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Wednesday, August 14, 2013, 12:24 pm PT (03:24 pm ET)

Microsoft faces lawsuit over Surface RT struggles as company preps Oct. 17 launch of Windows 8.1

Even as it prepares a critical update to its Windows 8 platform, Microsoft has become the target of a lawsuit alleging that the software giant misled investors regarding both Windows RT and the Surface RT device it released last year.



The lawsuit [PDF via TechCrunch] is a class action complaint filed in the United States District Court for the District of Massachusetts. The complaint alleges that Microsoft violated the federal securities laws with the way that it handled informing investors of the progress of the Surface RT tablet it released late last year.

The filing claims that Microsoft "led the market to believe that [its] launch of the Surface RT had been executed in a measured and conservative fashion so that it could observe and understand its progress and outcome." Instead, though, the suit calls the Surface RT launch "an unmitigated disaster, which left it with a large accumulation of excess, over-valued Surface RT inventory."

The suit goes on to claim that Microsoft issued "materially false and misleading financial statements and financial disclosures" regarding the real financial impact the Surface RT's underperformance was having on the company. Microsoft finally wrote down $900 million on the failed device at the end of the most recent quarter, and the company's stock plunged $4.04 per share, or 11.4 percent, eliminating roughly $34 billion of Microsoft's market value.

The suit also names a number of Microsoft's executives as defendants, including CEO Steve Ballmer and CFO Peter S. Klein. According to the filing, those individual defendants "are liable as participants in a fraudulent scheme and course of conduct that operated as a fraud or deceit on purchasers of Microsoft common stock" due to their sharing of information the suit deems "false and misleading," as well as their alleged "concealment" of other information.

Windows RT, a pared-down version of Windows meant to run on ARM-powered devices, was meant to give Microsoft a foothold in that low-power device market and serve as a bulwark against Apple's dominance in the segment. The operating system, though, debuted to consumer yawns and confusion, and Microsoft has been struggling to generate interest since.

Windows RT's full-powered counterpart, Windows 8, has seen little more luck as consumers are increasingly opting for Android and iOS-powered phones and tablets instead. Microsoft announced on Wednesday that a long-awaited update would arrive on October 17 under the moniker Windows 8.1. That update will give consumers the option to bypass Microsoft's "Modern" touch-centric interface in favor of the more familiar desktop layout.

The failure of the Surface RT is similar in some ways to that of Research In Motion's (now BlackBerry) PlayBook tablet. After the release of Apple's iPad in 2010, RIM attempted to roll out its own tablet device in order to capture a portion of that segment. The PlayBook sold just a half-million devices in its first quarter of availability, a quarter-million in the quarter after that, and 150,000 in the quarter following. RIM eventually took a writedown of $485 million on unsold inventory, and the company has been reluctant to re-enter the tablet market since.

Microsoft is thought to have sold a bit over 1.5 million units in total of its entire Surface line, which includes both the Surface Pro and the Surface RT. While the software giant hasn't released a detailed breakdown of Surface device sales, the majority of that 1.5 million figure is believed to consist of Surface Pro sales.

The lawsuit, filed on August 12, seeks class action status and unspecified compensatory damages.