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Gateway Unloaded Warranties on Insolvent Company, Suit Says

Company's actions disproportionately affected students

By Jon Hood
ConsumerAffairs.com

October 20, 2009

The complaint, filed in federal court in California, says that Gateway pushed extended warranties as a way to distinguish the company in the wake of the dot-com bust of the early 2000s. The company reassigned outstanding warranties to MPC Corporation, a company that was on the brink of insolvency. As part of the arrangement, Gateway acquired a 19 percent ownership stake in MPC and pumped $10 million into the ailing company.

A few months later, MPC, already teetering on the edge of insolvency, went under. When customers with seemingly valid warranties turned to Gateway, the company refused to help.

The suit alleges that Gateway knew -- or, at the very least, should have known -- that MPC was financially troubled when it assigned the warranties. The complaint points out that MPC's financial form for the period ending September 30, 2007 warned that "there can be no assurance that we will be able to continue...due to our significant liquidity constraints, unprofitable operations and negative operating cash flows."

But, according to the plaintiffs, the assignment was part of a struggling Gateway's larger plan to be acquired by Acer, the Taiwan-based electronics conglomerate. The plaintiffs say that Gateway "was a rising star in the 1980s and early 1990s," but that the burst of the so-called technology bubble left the company "unable to regain its star status in the competitive computer marketplace."

Acer ended up acquiring most of Gateway in August 2007, in a $710 million deal that made Acer the world's third-largest PC vendor. Gateway held onto its "Professional Division," however, which it then sold to MPC a week after the Acer acquisition. The Professional Division sold computers mostly to educational institutions and small businesses, and carried a warranty liability of $60 million.

Unloading this division onto MPC, the plaintiffs contend, was an attempt by Gateway to free itself of contractual obligations to consumers. The suit predicts that "discovery will reveal that Gateway's $10 million investment was the pay-off to MPC for assuming liabilities that MPC never intended to honor."

The lawsuit's lead plaintiff, Peter Wilson, bought a Gateway laptop to take to college in 2005 and shelled out over $1,500 for the extended warranty. In February 2009, with a year left on Wilson's warranty, his machine completely stopped working. When he called Gateway, the company gave him the runaround, repeatedly directing him to MPC even though that company had been out of business for well over a year. According to the suit, Gateway told Wilson "that it was no longer responsible to warrant his computer."

The suit contends that thousands of consumers are in the same situation as Wilson. Worse, many of these individuals are students who acquired their machines through Gateway's Professional Division.

Wilson alleges breach of contract, breach of the covenant of good faith and fair dealing, and unjust enrichment.

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