Toshiba to pay $2B settlement on laptops

Toshiba to pay $2B settlement on laptops

Summary: Company accused of allegedly selling defective notebook computers in the United States.

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Toshiba Corp. agreed to a $2.1 billion settlement for selling allegedly defective laptop computers in the U.S., the first fallout from a wave of lawsuits and government inquiries over a flaw that may be common to the products of many major computer makers.

Friday's announcement covers more than five million Toshiba laptops and requires the redesign of floppy-disk drives in all future Toshiba models sold here. The Tokyo company promised customers cash rebates, free merchandise and a software fix as part of the preliminary settlement of the class-action lawsuit brought six months ago in Beaumont, Texas.

The suspected flaw in the Toshibas was contained in certain semiconductor chips that control computers' floppy-disk drives. The defect can randomly destroy or corrupt data, according to the suits and information gathered by investigators, without any immediate warning or way for the user to determine that a file has been altered. In one test sponsored by plaintiffs' lawyers, each of 200 Toshiba laptops examined showed evidence of a defect.

The problem -- first examined in detail by a former International Business Machines Corp. (NYSE:IBM) engineer more than a decade ago -- allegedly stems from the design of a generation of so-called controller chips made by NEC Corp. and Intel Corp. (Nasdaq:INTC). The design was copied by chip makers around the world.

Those companies weren't part of Friday's settlement, and spokesmen for the two chip makers wouldn't comment on whether they are the subject of pending lawsuits. NEC was dropped as a defendant in the Toshiba case, but plaintiffs aren't prevented from going after it again.

Other big computer companies also figure in pending cases. Among them are IBM and Packard/Bell NEC, which is controlled by NEC, according to people familiar with the matter. An IBM spokesman said the company doesn't comment on anything related to pending litigation, and an NEC spokesman declined to elaborate on issues raised by the Toshiba settlement.

First hard impact
While the lawsuit in Texas is the first hard impact of the suspect chip design on major companies, government agencies have been looking into the widespread use of the flawed chips. Among the agencies involved are the Justice Department and the General Services Administration, which buys computers for the government, in addition to the California attorney general's office and officials from at least two other states, according to people familiar with the proceedings.

The General Services Administration's inspector general has issued investigative subpoenas, and federal investigators have attended laboratory demonstrations sponsored by plaintiffs' lawyers intended to show the occurrence of the alleged defect, these people said. State and local agencies can opt to assert damage claims on their own.

Viki Reath, a spokeswoman for the General Services Administration, said the agency doesn't comment "on anything having to do with pending investigations." Officials of the Justice Department and the California attorney general's office declined to comment.

Toshiba's move is bound to accelerate other probes and most likely spur a rash of private suits and lawsuits seeking class-action status against other firms.

A number of suits seeking damages are pending in California and at least two other states. They claim that the same chip design has been embedded in laptops and personal computers sold by some of the industry's most prominent companies, say people familiar with the matter. Papers filed in one suit claim as many as 19 computer brands, including Toshibas and many other well-known models, were discovered to contain a defective floppy disk controller.

Denied liability
In its settlement, Toshiba denied liability for the problem and maintained that there is no "problem or defect" in its laptops. The company said it agreed to the preliminary settlement because it feared a jury trial could have saddled it with a verdict of as much as $9 billion. The suit had claimed that officials at Toshiba's American Information Systems Inc. unit knew about the potential for "corruption or destruction of data" for 10 years, but "haven't corrected the problem and have withheld the truth" from buyers.

The terms, still subject to final court approval, were hammered out six months after the complaint was filed, an unusually swift conclusion for such a large and complex case. The settlement is designed to show consumers "that the Toshiba brand name continues to merit their trust," the companies said.

"This is a bitter pill for us to swallow," Toshiba's President Taizo Nishimuro told reporters Friday in Tokyo. He said Toshiba, the world's largest laptop maker, would take a $1 billion charge stemming from the settlement and expects to report an overall net loss of 50 billion yen ($480 million) for the fiscal year ending in March. The company indicated additional charges may be necessary. The settlement pegs the "aggregate face value" of the package at more than $2.1 billion, but the actual total could be less, depending on the number of Toshiba laptop owners who come forward to claim their rebates or other remedies.

The tentative settlement terms call for cash distributions of as much as $597 million, with consumers receiving rebates of as much as $443 each, based on a sliding scale depending on the age of their laptops.

Time investment
But for several years, Phil Adams, a former IBM designer who examined the alleged defect, and his lawyers, have waged a quiet but persistent campaign to bring his concerns to light. Adams said he started working on the problem in earnest during the first half of 1987 while at IBM's personal-computer headquarters in Boca Raton, Fla.

"The defect is insidious because it manifests itself in so many forms," according to Adams. He said computer users may believe they are "using a bad floppy diskette when, in fact, the diskette is defect free." Files transferred from a floppy to a hard drive "may forever after be corrupted," he said.

Adams isn't a plaintiff in the Texas action, but he was scheduled to be a witness if the case had gone to trial. The problem with the chips, according to court documents and interviews with experts, is that the suspect chip may cause data to be transported from one part of a floppy disk to another. It is most likely to occur when a computer is performing many tasks simultaneously.

Originally, the design that caused the problem was contained in controller chips made by NEC and Intel, two of the world's biggest chip makers, according to lawyers familiar with the issue. They first realized the potential problem and came out with modified versions more than a decade ago, according to the pending lawsuits and industry experts. Since then, they said, the faulty microcode -- or the instructions for the controller -- was picked up by various chip and computer makers around the world. Some of the allegations, based partly on documents purportedly prepared by NEC and Intel, revolve around questions of when companies first learned of the potential problem and whether they should have alerted government and consumers about it, according to people familiar with the issues.

A document plaintiffs' lawyers say was prepared in 1987 by NEC Electronics Inc. indicates "there is a flaw in the microcode" of the suspect chips. A similar document, apparently prepared by Intel, called the problem a "definite logic bug" affecting its chips, adding that "we have verified it."

The two companies declined to go into detail about their earlier products. "From NEC's perspective, we've acted in a responsible manner toward our customers at all times," said Mark Pearce, a spokesman for the Santa Clara, Calif., U.S. unit of NEC Corp. of Japan. "Beyond that, we haven't been able to make an assessment of the settlement." Bill Calder, a spokesman for Intel, declined to comment, except to say that he hadn't determined whether Intel is involved in the matter.

When NEC changed its design, "that revision didn't get into our chip," said Gary Elsasser, a vice president of Toshiba's U.S. informations system unit. "We believed at that time it was not an issue."

As part of its settlement, Toshiba said it will post a software patch on its Internet site. It also agreed to pay a total of $147.5 million to the law firms that brought the suit. Lon Packard, whose Salt Lake City firm, Packard Packard & Johnson, represents Adams, said the settlement "sends an unmistakable message to the entire industry that data integrity must not be compromised."

-- Gary McWilliams in Houston and Ian Messer of Dow Jones Newswires contributed to this article.

Toshiba Corp. agreed to a $2.1 billion settlement for selling allegedly defective laptop computers in the U.S., the first fallout from a wave of lawsuits and government inquiries over a flaw that may be common to the products of many major computer makers.

Friday's announcement covers more than five million Toshiba laptops and requires the redesign of floppy-disk drives in all future Toshiba models sold here. The Tokyo company promised customers cash rebates, free merchandise and a software fix as part of the preliminary settlement of the class-action lawsuit brought six months ago in Beaumont, Texas.

The suspected flaw in the Toshibas was contained in certain semiconductor chips that control computers' floppy-disk drives. The defect can randomly destroy or corrupt data, according to the suits and information gathered by investigators, without any immediate warning or way for the user to determine that a file has been altered. In one test sponsored by plaintiffs' lawyers, each of 200 Toshiba laptops examined showed evidence of a defect.

The problem -- first examined in detail by a former International Business Machines Corp. (NYSE:IBM) engineer more than a decade ago -- allegedly stems from the design of a generation of so-called controller chips made by NEC Corp. and Intel Corp. (Nasdaq:INTC). The design was copied by chip makers around the world.

Those companies weren't part of Friday's settlement, and spokesmen for the two chip makers wouldn't comment on whether they are the subject of pending lawsuits. NEC was dropped as a defendant in the Toshiba case, but plaintiffs aren't prevented from going after it again.

Other big computer companies also figure in pending cases. Among them are IBM and Packard/Bell NEC, which is controlled by NEC, according to people familiar with the matter. An IBM spokesman said the company doesn't comment on anything related to pending litigation, and an NEC spokesman declined to elaborate on issues raised by the Toshiba settlement.

First hard impact
While the lawsuit in Texas is the first hard impact of the suspect chip design on major companies, government agencies have been looking into the widespread use of the flawed chips. Among the agencies involved are the Justice Department and the General Services Administration, which buys computers for the government, in addition to the California attorney general's office and officials from at least two other states, according to people familiar with the proceedings.

The General Services Administration's inspector general has issued investigative subpoenas, and federal investigators have attended laboratory demonstrations sponsored by plaintiffs' lawyers intended to show the occurrence of the alleged defect, these people said. State and local agencies can opt to assert damage claims on their own.

Viki Reath, a spokeswoman for the General Services Administration, said the agency doesn't comment "on anything having to do with pending investigations." Officials of the Justice Department and the California attorney general's office declined to comment.

Toshiba's move is bound to accelerate other probes and most likely spur a rash of private suits and lawsuits seeking class-action status against other firms.

A number of suits seeking damages are pending in California and at least two other states. They claim that the same chip design has been embedded in laptops and personal computers sold by some of the industry's most prominent companies, say people familiar with the matter. Papers filed in one suit claim as many as 19 computer brands, including Toshibas and many other well-known models, were discovered to contain a defective floppy disk controller.

Denied liability
In its settlement, Toshiba denied liability for the problem and maintained that there is no "problem or defect" in its laptops. The company said it agreed to the preliminary settlement because it feared a jury trial could have saddled it with a verdict of as much as $9 billion. The suit had claimed that officials at Toshiba's American Information Systems Inc. unit knew about the potential for "corruption or destruction of data" for 10 years, but "haven't corrected the problem and have withheld the truth" from buyers.

The terms, still subject to final court approval, were hammered out six months after the complaint was filed, an unusually swift conclusion for such a large and complex case. The settlement is designed to show consumers "that the Toshiba brand name continues to merit their trust," the companies said.

"This is a bitter pill for us to swallow," Toshiba's President Taizo Nishimuro told reporters Friday in Tokyo. He said Toshiba, the world's largest laptop maker, would take a $1 billion charge stemming from the settlement and expects to report an overall net loss of 50 billion yen ($480 million) for the fiscal year ending in March. The company indicated additional charges may be necessary. The settlement pegs the "aggregate face value" of the package at more than $2.1 billion, but the actual total could be less, depending on the number of Toshiba laptop owners who come forward to claim their rebates or other remedies.

The tentative settlement terms call for cash distributions of as much as $597 million, with consumers receiving rebates of as much as $443 each, based on a sliding scale depending on the age of their laptops.

Time investment
But for several years, Phil Adams, a former IBM designer who examined the alleged defect, and his lawyers, have waged a quiet but persistent campaign to bring his concerns to light. Adams said he started working on the problem in earnest during the first half of 1987 while at IBM's personal-computer headquarters in Boca Raton, Fla.

"The defect is insidious because it manifests itself in so many forms," according to Adams. He said computer users may believe they are "using a bad floppy diskette when, in fact, the diskette is defect free." Files transferred from a floppy to a hard drive "may forever after be corrupted," he said.

Adams isn't a plaintiff in the Texas action, but he was scheduled to be a witness if the case had gone to trial. The problem with the chips, according to court documents and interviews with experts, is that the suspect chip may cause data to be transported from one part of a floppy disk to another. It is most likely to occur when a computer is performing many tasks simultaneously.

Originally, the design that caused the problem was contained in controller chips made by NEC and Intel, two of the world's biggest chip makers, according to lawyers familiar with the issue. They first realized the potential problem and came out with modified versions more than a decade ago, according to the pending lawsuits and industry experts. Since then, they said, the faulty microcode -- or the instructions for the controller -- was picked up by various chip and computer makers around the world. Some of the allegations, based partly on documents purportedly prepared by NEC and Intel, revolve around questions of when companies first learned of the potential problem and whether they should have alerted government and consumers about it, according to people familiar with the issues.

A document plaintiffs' lawyers say was prepared in 1987 by NEC Electronics Inc. indicates "there is a flaw in the microcode" of the suspect chips. A similar document, apparently prepared by Intel, called the problem a "definite logic bug" affecting its chips, adding that "we have verified it."

The two companies declined to go into detail about their earlier products. "From NEC's perspective, we've acted in a responsible manner toward our customers at all times," said Mark Pearce, a spokesman for the Santa Clara, Calif., U.S. unit of NEC Corp. of Japan. "Beyond that, we haven't been able to make an assessment of the settlement." Bill Calder, a spokesman for Intel, declined to comment, except to say that he hadn't determined whether Intel is involved in the matter.

When NEC changed its design, "that revision didn't get into our chip," said Gary Elsasser, a vice president of Toshiba's U.S. informations system unit. "We believed at that time it was not an issue."

As part of its settlement, Toshiba said it will post a software patch on its Internet site. It also agreed to pay a total of $147.5 million to the law firms that brought the suit. Lon Packard, whose Salt Lake City firm, Packard Packard & Johnson, represents Adams, said the settlement "sends an unmistakable message to the entire industry that data integrity must not be compromised."

-- Gary McWilliams in Houston and Ian Messer of Dow Jones Newswires contributed to this article.

Topics: Toshiba, Hardware, IBM, Intel, Laptops, Legal

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