I'd guess that using Zipcar in Boston I drove maybe 6 different Priuses. One unlucky Prius had this problem in a BAD way. It actually had just rained the night before through the morning. I was driving about 30 then had to stop a few times in heavy traffic. The first stop was a brief screech of the tires followed by stuttered stopping, followed by a thud-thud sound. The second stop was worse, and the third was horrifying (especially since I'd never heard of this issue) - the tires screeched loudly like I was stopping from going 80 when I was going at most 10, and the thud sound in the back sounded and felt almost like the rear of the car was being pounded on with a large metal object, repeatedly. Drivers all around looked in alarm.

So... what exactly is the cause of this? Where's the rust come in? I thought the friction brakes were just rubber touching the wheelbase...?

If someone has this problem and gets it fixed please let us know what exactly went wrong. In my case, Zipcar towed the vehicle and had it fixed, so I wasn't able to find out what went wrong. Given I bought a Prius of my own tonight (woohoo!), I guess I can look forward to having this problem someday.

Oh and thank you for the braking Neutral suggestion I'll keep that one in mind, an excellent workaround.