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IBM Disputes Claim of Faulty Drives

Employee e-mail read in court suggested failure rate was higher than firm acknowledged.

October 15, 2003|From Bloomberg News

IBM Corp. employees knew the company's computer disk drives had a higher failure rate than the company had acknowledged, according to court papers.

In courtroom testimony in August in Alameda, Calif., lawyers representing customers suing the company presented e-mail messages showing IBM employees discussing failure rates far higher than the company claims.

"Do you mean to tell me we're shipping drives for distribution with knowing defects of 17%?" one unidentified employee asks another, according to a transcript of a message read at the hearing.

The California suit over IBM's DeskStar drives, coupled with another case in Texas, is part of a spate of litigation against the makers of computer devices. In 1999, Toshiba Corp. paid $2.1 billion to settle claims that it sold computers with defective floppy disk controllers. In 2001, Iomega Corp. reached a $480-million accord with buyers of its Zip data-storage devices.

Armonk, N.Y.-based IBM contends that consumers' claims over the hard drives are "groundless" and that the company will be vindicated in court, company spokesman Joe Stunkard said.

IBM sold most of its hard-disk drive business to Hitachi Ltd. last year for $2.05 billion.

Shares of IBM, which have risen 46% in the last 12 months, fell 48 cents to $92.72 on the New York Stock Exchange.

IBM investors don't see the consumer suits as a major threat, said John Jacobs, who helps manage $150 million at Jacobs & Co.

"We know it's there, but it's not a major distraction," Jacobs said. "We are monitoring them, but it's not something that makes us shy away from IBM."

The California suit, filed in Alameda County Superior Court in October 2001 by six consumers, claims IBM continued to sell the drives knowing they had a high failure rate.

IBM has asked judges in the California and Texas cases to seal the records.

An IBM engineer said the company sold 3.8 million of the hard drives in the U.S., according to court records in the Texas case.

In all, manufacturers ship about 200 million hard drives a year, and the failure rate is typically less than 1%, he said.

In the California case, attorneys for the consumers said some IBM customers reported failure rates as high as 45%.

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