As the lucky co-owner of a Toshiba laptop computer, I should be tickled pink: I apparently qualify for a cash rebate of $309.90. This thanks to an Oct. 29 settlement in which Toshiba agreed to spend at least $1 billion to end a class action lawsuit–the first of a wave now being filed against computer-makers–claiming that it has sold more than 5 million defective laptops in the United States since 1987. Once the settlement receives final judicial approval, owners of laptops purchased since March 5, 1998, can claim cash rebates ranging from $210.00 to $443.21. Both they and owners of older Toshiba computers will also get discount coupons of up to $225 for future purchases of Toshiba products.

The two "named plaintiffs" will get $25,000 each. Their lawyers, who also seem to be my lawyers–and perhaps yours as well, now that they have filed copycat class actions against four other major computer-makers–will get $147.5 million. And the beauty of it is that my Toshiba works just fine! There is, I should report, an imperfection buried deep in a semiconductor chip called the "floppy-disk controller." Under certain unusual conditions, it could conceivably destroy or corrupt data without warning consumers or alerting them to the source of the problem. Very unusual conditions: Neither I nor my daughter (the primary owner) has ever had a problem with the laptop. Nor are we likely to have one.

Toshiba, the world’s largest maker of laptops, says that not one of its 5.5 million "victims" had ever reported a problem attributable to this "defect" before last March, when the lawsuit was filed.

Nobody has publicly contradicted this. Toshiba also says that even when it tried to get its laptops to malfunction, it could replicate the alleged data-loss problem only by saving a file to a floppy disk and simultaneously doing other memory-intensive tasks, such as playing a video game. The company denies that this amounts to a defect. Indeed, so remote is the possibility that our laptop will ever seriously malfunction that I may not get around to downloading the free software "patch" that Toshiba has provided as part of the settlement. So why did Toshiba agree to pay a penalty with a face amount of $2.1 billion? Why was the company (by its own account) afraid that fighting in court might have cost it as much as $9.5 billion? Two possibilities present themselves: 1) Toshiba did something really bad and covered it up, leaving even victimized consumers in the dark; or 2) this settlement–like thousands of others paid every year by companies all over America–was a tribute to the madness of our legal system by a company whose conduct could be made to look bad to a jury. It does appear that Toshiba and other companies were warned of the imperfection more than a decade ago. The first warnings came in 1986, when IBM informed NEC Corp., which first made the widely imitated floppy-disk controller chip in 1978, that it could cause data losses in some circumstances. Government agencies are looking into the possibility of misconduct. Maybe they’ll find some. But I doubt it. Toshiba may not have been as careful about quality as, say, Apple; that’s one of the reasons Apple’s computers are more expensive. But how likely is it that Toshiba was aware of a serious defect but for more than a decade did nothing to fix it, even though fixing it seems to be easy and cheap? It’s harder still to believe that–if this were a serious defect–18 other companies would have continued to sell computers with similar defects, as the plaintiffs’ lawyers allege. The 18 include the four that the lawyers sued in the wake of the Toshiba settlement: Hewlett-Packard Co., Compaq Computer Corp., Packard Bell NEC, and eMachines. Some of these 18 companies were well aware of the imperfection. They apparently decided that it would have no serious impact on their customers. Now they are getting an education in the stunning ability of our legal system to transform inconsequential imperfections into huge liabilities. One increasingly powerful engine of such liabilities is that ever-more-pervasive phenomenon, the lawsuit primarily to benefit lawyers.

The Toshiba case is hardly the most egregious example: In some other cases, the fees of the plaintiffs’ lawyers have dwarfed the benefits (if any) to the entire plaintiff class. The lawyers who sued Toshiba–led by asbestos-tobacco millionaire (or is it billionaire?) Wayne Reaud of Beaumont, Texas–will get 200,000 times as much as any individual member of the plaintiff class (except the two named plaintiffs). This $147.5 million fee may look like small change compared with the billions that lawyers, including Reaud, are collecting for suing tobacco companies. But it would still be enough to pay, for example, the combined annual salaries of more than 4,000 Americans at $35,000 apiece. Also cashing in is a software engineer named Phillip Adams, who investigated the imperfections in floppy-disk controllers while at IBM and later launched a personal crusade to get them fixed. While working closely with the lawyers who sued Toshiba, Adams has also filed at least four related lawsuits of his own under state and federal false-claims laws. Meanwhile, the Toshiba settlement’s benefits to class members are so modest that fewer than half are expected to collect their coupons. That’s why Toshiba expects to pay out less than half of the $2.1 billion and has promised that if class members don’t bother to collect enough coupons (and cash) to cost the company $1 billion, it will make up the difference by giving equipment to charity. As for the named plaintiffs, they complained not of any real problems but only of having been sold "defective" laptops–which fosters the suspicion that the $147.5 million legal team could not find a single consumer who could prove any real damages. One of the named plaintiffs (Ethan Shaw) is himself a lawyer, as are two of those in the copycat class actions. Shaw, like Reaud, is from Beaumont, where the cases were filed. Why Beaumont? The town is such a famed magnet for plaintiffs lawyers that Professor Lester Brickman of Yeshiva University’s Cardozo law school calls it "the Barbary Coast of class action litigation." And such is the genius of our legal system that a lawyer planning a nationwide class action can shop all over the country in search of the most pro-plaintiff courthouse available. If Toshiba had gambled on a trial before a Beaumont jury, the plaintiffs’ legal team could have used Adams to testify that this is a very serious problem indeed; in court papers they have conjured up fantastic visions of families plunged into financial chaos, medical prescriptions being scrambled, airliners falling from the sky, and other "clear risk[s] to public health and safety," all resulting from an "insidious scheme." The lawyers could have performed a carefully rehearsed demonstration of a Toshiba laptop’s floppy-disk drive going haywire. They could have pumped up the damage claims by introducing documents showing that Toshiba had been warned of the "defect" by NEC but had refused (arrogantly!) either to fix it or to warn customers (concealment!). "Ladies and gentlemen of the jury," the closing argument might have gone, "send them a message!" And since this is a huge, $42 billion corporation (not to mention Pearl Harbor and all that), only a multibillion-dollar message will get their attention! Suppose that you were a Toshiba executive facing such a trial. Suppose that you were advised that four out of five juries (even in America!) would throw out the case–but the fifth might just hit you for $9.5 billion. What would you do? Toshiba decided to pay a billion dollars in tribute. It appears to be the first computer company so severely mulcted for such inconsequential "defects." It won’t be the last. In the short run, such payments come out of corporate profits. In the long run, they add up to what has appropriately been called a "tort tax," one that is passed along to consumers in the form of higher prices. We have long paid tort taxes on products ranging from stepladders to medical care, not to mention cigarettes. Now it looks as if we’ll be paying them on computers and software, too. The costs increasingly dwarf any benefits that may flow from lawsuits like the one against Toshiba. And the costs will keep rising unless and until Congress clamps down hard on runaway damage awards. Perhaps the computer industry will come to see that it needs to help persuade Congress to do just that. Meanwhile, having paid my own share of tort taxes, I might as well collect my little rebate from Toshiba. After all, you will be paying for it, whether I collect it or not.