. Wood
31 I.E.R. Cas. (BNA) 962, 2010 U.S. App. LEXIS 955, 592 F.3d 412 (2010)
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Rule of Law:
Under Pennsylvania law, a restrictive covenant in an employment agreement remains enforceable by the corporation after a sale of its stock, as a stock sale merely transfers ownership and does not alter the corporate entity. Additionally, Federal Rule of Civil Procedure 65(c) makes it almost mandatory for a district court to require the posting of a security bond when issuing a preliminary injunction.
Facts:
- In 2001, Zambelli Fireworks Manufacturing Co., Inc. hired Matthew Wood as a pyrotechnician.
- Zambelli provided Wood with extensive and specialized training in show choreography, paid for his professional certifications, and gave him access to confidential business information, including client lists and pricing formulas.
- In 2005, Wood signed an updated employment agreement containing a covenant not to compete with Zambelli in the pyrotechnic business for two years after his employment ended.
- In 2007, a majority of Zambelli's stock was sold to a holding company, which changed the company's management from its traditional family-run structure, a change that displeased Wood.
- In late 2007, while still employed by Zambelli, Wood contacted Pyrotecnico F/X, LLC, a direct competitor, regarding potential employment.
- Pyrotecnico, knowing about Wood's non-compete agreement, offered him a job and agreed to indemnify him for his salary and litigation expenses if Zambelli enforced the covenant.
- On February 11, 2008, Wood resigned from Zambelli and began working for Pyrotecnico on March 3, 2008.
Procedural Posture:
- Zambelli Fireworks Manufacturing Co., Inc. sued Matthew Wood and Pyrotecnico F/X, LLC in the U.S. District Court for the Western District of Pennsylvania.
- Zambelli filed a motion for a preliminary injunction to enforce the non-compete clause in Wood's employment agreement.
- The District Court granted the preliminary injunction in part, modifying its terms and enjoining both Wood and Pyrotecnico.
- The District Court waived the requirement under Federal Rule of Civil Procedure 65(c) for Zambelli to post a security bond.
- Wood and Pyrotecnico (appellants) filed a timely appeal of the District Court's preliminary injunction order to the U.S. Court of Appeals for the Third Circuit.
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Issue:
Under Pennsylvania law, is a restrictive covenant in an employment agreement enforceable by the original corporate employer against a former employee after the corporation undergoes a 100% stock sale, and does the covenant protect a legitimate business interest?
Opinions:
Majority - Fisher, Circuit Judge.
Yes, the restrictive covenant is enforceable by Zambelli and protects its legitimate business interests. Under Pennsylvania law, a corporate stock sale does not alter the legal identity of the corporation, unlike an asset sale, so the company remains a party to its pre-existing contracts and may enforce them without a specific assignment. The court reasoned that a corporation is an entity distinct from its shareholders, and a change in stock ownership does not affect the corporation's contractual rights. Furthermore, the covenant was reasonably necessary to protect Zambelli's legitimate business interests, which include its customer goodwill and the specialized training and skills it provided to Wood. Wood's extensive client contact and access to confidential information created protectable goodwill, and Zambelli had a right to prevent a competitor from profiting from the unique, company-funded training Wood received. The court also held the District Court erred by failing to require an injunction bond under Federal Rule of Civil Procedure 65(c), as the rule is almost mandatory and exceptions are extremely rare.
Analysis:
This decision clarifies for the Third Circuit, predicting Pennsylvania law, that non-compete agreements survive corporate stock sales, providing important stability for contracts during mergers and acquisitions. It draws a critical distinction between a stock sale (which preserves the corporate entity) and an asset sale (which may require assignment of contracts). The ruling reinforces that protecting customer goodwill and investments in specialized employee training are legitimate business interests justifying restrictive covenants. Finally, the opinion strongly reaffirms that the injunction bond requirement under FRCP 65(c) is not discretionary and serves as a crucial protection for parties who may be wrongfully enjoined, significantly limiting a district court's ability to waive it.
