The Quality Books Co. of Northbrook, Ill., put an advertisement in the Wall Street Journal in July, 1980, asking readers to respond if they thought "overly zealous computer sales people may have misrepresented" a minicomputer system called the Burroughs B-800.
The ad produced 400 telephone calls, according to sales vice president Tony Leisner. Reassured that it was not alone in having problems, Quality Books sued Burroughs for $1.9 million on charges that the firm "engaged in deception, false pretense, false promises and misrepresentation" when it sold the publishing company a B-800 system in 1979.
The case, scheduled to go to trial in Chicago this month, was one of a wave of lawsuits filed around the country charging major computer firms with fraud and breach of warranty. Lawyers estimate that more than 500 such suits are pending from small businesses that bought various midsized computers and that hundreds of other serious disputes are settled out of court every year.
Industry officials say the number of lawsuits is small compared with the number of systems installed. Nonetheless, the Federal Trade Commission is investigating industry practices.
At one time, according to the Burroughs Corp., at least 160 lawsuits involved three of its systems that are no longer manufactured: the B-80, B-700 and B-800. Mike Egan of MIS-Week, a newsletter on management information systems, counted 19 suits against the now-defunct Northrop Data Systems. Other suits are pending against a long list of corporations including NCR Corp., Honeywell, Data General, Digital Equipment, Control Data, Quantell and Greyhound, according to court records.
Most charge that the minicomputers were oversold, misrepresented and otherwise never performed as advertised. Burroughs and NCR Corp., two of the largest computer makers, were found liable on fraud charges in two cases after testimony showed that officials knew the systems would not work as salesmen promised but allowed them to be sold anyway.
One case involved Industrial Distributors Inc. of Casper, Wyo. Gregory T. Lamont bought a Burroughs B-800 system in 1978 to keep track of inventory in the growing industrial hardware firm. But it didn't do what he had been told it would, his firm claimed.
"In the beginning we wondered if we were to blame," he said in an interview. "We didn't want to give up on it. You really start doubting yourself."
After three years of long nights over the keyboard, however, Industrial Distributors filed a fraud suit against Burroughs. Last November, it won a $154,200 judgment.
Internal Burroughs memos introduced at the trial have potential implications for other suits involving the B-80 and B-800 systems, according to Chicago attorney Marvin Benn, who has 75 cases against Burroughs.
One memo warned of "a critical software deficiency that is going to create tremendous problems" with those two systems. "When the marketing organization and our competition discovers this fact, it will have a serious impact on morale and our ability to compete in the marketplace," the memo added.
Another warned of "numerous recurring memory problems," and a third memo noted that "thousands of records are periodically dropped from files." All were written six months to a year before Lamont bought his system.
Burroughs attorney James Olson said the memos were from internal review groups assigned to scrutinize and perfect developing systems.
"They may write in strong language from time to time to make sure their point gets across," he said. "No installation is perfect when you put it in. The company deserves credit for having review groups like that."
Lawyers representing plaintiffs in the field blame the rise in fraud actions on cutthroat competition among computer makers and on naive and trusting customers who are dazzled by salesmen's jargon and do not understand contract terms.
Technological advances are so swift that today's state-of-the-art small-business system may be obsolete tomorrow, creating tremendous pressure to sell it before the research investment is lost. But customers want the latest thing, the attorneys say, so salesmen--who generally work on a salary-plus-commission basis--may promise delivery of computers and programs that are only in the design stage or that do not fit the customer's need.
"Some of these guys are like used-car salesmen. They'll say anything to get the sale, and the novice doesn't know. He's trusting the expert," said Benn.
All this is really "an overselling strategy that takes advantage of the computer myth, the perception out there that computers are omniscient and never make mistakes," said Thomas K. Christo, a New Hampshire attorney who says he has sued every major computer vendor at least twice in the past decade.
"No one would ever believe that about a lawn mower or a car or a can opener, but they do about computers," he said. "The fact is it may be more expensive to have a computer than to streamline your manual accounting system."
Small businessmen trying to computerize for the first time and unfamiliar with that exotic world are the overwhelming source of the court complaints. Most involve $20,000-to-$200,000 midsized units rather than the new personal microcomputers or the giant "mainframe" units that cost millions of dollars. Many other businesses have had problems but have remained silent because they are too small to pay for a long court battle, Benn said.
The computer firms agree that customers have occasionally been disappointed, but that, they say, is because the customers misstated their needs or had unrealistic expectations. Many court verdicts have favored the computer companies, they say, in part because problems blamed on the computer "hardware" may really lurk in the program "software" made by other companies. Some of the suits, they say, were frivolous.
"There are fewer suits nowadays," said Olson of Burroughs Corp. "At one time people thought they might win millions but the case histories disproved it."
Attorney Christo said Burroughs got more than its share of adverse publicity over early suits because it chose to go to court rather than settle as other companies were doing. The image contributed to severe management problems, so the policy changed when former treasury secretary W. Michael Blumenthal took over as chief executive officer in 1980.
"Settlements at relatively low sums are in everyone's interest," Olson said.
He and other company officials noted that the lawsuits involve less than 1 percent of installed computer systems.
The U.S. government has spent $3.45 billion in 37,550 purchases of data processing equipment from major computer firms since tallying began in fiscal 1979, according to the General Services Administration. The Justice Department says no fraud or misrepresentation suits have been filed.
A great deal of money is at stake. In what some lawyers now say was a little-noticed warning of things to come, the IBM Corp., which dominates the market, lost an $11.4 million judgment in 1974 to Catamore Enterprises Inc. of Providence, R.I., but won a retrial on appeal and then settled for an undisclosed amount. Few IBM suits have gone to trial since.
The largest single judgment to date was for three days' profits of the NCR Corp., $2.3 million, awarded by a federal court in May, 1981, to The Glovatorium Inc., a leather dry-cleaning firm in Oakland, Calif. It was upheld by the 9th U.S. Circuit Court of Appeals last August.
In his ruling, U.S. District Court Judge William W. Schwarzer said NCR "permitted the sale of the system for a purpose . . . for which it had never been used before, for which there was no program in existence and which NCR didn't have any reason to believe it could successfully perform." In testing the system, NCR "knew that it was subject to numerous problems and shortcomings, without disclosing that fact to the plaintiff," the judge said.
He accused the firm of "utter and knowing and deliberate disregard of that responsibility to the clients from the beginning of the deal," and said the award was "necessary to get the message across, not only to NCR, but to others similarly situated in this industry."
"It just never worked right," said Steven Depper, Glovatorium vice president, of the NCR 8200 system he bought in 1975 to modernize his $1 million annual business.
"It took a company growing at 20 percent a year and brought it to zero . . . the statements wouldn't balance, nothing balanced. They said bear with us, we'll make it work, and we did for four years. Then they said, 'You should have sued us earlier.' "
All sides agreed that no new laws are needed. Most computer cases are filed under contract, fraud or consumer laws, which the lawyers say are adequate.
As attorney Christo put it, "A computer that doesn't work is no different technically from a cow that doesn't give milk. The problem is not in the law but in judges who won't see its application to new situations.
"That's changing," he added, but said there's no indication the suits will stop. "As long as there are these high pressures on computer makers and willing buyers, you're going to have scams somewhere."