HP Pretexting Lawsuit Is Dismissed

The company is still recovering from last year's leak-investigation scandal, but it finally received some good news

Hewlett-Packard scored a key victory in a lawsuit that resurfaced allegations the computer maker lied to obtain phone records of an employee.

A federal judge in the U.S. District Court in the Eastern District of Texas on Jan. 25 ordered the dismissal of a lawsuit brought by Karl Kamb, a former executive, who said HP (HPQ) investigators posed as him to obtain his phone records, a practice known as pretexting.

The allegations, filed on Jan. 19, rekindled concerns—however briefly—over HP's use of spying tactics. These tactics landed the company in hot water last year with California Attorney General Bill Lockyer, forced the departure of HP Chairwoman Patricia Dunn, and were the subject of congressional hearings. Kamb's accusation came in the context of a larger legal dispute with his former employer over accusations he stole trade secrets while he was still employed at the company.

HP is suing Kamb, saying he laid the foundations of a flat-panel TV company, byd:sign, while still working for Hewlett-Packard. HP fired Kamb in 2005. Kamb countersued, saying the company falsely accused him of pocketing funds earmarked for a former Dell (DELL) executive in Japan, in exchange for competitive intelligence about Dell's pending entry into the printer market.

It's likely Kamb was looking to capitalize on the image problems suffered by HP in the wake of the pretexting scandal, says Rob Enderle, principal at market research company the Enderle Group. "When you see a company that's in trouble of exposure, you'll often see someone try to extort money, or get them off his back," Enderle says. "HP was vulnerable to pretexting."

'Patently Untrue'

In a statement issued Wednesday, Hewlett-Packard called Kamb's suit "wholly without merit," and said his claim that HP pretexted him was "to the best of our knowledge, patently untrue." Efforts to reach Kamb's attorney were unsuccessful. A salesman who answered the phone at the Las Vegas office of byd:sign said Kamb was traveling out of town and unreachable.

In his lawsuit, Kamb said HP had assigned him to gather detailed information on Dell's product and pricing plans, as it prepared to enter the printer market in 2002. The suit said HP offered a former Dell executive, Katsumi Iizuka, a monthly fee for intelligence about Dell's plans, and that those funds were paid through third-party companies. Kamb said HP fired him after it obtained his telephone records and "erroneously believed" he was using the money to form byd:sign.

To be sure, HP is locked in a fierce market-share battle with Dell, and in recent quarters, it's been gaining the upper hand. HP extended its recently recaptured lead over Dell in the PC market during the fourth quarter, according to reports issued by market researchers last week. HP's share of the worldwide PC market expanded to 17.4% of units shipped during the quarter, according to Gartner, up from 16.1% in the third quarter. Meanwhile, Dell's share slipped to 13.9%, from 15.9% the previous quarter. During the third quarter of last year, HP reclaimed the lead from Dell, which had been the leading supplier of PCs since 2003.

HP's Strengths

Gartner analyst Charles Smulders said HP's strength in the consumer market helped lift its share, and could sustain the company's PC momentum this year. "A lot of the 2007 demand will continue to come from the consumer market," he said. HP and Dell both shipped about 38 million PCs last year, and Dell could recover share as businesses start to buy more new PCs in 2008, he added.

In the printer market though, Dell hasn't performed as well as it had expected to, Smulders said. The company has had some success in the market for color laser printers, but plans to sell high volumes of inexpensive inkjet printers and replacement ink cartridges by bundling the printers with sales of PCs haven't panned out.

HP hopes to get beyond last year's disclosures of improper investigations of board members, employees, and journalists—including three from BusinessWeek—in an effort to stop leaks to the media (see, 9/22/06, "HP's Hurd on the Hot Seat"). Former Chairwoman Dunn and HP former general counsel Ann Baskins resigned last fall, and HP dismissed senior counsel Kevin Hunsaker and global investigations manager Anthony Gentilucci.

In December, HP settled a civil suit related to the leak investigation scandal with state Attorney General Lockyer for $14.5 million. Lockyer has also filed a criminal case against Dunn and four others.

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