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iPod nano Lawsuits: Who Wins?

Product releases at Apple Computer follow their own peculiar rhythm.

First come the rumors, spawned by purported "insider leaks" on enthusiast Web sites. Then comes the product announcement, often hosted by Steve Jobs himself, which is one part religious revival meeting, one part rock concert. Then comes the press coverage, almost always adoring, and often involving a cover on Time Magazine. Then come the hard-to-ignore TV ads that are sprayed into heavy rotation in prime-time slots, themselves generating yet another round of press coverage.

Then come the class actions.

The latest example of this pattern played out this late-October week, as a customer who bought one of Apple's (AAPL) iPod nano music players took it upon himself to file a class action in a U.S. District Court in San Jose, Calif. His beef: The display on the device tends to scratch easily.

SHORT-TERM HIT. The trouble with the nano display emerged as a bit of a tempest in a teapot, when a few people discovered to their dismay that the screen is indeed easy to scratch. While Apple has offered to replace nanos with cracked screens, it has said less than one-tenth of 1% of units shipped have a proclivity for cracks (see BW Online, 9/29/05, "A Very Sour Note for Apple").

Had the problem occurred with any other product family, it wouldn't have generated nearly as many headlines in the mainstream and technology press. But since it happened with the iPod, negative headlines accumulated, and Apple's stock promptly shed more than 4% of its value, going to $51.08 on Sept. 28, only to start climbing again the day after that. It closed at $57 on Oct. 26.

The iPod has certainly turned out to be blessing to Apple's bottom line. The product family accounted for nearly one-third of total sales in the most recent quarter, and Apple disclosed in early October that it sold more than a million iPod nanos during its first 17 days on the market.

TOO MUCH WORK? But iPod's success has led to the occasional legal and public relations irritant. Earlier versions of the device suffered from battery-life problems. A campaign to get Apple to replace the batteries led to a class action, recently settled. The terms of the settlement entitle customers who bought a third-generation iPod -- that's the one with the four buttons above the clickwheel -- to replacement of the battery or get a $50 credit toward Apple-branded products at The Apple Store.

To get your new battery or $50 credit, you have to fill out a form and enclose a proof of purchase, like a copy of the receipt, a canceled check, or a credit-card statement showing evidence of the purchase. Then you wait until something -- a battery or a coupon -- shows up in the mail.

If you think that sounds like an awful lot of trouble for a meager return, you're not alone. In 2003, the U.S. Chamber of Commerce's Institute for Legal Reform polled consumer attitudes toward class actions. The survey found that 40% of Americans have received notices in the mail that they could be part of a class-action settlement. But of those, less than a third said they did anything about it. And of the group that did try to take part in a settlement, more than half said they didn't get anything of real value.

CHUMP CHANGE. As to whether the battery settlement did Apple any financial damage -- it didn't. Girard Gibbs & De Bartolomeo, a San Francisco law firm, estimates the value of the deal at $14.5 million, or about one-tenth of 1% of Apple's $13.93 billion in revenue in the fiscal year ended Sept. 24.

Put another way, in that period, Apple generated about $14.5 million in sales every nine hours. In its most recent 10Q filing with the Securities & Exchange Commission, Apple said the settlement would "not have a material effect on the Company's financial position or results of operation." That's investor-relations-speak for saying it's chump change.

This same group surveyed by ILR had little positive to say about class actions: 74% said these lawsuits drive up prices, and 67% said they thought lawyers benefited the most.

RETURN FEE. They're right, at least concerning the lawyers. Girard Gibbs & De Bartolomeo says it's going to be paid more than $2.7 million in legal fees and expenses. Once you subtract the legal fees, Apple has set aside enough money to cover claims by about 234,000 people. Meanwhile, the eight original plaintiffs in the case were each paid $1,500 for their trouble.

I have no insight into any legal strategies Apple may pursue with this latest lawsuit concerning the nano, and Apple had no comment on the matter. A spokesman said the company doesn't comment on pending litigation. But if you bought a nano and find you're unhappy with it, why not just take it back for refund?

If you bought it online, you have 14 days, and if you bought it at an Apple retail store, you have 10 days to make up your mind. The only catches are that you have to bring it back in the original box and tolerate a restocking fee that amounts to 10% of the purchase price. With the refund, you can go and buy another brand of music player.

HUGE RESPONSE. That's apparently not good enough for Jason Tomczak, the lead plaintiff in the nano case, who's alleging that Apple knew about defects to the screen yet didn't recall the affected units, passing on the "expense, hassle, and frustration" of getting a replacement on to consumers.

He returned his scratched nano and paid a $25 restocking fee to get his refund. That prompted him to contact a lawyer and file a lawsuit seeking restitution, disgorgement of profits, compensatory and consequential damages, punitive damages, attorneys' fees, costs of the suit, pre- and post-judgment interest, and "further relief as this Court may deem necessary and proper." He's represented by Steven Berman of Hagens Berman Sobol Shapiro, a Seattle-based law firm with branch offices in Los Angeles, Chicago, Phoenix, and Cambridge, Mass.

Berman says in 25 years of class-action practice, he has never received so large a response in such a short time. "We have people calling in from every state and from 10 different countries. We can't keep up with all the e-mail that's pouring in on this case."

HASSLE AND FRUSTRATION. He adds that if Apple's claim that the quality issue regarding the scratch-prone iPod nano screens indeed isn't widespread issue, then this is all the more reason for Apple to make it right. "I'm surprised they don't just own up to it. It seems pretty obvious there's a problem.

It seems to me that Apple could have saved itself a lot of "expense, hassle, and frustration" of its own if it just offered full refunds on unwanted nanos and lengthened the return period to 30 or 60 days. But it also seems to me it's far too easy to hassle a big company like Apple with stupid lawsuits, to the measurable benefit of no one but trial lawyers.


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