A Bug in the Chips
Why is Beaumont tort king Wayne Reaud suing Houston's Compaq Computer?
Beaumont attorney Wayne Reaud has made a career—not to mention a fortune—fighting big corporations. His weapon of choice is the class-action lawsuit, which he used successfully in the seventies and eighties to sue businesses whose workers were exposed to asbestos insulation. He became one of the kings of so-called toxic tort lawsuits filed against the huge chemical and petrochemical companies that proliferate along Texas' eastern Gulf Coast. In the nineties he helped represent Texas in its class-action claim against Big Tobacco, and in 1998 he was one of five lawyers to split a record $3.3 billion award for legal fees in the huge settlement. Reaud's cut was $660 million. In the new century the burly, intense 53-year-old Reaud (pronounced "Rio") has found a new target—the personal computer industry—and a potential mother lode of litigation. He's taking on a handful of corporate giants, including Houston's Compaq Computer, the world's largest maker of personal computers, with a remarkable claim: Without providing a single example of harm to anyone, he maintains that computermakers knowingly made computers with a flaw in a microchip that controls the way data is written to floppy disks. He is saying, in effect, not that this floppy disk controller harmed anyone, only that it could alter or corrupt the data under certain circumstances and that, in turn, might cause harm.
If the basis for the lawsuit sounds a bit shaky, consider that Reaud won big last year in a similar class-action suit against Toshiba. That suit charged that the Japanese electronics giant sold five million laptop computers with the same defective disk-controller technology. Toshiba lost a motion to have the case dismissed, then stunned the computer industry last October by settling for a whopping $2.1 billion without admitting any wrongdoing. Reaud and his legal team pocketed $147 million in fees from the deal. But they didn't stop there. Days after the settlement, they filed similar suits against Compaq, Hewlett-Packard, Packard Bell NEC, and eMachines, claiming that each manufacturer sold machines that contained the flawed disk-controller technology.
In the Compaq case, the most advanced of the five, the crux of the claim by the four plaintiffs is that they and other computer users have a "reasonable expectation" that their machines will store and retrieve data with 100 percent accuracy unless an error is reported to them. The integrity of that information is important, the suit argues, because all sorts of sensitive functions rely on computer data: financial transactions; medical diagnoses and treatments; the design and construction of cars, planes, bridges, dams, office buildings; and so forth. Moreover, the plaintiffs maintain that Compaq and other PC manufacturers were aware of the bug and didn't fix it. In this class-action case, with no dead or maimed bodies or ruined lives, the damage is to the "trust" computer users have that their machines will store and retrieve data accurately, according to the suit.
This disk-drive bug isn't a new revelation in the PC industry, where bugs and glitches in computers and components are common. In 1986 an engineer at IBM discovered that chips made by the NEC Corporation of Japan could damage data stored on floppy disks. NEC acknowledged the problem and even ran advertisements that brought it to consumers' attention and offered free detector software to find the bug. NEC then fixed the problem in the next generations of chips it produced.
But Toshiba went ahead and used the original NEC design for its own chips. Other suppliers in Asia, which produce components for PCs, apparently have too, and their chips have ended up in computers made by Compaq. One might have expected a public outcry, but the defect wasn't easily detected and only occurred under certain circumstances, such as when a computer was multitasking.
Reaud became interested in the defect when a doctor friend told him that a leukemia patient had died after a laboratory blood reader reported an incorrect white blood cell count. The error was believed to have been caused by the disk-drive defect. So far a suit hasn't been filed related to that incident, but Reaud may not need a smoking gun. He has filed suit alleging several causes of action, including breach of warranty and violation of a federal statute meant to criminalize computer crime such as hacking and fraud—a law that Compaq doesn't believe applies in this case. But under that statute all Reaud has to prove is that Compaq sold a defective product, not that consumers were harmed by it.
Reaud's arguments may well find a sympathetic audience in Beaumont, where he has won or settled so many class-action cases. Indeed, some lawyers view Beaumont as a "speed trap" on the nation's litigation highway. Blue-collar, with a large petrochemical industry and a heavily unionized workforce, Beaumont has a reputation for producing juries friendly to plaintiffs in class-action injury claims against big corporations. Toshiba officials said they settled because the company couldn't afford to risk paying up to $9.5 billion if it lost a jury trial—an amount they said could threaten the company's existence. Compaq tried to get the case moved out of Beaumont and wanted a gag order restricting public statements on both sides. But U.S. district judge Thad Heartfield, who also presided over the Toshiba case, shot those motions down.
Compaq has hired some big guns itself. Its lead counsel is David Beck, a Houston attorney and principal of Beck, Redden, and Secrest who's originally from Port Arthur. Also on the legal team is Skadden, Arps, Slate, Meagher, and Flom of New York, the nation's largest law firm, which represented President Clinton in the Paula Jones sexual harassment case. If the case goes to trial, it probably won't be until next year. Settlement talks between the two sides had been held late last year, then broke off, and neither side is saying much publicly. Reaud did not return phone calls. His office referred questions to George Shipley's Austin public relations firm. Compaq's attorneys would speak about the case only on background. Though Judge Heartfield has yet to certify a class—meaning the people who were allegedly harmed—in all likelihood he will, as he did in the Toshiba suit. The big unknown is the size of that class, and therefore Compaq's potential liability. But, as in the Toshiba case, it could be huge.
Compaq, though, may be better positioned to fight the suit than Toshiba was. For one thing, Toshiba faced a double whammy. It not only made notebook computers that showed signs of the chip flaw, but it also made the defective floppy disk controllers. In court documents Compaq says it didn't manufacture the chip or the controller in any of the models that failed. Rather, it bought motherboards with the controllers already installed on them from suppliers. Compaq also is contesting Reaud's assertion that the chip flaw is "widespread" among Compaq models. The company insists the alleged design exists, "if it exists at all," in only the four models of its popular Presario line that failed a test by the plaintiffs' team. About 1.7 million of those Presario computers had been sold up to the time of the suit. Furthermore, the company said that the plaintiffs' test placed "abnormal strain" on the computers. Compaq said it no longer uses the chips and the controllers in the four models that allegedly failed the test. Still, in February it began offering a software patch that users could download to address a potential condition in the floppy diskette interface chip that "could affect downloading to a floppy diskette in rare situations while multitasking." The company says it doesn't know how many people have downloaded the patch because it offered it only as a precaution, and that it was unaware of any complaints under the circumstances described in the lawsuit (in late August, Hewlett-Packard began offering a similar patch on its Web site).
Certainly, though, the prospect of settling or going to trial comes at an inopportune time for Compaq. After a couple of dismal years, the company has been slowly improving. Setbacks such as a $2.7 billion loss in 1998 following its acquisition of Digital Equipment and market share losses to competitors like Austin-based Dell Computer, prompted Compaq last year to fire its president and chief executive Eckhard Pfeiffer and restructure the company.
The efforts seem to be paying off. In the most recent second quarter, the company earned $387 million compared with a $184 million loss a year earlier. Compaq generated positive buzz in August when the company and Microsoft teamed up to unveil an inexpensive, stripped-down computer for Web browsing, e-mail, and instant messaging. James T. Johnson, a PC analyst at A.G. Edwards, said Compaq's positive momentum should make for a promising second half this year. He doesn't see the Beaumont lawsuit as a big threat to the company. "They're not strapped for cash," Johnson says, noting that Compaq had more than $2.5 billion in cash on its balance sheet as of June 30.
As the fight plays out in Beaumont, Reaud is once again in the spotlight. Depending on your point of view, the controversial lawyer is either a villain thirsty for money and power and a poster boy for lawsuit reform or, as many of his clients in Texas believe, a hero crusading for consumer interests. The famously anti-tort Wall Street Journal, for instance, referred to him in an editorial as "one of the king pirates of the Texas plaintiffs bar."
In the disk-drive cases, Reaud has certainly been aggressive. He sought out technical experts and tech-literate lawyers to assemble a team that includes DeWayne Layfield, a Beaumont attorney with a strong technical background. Reaud's approach to law "has less and less to do with the [defendant] company's guilt and responsibility and more and more to do with the aggressiveness of the law firm," says Ken Hoagland, a spokesman for Texans for Lawsuit Reform, a Houston-based advocacy group.
Beaumont attorney Wayne Reaud has made a career—not to mention a fortune—fighting big corporations. His weapon of choice is the class-action lawsuit, which he used successfully in the seventies and eighties to sue businesses whose workers were exposed to asbestos insulation. He became one of the kings of so-called toxic tort lawsuits filed against the huge chemical and petrochemical companies that proliferate along Texas' eastern Gulf Coast. In the nineties he helped represent Texas in its class-action claim against Big Tobacco, and in 1998 he was one of five lawyers to split a record $3.3 billion award for legal fees in the huge settlement. Reaud's cut was $660 million. In the new century the burly, intense 53-year-old Reaud (pronounced "Rio") has found a new target—the personal computer industry—and a potential mother lode of litigation. He's taking on a handful of corporate giants, including Houston's Compaq Computer, the world's largest maker of personal computers, with a remarkable claim: Without providing a single example of harm to anyone, he maintains that computermakers knowingly made computers with a flaw in a microchip that controls the way data is written to floppy disks. He is saying, in effect, not that this floppy disk controller harmed anyone, only that it could alter or corrupt the data under certain circumstances and that, in turn, might cause harm.
If the basis for the lawsuit sounds a bit shaky, consider that Reaud won big last year in a similar class-action suit against Toshiba. That suit charged that the Japanese electronics giant sold five million laptop computers with the same defective disk-controller technology. Toshiba lost a motion to have the case dismissed, then stunned the computer industry last October by settling for a whopping $2.1 billion without admitting any wrongdoing. Reaud and his legal team pocketed $147 million in fees from the deal. But they didn't stop there. Days after the settlement, they filed similar suits against Compaq, Hewlett-Packard, Packard Bell NEC, and eMachines, claiming that each manufacturer sold machines that contained the flawed disk-controller technology.
In the Compaq case, the most advanced of the five, the crux of the claim by the four plaintiffs is that they and other computer users have a "reasonable expectation" that their machines will store and retrieve data with 100 percent accuracy unless an error is reported to them. The integrity of that information is important, the suit argues, because all sorts of sensitive functions rely on computer data: financial transactions; medical diagnoses and treatments; the design and construction of cars, planes, bridges, dams, office buildings; and so forth. Moreover, the plaintiffs maintain that Compaq and other PC manufacturers were aware of the bug and didn't fix it. In this class-action case, with no dead or maimed bodies or ruined lives, the damage is to the "trust" computer users have that their machines will store and retrieve data accurately, according to the suit.
This disk-drive bug isn't a new revelation in the PC industry, where bugs and glitches in computers and components are common. In 1986 an engineer at IBM discovered that chips made by the NEC Corporation of Japan could damage data stored on floppy disks. NEC acknowledged the problem and even ran advertisements that brought it to consumers' attention and offered free detector software to find the bug. NEC then fixed the problem in the next generations of chips it produced.
But Toshiba went ahead and used the original NEC design for its own chips. Other suppliers in Asia, which produce components for PCs, apparently have too, and their chips have ended up in computers made by Compaq. One might have expected a public outcry, but the defect wasn't easily detected and only occurred under certain circumstances, such as when a computer was multitasking.
Reaud became interested in the defect when a doctor friend told him that a leukemia patient had died after a laboratory blood reader reported an incorrect white blood cell count. The error was believed to have been caused by the disk-drive defect. So far a suit hasn't been filed related to that incident, but Reaud may not need a smoking gun. He has filed suit alleging several causes of action, including breach of warranty and violation of a federal statute meant to criminalize computer crime such as hacking and fraud—a law that Compaq doesn't believe applies in this case. But under that statute all Reaud has to prove is that Compaq sold a defective product, not that consumers were harmed by it.
Reaud's arguments may well find a sympathetic audience in Beaumont, where he has won or settled so many class-action cases. Indeed, some lawyers view Beaumont as a "speed trap" on the nation's litigation highway. Blue-collar, with a large petrochemical industry and a heavily unionized workforce, Beaumont has a reputation for producing juries friendly to plaintiffs in class-action injury claims against big corporations. Toshiba officials said they settled because the company couldn't afford to risk paying up to $9.5 billion if it lost a jury trial—an amount they said could threaten the company's existence. Compaq tried to get the case moved out of Beaumont and wanted a gag order restricting public statements on both sides. But U.S. district judge Thad Heartfield, who also presided over the Toshiba case, shot those motions down.
Compaq has hired some big guns itself. Its lead counsel is David Beck, a Houston attorney and principal of Beck, Redden, and Secrest who's originally from Port Arthur. Also on the legal team is Skadden, Arps, Slate, Meagher, and Flom of New York, the nation's largest law firm, which represented President Clinton in the Paula Jones sexual harassment case. If the case goes to trial, it probably won't be until next year. Settlement talks between the two sides had been held late last year, then broke off, and neither side is saying much publicly. Reaud did not return phone calls. His office referred questions to George Shipley's Austin public relations firm. Compaq's attorneys would speak about the case only on background. Though Judge Heartfield has yet to certify a class—meaning the people who were allegedly harmed—in all likelihood he will, as he did in the Toshiba suit. The big unknown is the size of that class, and therefore Compaq's potential liability. But, as in the Toshiba case, it could be huge.
Compaq, though, may be better positioned to fight the suit than Toshiba was. For one thing, Toshiba faced a double whammy. It not only made notebook computers that showed signs of the chip flaw, but it also made the defective floppy disk controllers. In court documents Compaq says it didn't manufacture the chip or the controller in any of the models that failed. Rather, it bought motherboards with the controllers already installed on them from suppliers. Compaq also is contesting Reaud's assertion that the chip flaw is "widespread" among Compaq models. The company insists the alleged design exists, "if it exists at all," in only the four models of its popular Presario line that failed a test by the plaintiffs' team. About 1.7 million of those Presario computers had been sold up to the time of the suit. Furthermore, the company said that the plaintiffs' test placed "abnormal strain" on the computers. Compaq said it no longer uses the chips and the controllers in the four models that allegedly failed the test. Still, in February it began offering a software patch that users could download to address a potential condition in the floppy diskette interface chip that "could affect downloading to a floppy diskette in rare situations while multitasking." The company says it doesn't know how many people have downloaded the patch because it offered it only as a precaution, and that it was unaware of any complaints under the circumstances described in the lawsuit (in late August, Hewlett-Packard began offering a similar patch on its Web site).
Certainly, though, the prospect of settling or going to trial comes at an inopportune time for Compaq. After a couple of dismal years, the company has been slowly improving. Setbacks such as a $2.7 billion loss in 1998 following its acquisition of Digital Equipment and market share losses to competitors like Austin-based Dell Computer, prompted Compaq last year to fire its president and chief executive Eckhard Pfeiffer and restructure the company.
The efforts seem to be paying off. In the most recent second quarter, the company earned $387 million compared with a $184 million loss a year earlier. Compaq generated positive buzz in August when the company and Microsoft teamed up to unveil an inexpensive, stripped-down computer for Web browsing, e-mail, and instant messaging. James T. Johnson, a PC analyst at A.G. Edwards, said Compaq's positive momentum should make for a promising second half this year. He doesn't see the Beaumont lawsuit as a big threat to the company. "They're not strapped for cash," Johnson says, noting that Compaq had more than $2.5 billion in cash on its balance sheet as of June 30.
As the fight plays out in Beaumont, Reaud is once again in the spotlight. Depending on your point of view, the controversial lawyer is either a villain thirsty for money and power and a poster boy for lawsuit reform or, as many of his clients in Texas believe, a hero crusading for consumer interests. The famously anti-tort Wall Street Journal, for instance, referred to him in an editorial as "one of the king pirates of the Texas plaintiffs bar."
In the disk-drive cases, Reaud has certainly been aggressive. He sought out technical experts and tech-literate lawyers to assemble a team that includes DeWayne Layfield, a Beaumont attorney with a strong technical background. Reaud's approach to law "has less and less to do with the [defendant] company's guilt and responsibility and more and more to do with the aggressiveness of the law firm," says Ken Hoagland, a spokesman for Texans for Lawsuit Reform, a Houston-based advocacy group.
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