British Building Material Manuafacturer Wins $36M Verdict in Breach of Contract Case

Missouri Lawyers Weekly – Copyright 2006 Dolan Media Company
By Anne C. Vitale

A British building material manufacturer has won a $36 million verdict in its federal breach of contract case against Zoltek Corporation, a St. Louis-based carbon fiber manufacturer.

In its lawsuit filed in U.S. District Court, Eastern District of Missouri, Structural Polymer Systems, Ltd. claimed that Zoltek quit supplying its requirements for large filament count carbon fiber in breach of a 10-year supply contract signed in 2000. But Zoltek maintained that the contract covered only an earlier version of the product SP Systems had ordered through 2003, not an improved version launched in 2004.

The jury found that the contract covers both products and is still in effect, eliminating any need for Judge Carol Jackson to order specific performance. “In essence, the jury and judge found that Zoltek is bound to honor the contract and that it must supply SP Systems’ requirements through 2010,” said Edward L. Dowd Jr., attorney for SP Systems.

Dowd and James F. Bennett of Dowd Bennett LLP were part of a St. Louis-based trial team led by Louis F. Bonacorsi of Bryan Cave LLP. They battled repeated reminders from the defense that SP Systems is a British company, owned by a Swiss enterprise, challenging a local company.

“It’s tough being the team from out-of-town taking on the home team,” Bonacorsi said. “But it goes to show that a foreign business can fare well in our courts, which was a reflection of a very well-run courtroom with fair-minded jurors. Our clients were very impressed with our judicial system.”

Zoltek issued a statement that it will challenge the verdicts favoring SP Systems on one count of damages of $21 million and a second count of $15 million. “Although the outcome of this litigation is inherently uncertain, Zoltek believes it has strong legal grounds to overturn these verdicts and will file post-trial motions challenging the jury’s verdicts in several fundamental respects,” the statement said.

James J. Virtel and James G. Martin of Armstrong Teasdale LLP in St. Louis, attorneys for Zoltek, declined to comment further.

In November 2000, SP Systems and Zoltek entered a 10-year supply agreement making Zoltek the exclusive supplier of SP Systems’ requirements for large filament count carbon fibers, a raw material used in various composite products. SP Systems combines the material with resins and manufactures a strong, lightweight building material, which it sells to companies that manufacture boats and blades for wind-energy windmills.

SP Systems honored the agreement by purchasing small amounts of Zoltek’s carbon fiber product, PANEX 33, in 2000, 2001, and 2002. But SP Systems had many problems with the product’s quality and processability.

In 2004, Zoltek improved the quality of its carbon fiber with a new product, PANEX 35. At the same time, the wind energy market exploded.

SP tested and began ordering significant quantities of PANEX 35. Zoltek initially supplied these quantities, but quickly fell behind and eventually refused to fill SP Systems’ orders, Dowd said. Zoltek subsequently shifted its fiber supplies and entered supply agreements with two of SP Systems’ customers in late 2004 and early 2005.

The main issue in the case was whether the contract covered both PANEX 33 and PANEX 35, Dowd said. Zoltek maintained that the contract did not cover the newer product.

The contract stated the subject as “large filament count carbon fiber as defined by PANEX 33 specifications.” Zoltek claimed this language referred to only PANEX 33. But SP Systems argued that “PANEX 33 specifications” meant that the contract covered any of Zoltek’s large filament count carbon fibers that met those specifications, including PANEX 35.

“Even when the contract was originally signed in November 2000, everyone was aware that PANEX 35 was being developed and that Zoltek was planning it to be superior,” Dowd said. “So it was definitely within the contemplation of the parties at the time the contract was entered into that we would be getting PANEX 35 as well.”

Supporting SP Systems’ position, Dowd said, former Zoltek CFO Dan Greenwell testified in his deposition that he negotiated the contract with the CEO of SP Systems, and that the contract was designed to include both PANEX 33 and PANEX 35.

Zoltek further contended that SP Systems had abandoned the contract by not ordering more of the carbon fiber product in 2001, 2002 and 2003. SP Systems argued that it ordered the products in each of those years, but admittedly ordered more in 2004 as the demand from its wind energy customers increased.

Another issue, Dowd said, was that Zoltek owned SP Systems for about a year in 2000. “It was not a happy partnership,” he said.

Zoltek was forced to sell SP Systems back to its employees and shareholders in November 2000. At that point, Dowd said, Zoltek CEO Zsolt Rumy insisted that SP Systems agree to buy all of its requirements of large filament count carbon fibers for the next 10 years from Zoltek.

In its breach of contract counterclaim, Zoltek alleged that SP Systems failed to discharge its obligations of good faith and fair dealing. But Zoltek produced no evidence to support its allegations, Dowd said.

After a three-and-a-half week trial and about six hours of deliberation, the jury made specific findings that SP Systems had not abandoned or breached the contract, that the contract was still in effect and that it covered both PANEX 33 and PANEX 35. The jury found that Zoltek had breached the agreement, and awarded $21 million for breach of its duty to sell PANEX 35 and $15 million for breach of its duty to sell PANEX 33 – the exact amounts SP Systems had claimed in lost profits.

The jury also sided with SP Systems on Zoltek’s counterclaim.

Videotaped depositions
The plaintiffs videotaped many of the depositions in this case, enabling them to play portions of the depositions for the jury, Dowd said. He advised that when taking videotaped depositions, lawyers should be prepared and have the court reporter mark exhibits in advance to avoid interrupting the flow by having them marked during the deposition.

Dowd also recommended approaching such depositions as if in trial before a jury. “Ask questions quickly and strongly, don’t delay and wait to figure out your next question while everyone is watching and waiting,” he said.

Facts of the case
Type of Action: Breach of contract

Type of Injuries: Economic

Court/Case Number/Date: U.S. District Court, E.D.Mo./4:05CV00321CEJ/

Nov. 29, 2006

Caption: Structural Polymer Group, Ltd. and Structural Polymer Systems, Ltd. v. Zoltek Corporation

Judge, Jury or ADR: Jury

Name of Judge: Carol E. Jackson

Verdict or Settlement: $36,044,895 verdict

Special Damages: $36,044,895 lost profits

Allocation of Fault: N/A

Last Demand: N/A

Last Offer: N/A

Attorneys for Plaintiff: Edward L. Dowd Jr. and James F. Bennett, Dowd Bennett LLP, St. Louis; Louis F. Bonacorsi and James M. Weiss, Bryan Cave LLP, St. Louis

Attorneys for Defendant: James J. Virtel, James G. Martin, Deanna M. Wendler Modde and Brent M. Covington, Armstrong Teasdale LLP, St. Louis

Insurance Carrier: N/A

Plaintiff’s Experts: Donna Smith, St. Louis (certified public accountant)

Defendant’s Experts: None

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