896 F.2d 1035 (7th Cir. 1990), 89-1437, AMPAT/Midwest, Inc. v. Illinois Tool Works Inc.

Docket Nº:89-1437, 89-1473.
Citation:896 F.2d 1035
Party Name:AMPAT/MIDWEST, INC., Plaintiff-Appellant, Cross-Appellee, v. ILLINOIS TOOL WORKS INC., Defendant-Appellee, Cross-Appellant, and Triangle Fastener Corp., Defendant.
Case Date:February 16, 1990
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit
 
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Page 1035

896 F.2d 1035 (7th Cir. 1990)

AMPAT/MIDWEST, INC., Plaintiff-Appellant, Cross-Appellee,

v.

ILLINOIS TOOL WORKS INC., Defendant-Appellee, Cross-Appellant,

and

Triangle Fastener Corp., Defendant.

Nos. 89-1437, 89-1473.

United States Court of Appeals, Seventh Circuit

February 16, 1990

Argued Nov. 27, 1989.

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James R. Epstein, Robert Zaideman, Jerry A. Esrig (argued), Epstein, Zaideman & Esrig, Mary Ellen Dienes, Chicago, Ill., for AMPAT/Midwest, Inc.

Diane I. Jennings, Daniel I. Schlessinger (argued), Rowe W. Snider, Lord, Bissell & Brook, Chicago, Ill., for Ill. Tool Works, Inc.

Before CUDAHY and POSNER, Circuit Judges, and FAIRCHILD, Senior Circuit Judge.

POSNER, Circuit Judge.

Before us are the appeal and cross-appeal from a substantial judgment in a diversity suit charging fraud and breach of contract. The plaintiff, AMPAT, a large window and curtainwall contractor operating nationwide, was awarded the subcontract to install the windows in the Onterie Center, a 60-story building in downtown Chicago. A key step in installation is to anchor the window frame to the wall, and for this one needs anchors. "Tapcon" is the trade name of a carbon steel screw designed and manufactured by defendant Illinois Tool Works for use as a masonry anchor. From Triangle Fastener Corporation, the other defendant, AMPAT bought 30,000 Tapcons at a total price of $4,700; Triangle had bought them from Illinois Tool Works for $3,000. The subcontract between AMPAT and the builder of the Onterie Center specified stainless steel--not carbon steel--anchors. Carbon steel is more susceptible than stainless steel to stress-corrosion cracking, which occurs when stress is placed on a metal object that has become corroded from contact with water (or some other corroding substance), or when a metal object that is already under stress becomes corroded. Cf. McLaughlin v. Union Oil Co., 869 F.2d 1039, 1044 (7th Cir.1989).

The Tapcons that AMPAT bought were defectively manufactured, and the consequence, according to AMPAT, was that the cost of performing the subcontract skyrocketed. AMPAT had no recourse against the prime contractor--if only because it had failed to use stainless steel anchors, as its subcontract required. Instead it sued Triangle Fastener and Illinois Tool Works for breach of warranty, and Illinois Tool Works for fraud as well. The jury exonerated Triangle Fastener but found Illinois Tool Works liable for breach of warranty and for fraud and awarded AMPAT more than $900,000 in compensatory damages, plus $500,000 in punitive damages. The district judge set aside the

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award of punitive damages on the ground that Illinois law (which the parties agree governs the substantive issues in the case) does not authorize an award of punitive damages without circumstances of aggravation not present here. AMPAT does not appeal the dismissal of Triangle Fastener (which therefore is no longer a party), but it does appeal the setting aside of the award of punitive damages. Illinois Tool Works does not appeal the finding of breach of warranty, but does appeal the finding of fraud and the award of compensatory damages. The issues of fraud and damages are connected because most of the damages awarded AMPAT were consequential damages, which are fully recoverable in a fraud case, Tan v. Boyke, 156 Ill.App.3d 49, 55, 108 Ill.Dec. 229, 233, 508 N.E.2d 390, 394 (1987); Home Savings & Loan Ass'n v. Schneider, 127 Ill.App.3d 689, 695, 82 Ill.Dec. 941, 945, 469 N.E.2d 585, 589 (1984), rev'd in part on other grounds, 108 Ill.2d 277, 91 Ill.Dec. 590, 483 N.E.2d 1225 (1985), but often not in a pure contract case. Midland Hotel Corp. v. Reuben H. Donnelley Corp., 118 Ill.2d 306, 318, 113 Ill.Dec. 252, 258, 515 N.E.2d 61, 67 (1987); Cencula v. Keller, 180 Ill.App.3d 645, 650, 129 Ill.Dec. 409, 412, 536 N.E.2d 93, 96 (1989). The order of our discussion will be fraud, punitive damages, compensatory damages.

As there is no contention that the district judge made errors in his evidentiary rulings on liability or in his instructions to the jury, we construe the facts relating to liability as favorably to AMPAT as is reasonable. AMPAT began installing windows in the Onterie Center in the fall of 1984. On January 2, 1985, it discovered broken Tapcons among those it had used before Christmas to anchor sloped window frames. (Some of the windows in the building are not vertical, but instead slope inward.) The Tapcons had broken even though, since the glass had not yet been inserted in the frames, the frames were not bearing their full weight. An inspection two days later revealed that 30 to 40 percent of the Tapcons in the sides of the sloped window frames were broken.

The broken Tapcons were collected and shipped off in three groups for inspection. One group was inspected by a metallurgist named Geiselman, whom AMPAT had retained for this purpose. The others were inspected by two employees of Illinois Tool Works--Lyu, also a metallurgist, and Janusz, an engineer who testified that he did not understand Lyu's metallurgical reports. In addition, unused Tapcons were taken from the three boxes in which they had been shipped by Triangle Fastener and were given to Lyu and Geiselman to test. The test evaluations differed. Janusz at first found no problems. Later both he and Geiselman found defects in the Tapcons they inspected. They were minor defects, and neither he nor Geiselman thought they had caused the Tapcons to break; nevertheless Geiselman recommended, as a precautionary measure, that AMPAT replace all the Tapcons that Triangle had shipped to it. Lyu's findings were the most ominous: he found all six Tapcons in two of the three lots of unused Tapcons to be either seriously or marginally defective.

Enter, stage front, Patterson, the national sales manager for the division of Illinois Tool Works that manufactures Tapcons. Patterson told AMPAT's project manager that AMPAT was installing the Tapcons incorrectly, although in a grudging and inaccurate nod to Lyu's report he added that one of the three lots that had been inspected had been found to be marginal. The project manager wanted this in writing and Janusz drafted a letter for Patterson's signature that described two of the three lots as marginal. In the letter as mailed, however (dated January 28), Patterson changed the number of marginal lots to one and described the other two lots as okay; the problem, he said, had been "isolated" to the one lot. He promised to ship replacement Tapcons forthwith, bypassing Triangle, and said the replacements would be "fully inspected for compliance with our product design parameters." The letter attributed the problems AMPAT had encountered to the combination of the one lot's marginality and improper installation.

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Patterson's letter was misleading. Not only had Lyu found defects in two lots rather than one, but he had found seriously defective Tapcons in those lots, not just marginally defective ones. Patterson's statement that the problem had been "isolated" to one lot made it sound as if Illinois Tool Works had found one marginal production run, implying that so long as it replaced the defective Tapcons from a different run the problem would not recur--especially since all the new Tapcons would be "fully inspected." In fact the "lots" to which the letter referred were simply the contents of three boxes in which Triangle Fastener had happened to ship Tapcons to the Onterie building site; the boxes were not identified with particular production runs. Lyu's findings--never communicated to AMPAT--supported the hypothesis that two-thirds of all the Tapcons that Illinois Tool Works had sold to Triangle Fastener were defective. Of course Lyu had been working with a small sample. And it is uncertain that the Tapcons were so defective that they flunked the specifications in Illinois Tool Works' sales literature. Tapcons just may not have been up to a job for which, after all, stainless steel anchors rather than carbon steel anchors had been specified. But after the initial failure and ensuing complaints by AMPAT, Illinois Tool Works knew what the Tapcons were being used for; and Patterson's letter was an implied representation that the replacement Tapcons he was shipping would do the job for which AMPAT wanted them.

A week after Patterson's letter was mailed, Janusz received a report of defective Tapcons at another building site. Tests run on them by Lyu revealed defects similar to those in the Tapcons at the Onterie Center. Illinois Tool Works did not tell AMPAT about this development.

In accordance with Patterson's promise that the replacement Tapcons would be fully inspected before being shipped, Lyu tested one Tapcon in each of the 30 boxes of replacements. Twenty-six of the 30 Tapcons that he tested flunked, but the replacements were shipped anyway and AMPAT was not told about the test results. AMPAT received the replacements on February 12 and began installing them--and a month later discovered that a large percentage (perhaps as many as a third) of the installed replacement Tapcons had broken, just like their predecessors. At this point AMPAT stopped using Tapcons and added additional anchors (made by another manufacturer) to the windows that it had installed already. Expert evidence at trial established that the Tapcons, both the original and the replacement ones, had broken because of stress-corrosion cracking due in part to deficiencies in the manufacturing process at Illinois Tool Works' plant.

A reasonable jury could conclude, to the degree of confidence implied by the "clear and convincing" standard applicable to a fraud case, Beaton & Associates, Ltd. v. Joslyn Mfg. & Supply Co., 159...

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