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United Stars Industries, Inc. v. Plastech Engineered Products

May 13, 2008

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.

The opinion of the court was delivered by: Easterbrook, Chief Judge.

ARGUED APRIL 2, 2008

Before EASTERBROOK, Chief Judge, and BAUER and EVANS, Circuit Judges.

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 materials changed. Steel mills set a basic price covering iron and other common ingredients, such as silicon and carbon, 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 contains 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 surcharge 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' surcharges 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 compromise 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 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 sanctions against Jones Day, Plastech's law firm, for misconduct. 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 concluding 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 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 expressly 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 materials 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 calculated surcharges correctly under the 2000 contract plus the purchase orders and releases that Plastech submitted. 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 contends 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 support 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 challenges.

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 describe 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 purchasing in 2000, about her understanding of the contract'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 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 process. Why should things be otherwise with the surcharge, 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 containing 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 recover 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 ...


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