Dell Inc. Settles Customer Hardware Dispute Out of Court

Michael Dell founded Dell in 1984 in Austin, Texas, with what was at the time a novel idea—sell computer systems directly to customers and thereby deliver the most effective computing solutions to meet their needs.⁴⁵ This approach was so successful that the “Dell model” was taught in business schools as the way to sell custom products directly to customers.

Dell currently segments its customers into four groups: large enterprises, public institutions (health care, education, and government), small and medium businesses, and consumers. Although HP has surpassed Dell in worldwide PC sales, Dell is still the number one provider of PCs to large enterprises around the world and the number one provider to public sector customers in the United States.⁴⁶

Between 2003 and 2004, Advanced Internet Technologies (AIT), an Internet services company based in North Carolina, purchased 2,000 OptiPlex™ computers from Dell. The OptiPlex desktop computer was Dell’s primary offering to business and government customers. In 2007, the firm filed suit against Dell alleging that Dell knew long before AIT purchased the computers that there were significant problems with the Dell OptiPlex computers, including, but not limited to, problems with the motherboard and the power supply as well as CPU fan failures that caused overheating, crashes, and lost data.⁴⁷ AIT alleged that Dell had refused to take responsibility for the problem and that AIT had lost millions of dollars in business as a result.⁴⁸ AIT sought $75,000 and punitive damages for breach of contract, fraud, and deceptive business practices.⁴⁹

A primary cause of the computer problems was bad capacitors provided by Nichicon, a Japanese PC component supplier. A capacitor is a small electrical component on a computer’s motherboard that conditions direct current voltage to the components and thus provides a steady power supply. If the capacitor is faulty, it can lose its power and shut down the PC or freeze the screen. Millions of Dell OptiPlex PC computers with the faulty capacitor were shipped to customers such as Wells Fargo, WalMart, the Mayo Clinic, and AIT.⁵⁰

In June 2010, the New York Times published an article noting that the failed computers and the manner in which the problem was handled were part of “the decline of one of America’s most celebrated and admired companies.” In addition, the article cited Dell emails and internal documents that indicated Dell employees had prior knowledge of problems with the computers. In one document, a Dell worker stated, “We need to avoid all language indicating the boards were bad or had ‘issues’ per our discussion this morning.”⁵¹ In offering advice on how to handle complaints about the faulty computers, Dell salespeople were told, “Don’t bring this to customer’s attention proactively” and “Emphasize uncertainty.”⁵² Other documents showed that after AIT complained, Dell service people examined the failed computers and informed AIT that the computers had been driven too hard in a hot, confined space. The servers were stacked on steel pantry racks, and Dell suggested a change to the stacking method that would result in cooler operating conditions. Dell sales reps then tried to sell AIT more expensive computers to replace the failed computers.⁵³

Dell spokesman, David Frink, wrote in an email that “Dell worked with customers to address their issues, and Dell extended the warranties of all OptiPlex motherboards to January 2008 in order to address the Nichicon capacitor problem. 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.”⁵⁴

In October 2010, AIT agreed to dismiss the lawsuit against Dell, thus avoiding a trial scheduled to start in February 2011. Financial terms of the agreement were not released.

How might the situation with AIT been handled more smoothly by Dell to avoid creating such ill will with a key customer?