In a class action suit filed in San Jose, California, Debra Hilton claims that Apple knew about a defect in a flex cable that controls the on-off button, but chose to stay quiet about it so as to sell more phones.

As evidence, she points to Apple discussion forums viewed by hundreds of thousands of visitors on which users complain of “wiggly” power buttons. Hilton also points to a fix-it video on YouTube and comments by a self-described iPhone repairman who says the power button defect is prevalent on the iPhone 4 which went on sale in 2010.

Apple did not immediately return a request for comment.

The lawsuit claims that the defect typically arises shortly after one year at which point the warranty has expired, forcing consumers to pay $149 for repairs.

Hilton is suing under the RICO statute, a federal racketeering law that has become a vehicle for national class actions. The lawsuit also accuses Apple of violating California’s unfair competition laws.

You can read the complaint for yourself here:

Apple Power Button Lawsuit

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Apple is offering buyers of its iPhone 4 a free case to address the reception issues caused by the antenna’s placement on the handset, despite the fact that Apple CEO Steve Jobs told a press conference at the company’s Cupertino, Calif. headquarters this morning that the antenna problem had been blown out of proportion, and that the majority of users appeared to have no issues with reception on the device. Om live-blogged the news conference if you want to catch up on the details.

Although Jobs said that the number of complaints was relatively low (just one half of one percent), he added that Apple “wants to make all its users happy” and therefore the company is offering free “bumper” cases that cover the spot on the phone’s exterior that is said to cause the antenna issues when it is held a certain way. Our own Kevin Tofel would likely agree with this strategy. Apple will also offer a free refund within 30 days of purchase if a user is not completely satisfied, Jobs said, and will waive the normal “restocking” fee in such cases.

The Apple CEO also said that the company has sold more than 3 million of the new phones in 3 weeks, and noted during his presentation that Apple engineers had found antenna-related issues with a number of other smartphones, including the BlackBerry Bold from Research In Motion and the Droid Eris from HTC. And Jobs reiterated that the company’s engineers had discovered during their tests that the software being used to display signal strength on the new phone was not correct — or as he put it, “we screwed up with our algorithm.” The latest OS update fixes that problem, he said (which is a separate issue from the grip-related antenna problem).

Some users who talked about the Apple news on Twitter and elsewhere said that the antenna issue was a tempest in a teapot, and that the company had handled it as well as it could have — but others said the offer of a free case was a cop out, and that Apple was trying to sidestep a serious issue with its phones. What do you think? Let us know by answering our poll, or by posting a comment.

Meanwhile, here’s a video of the humorous “Antenna Song” that Apple played before its press conference started:

http://www.youtube.com/v/VKIcaejkpD4&hl=en_US&fs=1?rel=0&border=1

10:04: They are showing a video called the “iPhone Antenna Song.” Dismissing all the noise as a lot of hoopla.

10:06: Steve Jobs is out and is saying he is going to make a 15-minute presentation and then will take questions.

Steve says: We are not perfect. Phones are not perfect. We want to make all our users happy. We love to make our users happy and that is what drives us today.

We have sold 3 million phones in three weeks. This is the best smartphone we have built.

Gizmodo showed the video and we got what others are calling an “antenna-gate.”

We have been working our butts off for 22 days to figure out and fix what is wrong. I think we learned that antenna-gate is not unique to iPhone.

10:12: Jobs is showing videos of other phones that lose their signal. Blackberry Bold 9700 — 5 bars to 1. HTC Droid Eris goes down to zero. If you take your hand away from where there is an antenna weak spot, it goes down. Showing Samsung Mobile phone with Windows.

Jobs: Most smartphones have that problem and we have that as a challenge, which the entire industry faces. Takes a dig at Gizmodo — described as “a certain site.”

Jobs: We screwed up with our algorithms. We got a sophisticated antenna lab and we are looking at antenna reception from all angles. Says Apple has spent $100 million in antenna lab with 18 Ph.D. scientists and engineers. We didn’t think this would be a big problem. All smartphones have that problem.

Jobs: What we have learned is smartphones have weak spots, not unique to iPhone 4. All smartphones have weak spots and you will drop calls. AppleCare data shows that 0.55 percent of all iPhone 4 users have called about antenna or reception. If you read all these articles, half our customers have called and are angry. One half of one percent — 0.55 percent! Historically, this is not a large number. Doesn’t jive with what you read about this problem.

10:20: What are the return rates on AT&T for iPhone 4 and compared with iPhone 3GS. iPhone 3GS had a return rate of 6 percent, below the smartphone average. From the articles you would read, half the people might be returning the iPhone. The hard data says 1.7 percent.  That is a third of iPhone 3GS. That is returns at our largest iPhone 4 reseller.

10:22: AT&T call drop rates — when compared to additional calls dropped per 100 calls compared to iPhone 3GS, iPhone 4 drops less than one additional call per 100 when compared to the 3GS.

10.25: Jobs: We can’t make enough bumper cases.

10:28: Jobs: We think there is a problem and it is affecting a small percentage of users. We care about every user and we are not going to stop till every customer is happy.

10:29: Jobs: It is all blown out of proportion.

10:30: Release iOS 4.01 which fixes the bars and Exchange issues.

10:31: Jobs: Free case for every iPhone 4 and giving it away through September. We are giving them away, but can’t make enough. So we are going to send you another case from our website and, if you are still not happy, you can get a full refund within 30 days of purchase. No restocking fee. We want everyone to be happy.

10:32: Shipping white Wi-Fi phones by end of this month in limited quantities. Will introduce the iPhone 4 in 17 countries, slight delay in South Korea.

10:33: Jobs: How we operate and how we make decisions … We love our users and we work our asses off to delight them. We make some interesting products for them. There are 300 Apple stores across the world. 60 million people in the stores during the last quarter. When we fall short, we try harder.

Jobs: And when we succeed users reward us by staying our users. That is what drives us. When people are criticizing us, we take it very personally. When users have a problem, it is our problem. We have been working for 22 days to figure out the real problem and then solve it. Instead of putting a band-aid, we want to fix the real problems.

Jobs: There is no antenna-gate, there is a challenge for the entire industry. We are dedicated to fixing that and that is in the future.

10:37: Tim Cook and Bob Mansfield join Steve Jobs on stage for Q&A.

Q: How are you Steve? How is your health?

A: I am doing fine. I was having a vacation in Hawaii and it was important enough for me to come back.

Q: Will you change the antenna design in the future?

A: We are busy with this problem. The touch-me grip made it obvious for the iPhone. We are getting reports that it is a lot better than iPhone 3G. Maybe our wizards in the antenna may come up with something new. Right now it is not something we are considering.

Q: Is this a PR problem?

A: If we could do this again, we would have tried to mitigate the problem.

Q: Were you told about the design concerns by engineers and did they talk to you?

A: Bloomberg article is total crock. We have challenged them to prove beyond rumors. The best ideas win here. Healthy debates in this company. We debate how to tie shoe laces. We argue about what great is. Reuben said it is total bullshit.

Q: Apology to investors, considering what happened to the stock. Are you willing to make that apology?

A: There are some customers who are happy. There are some customers who are not happy. And I apologize to them and we are going to try and make them happy. We want investors who are in it for the long haul and are for the character of the company, not investors who saw us across the news on the wire.

Q: Do you make people choose between from and function?

A: No. We try and make our products a great size. iPod Touch is thin enough to fit in your pocket. Retina display is the best electronic display ever created. It cost a little more and ramp up productions. We like great design and great performance.

Q: AT&T plans canceled?

A: People can return the phones and get out of their AT&T contracts.

The problem is that we didn’t understand that there would be these problems. I don’t know what it was, what we could have said. We could have pointed it out. Right now, it is not possible to make a smartphone without weak spots. You can make a Hummer that you can’t get their hand around it. We are advanced smartphone. Antenna design that is smarter than most. Everyone thought we were perfect and saw that it was a chance to jump on us. We are not perfect. We are human. We make mistakes. We take care of our customers. We appreciate them and we don’t take them for granted.

Q: September 30 limit?

A:  Maybe we have a better idea. We will re-evaluate in September.

Q: Is the free bumper offer for devices that were bought from Apple?

A: We will not replace third-party cases. If I tell the world our products, what are our future products, they stop buying our current products. It has a whole bunch of negative consequences.

Q: What have you learned?

A: I don’t know yet, we need some distance. One thing we didn’t need to learn — how much we love our customers. We were embarrassed by the Consumer Reports stuff that came out. We didn’t need to hear that to take care of our customers. We have been in the labs to figure things out.

We are an engineering company and we think like engineers and scientists and solve hard problems. It is operating like more.

We can’t run any faster. Cars in parking lots. I don’t know how we could be working harder. One of the things I have learned is that it is human nature: when a group or an organization gets successful, people want to tear it down. People are doing that to Google. It is a great company. Some people are jumping on us. You want us to be Korean companies and not be an American company. You don’t want us innovating here. Of course we are human, we make mistakes.

In search of eyeballs, people don’t care what they leave in their wake. Antenna-gate … in 34 years haven’t we earned trust and get benefit of the doubt? I am not saying we are not at fault. We are not just innocents in this.

Q: Will there be a hardware redesign to solve this problem? Will you do it in this generation.

A: What I am saying is that, you can see videos of phones with stickers that show don’t search there. We are not saying all our customers experiencing this problem and for those customers who are experiencing it, we want to get them a case or a new phone. Working on a new antenna design and working hard on this.

Q: Is there a software fix for the attenuation problem? (Question is based on the New York Times article this morning about a possible software fix.)

A: Is there a software fix for smartphone attenuation problem which impacts all smartphones? Can we leapfrog them? I would love that.

Q: Any change in iPhone 4 messaging in 80-plus markets around the world?

A: The antenna-gate is predominantly a U.S. problem and most of the feedback is from the U.S. We will market as planned. We can’t make them fast enough. We are way behind demand. Sometimes it reminds of a joke in a Woody Allen movie — food is so awful and the portions are so small. We are selling every phone we can make.

Q: Financial impact?

A: It will be announced during our conference call after the earnings.

When someone owns the primary technology, they are going to beat you on it. In computer business, software was the most important thing. The big insight we had was that software was going to be very important. We are pretty good at making software for iPods, PCs and the cloud and making them work together. We brought back to the phone business. Other pioneered, Palm. Everyone is copying Apple now.

Q: Emails? Do you write them.

A: Some people are making them up. Don’t believe everything you read. I try and reply to some of them because they are our customers.

Q: Free bumper offer outside U.S.?

A: The answer is yes.

Related GigaOM Pro research (sub req’d): Why Carriers Should Care About Customer Care

• 24 percent thinner than the iPhone 3GS
• Front-facing camera in addition to rear 5-megapixel camera with LED flash and 5x digital zoom, support for 720p video recording at 30 fps.
• Two microphones for noise suppression
• Stainless steel frame with radio antennas integrated into the structure of the phone
• A 960×640 high resolution display with 326 pixels per inch — roughly double the pixel count of the current iPhone and more like printed text
• Up to 32GB of storage, 802.11 n Wi-Fi, Bluetooth, GPS, and a three-axis gyro
• Support for quad-band HSPA, or 7.2 Mbps down and 5.8 Mbps up
• 7 hours of talk time, 6 hours of 3G browsing or 10 hours on Wi-Fi, 10 hours of video, 40 hours of music and 300 hours of standby

CEO Steve Jobs himself demonstrated the difference between the current iPhone 3GS display and the New Retina display of the iPhone 4. This technology appears to be the biggest improvement over the prior model device as text is noticeably crisper while pictures are far more detailed.

Helping out the visuals of the Retina Display is an 800:1 contrast ratio — four times greater than the prior model’s display — and the use of IPS or In Plane Switching technology for a wide-angle viewing, just like the iPad and Apple displays. The new iPhone 4 is powered by Apple’s custom A4 chip, first used in the iPad, and like its big brother, uses a microSIM card.

With the new higher-quality camera, Apple is also offering a way to edit video on the phone with iMovie for iPhone, priced at $4.99. Based on the demonstration provided, the software appears to be more polished than the prior editing method and uses the full iPhone display for movie edits — gone is the trim timeline from the currently meager editing functionality of the 3GS. Still photos can be added to iPhone movies as can transitions and music tracks from the iTunes library on the handset.

The new iPhone 4 will run the already announced iPhone OS 4, but the platform gets a rename — as of today, it’s iOS 4, which makes sense, since the non-phone iPad runs the same mobile operating system. (Related: Apple’s iPhone OS 4: What You Need to Know) As expected, the most prominent features are multitasking, folders, customized home screens and a unified Inbox for email.

Google will remain the default search engine in iOS 4, but Microsoft’s Bing is now an available option. A new software addition is the iBooks for iPhone application, which should help sell even more books (Apple has already sold 5 million.) iBooks will sync a reader’s place between the iPhone, iPad or iPod touch, as well their bookmarks and notes, much as Amazon does with its Kindle platform. And when paired with the Retina Display, iBooks looks stellar for handheld reading — Apple is sure to sell even more titles as a result.

With all the new features, Apple continues to entice developers; it expects to this month sell its 100 millionth iOS device, which includes sales of iPads, iPods and iPhones. I will update the post as more details on iPhone 4 are revealed.

Update: Apple waited until the end, but finally demonstrated what the front-facing camera is for — video calling with FaceTime, which works over Wi-Fi only. Additionally, Apple shared pricing and availability for the new iPhone 4, which goes on sale June 24th. The 16 GB version is $199 with contract while the 32 GB model is $299 in the U.S. Pre-orders begin on June 15 and Apple expects iPhone 4 availability in 88 countries by September.