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If I would have read this story anytime before 2007, it would have angered me. But in the past few years, I've read about so many instances of poorly-constructed exploding batteries (most of which were from 3rd parties) that I have a hard time passing judgment on Panasonic for this.
I agree. From a user perspective, it seems monopolistic and restrictive, but what about from Panasonic's perspective? How much money do they lose dealing with warranty claims caused by defective 3rd party batteries?
I don't think it's warranty related at all, I think this is all about brand image and marketing. Think about it, when a camera explodes, the press announces that PANASONIC CAMERA EXPLODES! Then in the fine-print a day later they update the story saying it was a third-party battery that was to blame. But no one remembers that, they only know that Panasonic cameras explode and so they stick with Canon or Nikon or whatever.

Sure this sucks for the consumer, but Panasonic has to protect their brand somehow from the nefarious crappy batteries. If I were in charge, I'd opt for the big ugly sticker on the box and in twenty other places, that says using non-Panasonic batteries might cause explosions and if it does you're SOL, or something to that effect.

But honestly, what do they care if a third-party battery explodes in the user's hand? IMO a better way to deal with this would be for the firmware to record when a third-party battery is used, but not prevent it; in this way, Panasonic could shield themselves from spurious maintenance requests (and lawsuits), while still allowing the camera's owner to ultimately decide how the camera is used.

This isn't unlike Apple's insistence on Apple-branded RAM being used in their machines; if you're having Mac problems, and you have third-party RAM installed, AppleCare will tell you to take a hike.

Product Liability Law in many jurisdictions requires manufacturers to correct problems when they become known. Some jurisdictions require the correction for already sold and shipped product (Hello, this is Panasonic. Send your camera in for firmware update.) Other jurisdictions only require correction for new sales (Those cameras will merely ship with the updated firmware).

In any event, recording when a third-party battery is used does not shield a manufacturer from liability. In fact, it will be excellent evidence for the Plaintiff that the manufacturer knew of the design defect, and failed to correct it. Furthermore, the manufacturer failed to adequately warn the consumer. Two counts lost by Panasonic.

But this implies there is a defect in the camera that causes the explosion. The defect, and product liability, is in the battery.
Not according to the law. The Plaintiff's lawyer will allege that the camera is defective where it does not have the necessary safety devices to accommodate third party batteries. Courts consider that a design defect. Manufacturers have a non-delegable duty to install safety devices in their products.
"This isn't unlike Apple's insistence on Apple-branded RAM being used in their machines; if you're having Mac problems, and you have third-party RAM installed, AppleCare will tell you to take a hike."

Not true. Twice I've had Macs have issues and both had Crucial RAM. Each time I was asked to remove the RAM and re-verify the problem. Each time the problem persisted and was fixed by Apple.

So in other words, Apple wouldn't deal with your problem while you were using non-Apple RAM. I think we agree here.
That's a kind of unfair spin. A much fairer summary would be "Apple had him check whether it was an issue with his third-party memory before sending it in."
Verifing that the problem is something that they can help you with is part of helping deal with the problem. It's not the same as telling you to "take a hike".
Apple very carefully qualifies RAM for each of their machines. Not all RAM is the same... some can choke up modern high-speed FSBs. You're paying for all the work it takes to qual those parts.
Don't get me wrong, I don't blame Apple for their policy. Wonky RAM can cause all sorts of weird bugs, so Apple is right to avoid the diagnostic nightmare.
> This isn't unlike Apple's insistence on Apple-branded RAM being used in their machines;

I've never had this issue, and I've taken in two machines for service with non-Apple RAM.

Panasonic should have a certification process to allow 3rd party batteries that meet their safety standards.
What makes you think they can afford to do that? And enforce it. There are already numerous international standards (ISO, etc) on things like Li-ion batteries, which of-label manufacturers are happy to ignore, lie about, or just implement incompetently.
Panasonic wouldn't have to pay for it. The 3rd party manufacturer would go to a testing lab (recognized by Panasonic) and pay for certification.

Once they receive certification, they could be added to the approved vendor list.

It also solves the problem of people keeping their digital camera for more than a year now that they have realized that they don't need twice as many megapixels.

Oh sorry - we don't make the battery for the 2008 model anymore, but the 2009 model with chrome fins (although the same imager) is on sale!

This seems like user-hostile behavior to me. It would stop me from buying one of their cameras.
I used to think you should never buy OEM parts (for your car, your computer, etc). I thought the aftermarket could even provide superior versions of parts, or at least, the same thing for less money.

Then I got a job in hardware engineering. Now I _always_ buy the OEM part. Some examples:

* Remanufactured toner cartridges -- much more likely to contain toxic substances that can vaporize into the air when printing. And have fun guessing whether they stated the page counts accurately.

* Seagate HDDs vs. Apple HDDs -- same drive, right? Wrong. Apple writes custom firmware, based on extensive testing. You may recall the data loss issue that came out last year with these (Barracuda 7200.11) drives... but not with the Apple firmware.

* No-name Chinese Li-ion batteries. Tested them myself, and they outright lie about the mAh. They're also almost certainly less safe.

* Got Bosch platinum plugs for my VR6 Jetta. Better than stock, right? Wrong. Finally found a mechanic that truly understands the VR6, and the stock plugs (NGK) were chosen for a reason.

Other examples abound. It isn't worth your time trying to outsmart the engineers that made your device by going with a part made by someone with no accountability (no brand to protect, no phone number you can call, etc).

"Now I _always_ buy the OEM part. Some examples:"

I thought I would provide another example as this was one of those things that always amused me.

Back when my brother was alive, he was a Porsche enthusiast, he owned several at the same time (4) and his first love was his 944 that he raced.

Anyway, the door handles on a 944 are the same as a standard VW part, with one slight difference. One has "PORSCHE" etched into the plastic while the other didn't. A luxury that increased the cost of the part by nearly 15 times.

The funny thing was that with the 944 series, there were many non porsche parts used in the production of the car. The body was made by Audi (which we learnt one summer while stripping all of the noice cancelling rubber off the body... not a fun job)

They could potentially let you downgrade to another firmware version that does not have this check. In that case you accept the liability if the batteries do explode.
Lithium polymer batteries are no joke. They can explode and mess you up if you happen to be too close to them when they do. Panasonic is only trying to protect the consumers of their products.
Based on the comments I think Panasonic is within their rights here, but still I would probably not buy from them. I'll stick with cameras using rechargeable AAs.

Possibly somebody will figure out how to make a knock-off battery that the camera recognizes as genuine Panasonic, putting us back at square 1 again.