United Star Indus v. Plastech Engineered ( 2008 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 07-2919, 07-3052, 07-3106 & 07-3107
UNITED STARS INDUSTRIES, INC.,
Plaintiff-Appellee,
v.
PLASTECH ENGINEERED PRODUCTS, INC.,
Defendant-Appellant.
JONES DAY,
Appellant.
____________
Appeals from the United States District Court
for the Western District of Wisconsin.
No. 06-C-349-C—Barbara B. Crabb, Chief Judge.
____________
ARGUED APRIL 2, 2008—DECIDED MAY 13, 2008
____________
Before EASTERBROOK, Chief Judge, and BAUER and
EVANS, Circuit Judges.
EASTERBROOK, Chief Judge. United Stars Industries sold
stainless-steel tubing to Plastech Engineered Products
between 2000 and 2005. The firms agreed that the price
would be adjusted periodically as the cost of raw mate-
rials changed. Steel mills set a basic price covering iron
and other common ingredients, such as silicon and car-
2 Nos. 07-2919, 07-3052, 07-3106 & 07-3107
bon, plus a surcharge for costly elements that are used
in particular alloys. Plastech initially ordered products
made from a steel that the parties call 304, which con-
tains chromium and nickel. Later it asked United Stars
to use 316L steel, which resists corrosion better. Grade
316L stainless steel contains more nickel than grade 304,
plus molybdenum, in addition to chromium.
United Stars changed its price for finished tubing
every time the steel mills changed their surcharge for
chromium, nickel, or molybdenum. Plastech paid regularly
until May 2005, when United Stars sent it an extra bill
for roughly $700,000. United Stars told Plastech that for
the last 18 months it had been basing bills on the sur-
charge for 304 steel rather than the higher surcharge for
316L steel. Plastech inquired how the surcharges had
been calculated and learned that United Stars passed
through the entire cost of raw materials, even though about
9% of the steel that United Stars purchased was lost as
waste during the process of forming tubing. Plastech
insisted that it had agreed to pay surcharges only for
the cost of nickel, not chromium or molybdenum, and
had not agreed to pay any part of the steel mills’ sur-
charges for materials that United Stars discarded during
manufacturing. By Plastech’s calculation, United Stars
owed it about $900,000.
Plastech stopped paying for tubing, contending that it
was entitled to recoup the $900,000 by setoff. United Stars
stopped shipping once Plastech fell into arrears. Meetings
to discuss this $1.6 million disagreement led to a com-
promise in August 2005, or so the district judge found
after a bench trial of this diversity litigation. United Stars
agreed to give Plastech a credit of about $200,000, spread
over several years, and Plastech promised to continue
Nos. 07-2919, 07-3052, 07-3106 & 07-3107 3
buying from United Stars as long as it kept the price low.
Plastech then submitted new orders, using the newly
negotiated price. United Stars resumed shipping and
ordered new raw materials (steel mills need orders
12 weeks in advance of delivery).
Plastech went on submitting orders and accepting
deliveries until mid-October 2005—but it never paid
United Stars another dollar. When the tab had reached
$800,000, it told United Stars that it was taking its business
to a different vendor. (It had signed a contract with the
new vendor in June 2005, without telling United Stars.)
United Stars then filed this suit, and the district judge
entered judgment in its favor for some $1.3 million, a
figure that covers the price of tubing that Plastech did
not pay for, interest on that figure, and the loss that United
Stars incurred when reselling raw materials that it could
not use after Plastech walked away. 2007 U.S. Dist. LEXIS
40958 (W.D. Wis. June 5, 2007). The judge added sanc-
tions against Jones Day, Plastech’s law firm, for miscon-
duct. 2007 U.S. Dist. LEXIS 64096 (W.D. Wis. Aug. 27, 2007).
Plastech entered bankruptcy after filing its appellate
briefs, but United Stars is secured by a supersedeas bond.
The bankruptcy court has lifted the automatic stay so
that the appeal can be resolved.
According to Plastech, the district judge erred in con-
cluding that a compromise had been reached in August
2005 (though Plastech submitted orders consistent with
the new arrangement, and the judge credited testimony
that Plastech had agreed orally to the written offer
United Stars sent). If there was an agreement, Plastech
insists, it dealt only with future prices and not with
Plastech’s claim that it had been overcharged in years
past. The complaint that United Stars filed rested on the
4 Nos. 07-2919, 07-3052, 07-3106 & 07-3107
2000 contract and Plastech’s later purchase orders; that
should have been the sole topic of trial, Plastech believes.
Finally, Plastech maintains that the 2000 contract limited
its liability for raw materials to steel that it had ex-
pressly authorized United Stars to purchase. The district
court’s opinion does not clearly resolve the parties’ dispute
about whether all acquisition of the unused raw mate-
rials had been authorized in “releases” that Plastech sent
to United Stars.
Suppose Plastech is right and that the trial should have
been limited to determining whether United Stars cal-
culated surcharges correctly under the 2000 contract plus
the purchase orders and releases that Plastech submit-
ted. Plastech thinks that, if the district judge erred, then it
own position must be correct. Not at all. If we were to
accept Plastech’s argument that the dispute was not
compromised in April 2005, it still would lose—indeed,
the judgment in United Stars’ favor would have been
even greater (though United Stars has not filed a cross
appeal, so the award cannot be increased).
United Stars understands the contract as allowing it to
pass through the entire surcharge, while Plastech con-
tends that only the surcharge for nickel could be passed
through, and then only for the weight of the delivered
tubing. As the district judge remarked when imposing
sanctions on Jones Day after trial, although Plastech filed
a counterclaim demanding $890,000 for supposed over-
charges, it never produced a scrap of evidence to sup-
port its position. And because Plastech therefore loses
whether or not a binding compromise was struck in
August 2005, it is unnecessary to resolve Plastech’s chal-
lenges.
Nos. 07-2919, 07-3052, 07-3106 & 07-3107 5
Plastech does not rely on any particular language in the
contract, and when United Stars demanded that Plastech
designate a corporate witness to attend a deposition
with documents supporting its position and able to de-
scribe an audit that Plastech claims to have performed,
Plastech produced Scott Ryan, who professed ignorance
about the subject and did not supply a single document or
recollection. Plastech called Ryan at trial, with the same
result: no evidence. Nor does Plastech have evidence
of discussions between the parties in 2000 about how
surcharges would be handled. It relies on the testimony
of Elizabeth Pypa, Plastech’s vice-president for pur-
chasing in 2000, about her understanding of the con-
tract’s meaning. But Pypa’s beliefs do not count because
they were not communicated to United Stars during the
negotiations. See, e.g., Skycom Corp. v. Telstar Corp., 813
F.2d 810, 814–15 (7th Cir. 1987) (Wisconsin law); House-
hold Utilities, Inc. v. Andrews Co., 71 Wis. 2d 17, 28–29,
236 N.W.2d 663, 669 (1976). So, if the district judge had
reached the question whether United Stars was correct
in calculating the surcharge, it would have prevailed
and won $700,000 on top of the invoice price of the tubing
that Plastech accepted and did not pay for. That $700,000
substantially exceeds the (disputed) $264,574 that the
judgment included to compensate United Stars for
unused raw materials.
United Stars had more going for it than just Plastech’s
failure to substantiate its own view of the contract. The
written documents entitle United Stars to pass on the
steel mills’ metals surcharges. When Plastech decided to
order steel containing molybdenum and extra nickel, it
necessarily undertook to pay the higher cost; otherwise
United Stars was making it a gift, and it rarely makes
6 Nos. 07-2919, 07-3052, 07-3106 & 07-3107
sense to interpret a commercial contract as lopsided.
Paying for all of the surcharges likewise was logical.
United Stars recovered 100% of the steel’s base price
from Plastech through the list price of the tubing, even
though 9% of the steel is lost in the manufacturing pro-
cess. Why should things be otherwise with the sur-
charge, which is a variable component of the steel’s price?
If United Stars must buy 110 tons of steel coil in order to
deliver 100 tons of steel tubing, it must cover the entire
cost of the 110 tons through the price of the tubing in
order to stay in business. The structure of this contract is
one in which Plastech pays for the raw material, and the
final price then compensates United Stars for its value
added (turning giant steel coils into steel tubing). Plastech
might have been able to get somewhere if it could show
that the custom in the trade is that fabricators swallow
the surcharges for scrap (as they might if scrap con-
taining valuable metals fetches enough from recyclers),
but Plastech did not offer any evidence to that effect—and
we know from the district court’s handling of the unused-
materials question that United Stars was unable to re-
cover the full price of 316L steel even when it was still in
the original coils. No more need be said to show that
United Stars is entitled to an award at least as high as the
judgment.
The remaining question is whether the district judge
abused her discretion by requiring Jones Day to pay
about $30,000 in sanctions for making unsupported (but
costly to defend) contentions during the litigation. Here
is the district judge’s explanation concerning the counter-
claim, which accounts for about ¾ of the sanction.
Plaintiff is correct in characterizing defendant’s
counterclaim as baseless. Although defendant al-
Nos. 07-2919, 07-3052, 07-3106 & 07-3107 7
leged that plaintiff had overcharged defendant by
approximately $890,000, it never produced any
evidence that it had a legitimate basis for the
claim. At the same time, it used the counterclaim
as the basis for discovery requests related to the
alleged overcharges.
Although defendant made many requests directed
to the overcharges, when it came to its own dis-
closures, it identified only one employee, Scott
Ryan, as having information about them. It told
plaintiff that Ryan had performed an “in-depth
audit” and was knowledgeable about the alleged
overcharges. In fact, at his deposition, Ryan ex-
pressed his ignorance of any damages. He denied
having ever conducted an audit or even knowing
what an “internal audit staff” was. Undaunted,
defendant named Ryan as a witness at trial and
called him despite his lack of knowledge about the
alleged overcharges. It produced no other wit-
nesses to testify about its counterclaim.
Even now, defendant cannot point to any evidence
to show that its counterclaim had any kind of
foundation. It quotes the testimony of Rodney
Turton [Plastech’s current vice president for pur-
chasing] that “[W]e had our finance team conduct
audits in order to [see] what we were being
charged, how much we paid, et cetera, to under-
stand where this disconnect came about,” Tr. 2-80:
16–25, but says nothing about the results of the
audits.
Defendant argues that plaintiff would have in-
curred the fees incurred during discovery in any
event because it had to prove the terms of the
8 Nos. 07-2919, 07-3052, 07-3106 & 07-3107
parties’ agreement, “which generally consisted of
multiplying an applicable tube weight by an ap-
plicable surcharge rate.” It asserts that the ultimate
questions for plaintiff’s claim and defendant’s
counterclaim were identical (apparently because
both related to the calculation of surcharges). This
is an ingenious argument but not one that stands
up to scrutiny. For plaintiff to explain how it
calculated the surcharges took almost no work
because it did these calculations regularly. On the
other hand, it would have had to engage in exten-
sive efforts to try to understand how and why
defendant believed the surcharges to be improper.
One can appreciate the difficulty (and futility) of
those efforts now that it is clear that defendant
itself cannot explain the basis for its belief.
But for this baseless counterclaim the suit could have
been resolved without a trial. As a practical matter, all
of United Stars’ legal expenses are attributable to the
counterclaim, though the district judge awarded only
$21,754 for the time counsel spent dealing with Ryan’s
deposition and testimony. That sanction is modest.
The district court invoked 28 U.S.C. §1927 as the basis
of sanctions, and Jones Day reminds us that this statute
authorizes awards against individual lawyers but not law
firms. Claiborne v. Wisdom, 414 F.3d 715 (7th Cir. 2005).
(Claiborne was not called to the district court’s attention
until after it had ruled, and at oral argument Jones Day
abandoned this as a ground for reversal; it does not
want the sanctions imposed directly on the lawyers
who represented Plastech.) Moreover, §1927 sets a higher
standard for sanctions than do other sources such as Fed.
R. Civ. P. 11(c)(3), 26(g)(3), and 37(a)(5), (b). See Kotsilieris
v. Chalmers, 966 F.2d 1181, 1184–85 (7th Cir. 1992); In re TCI
Nos. 07-2919, 07-3052, 07-3106 & 07-3107 9
Ltd., 769 F.2d 441 (7th Cir. 1985). The judge stated that
Rule 11 “is useless in [this] situation because the lack of any
foundation for the counterclaim is not obvious to
the opposing party early enough in the litigation to make
a Rule 11 motion efficacious.” This supposes that only a
motion by counsel under Rule 11(c)(2) allows sanctions;
the judge overlooked Rule 11(c)(3), which allows sanc-
tions on the judge’s initiative at any time.
Rule 11(c)(3) is the best foundation for this sanction. The
judge found that Jones Day advanced a position that
never had any evidentiary support, and thus necessarily
could not have been based on a reasonable investigation
preceding the counterclaim. Rule 11 also allows the
imposition of sanctions on law firms as well as on individ-
ual lawyers. (Rule 11(c)(1) was amended in 1993 to depart
from Pavelic & LeFlore v. Marvel Entertainment Group,
493 U.S. 120 (1989), which had held that sanctions must
be assessed against lawyers rather than law firms.)
Rule 11(c)(3) requires notice and an opportunity to re-
spond; Jones Day had that opportunity as a result of
United Stars’ motion. And although Jones Day contends
that it conducted the reasonable inquiry required by the
Rule, the district court’s findings show otherwise. The
remaining sanctions, in lesser amounts, also are within
the district court’s authority under Rule 11, which ap-
plies to every motion as well as every pleading. See
Rule 11(a). It is unnecessary to analyze these modest
sanctions in detail. Appellate review of Rule 11 sanctions
is deferential, see Cooter & Gell v. Hartmarx Corp., 496 U.S.
384 (1990), and the district judge did not abuse her discre-
tion. This is clear enough that it would be pointless to
remand just so that the district judge may substitute
Rule 11 for §1927. Cf. Samuels v. Boyle, 906 F.2d 272 (7th
Cir. 1990). Since Rule 11 gives the district judge more
10 Nos. 07-2919, 07-3052, 07-3106 & 07-3107
discretion than does §1927, the outcome would be fore-
ordained.
AFFIRMED
USCA-02-C-0072—5-13-08