PC makers hit with Toshiba copycat suits

Lawyers for the two plaintiffs in the Toshiba case filed suit this past weekend against Compaq Computer, NEC Corporation, Hewlett-Packard, Packard-Bell NEC, and Emachines, alleging the companies sold notebook computers with defective floppy drives.

"We're confident Compaq products have no problems as discussed in the complaint," said Compaq spokesperson Alan Hodel. "The complaint filed against Compaq appears to be a copycat suit filed in an attempt to exploit the settlement by Toshiba."

Stephen Dukker, chief executive of Emachines, was surprised at being included in the lawsuits.

"We do not make notebook computers," he said. "We have never made notebook computers. So how can we be sued?"

Emachines uses floppy drives made by Samsung, Dukker said, which he believes are not affected by a microcode flaw.

But Peter Glaskowsky, an analyst with MicroDesign Resources, said the inclusion of Emachines might not be that surprising. "Emachines has certainly pursued small, cheap machines, and those would be the kind of places where you would use things like components that would be used in notebooks," he said.

"This wouldn't be the first time we've had floppy drives being unreliable, because the nature of the PC architecture has caused them to have problems when other things are happening on the system," Glaskowsky said.

One issue is another device on the system causing problems when running at the same time as the floppy drive, "and this starves the data, but doesn't report an error," Glaskowsky said.

The problem goes back more than ten years to microcode on an NEC chip used in floppy drives. NEC later learned the troubled microcode could corrupt or delete data transferred from a computer hard drive to a floppy disk. The company fixed the problem and issued a corrected design to other PC manufacturers.

Toshiba, which assumed no liability in its settlement, continued to use the microcode in chips it manufactured, said sources close to the situation.

The suit against Compaq was filed at the U.S. District Court for the Eastern District of Texas in Beaumont, Texas. Lawyers filed the suit after the court closed on Friday.

The five class action suits are not surprising, said legal experts.

"The attorneys are now flush with cash to take up the next fight and have the wherewithal to go out and do it again. I expect through their own technical experts and through discovery they may also have developed a lot of information, said Rich Gray, an intellectual property attorney with Outside General Counsel of Silicon Valley.

"They will have developed a family tree, if you will, of how that technology was used in other products," Gray said. "If they had solid information developed from the Toshiba lawsuit it would have been more surprising if they hadn't gone after other companies."

Compaq disputes allegation
"We learned of this yesterday, that Compaq had received service of a class-action complaint," said Hodel. "We believe the vague complaint [is] completely baseless and without merit. We will defend the suit vigorously."

Sources close to Compaq said the company never used Toshiba's chips and only those with corrected microcode from NEC.

Hewlett-Packard would not comment on the lawsuit, stating it had not yet been presented with papers detailing the suit.

Two U.S. owners of Toshiba laptop computers initiated the class-action lawsuit earlier in 1999, alleging that the microcode in the floppy disk controller could cause data in a floppy disk to be lost or corrupted.

Under terms of the Toshiba settlement, the company will use new floppy disk controllers in computers for sale in the United States. Those eligible may also receive coupons ranging from $100 to $225.

While Compaq and Emachines dismiss the suits as frivolous, legal experts point out that Rule 11 of Federal Rules of Civil procedure protects against such actions and that many states have similar statutes.

The PC makers, 19 potential litigants in all, face tough adversaries. The law office of Reaud, Morgan & Quinn, which brought the most recent suits and the one against Toshiba, championed successfully against big tobacco firms.

The Beaumont, Texas, law firm knows how to take on large companies en masse and win, said legal experts, who speculated this could be one reason for Toshiba's quick capitulation.

"There's sort of something of a trend of more generous verdicts out there, especially when you have out-of-state defendants," said David Levine, a professor at the University of California, Hastings College of the Law. "Texas and Alabama are the ones that stick out."

Large states like Texas and California also often liberalize the rules for maintaining a class action suit in ways that favor plaintiffs, he added. The settlement achieved with Toshiba brings up a number of interesting nuances, said Levine.

First, although Toshiba admitted no wrongdoing, the size of the settlement gives some indication that Toshiba feared the potential of a verdict against it. "It looks like a lot more than nuisance value," he said.

Second, the settlement also largely revolves around coupons and rebates, which have been questioned by courts in the past. In the Toshiba settlement, plaintiffs receive coupons for more Toshiba products or cash, depending on the circumstances.

Coupon settlements can have the effect of inflating the value of a settlement or verdict, he noted. Many customers never turn in the coupon. In addition, the defendant is not so much paying a verdict as it is gaining a customer.

"Coupons may not be particularly beneficial," he said, "You're going to see a very small percentage of coupons ever coming back."

Texas, he added, is one of the favored jurisdictions for plaintiffs' attorneys.

Reuters contributed to this report.