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Data-storage suit sends shockwaves through PC industry

Compaq battles a class-action lawsuit alleging the computer maker shipped PCs with faulty floppy drives that could corrupt data transferred to floppy disks.

    Will lawyers wring another huge class-action settlement out of a major PC maker?

    The answer to that question could send reverberations through the high-tech industry as Compaq Computer battles a class-action lawsuit similar to the huge one that smacked Toshiba. With the lawsuit still in its earliest stages, word leaked out yesterday that Compaq's lawyers may have admitted a floppy drive flaw affecting 1.7 million Presario PCs.

    Officially, Compaq spokesperson Alan Hodel said today: "We did not acknowledge this. There is no basis for the plaintiffs' lawsuit, and we are going to vigorously defend against it."

    The bigger issue may be how lawyers use the press and how companies react, analysts said. Microsoft's antitrust battle with the government, for example, has largely played out before the media, through both public disclosure and a series of leaks.

    Media hype surrounded the Toshiba case early on. After settling with Toshiba, the Beaumont, Texas, law firm of Reaud; Orgain, Bell & Tucker; and law offices of L. DeWayne Layfield rushed out to proclaim their $2.1 billion triumph over the PC maker. But Toshiba America vice president and general manager Jeffrey Friederichs put the figure no higher than $1 billion and potentially as little as $600 million.

    Days later--with a war chest of $147.5 million from their Toshiba victory--the law firm, which cut its teeth fighting big tobacco and asbestos companies, filed five more suits.

    The suits allege the computer makers shipped PCs with faulty floppy drives that could corrupt data transferred to floppy disks. This, they contend, harmed consumers.

    "The whole lawsuit is the height of ludicrous litigation," said Technology Business Research analyst Lindy Lesperance. "If you look at the cases these lawyers pursued before--tobacco and asbestos--you have considerable consumer harm. Where's the harm here? You have no consumers who have complained of a problem."

    Compaq, which was sued simultaneously with Emachines and Hewlett-Packard faces a similar dilemma as Microsoft: fighting a lawsuit before the court of the media as well as the court of law, said legal experts.

    Lawyers met before a judge on Monday, with Compaq making 10 motions, including a request to seal the court record and to move the trial to another venue. The judge denied the motions but gave both parties until March 6 to decide what information would be confidential.

    Compaq revealed that on Saturday it had sent an undisclosed number of Presario PC owners a postcard warning of a floppy drive problem and directed them to download a software patch. Hodel said that problem, discovered during testing for the one alleged in the suit, is different and occurs only in "extreme" occasions.

    One source close to the matter contends someone--possibly the plaintiffs--then leaked a confidential settlement letter to the media that when read out of the context of negotiations appeared to indicate Compaq admitted fault.

    A spokesperson for plaintiff attorneys denied doing this, arguing the document had been introduced into court last Friday. Patrick Woodson, speaking on behalf of Reaud law firm, said Compaq had earlier filed an affidavit from employee Kenneth Lewellan that breached Dec. 10 settlement negotiations and plaintiff attorneys had responded by giving the letter to the court. The confidential letter demonstrates Compaq lawyers knew Federal Rules of Evidence 408 governed statements made during the meeting and, therefore, they were inadmissible in court, according to court documents.

    "Here's the problem: We're faced with the situation where this company is going to court saying that there should be prior restraint on the media, and lawyers shouldn't be able to talk about this problem--not just Compaq, but this problem," Woodson said.

    "They're trying to keep this from open view, but there are computers on the shelves that are still defective today," Woodson continued. "We felt that if they were going to continue to make these assertions, the court and the people had a right to know."

    The letter, from Compaq attorney Steven Zager to opposing counsel, states clearly the letter is part "of ongoing settlement discussions" and "is strictly confidential." In the letter, Zager writes that 1.7 million Presario PCs are affected by the floppy drive problem, on the "assumption your test is accurate" and "for the purpose of our discussion."

    "Unless there was some specific reason why settlement negotiations were on the table and some specific argument those should be made public...they should not have been discussed," said Rich Gray, an intellectual property attorney with Outside General Counsel Silicon Valley, Menlo Park, Calif.

    A source close to the negotiations, who requested anonymity, said plaintiff lawyers had wanted to include all 60 million PCs shipped by Compaq, but the "confidential communication was meant to clarify if there was a problem it would only affect the 1.7 million Presario consumer PCs."

    "It is outrageous for a letter to contain a concession, even a hypothetical one, to be revealed to any third party," Gray said. "The whole focus surrounding a settlement negotiation is to say things they would never say during litigation to work to a potential resolution."

    Gray acknowledged, however, that if Compaq had already put in evidence statements regarding those settlement discussions, there might be a legitimate basis to put the letter before the court.

    Woodson defended the plaintiff lawyers' actions.

    "We tested 11 systems in front of Compaq engineers, and four of them demonstrated the problem," he said.

    Compaq's sleight of hand--admitting no fault publicly but sending Presario's a letter warning of a problem--demanded a swift response.

    As the case goes forward, Lesperance, who also is a lawyer, warned other PC makers should prepare to respond to these hardball tactics from the law firm seasoned by battling big tobacco. Some defendants may not be up to the fight, she said.

    "Some of these companies have deep pockets, but fighting a suit like this could put a company like Emachines out of business--and they have an IPO coming," Lesperance said. "These lawyers have a nice little pot of money to go after many companies."