United Stars Industries, Inc. v. Plastech Engineered Products, Inc., 525 F.3d 605 (7th Cir. 2008)
Brief Summary
Law firm was sanctioned under Rule 11(c)(3) for filing a counterclaim without supporting evidence.
Complete Summary
Law firm Jones Day represented defendant Plastech Engineered Products, Inc. (“Plastech”) in a dispute with Plastech’s supplier of steel tubing, United Stars Industries, Inc. (“USI”). The dispute arose from Plastech’s alleged failure to pay for supplies. Plastech counterclaimed that USI had overcharged for the supplies by passing through costs of raw materials which were not used in the finished product. The district court considered the counterclaim baseless and sanctioned Jones Day under 28 U.S.C. § 1927.
The Seventh Circuit upheld the sanction, albeit under a different legal standard, because the district court had not abused its discretion. The Seventh Circuit held that the sanction was appropriate because Plastech and its counsel had not produced adequate evidence to support its counterclaim. Plastech failed to cite any particular contractual language regarding a required passthrough of costs, and the Seventh Circuit found the allegations in the counterclaim to be quite illogical. In addition, Plastech’s one witness on the subject of the overcharges confessed ignorance of any damages.
Jones Day made one notable argument at trial, reasoning that Plastech’s counterclaim had not raised USI’s cost of litigation because both parties’ claims required explaining how costs were calculated. The Seventh Circuit called this argument “ingenious” but rejected it on the ground that the plaintiff/counterclaim defendant could not know how to respond on the merits to a damage claim that the defendant/counterclaim plaintiff could not explain. The Seventh Circuit also asserted that, “[b]ut for [Plastech’s] baseless counterclaim the suit could have been resolved without a trial.” United Stars Industries, 525 F.3d at 609.
The Seventh Circuit did change the basis for imposing sanctions from § 1927 to Rule 11(c)(3) of the Federal Rules of Civil Procedure. Section 1927 was inappropriate, the court noted, because it authorizes awards against lawyers, not law firms. Rule 11(c)(3), on the other hand, has a lower standard for imposing sanctions and gives the judge the power to sanction lawyers or law firms at any time. The court found it pointless to remand just so the district court could substitute Rule 11 for § 1927.
Significance of Opinion
This opinion serves as a reminder that baseless counterclaims, as well as baseless claims, may subject lawyers to sanctions.
This alert has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.
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