A BOX IN TODAY'S BUSINESS SECTION, WHICH WAS PRINTED IN ADVANCE, GIVES AN INCORRECT TOTAL FOR LEGAL SETTLEMENTS THAT SEARS, ROEBUCK AND CO. HAS PAID SINCE 1992. THE CORRECT TOTAL IS $646.57 MILLION. (PUBLISHED 07/18/99)
In the spring of 1994, Sears, Roebuck and Co. sent a half-hour video to its 800 Auto Centers, ordering the systematic destruction of 1,500 special tire-balancing machines and setting out, with precision, the exact method to destroy them:
Remove the circuit board. Put it in a vise. Snap it in half. Break the rest into several parts for compacting or hauling. With that, the Assix AccuBalance, as the device was called, will be no more.
"The most important factor we would like to stress . . . is we do destroy the circuitry on the control board, rendering the unit useless," lectured George Hoffman, facilities and equipment manager for Sears Auto Centers.
In destroying the machines, Sears may have thought it was finally resolving a stormy relationship with its maker, Assix International Inc. Sears had already paid Assix handsomely--$16 million in cash plus an abandoned warehouse worth at least $5 million and possibly three times that amount--to terminate its five-year-old contract with the small Florida firm. Sears had ended the relationship in 1993 after deciding that improved technology in both tires and wheel rims made the machines obsolete.
What Sears learned was that you can break the machine, even compact it--but you can't crush it. The spirit of Assix AccuBalance lives on in lawsuits, investigations, an expensive settlement and recriminations.
More than five years after the machines were destroyed, the nation's second-largest retailer faces two class-action suits alleging that it used the AccuBalance to engage in widespread fraud, with employees knowingly charging customers for the service but rarely performing it.
The suits also accuse Sears of paying a substantial sum to Assix for its silence and destroying the evidence to cover up the alleged fraud. The suits say the machines had mechanical counters that would have shown a large discrepancy between the amount of transactions performed and the number of transactions rung up by Sears cash registers. The suits say that Sears charged customers more than $400 million for AccuBalance service and that anywhere from 7 million to 30 million customers may have been victimized.
Sears has vehemently denied the allegations. "The evidence simply does not support the suggestion that there was a systemic company-wide policy of selling but not performing the Assix AccuBalance service," said Steven F. Molo, a lawyer representing Sears.
Molo said any evidence that exists is questionable because it comes from Assix, "a company disgruntled over losing its significant contract with Sears." Its machines' counters were unreliable, he added.
The AccuBalance tale is a complicated one of a business relationship gone sour, with accusations leveled against almost everyone involved. Assix International has made accusations against Sears and then modified or retracted some. It also has its own legal problems unrelated to the machines. Almost everyone is "disgruntled" about something.
The publicity surrounding the accusations is nevertheless more bad news for Sears, which has recently settled a number of class-action suits involving its credit and sales practices, particularly in the Auto Centers. In 1992, Sears settled for $15 million (without admitting any wrongdoing) allegations that it routinely charged for all sorts of work that was either unnecessary or never performed. Sears is citing that settlement--with mixed success--to stop the AccuBalance litigation, arguing that it was preempted by the earlier settlement.
The AccuBalance allegations have already been investigated by the Florida Attorney General's Office, which reached a settlement with Sears in 1997. Sears agreed to pay $580,000 to the state, without admitting any liability or wrongdoing. Sears "presented extensive evidence," but Florida prosecutors "never came up with enough evidence to file charges," said Sears attorney Molo.
Daniel Stermer, a Florida assistant attorney general involved in the state investigation, said the state took the accusations seriously. "We were drafting a racketeering complaint alleging that Sears, through its management, was basically stealing money from consumers," Stermer said in a recent telephone interview. "We believe there was enough to go forward, and we were prepared to go forward" when Sears asked what it would take to settle, he said.
Sears attorney Tom Wiegand said Sears settled for the cost of Florida's investigation. "If he really thought we were guilty of that [racketeering], he would have never settled for what he did."
Sears said it was Florida prosecutors who made the offer to settle, not the company.
The AccuBalance machine was about three feet wide, three feet high and three feet deep. Its purpose was to match new tires to the existing wheel rim of a car. If the tire was not perfectly round or the wheel rim was the least bit out of shape, the new wheel-and-tire assembly could vibrate excessively and produce a shaky ride. AccuBalance selectively shaved rubber from the tire to create a perfectly round wheel-tire combination to produce a smoother ride.
At Sears, the standard cost for AccuBalance service was $12.50 per tire, compared with about $8 to $10 per tire for the traditional spin balancing service in which weights are attached to the rim to correct any noticeable imbalance.
The unschooled customer would not be able to tell whether or not their tires had actually been shaved. "There's nothing visible about the tire that once you mount it and put it back on the car that a layperson would be able to say, 'I know those tires have been AccuBalanced,' " James Thornton, the Sears automotive department's national business manager in the early '90s, said in a deposition.
That's probably even more likely if customers drive in with worn tires. As Kevin Twigg, a Florida resident who is the lead plaintiff in one of the class-action cases, said in a deposition, "when I went to Sears my tires were a little on the balding side so anything I came out with was going to give me a better ride."
The first Sears learned Twigg was unhappy about the tires he purchased in 1991 was four years later, when his suit was filed in U.S. District Court in Florida. That's one reason why Sears says his case should be dismissed. "He cannot prove a misrepresentation, reliance or injury . . . he had no complaints about the ride provided by the tires he purchased," Sears said in a recent filing seeking to dismiss the case. Sears said Twigg became involved in the suit "only when his father-in-law, who worked as an accountant for plaintiff's counsel in this case, asked him whether he had ever purchased his tires from Sears."
Although Twigg's suit was filed four years ago, it received little media attention until last month when an almost identical case was filed in state court in Illinois, where Sears is based.
A Sears spokesman called the Illinois filing a "copycat case," another attempt by plaintiffs' attorneys to collect legal fees. Molo said the lawyer even ran a newspaper ad seeking people who purchased Sears tires between 1989 and 1993.
The attorney, Steven A. Katz, said he brought the case to protect Illinois residents from the statute of limitations that could run out before the Twigg case is decided. Katz added, "there is absolutely nothing wrong with advertising" for victims.
From depositions taken in the Twigg case, the AccuBalance did not appear to be a popular machine among the Sears employees. Mechanics complained the machine put significant new demands on their time just as Sears was pressing them to do more work in less time while salespersons testified that they also found the service difficult to sell. "Customers would get a little leery when you told them, 'We just sold you a $140 Michelin tire and now we're going to grind rubber off it,' " said Richard Blank, a former salesman in a California store.
But the former employees who gave depositions said they nonetheless pressed AccuBalance on customers, partly because they got a commission--about 3 percent, or around 40 cents per tire. And if they failed to meet their sales quotas, they would be criticized.
When the AccuBalance machines were initially installed in Sears stores in 1989, they were used fairly regularly, the former employees said. But gradually, they said, their use declined to the point that they were rarely used by the time the service was discontinued in 1993.
According to Assix documents obtained by the Florida Attorney General's Office, selling but not performing was widespread. In a 1993 study of 185 centers, about 23 percent of Sears's total centers, 147 stores were "selling AccuBalance but not performing to a major extent."
Sears's Molo calls Assix's data "suspect" and "unsupportable," gathered in 1992 when Assix was trying to keep from losing the retailer's business.
In August 1993, after negotiations between the companies failed, Sears sued Assix, asking a federal judge to officially terminate its contract with Assix. Sears said it would pay Assix $6 million. Two months later, Newton wrote Sears Chairman Edward A. Brennan, saying Assix would file its own countersuit unless a settlement was reached quickly. Newton told Brennan: "Our claim includes the following: Sears's senior management recognized an opportunity in 1988 to charge customers with impunity for a variety of undelivered services, including wheel balancing, which it believed could not be counted or evaluated like other automotive products."
Sears says Newton's records were based on inaccurate counters in the Assix machines. They didn't always record when the machine was used--which is why the company agreed to be paid its royalty fee of 15 cents per transaction based on the number of transactions rung up at the cash register, Molo said.
Less than a month after Newton's letter, Sears and Assix officials agreed to settle the dispute, with Assix receiving at least three times--and possibly five times--as much as Sears initially offered in its suit, depending how the abandoned warehouse is valued. While Assix says the value is $5 million, some appraisals are as high as $16 million.
"Sears may have paid Assix more than Assix deserved," Molo said. "Sears did this not because it believed Assix's allegations of selling but not performing were true. Rather, Sears settled with Assix to end a dispute, provide a 'soft landing' to a supplier who was losing its largest customers, and to avoid any further adverse publicity concerning the Auto Centers, the volume and effect of which is not dependent on whether the allegations are true or false."
Today, officials for Assix, renamed Excal Enterprises Inc., are distancing themselves from Newton's earlier accusations, which have become the evidentiary centerpiece of the class-action cases.
In a recent telephone interview, Assix attorney James M. Landis said the charges were just "a fair amount of posturing . . . a fairly typical kind of correspondence when in litigation or about to be." Landis said Assix "stood by those allegations, but it would have been difficult to try to prove some of those claims, to quantify how often charging but not performing occurred. There's no question it did occur, but whether it was systemic as [the class actions charge] is highly unlikely."
Landis now attributes the discrepancy in transaction numbers to a flaw in the mechanical counter, which didn't always record the use of an AccuBalance machine.
The Sears-Assix settlement continues to haunt Assix as well as Sears. In 1995, the Securities and Exchange Commission filed a securities-fraud suit against Assix, saying it misled investors into thinking the company "was a financially sound and growing company when it was not." The SEC accused Assix of "filing numerous false periodic reports with the [SEC], creating and maintaining false and inaccurate books and records, and repeatedly lying to the company's auditors."
The SEC also said that Assix "grossly understated" the value of the warehouse received in the Sears settlement to reduce its tax liabilities. Excal has denied the SEC allegations and is seeking to have the suit dismissed.
Molo said that after Sears acquired the AccuBalance machines through settlement, the company tried to sell them but found no buyers in the United States. Sears also concluded it would be uneconomical to ship the machines abroad. "Sears ultimately decided that the most efficient course would be to dismantle the machines in place," Molo said. "It was an ordinary practice at Sears to destroy outmoded equipment and one which [is] followed on many occasions with, for example, outmoded cash registers."
But Frank Jakes, an attorney for Twigg in the Florida case, says, "By destroying the machine, Sears has given us a big question mark, depriving anyone of knowing whether these worked or not."
Since 1992, Sears has paid more than $2 billion to settle several class-action lawsuits and state investigations alleging wrongdoing:
In April, Sears agreed to pay $985,000 to close a Florida investigation into charges that the company was selling used batteries as new. Sears settled without admitting any wrongdoing.
In March, the company agreed to settle several class-action lawsuits accusing it of unfairly increasing credit-card interest rates. Without admitting any wrongdoing, Sears said it would pay about $155 million in cash and merchandise coupons to affected cardholders.
A month earlier, Sears paid the largest criminal fine in U.S. history -- $60 million -- to the U.S. Justice Department, admitting it violated federal bankruptcy laws by trying to collect debt already forgiven in bankruptcy proceedings. The fine was part of $475 million Sears paid to settle suits involving the same charges.
In 1997, Sears agreed to pay $580,000 to the state of Florida to settle an investigation of its use of AccuBalance machines. Sears denied any liability or wrongdoing in the case.
In 1992, a California investigation charged the chain with systematically overcharging customers and selling unnecessary services. Sears denied the charges but settled the accusations with 43 state attorneys general for $15 million -- the very settlement that Sears now argues also covers the current AccuBalance allegations.
CAPTION: Floridian Kevin Twigg is the lead plaintiff in a suit alleging Sears charged customers for special tire balancing without providing the service.