Dell Knowingly Sold Faulty PCs, Lawsuit Claims

PC giant Dell has been accused of selling millions of desktop PCs that it knew had a severe motherboard defect, according to recently unsealed court documents from a three-year old lawsuit.

The civil suit, first reported Tuesday by The New York Times, was filed in 2007 by Fayetteville, N.C.-based Advanced Internet Technologies in Federal District Court in North Carolina. It said Dell employees knew since 2004 that the company's OptiPlex business PCs were likely to break.

The PC maker's salespeople were told to say "don't bring this to customers' attention proactively," in an effort to conceal system problems, according to court documents.

"Dell documents indicate strenuous efforts to attribute OptiPlex failures to customer use and site conditions even when Dell knew that defective capacitors were to blame," the lawsuit states.

The problems stemmed from bad capacitors on motherboards, which would inevitably cause systems to fail. Capacitors are small cylinders, sometimes no more than an inch tall, that are used to hold an electrical charge. Capacitors have no moving parts, but take quite a beating because of their function, which makes for relatively common failures in electrical systems, including PCs.

"It's a critical component," Jon Peddie, president of Jon Peddie Research, told InternetNews.com. "The capacitor filters the power supply and a bunch of other systems. It slows things down, so if you get power spikes in your power supply, the capacitors take that out. When dealing with really fast signals, like gigahertz CPUs, keeping clean power and signal lines is important."

In Dell's case, the PC maker had been accused of selling around 11.8 million OptiPlex computers between May 2003 and July 2005 that were at risk of failing because of the bad capacitors, according to the unsealed court and internal documents. At least some of the bad capacitors were allegedly made by a company called Nichicon, and the problem impacted other hardware makers, but Dell in particular.

"Dell acknowledges supply chain and defect problems involving 'second tier' suppliers in 2004 requiring escalation including demands for reimbursement from suppliers and noting failure rate up to 97 percent due to defective Nichicon capacitors," the lawsuit states.

Jess Blackburn, a spokesman for Dell, waved away the revelation's importance.

"The Nichicon issue is old news, and the implication that this situation affects Dell currently is incorrect," Blackburn said. "The AIT lawsuit is three years old, and the Nichicon capacitors were used by Dell suppliers at certain times from 2003 to 2005. Dell worked with customers to address their issues, and Dell extended the warranties on all OptiPlex motherboards to January 2008 in order to address the Nichicon capacitor problem."

"Faulty Nichicon capacitors affected many manufacturers," Blackburn added. "It is speculation to suggest that Dell was affected more than other companies. The AIT lawsuit does not involve any current Dell products. Dell is responsive to customer issues and we continue to remain focused on our customers, their needs, and our growing record of superior customer service."

Spokespeople for Nichicon did not return requests for comment by press time.

Dell did take a $442 million charge in its third fiscal quarter of 2006 to account for a number of restructuring charges, including the costs associated with replacing faulty capacitors on some of its OptiPlex desktops.

Peddie said that original design manufacturers (ODMs) compete on price to win big PC vendor contracts for companies like Dell, HP, Acer and Lenovo, and often it comes down to shaving pennies off the cost of components, since these orders are placed in the millions of units. It would not be the first time an ODM foisted a cheaper capacitor on a PC vendor, he added.

"I think that Dell got snookered by their ODM, who in turn got snookered by its component supplier [i.e. Nichicon], and Dell is the victim here, not the perpetrator," he said. "The problem is these complainants can't get their hands on the ODM because they are in Asia, but Dell has deep pockets and is a U.S. company."

Peddie added that he didn't believe Dell was obfuscating the problem, but that it might have been trying to find out what was the cause of failures. "I don't think Dell is dishonest at all. You can't get to be a huge company like this and be dishonest. And [CEO] Michael Dell is about as straight a shooter as you're going to find," he said.

Andy Patrizio is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.