Although, at $2.1 billion, Toshiba’s recent product-liability settlement might seem an impressive figure, chances are it will only cost the company about half that amount. Moreover, only about a fourth of the face value of the settlement is expected to wind up with the consumers who allegedly were harmed by Toshiba.
Still, whether the actual payout is the publicized figure of $2.1 billion or the $1 billion that Toshiba is writing off, it’s a lot of money. And judging from terms of the agreement, observers say, such cases could become a technological gravy train for product-liability attorneys.
“It’s a crock of (expletive),” said an attorney representing one of the companies targeted in a follow-up suit, referring to the merits of the action. “This is simply classic tort law, and there ought to be damage before there can be a cause for action.”
In November, Toshiba’s Irvine-based U.S. operation, without admitting any wrongdoing, agreed to settle claims that floppy drives on its popular laptop computers had a defect that could corrupt data in certain situations.
The lawyers who filed the case,four firms led by Texas-based Orgain Bell & Tucker,now are targeting Irvine computer maker eMachines along with Compaq Computer, Hewlett-Packard and Packard Bell NEC for allegedly making PCs with the same defect.
No one from eMachines would comment for this story, but the company , along with others targeted in the follow-up suits , has vowed to defend itself in court.
The hard line being drawn by the other computer makers contrasts with the deal that Toshiba was willing to work out. Perhaps that reflects an amount of pre-trial bravado on the part of these defendants. But many legal observers have expressed surprise that Toshiba was willing to pay so much, for what at least publicly was scant evidence that its floppy drive defect caused any significant damage to plaintiffs
What, then, motivated Toshiba to strike the deal that it did?
Brand Name at Stake
Toshiba officials would not comment extensively on the settlement, but a spokeswoman for the company said she hoped it wouldn’t open the floodgates for similar suits against other manufacturers. In a statement, the company said it settled to protect its brand name and because it didn’t want to face the prospect of an even bigger jury award, possibly as high as $9 billion.
“Based on legal precedents in the U.S., there was a serious risk that a substantial amount of compensation could be awarded through a jury verdict in the class-action lawsuit,” read Toshiba’s official statement.
The Wall Street Journal quoted Toshiba President Taizo Nishimuro as saying that he initially wanted to fight the suit, but concluded there was a “close to 100% chance” his company would lose.
But some observers suggest that Toshiba’s desire to protect its brand name was at least as big of a consideration.
Long known as the Cadillac of laptops, Toshiba has struggled in recent months with quality-control issues, as have some other laptop makers. Also, Toshiba has been beset by a flood of low-cost competitors. While Toshiba has regained its sales crown in the laptop market after losing it to Compaq last year, its lead is considerably more narrow than in years past, making the company more sensitive to market perception.
A lawyer for another targeted company also speculated that Toshiba may have wanted to rid itself of a distraction like a lawsuit for a yet undisclosed reason, such as an upcoming offering or a significant corporate transaction.
No lawyers contacted for this story,representing the plaintiffs, Toshiba or other companies bracing for similar suits,would comment on the record. That reflects in part the sensitivity of the case and restrictions on what lawyers involved can say publicly.
Like most class-action suits, Toshiba’s high-dollar award will be split among hundreds of recipients. For Toshiba laptop users, the share will include software upgrades, repairs, coupons toward new Toshiba products and, for the most recent purchasers, cash refunds. Ironically, the coupons could generate revenue for Toshiba by sparking additional sales.
Toshiba will take a $1 billion charge on fiscal year 1999 earnings. (The company has agreed to pay out the $1 billion no matter what , the part of the $1 billion not claimed by consumers will be donated to schools in the form of computer equipment.) It appears that attorney fees were not included in the charge-off. While the $1 billion is Toshiba’s estimate of what the settlement will cost, it did not rule out taking additional charges later. The company didn’t specify why that might occur, but it might relate to exchange rates, since the deal was denominated in yen.
Lawyers Win
The biggest individual winners will be the plaintiffs’ lawyers, who will receive a combined $147.5 million.
Individual refunds to consumers, meanwhile, will range from $210 to $443.
Patrick Woodson, a spokesman for the law firms pursuing the case, said the case represented two years of work by four different law firms.
“It’s a little unfair for lawyers to get criticized for filing this case,” he said. Using math based on the $2.1 billion announced settlement figure, he added, “Ninety-three cents in every settlement dollar is returned to the (plaintiff) class; seven cents is going to the lawyers who worked two years on this case, spent a tremendous amount of money, took all the risk and bore the burden of taking defective products off the market.”
One of the lead attorneys, Wayne Reaud, is best known for his role in successful asbestos and tobacco litigation.
Woodson added that while the lawyers were well compensated, 7% is considered a “paltry” sum in most class-action suits.
Consumer Payout Small
However, considering that the cash payout to consumers likely will be, at most, about half the settlement’s face value, the plaintiff attorneys’ fees as a percentage of their clients’ awards would appear to be closer to 15% and could approach 30% if claims are lower than expected and more settlement dollars wind up going to schools.
The lawsuit centers around a defect in the component that manages the flow of information to and from a computer’s floppy disk drive. Under certain circumstances, when two applications try to use the drive at the same time, the floppy control can overwrite or corrupt data without indicating a problem. Other computer makers had corrected the problem years ago, but Toshiba, assuming the problem was too rare to be worth the trouble, had continued making drives with the defect and supplying them to other computer makers.
One of the lawyers said that while none of the cases would stand up in a full-blown trial, sued companies have strong economic incentives to settle. And even if some companies decide to fight such lawsuits, many more will capitulate, giving product-liability attorneys a reason to keep filing them.
Though no reports of actual damage had surfaced as a result of the Toshiba defect, Woodson insisted that a full-blown trial would have shown that several consumers “suffered greatly” from the defect.
The settlement prevents either side from talking extensively about the case, but in court documents the plaintiffs’ law firms have mentioned hypothetical “life and death” situations, such as medical or scientific work.
With the tech sector booming, chances are good that the industry will see many similar lawsuits, creating additional financial hazards in an already cutthroat business. n
