Toshiba Swallows Bitter Pill in Laptop Lawsuit

In late October 1999, Toshiba agreed to a $2.1 billion settlement of a class action suit filed in Beaumont, Texas, which alleged that defective chips in the control disk drives of Toshiba's laptops caused information to be corrupted. According to the case, the flawed controllers could be found in nearly all the company's laptops shipped in the US since 1985 -- numbering around 5 million units.

While Toshiba denied that its computers were defective, in a surprising but somewhat typically Japanese move, it accepted the settlement in order to protect its brand image. More important, the company said that had it not agreed to the preliminary settlement, a jury trial could have awarded damages climbing to as much as $9 billion.

As part of the agreement, Toshiba is required to provide warranty holders with some form of refund for purchases made after February 1998. Another option given to buyers was to download software or get new hardware and accept coupons of varying prices, details of which are still being worked out.

The costly payout caused Toshiba to revise its earnings forecast for the current fiscal year through March 2000, and that was after the company disclosed in September plans to reduce its work force by about 5,000 because of an already dismal outlook for business performance. Toshiba now expects to post a net loss of ¥50 billion and a pretax loss of ¥70 billion on a consolidated basis, compared to a net loss of ¥15 billion and a pretax loss of ¥10 billion it had forecast previously. In reaction to the settlement news, Toshiba's share price plummeted some 6 percent on the Tokyo Stock Exchange that day.

Industry watchers say that Toshiba's bitter pill could be shared by many others in the field. The company's example could speed up damages in suits pending in several states in the US, as well as prompt more private lawsuits claiming liability for defective products.

This guess could be closer to home than it seems, because according to experts the same chip design has been used in products manufactured by some of the larger computer makers. The alleged defective design originated in controller chips made by NEC and Intel, and while the two companies became aware of the potential problem over a decade ago and modified the design, the former flawed version had been picked up by other chip and computer manufacturers, thus spreading the malaise.

The same plaintiffs' lawyers from the Texas case have already followed up the Toshiba suit with a slew of similar others, including one against computer giant Compaq, which, unlike Toshiba, has said it would fight its adversaries. Whether the choice is to retreat or defend, the suits are sure to keep manufacturers on their toes.