The U.S. Court of Appeals for the Third Circuit has held that a non-compete clause is enforceable by a corporation after it has undergone “a substantial change in stock ownership.” Matthew Wood joined Zambelli Fireworks Manufacturing Company, Inc. (Zambelli) in 2001, when the company was a family business. When he joined Zambelli, Mr. Wood signed an employment agreement that contained a two-year non-compete clause and later agreed to a new agreement with similar, but more comprehensive, restrictive covenants.
In May 2007, a major sale of Zambelli’s stock took place, pursuant to which the Zambelli family sold their interest to one remaining family member and a holding company comprised of private investors. Unhappy with the change, Mr. Wood sought new employment shortly after the transaction was consummated and, in early 2008, went to work for a competitor, Pyrotecnico F/X LLC (Pyrotecnico). Zambelli sued both Wood and Pyrotecnico to enforce the non-compete clause and the district court, sitting in diversity, granted an injunction against the defendants, who appealed.
Mr. Wood argued that the non-compete clause he signed in 2001 was no longer valid because the family-owned entity that executed the agreement was required to assign the non-compete agreement to the “purchasing business entity” after the majority of Zambelli’s stock was sold. The Third Circuit rejected this argument, ruling that a stock sale—unlike a sale of assets—does not alter the corporate entity and that, as a result, no assignment was necessary. In so ruling, the court pointed out that a change in corporate culture is not equivalent to a change in the corporate entity and has no effect on a legally binding contract. Accordingly, the court ruled that Zambelli and its new ownership could enforce the non-compete agreement against Mr. Wood. (Zambelli Fireworks Mfg. Co. v. Wood, Civ. No. 09-1526, 2010 WL 143682 (3d Cir. Jan. 15, 2010))