Storage court battle ends in $21M payout

A six-year court battle that saw one of the world's biggest storage companies accused of knowingly selling millions of dollars worth of faulty product and led to possibly the biggest recall in history has been settled for US$21 million.

Imation was originally sued by Jazz Photo in May 1999 after Jazz Photo was forced to recall over 5 million instant cameras from Walmart stores because the film inside was allegedly defective. Jazz Photo claimed that Imation had sold it the film knowing it was no good and that it continued to sell it sub-standard film. Imation did not agree and has fought tooth-and-nail to keep its reputation clean.

Imation is the world's leading provider of removable data storage products. It proudly states it is dedicated to creating and selling the world's most reliable data storage products.

But Jazz Photo bought an action against Imation using the increasingly popular RICO -- Racketeering Influenced and Corrupt Organization -- charge. In New Jersey Superior Court, it also alleged breach of warranty and fraud and asked for US$100 million plus damages, in which it included lost sales thanks to the whole recall.

Jack Benun, principal consultant to Jazz Photo, explained the company's approach back in 1999: "What particularly upsets us and accounts for Jazz's RICO claim is that from the time we identified the problem last September, Imation continuously assured us that it was a problem of our making and that no other customers had experienced it. Those assurances resulted in Jazz making additional purchases of defective film from Imation. In fact, we have since learned that other customers had similar problems and received similar assurances from Imation."

Imation heavily contested the claim, stating there was no truth to the allegations and that it would vigorously defend itself. It has done so and the US$21 million payment to Jazz Photo this month was accompanied by Imation's CEO Bruce Henderson claiming that the company was happy to go to trial but "the opportunity to end this dispute would remove a significant distraction to the company and eliminate ongoing litigation expense".

The legal battle has not been pretty though. Imation asserted that it had extensively investigated Jazz Photos claims at the time and found the problems were not related to Imation's products or services. Imation's general counsel John Sullivan also suggested Jazz Photo knew its allegations were false. "They said we sold them defective film. Their own expert concluded that the film was fine. The cause of the problem was an exposure to heat, humidity and fumes. Their own expert didn't support them," he argued.

Imation sold the 35mm color film part of its business at the heart of the dispute three months after Jazz Photo lodged its lawsuit.

In between that time and now, Jazz Photo has also been on the end of its own lawsuits. A patent infringement case bought against it by Fuji Photo Film resulted in an US$28 million award to Fuji in March 2003. Jazz Photo went into Chapter 11 bankruptcy. It also has a US$13 million dollar claim against it from the U.S. International Trade Commission for importing camera bodies (for re-use) without paying royalties.

But Imation has not come out of the saga untarnished. In June last year it was sanctioned by the District Court in New Jersey. Jazz Photo's CEO Jack Benun leapt on the criticism: "It is heartening to see that the tactics in which Imation has regularly engaged to delay and disrupt the orderly progress of our claims to trial has resulted in the assessment of sanctions by the Court. Imation's attempt to hide witnesses whose testimony supports Jazz's claims certainly was sanctionable conduct. We are going to trial in this case in September and expect to recover damages in excess of US$250 million."

Imation's Sullivan refuted Benun's assertion: "It was a disagreement over which witnesses were available. ... There was no attempt to hide witnesses, not at all."

The trial actually began four months later than Benun suggested, on Jan. 10, 2005. Two weeks later and the US$21 million settlement had been thrashed out.

Imation head Henderson was bullish: "While we always disputed the legitimacy of the claims against Imation, and are willing to defend ourselves at trial, the opportunity to end this dispute would remove a significant distraction to the company and eliminate ongoing litigation expense." Imation's Sullivan added: "We felt real confident in our ability to prove at trial that we did not sell defective film. From a business perspective it was better not to litigate for a couple of years."

Under the settlement, Imation will pay US$21 million in cash in 2005 and will receive an offsetting benefit of US$8 million from tax deductions. Imation's fourth quarter results will be revised with a loss of US$7.9 million compared to a previously stated profit of US$5.1 million. Full year results would consequently move from a profit of US$42.9 million to one of US$29.9 million.

And so ends one of the storage industry's longest running sagas with Imation out-of-pocket but without the accusations of defective product hanging over it. Jazz Photo remains in difficulty but can point to the $US21 million settlement as evidence that its claims were not without merit.

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