The U.S. Court of Appeals for the Third Circuit recently held that a stock sale did not invalidate an employee’s non-compete. Zambelli Fireworks Manufacturing Co., Inc. v. Wood et al., Case No. 09-1526 (January 15, 2010).
In Zambelli, a company brought suit against a former employee to enforce his non-compete. The employee responded, in part, by arguing that the non-compete was invalid because, when a majority of the company’s stock had been sold, there was no specific assignment of the employee’s non-compete to the buyer of the stock.
Although this would not seem to be a novel question, the Third Circuit explained that it found no Pennsylvania appellate decisions which addressed “the impact of a stock sale on the enforceability of a non-compete agreement.” Nevertheless, relying on Pennsylvania cases holding that (a) “a stock sale, unlike a sale of assets, does not necessitate an assignment in order for the corporation to enforce an employment agreement” and (b) “the transfer of a corporation’s stock does not destroy the corporate entity” because its existence is “irrespective of, and entirely distinct from, the persons who own its stock,” the Third Circuit concluded “that the transfer of some or all of the stock of a corporation has no effect on its ability to enforce a non-compete agreement.”
Accordingly, the Third Circuit rejected the employee’s challenge to his non-compete based on the lack of an assignment agreement at the time of the stock sale. The Third Circuit added that if the non-compete was intended to be contingent on the company remaining a family-owned business, that should have been set out as a material condition to the agreement.