Toshiba 10 years later: A look back at a Texas city's big settlement

BEAUMONT, Texas (Legal Newsline)--It's been 10 years since Toshiba settled what is probably the largest recovery ever obtained in a class action lawsuit for economic damages.

On Oct. 28, 1999, lead class plaintiffs Ethan Shaw and Clive D. Moon settled a lawsuit with Toshiba America Information Systems Inc. and NEC Electronics for $2.1 billion after complaining that floppy diskette controllers in the machines were defective.

Lawyers Hubert Oxford III of Beaumont, Gilbert I. "Buddy" Low of Orgain, Bell and Tucker in Beaumont, L. DeWayne Layfield of Pasadena and Wayne Reaud received $147.5 million in attorneys' fees for their work.

When it was announced, the extraordinarily large settlement shocked some lawyers who couldn't understand why the company was willing to pay such an exorbitant amount.

"I'm just baffled by it," Charles L. Kerr, a lawyer for Morrison and Foerster in New York who worked on computer liability cases, told the New York Times two days after the settlement was announced. "It's a substantial hit and they must have had pretty good reasons for taking a substantial hit."

But Toshiba executives defended the settlement, saying they could have been forced to pay much more - up to $9.5 billion -- if they had lost the litigation in a jury trial.

"That would have endangered the very existence of the company," Taizo Nishimuro, the company's president, said at a news conference held in Tokyo shortly after the settlement. "That's why we made the tough decision to settle."

Even in the settlement, Toshiba says it entered into the agreement "solely to avoid further expense, inconvenience and burden of this protracted and complex litigation, the risks inherent in uncertain complex litigation, and the distraction and diversion of their personnel and resources, and thereby to put to rest this controversy."

The court felt the need to defend another controversial decision - the millions of dollars of attorneys' fees it awarded.

Presiding U.S. District Judge Thad Heartfield wrote in his findings of fact that the fees represent only 7 percent of the total awarded to the class. On average, attorneys stand to make about 32 percent of total damages.

In addition, attorneys worked hard on the lawsuit, pouring through millions of pages of documents written in Japanese, the court's findings of fact state.

"In addition to these documents, Defendants also produced a mountain of magnetic and optical media containing millions of entries relating to product design, defects, complaints, and other relevant issues," Heartfield wrote in the court's findings of fact. "Deciphering the relevant information and data from the digital backup tapes, optical disks, removable magnetic disks, floppy disks, and videotapes required substantial skill and was itself a monumental task."

In their lawsuit filed March 5, 1999, in U.S. District Court for the Eastern District of Texas, Shaw, a Beaumont lawyer at the time of the lawsuit, and Moon, a retiree from Plano, accused Toshiba and NEC of selling 5 million notebook computers that would destroy or lose information without their users' knowledge.

The problems originated in the computers' floppy diskette controllers, which is a device that controls the floppy disk drive, according to the complaint.

"FDCs affect all of us," Shaw and Moon wrote in the complaint. "Devices incorporating FDCs, including, without limitation, computer systems, are used in our homes, schools, businesses, doctor's offices, hospitals, banks, government installations, air traffic control systems, and medical laboratories. We use that data to protect our health; to design our bridges, office buildings, dams and skyscrapers; to find energy reserves; to design and pilot our planes and spacecraft; to provide government services; and to pay our bills and taxes."

It is vital for public safety that Americans be able to trust their computers, Shaw and Moon claimed.

However, most, if not all, of the floppy diskette controllers sold by Toshiba and NEC Electronics destroyed data contained in or retrieved from the computer's storage system.

"When doctors cannot trust the medical data in their computers or the test results they receive from the lab; when engineers cannot depend on the data they use to design our bridges, skyscrapers, dams, and commercial airliners, Defendants pose a clear risk to public health and safety," the suit states.

Data corruption occurred because of an alleged defective microcode contained in the FDCs. In the complaint, the problem is referred to as a boundary error. And when that error occurred, users were not informed of it, the complaint says.

Even in properly manufactured floppy diskette controllers, such errors would have occurred when floppy diskette controllers were forced to wait too long for data to arrive - even for a few microseconds. But unlike the correctly configured floppy diskette controllers, Toshibas failed to detect the problem and properly rewrite the information, Shaw and Moon claimed.

Even worse, the floppy diskette controllers would write corrupted data to the disk or another storage device, then make a report that the information was successfully transferred.

"Defendants' defective FDCs instead verify the erroneous data as correct without an error status, resulting in the storage of corrupt data or the destruction of data without notice to the control program or operating system and without the operator's knowledge," the suit states.

According to the complaint, Toshiba and NEC Electronics knew about the faulty floppy diskette controllers for more than 10 years before Shaw and Moon filed their lawsuit, but both companies continued to mislead consumers into believing their products met computer industry standards.

The alleged deception ended by the time Toshiba reached a settlement with the plaintiffs.

As a result of the settlement, most people who purchased a new Toshiba laptop on or after March 5, 1998, but before Nov. 8, 1999, were entitled to a cash payment of $210 to $443.21 per defective unit depending on its age, and to a software solution that would correct the FDC condition. In addition, they were awarded a $225 coupon good for the purchase of other Toshiba products.

Other class members not entitled to the previously mentioned relief were allowed a software patch for the FDC condition and a $100 coupon.

For the time they spent participating in and monitoring the case, Shaw and Moon each received $25,000.

"This is one of the largest consumer class recoveries stemming from an allegedly defective product - possibly the largest ever in a case where economic damages were at issue," the court's findings of fact states. "It is 'off the charts' by comparison to other class-action settlements."

In addition, without admitting any of the floppy diskette controllers in its laptops were defective, Toshiba agreed to solve the floppy diskette controller problems by creating a hardware fix on its new computers that alerted the operating system if data was written incorrectly to a floppy diskette.

To pay class members' claims, Toshiba was required to establish a cash fund of $597.5 million. Any remaining money not claimed was used to fund a charity called the Beaumont Foundation of America, which used the cash to purchase Toshiba laptops and desktops that would be distributed to schools, churches, non-profit organizations, libraries, hospitals and the poor throughout the United States.

In its findings of fact, the court advocated the advantages of the foundation, saying it would help not only help children, but would also have a positive impact on businesses that were class members.

"Children growing up in homes without computers or attending schools without computers and computer training are substantially disadvantaged with respect to education and future employment," the suit states. "This imbalance, referred to as the 'digital divide,' has received nationwide attention and study. The goal of eradicating it is an important public priority."

Because most businesses require employees to have strong computer skills, the foundation benefited a "significant portion" of the class while also helping the poor.

"In this Court's judgment, it is difficult to think of a better way of using any funds that may remain after all claims are processed," the findings of fact state. "This Court applauds and congratulates Class Counsel and Toshiba for dedicating any unclaimed funds that remain at the end of the case to an important and worthwhile social purpose that has the potential to benefit a large segment of the class."

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