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Contract Counterclaim Fails and Sanctions Upheld, Seventh Circuit Rules

The Seventh U.S. Circuit Court of Appeals issued a ruling May 13 in United Stars Industries, Inc. v. Plastech Engineered Products, Inc., 07-2919 (7th Cir. 2008), a business contract dispute in which Plastech alleged that its tubing supplier, United Stars, overcharged it by about $1.6 million. The case is also notable because the appellate court upheld $30,000 in sanctions against the law firm Jones Day for “frivolous claims.”
The underlying dispute started when United Stars notified Plastech, its customer, that it had been charging Plastech surcharges for the cost of raw materials, even though about 9% of those materials were lost during processing. Plastech contends that it did not agree to pay the full amount of those surcharges; thus, it believed United Stars owed it about $900,000, and Plastech refused to pay another $700,000 bill, for a total of $1.6 million in dispute. Plastech stopped paying United Stars, even after reaching a purported compromise in 2005, then found another vendor. In the ensuing lawsuit, in U.S. District Court for the Western District of Wisconsin, the judge awarded $1.3 million to United Stars, sending Plastech into bankruptcy.

On appeal, Plastech contended that the trial judge erred in deciding that the companies reached a compromise in 2005. However, the Seventh said, Plastech’s claim fails regardless of whether there was a compromise, because it did not present “a scrap of evidence” to support its interpretation of the companies’ contract. Furthermore, the language of the contract itself favored United Stars.

Plastech’s interpretation of the contract formed the basis of a counterclaim for the alleged $900,000 overcharge, which the Seventh said would have failed if it had been tried. For that reason, the court upheld $30,000 in sanctions against Plastech’s law firm, Jones Day, for violating Rule 11(3)(c) of the Federal Rules of Civil Procedure, which prohibits frivolous claims. The opinion quoted U.S. District Judge Barbara B. Crabb, who said Plastech and its lawyers failed to produce any credible evidence for their costly-to-defend counterclaim, but did use it as a basis for discovery requests. According to the National Law Journal, Jones Day maintains that its actions were appropriate.