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Zambelli Fireworks Manufacturing Co., Inc. v. Wood

January 15, 2010

ZAMBELLI FIREWORKS MANUFACTURING CO., INC. D/B/A ZAMBELLI FIREWORKS INTERNATIONALE
v.
MATTHEW WOOD; PYROTECNICO F/X LLC, APPELLANTS



On Appeal from the United States District Court for the Western District of Pennsylvania. (D.C. No. 08-cv-00415) District Judge: Honorable Terrence F. McVerry.

The opinion of the court was delivered by: Fisher, Circuit Judge

PRECEDENTIAL

Argued October 28, 2009

Before: SMITH, FISHER and STAPLETON, Circuit Judges.

OPINION OF THE COURT

This appeal presents a question of the propriety of a preliminary injunction enforcing, under Pennsylvania law, a restrictive covenant not to compete. However, because the parties concede on appeal that the lack of complete diversity deprives this Court of subject matter jurisdiction, the threshold question before us is how to proceed in light of this jurisdictional defect. At the request of the plaintiff-appellee, we will exercise our authority under Federal Rule of Civil Procedure 21 to dismiss the dispensable nondiverse party, and thereby restore this Court's jurisdiction to reach the merits of the appeal. Because the restrictive covenant is an appropriately narrow protection of a legitimate business interest, and because Zambelli remains the appropriate entity to enforce the covenant under Pennsylvania state law, we will affirm the District Court's holding in those regards. However, because the District Court failed to require a bond in connection with the injunction, as required by Federal Rule of Civil Procedure 65(c), we will vacate the injunction and remand with instructions to impose such a bond should the District Court reissue the injunction.

I.

A.

Plaintiff Zambelli Fireworks Manufacturing Co., Inc. d/b/a Zambelli Fireworks Internationale ("Zambelli") is one of the oldest and largest fireworks companies in the United States, doing business in approximately 40 states. The company was historically family-owned and operated, first by George Zambelli, Sr. and later by his children Marcy, Danabeth, and George Zambelli, Jr. Zambelli is a corporation incorporated under the laws of Pennsylvania, with its principal place of business in New Castle, Pennsylvania.

Defendant Pyrotecnico F/X, LLC ("Pyrotecnico") has been a direct competitor of Zambelli in the fireworks industry for many years. Pyrotecnico is comprised of several related companies, all of which are managed by Stephen Vitale. Pyrotecnico is a limited liability company registered under the laws of Nevada. Its sole member is Pyrotecnico of Louisiana, LLC, another limited liability company registered under the laws of Louisiana. Stephen Vitale, a resident of New Castle, Pennsylvania, is the managing member of Pyrotecnico of Louisiana, LLC.

Defendant Matthew Wood ("Wood"), a resident of Pompano Beach, Florida, works in the fireworks industry as a pyrotechnician and choreographer, executing fireworks displays in combination with music through the use of computer software. Prior to Wood's employment with Zambelli, Wood obtained an associate's degree in technical theater from Vincennes University and a bachelor's degree in theater from Indiana State University. Wood also had prior pyrotechnics experience in the areas of sales, agreements, design work, effects, and pyrodigital software. Although Wood had some prior experience with stage pyrotechnics and home fireworks, he had little experience in aerial fireworks displays on the scale of Zambelli's major shows.

In 2001, Zambelli hired Wood to work in its Florida office pursuant to the terms of an employment agreement containing a two-year non-compete provision. Wood's initial responsibilities with Zambelli included work on new and existing accounts, calling on customers, applying for permits, reviewing sites, and attending trade conferences. His responsibilities expanded over time as Zambelli provided Wood with valuable pyrotechnics training. Specifically, Wood received training in the layout and choreography of shows as well as the setup and use of the Zambelli systems. Wood gained hands-on experience and application of these skills by helping shoot aerial fireworks displays for Zambelli customers. In 2007, Zambelli paid for Wood to become a certified trainer for the Pyrotechnic Guild International. Wood also became licensed in Colorado and New York during the course of his employment with Zambelli.

In fulfilling his job responsibilities, Wood was privy to many of the inner workings of Zambelli's business. He was responsible for preparing business proposals, which required access to pricing information, contract terms, and client lists. In particular, Wood had access to an Excel spreadsheet that contained the formula Zambelli used to price its shows. Wood was also aware of the prices that Zambelli paid for its fireworks shells.

A significant portion of Wood's responsibilities required contact with Zambelli clients. Both in preparing business proposals and before and after fireworks shows, Wood was in communication with Zambelli clients throughout the country. Because Zambelli advertised Wood as one of its premier choreographers in connection with some of its highest profile shows, Wood's skills and experience were known both in the pyrotechnics industry and to Zambelli clients.

As Wood assumed increasing responsibilities in the Zambelli company, the Zambelli family considered Wood to be the "next generation" and "future of the company." Thus in 2005, the Zambellis asked Wood to sign an updated employment agreement that would ensure Wood's continued commitment to the company. This later agreement, signed June 2, 2005 (the "2005 Agreement"), superseded the earlier 2001 employment agreement.*fn1 The 2005 Agreement contained, inter alia, a number of provisions, including:

1. A clause prohibiting Wood from "engag[ing] in any manner in the pyrotechnic business" within the Continental United States or taking any position of employment with any company engaged in the sale or production of pyrotechnic displays for a period of two years after leaving Zambelli;

2. A non-solicitation provision proscribing Wood from soliciting any former customers or clients of Zambelli as well as any Zambelli employees for alternative employment for a period of two years after leaving Zambelli;

3. A confidentiality clause preventing the disclosure or use of trade secrets or any information regarding the operation of Zambelli's business;

4. A provision that Wood provide Zambelli with three months' notice of resignation;

5. A provision permitting a court to modify the terms of the 2005 Agreement in order to render it enforceable in the event the non-compete provision was found to be unreasonable;

6. A provision whereby Wood agreed to pay all legal fees, costs, and expenses if Zambelli prevailed in a legal proceeding to enforce the terms of the 2005 Agreement;

7. A choice of law provision stating that Pennsylvania law would govern the interpretation of the 2005 Agreement.

In May 2007, a major sale of Zambelli's stock took place, after which the company was no longer wholly owned by Zambelli family members. The transaction was structured as a stock sale as opposed to an asset purchase for a variety of reasons, including the retention of various state and federal permits, licenses, and contractual relationships. Following the sale, George Zambelli, Jr. was the only remaining Zambelli family member with stock ownership in the company. His interest increased from 20% to 50% and he acquired a right of first refusal to purchase outstanding stock from other shareholders. A holding company made up of four private investors acquired the remaining 50% of the stock. One of those investors, Douglas Taylor, assumed the role of CEO and President of Zambelli.

Wood, who had initially been attracted to the family-run nature of Zambelli, was displeased with the change in management and uncertain of the security of his employment with Zambelli. In January 2008, Taylor presented Wood with an "Employment Proposal" that outlined terms for a new employment agreement, requiring, among other things, that Wood assume substantial new job responsibilities. Wood did not sign the proposal.

In light of the changes in management and the expectation of increased job responsibilities, Wood contacted Stephen Vitale, Pyrotecnico's manager, in October 2007 regarding potential employment with Pyrotecnico. Vitale and Wood eventually executed an employment agreement in which Pyrotecnico agreed to hire Wood. It was a condition of Wood's employment with Pyrotecnico that he not take or use any Zambelli information or bring any trade secrets or proprietary information from Zambelli. Pyrotecnico was aware of the restrictive covenant in Wood's 2005 Agreement with Zambelli and agreed to pay Wood his salary for two years if the covenant were enforced and to indemnify Wood for his litigation expenses.

On February 11, 2008, Wood provided Zambelli with eleven days' notice that he was resigning, effective February 22, 2008. Wood began working for Pyrotecnico on March 3, 2008. Since his employment with Pyrotecnico, Wood and Pyrotecnico have actively attempted to minimize any conduct that may constitute a breach of the 2005 Agreement with Zambelli. Wood's work with Pyrotecnico is only internal and he does not have client or customer contacts. Wood's duties with Pyrotecnico primarily consist of editing music, serving as a technician or ...


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