State hits Microworkz with lawsuit

Responding to customer complaints, the Washington state attorney general files suit against Microworkz, one of the start-ups that launched the "free PC" movement.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
3 min read
Microworkz, one of the start-ups that launched the "free PC" movement, has been slapped with a lawsuit by the Washington state attorney general for allegedly failing to deliver timely refunds or computers to approximately 95 consumers.

The complaint states that Microworkz violated state consumer protection laws by, among other acts, failing to deliver computers or refunds to customers, failing to honor warranties, and failing to provide promised free Internet service. Despite the lapses, the company continued to take orders, the attorney general's office said.

The complaint seeks an injunction barring Microworkz from permanently engaging in certain business practices and seeks compensation for consumers and legal fees.

"We started getting complaints about them earlier this year. They really hit a critical mass in June," said Assistant Attorney General Paula Selis.

Microworkz said the problems are a thing of the past. The company is no longer making or selling PCs, just designing them, said chief executive Rick Latman. Further, Latman said he will resign on November 15.

"We have not produced a machine in 42 days," said the outgoing CEO. "It is anticlimactic. We were shocked."

Selis did not see it that way. "I'd have to disagree with him. If they are clearing up these problems, the least they can do is show some evidence," she said.

Swamped with orders
The lawsuit, filed yesterday, is the latest event in the free PC melodrama. Earlier this year, Microworkz gained national attention as one of a series of start-ups that promised to get consumers on the Internet for little or no money down. Wildly popular, many of these companies soon found themselves swamped with orders, as well as angry consumer complaints, lawsuits, and legal investigations for failure to deliver machines.

Microworkz, for instance, is also being scrutinized by the Federal Trade Commission and is involved in a lawsuit with former Internet service provider (ISP) partner EarthLink and has faced various small-claims actions.

Despite these stumbles, the merchandising techniques introduced by these companies has changed how Dell Computer and other major manufacturers market their PCs. These more-established companies now couple $400 rebates, or free Internet access, with consumer PCs.

The lawsuit largely revolves around Microworkz's handling of orders for its now-discontinued line of Webzter PCs, the company said. Earlier this year, Microworkz offered Webzter PCs to consumers for $299 and bundled in a free year's worth of Internet access.

Microworkz took payment for these PCs but didn't deliver the machines or a timely refund, the suit alleges, according to the company. The state attorney general's office could not be reached for comment.

"The Webzter was a disaster"
"It's all about he Webzter and how we did a poor job with the Webzter," Latman said. "The Webzter was a disaster."

Although it agrees with parts of the lawsuit, the company disputes the particulars, Latman said. The suit rests on 95 consumer complaints, and the "vast majority" of those have been resolved, Latman said. Further, many of the delays occurred because the company was having difficulty confirming whether or not a computer had been shipped or returned. The company, he asserted, was in the process of negotiating a resolution of these issues with the attorney general.

"She [Selis] was skeptical of our progress," added Lance Rosen, another Microworkz executive. "From her position, it was justifiable." Selis, for her part, stated little evidence of claim resolution was presented.

Further, although it won't help these customers, the company promises that it won't happen again. After several months of experimentation, Microworkz has once again changed its business model. Rather than manufacture and market its own PCs, the company has launched a plan to market the designs for its Internet appliance and live off royalties and other residuals.

Currently, Microworkz is trying to license the design for its "iToaster," an Internet access device that uses a proprietary operating system, Latman said. The iToaster will cost $299 but come with free Internet access. The company is currently negotiating with a major manufacturer, who may come out with an iToaster.

As part of the overhaul, Latman added that he will resign November 15 as CEO, although he will remain for now as chairman of the company.