4 April 2019Analysis

Microsoft captive fails to recoup $175m in suit relating to Xbox One launch issues

Cypress Insurance Company, the captive insurer of Microsoft Corporation, has been unsuccessful in its attempts to recoup $175m in losses relating to a fire at the SK Hynix manufacturing complex in Wuxi, China. The fire suspended the production of memory chips, which Microsoft had alleged impacted the 2013 launch of its video gaming console, the Xbox One.

The jury in the US District Court for the Western District of Washington ultimately decided in favour of the defendant on March 28, 2019, meaning Cypress would not be able to recover $175m in insurance payments that it is said to have paid to Microsoft to secure substituted memory chips and to ensure the Xbox One could launch as planned.

Hynix had signed a general component purchase agreement with Microsoft in 2004 governing the supply of various semiconductor memory chips.

In March 2017, Cypress had sued SK Hynix America, a supplier of dynamic random-access memory (DRAM) chips, alleging it had failed to deliver these products in accordance with its contract, due to the Wuxi fire in 2013 that suspended production of the chips.

Microsoft claimed that due to the Wuxi fire in 2013, it needed to charter cargo planes to ship its completed Xbox One consoles, and also claimed to have spent additional money to store Xbox One accessories and to pay staff at its manufacturing facility because of the related supply interruption.

SK Hynix America had argued it had not breached any of its contractual duties, and that Cypress had not pointed to any fault on Hynix's part that contributed towards the fire at the Hynix-affiliated manufacturing facility.

The chip manufacturer alleged that Microsoft had not verified whether the claimed business interruption was a covered loss directly resulting from physical loss or damage to Hynix's property, and argued it cannot be liable for the "voluntary payments" Cypress and its reinsurers had made to Microsoft.

Microsoft has been contacted for comment.