Cypress Insurance Company v. SK Hynix America, Inc.

RESPONSE

W.D. Wash.February 28, 2019

CYPRESS’ OPPOSITION TO SK HYNIX AMERICA INC.’S ADDITIONAL MOTION IN LIMINE LAW OFFICES OF COZEN O’CONNOR A PROFESSIONAL CORPORATION 999 THIRD AVENUE SUITE 1900 SEATTLE, WASHINGTON 98104 (206) 340-1000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE CYPRESS INSURANCE COMPANY, as subrogee of Microsoft Corporation Plaintiff, vs. SK HYNIX AMERICA, INC. Defendant. ) ) ) ) ) ) ) ) ) ) ) ) Case No. 2:17-cv-00467-RAJ PLAINTIFF CYPRESS INSURANCE COMPANY’S OPPOSITION TO SK HYNIX AMERICA INC.’S MOTION IN LIMINE TO (1) EXCLUDE CYPRESS’S DAMAGES ITERATIONS NOS. 4 AND 5 AND (2) PRECLUDE REFERENCES TO THE COURT’S RULINGS ON BUFFER INVENTORY AND DISASTER RECOVERY PLAN Plaintiff, Cypress Insurance Company (“Cypress”), as subrogee of Microsoft Corporation (“Microsoft”), by counsel, hereby submits its opposition to SK Hynix America Inc.’s Motion in Limine to (1) exclude Cypress’ damages iterations Nos. 4 and 5 and (2) preclude references to the Court’s rulings on buffer inventory and disaster recovery plan as follows: Case 2:17-cv-00467-RAJ Document 231 Filed 02/28/19 Page 1 of 19 CYPRESS’ OPPOSITION TO SK HYNIX AMERICA INC.’S ADDITIONAL MOTION IN LIMINE - 1 LAW OFFICES OF COZEN O’CONNOR A PROFESSIONAL CORPORATION 999 THIRD AVENUE SUITE 1900 SEATTLE, WASHINGTON 98104 (206) 340-1000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 I. INTRODUCTION This Court should permit Cypress, as subrogee of Microsoft, to present to the jury all of the iterations of damages set forth in its Trial Brief (ECF No. 216). These iterations include Iteration No. 4 for $97,714,253, which represents the amount of damages as calculated by the Reinsurers, including Microsoft’s deductible, less incidental and consequential damages that the Court has ruled are not recoverable. (ECF No. 195, p. 18). Those $97,714,253 in incremental chip costs are fully recoverable cover damages incurred by Microsoft as a result of the Wuxi fire. Hynix has completely missed the evidentiary value of Iteration No. 4 and whether it is acceptable for Cypress to present to the jury, as the issue is one of Hynix’s own making.1 The issue is not one of Cypress attempting to circumvent the Court’s ruling on incidental and consequential damages, but instead it is one of fundamental fairness and the prevention of unfair prejudice to Cypress. It would be grossly prejudicial to Cypress for the jury to be misled into accepting Hynix’s voluntary payor defense without a full presentation of the total amount Cypress paid to Microsoft and the bases, analysis and investigation for that payment. As explained further below, the myriad of issues Hynix has created by improperly injecting a voluntary payor defense – strictly a legal matter for this Court to address – can and should be resolved by this Court striking Hynix’s voluntary payor defense. Further, the $97,714,253 cover damages figure is not new and is easily ascertained from the adjuster’s reports as well as from the analysis of Bill Bradshaw’ conducted during the adjustment. It is simply the amount paid by Cypress for the claim less consequential damages (i.e., less the transportation costs and other extra expenses removed from the total), in accordance with the Court’s ruling. These figures have been known by Hynix since the claims file was 1 Hynix’s voluntary payor defense necessitates the testimony of seven witnesses and one expert despite Hynix’s admissions and lack of evidence to the contrary. Case 2:17-cv-00467-RAJ Document 231 Filed 02/28/19 Page 2 of 19 CYPRESS’ OPPOSITION TO SK HYNIX AMERICA INC.’S ADDITIONAL MOTION IN LIMINE - 2 LAW OFFICES OF COZEN O’CONNOR A PROFESSIONAL CORPORATION 999 THIRD AVENUE SUITE 1900 SEATTLE, WASHINGTON 98104 (206) 340-1000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 originally produced years ago. Cypress is entitled to present the $97,714,253 in incremental chips costs, both because those damages are fully recoverable and to negate the perception on the part of the jury that Cypress was a voluntary payor. Cypress would suffer extreme prejudice in multiple ways if this evidence is not permitted at the trial of this matter. Accordingly, Cypress is entitled to present all of these damages iterations. These iterations also include Iteration No. 5,2 which represents the damages that relate to the Hynix’s breach of buffer inventory. The evidence establishes that Microsoft incurred the increased cost of acquiring approximately 2133 MHz DRAM chips in an amount of million as a result of Hynix’s failure to maintain a sufficient buffer inventory as required by the Agreement and the Amendment. Microsoft incurred this amount of damages as a result of Hynix’s continuing breach of its requirement to maintain the required buffer inventory – a breach which continued through the occurrence of the Wuxi fire or afterward. The million figure is simply the arithmetic required to place the proper value on the cover damages for the specific quantity of chips that should have been part of that buffer. The number of chips is easily calculated from the forecast quantities. The difference in price is easily calculated from the difference in price between the Hynix contract price for these chips and the actual amounts paid by Microsoft, all of which have been disclosed and opined on by Cypress’ expert Bill Bradshaw. These are hardly new to Hynix and cannot be said to be prejudicial. Accordingly, Cypress should be permitted to present these recoverable damages associated with Hynix’s failure to maintain the buffer inventory to the jury. Finally, Cypress should be permitted to inform the jury of the Court’s rulings that Hynix has breach the buffer inventory and Disaster Recovery Plan provisions of the Agreement and 2 Significantly, Hynix failed to address Iteration No. 5 or the prior Court’s rulings regarding Hynix’s breaches of contract at the Pretrial Conference, Hynix failed to meet and confer with Cypress prior to filing its additional Motions in Limine, and the Court did not afford Hynix leave to brief these issues pursuant to the Court’s instructions during the Pretrial Conference. Case 2:17-cv-00467-RAJ Document 231 Filed 02/28/19 Page 3 of 19 CYPRESS’ OPPOSITION TO SK HYNIX AMERICA INC.’S ADDITIONAL MOTION IN LIMINE - 3 LAW OFFICES OF COZEN O’CONNOR A PROFESSIONAL CORPORATION 999 THIRD AVENUE SUITE 1900 SEATTLE, WASHINGTON 98104 (206) 340-1000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Amendment. The jury is entitled to be made aware of those critical Court rulings as early as possible during the trial, and the lack of such information would not only be highly prejudicial to Cypress, but it would also create an inherently conflicting evidentiary quagmire. Therefore, Cypress should be permitted to disclose to the jury from the outset of trial that it must find, or accept the Court’s finding, that Hynix breached the contract by failing to maintain a buffer inventory and by failing to maintain a Disaster Recovery Plan. II. CYPRESS SHOULD BE PERMITTED TO PRESENT DAMAGES ITERATION NO. 4, WHICH ARE FULLY RECOVERABLE IN THIS LAWSUIT A. Hynix’s Voluntary Payor Defense – A Strictly Legal Defense Which This Court Should Strike As a Matter of Law - Necessitates the Presentation of Damages Iteration No. 4 to the Jury. Before exploring the particulars of Cypress’ permissible and fully recoverable Damages Iteration No. 4, it is of paramount importance for Cypress to emphasize up front that Hynix’s voluntary payor defense leaves Cypress no viable alternative but to present Iteration No. 4. This Court has ruled – at Hynix’s request – that of the total adjusted loss of over $175 million, approximately $77 million in ocean freight charges and extra expenses are non-recoverable consequential damages in this lawsuit. In and of itself, the resulting gap – a nearly $80 million delta between the $175+ million insurance payment and the $98 million in recoverable incremental chip costs – presents the prima facie misimpression that Cypress substantially overpaid Microsoft’s insurance claim, which could easily lead to the jury to the wrong conclusion that Cypress was a voluntary payor. While such a result would be more than satisfying to Hynix, it would be grossly prejudicial to Cypress. In order to remedy this mechanism for prejudice to Cypress that Hynix has artificially injected into this lawsuit, it is necessary, fair and appropriate for Cypress to present Iteration No. 4 to the jury. More importantly, this Court should eliminate the danger of this potential miscarriage of justice by striking Hynix’s voluntary payor defense. Case 2:17-cv-00467-RAJ Document 231 Filed 02/28/19 Page 4 of 19 CYPRESS’ OPPOSITION TO SK HYNIX AMERICA INC.’S ADDITIONAL MOTION IN LIMINE - 4 LAW OFFICES OF COZEN O’CONNOR A PROFESSIONAL CORPORATION 999 THIRD AVENUE SUITE 1900 SEATTLE, WASHINGTON 98104 (206) 340-1000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Whether Microsoft’s claimed loss was a covered loss is question of law for the Court, not a question of fact for the jury. Morgan v. Prudential Ins. Co. of Am., 86 Wash.2d 432, 434–35, 545 P.2d 1193 (1976). Even still, Hynix has admitted that the loss was a covered loss. (ECF No. 155.1, Ex. E, Nos. 2 and 4). Based solely on that admission, Hynix’s voluntary payor defense should be stricken. But even if the loss was not a covered loss (which it is and which Hynix has admitted),Washington law is clear and indisputable that if an insurer is potentially subject to a suit if it does not pay its insured’s claim, then the insurer cannot be a volunteer and its right to recover contribution is lost. See, e.g., Jacob’s Meadow Owners Association v. Plateau 44 II, LLC, 139 Wash.App. 743, 768, 162 P.3d 1153 (2007) (holding that if it is foreseeable that the insurance company would have faced a suit if it had refused to cover a claim, then the insurer did not act as a mere volunteer as a matter of law). Here, it is patently foreseeable that Cypress would have faced a lawsuit if it had refused to cover the claim. Therefore, this Court should strike Hynix’s voluntary payor defense as a matter of law. B. The Wuxi Fire Caused Hynix to Breach the Agreement and Amendment Hynix has judicially admitted that as a result of the fire at its Wuxi fabrication facility, it failed to provide Microsoft with at least 2133 MHz DRAM chips as required by the Agreement and the Amendment and that it failed to meet all of Microsoft’s demands for 2133 MHz DRAM chips. (ECF No. 155.1, Ex. E, Nos. 2 and 4). In addition, Hynix’s witnesses have testified that Hynix was unable to supply the DRAM chips to Microsoft as required by the Agreement and the Amendment as a result of the fire. (ECF No. 155.1, Ex. G, Lee Dep., p. 64:5- 9; ECF No. 155.1, Ex. J, Kaye Dep., p. 35:11-14; ECF No. 155.1, Ex. K, Jeong Dep., pp. 74:21- 75:1 “As far as I know, the Wuxi fire had an impact [on Hynix’s ability to meet its customer’s needs.]”; ECF No. 155.1, Ex. I, Taluja Dep., p. 34:14-18 “We had a significant constraint in Case 2:17-cv-00467-RAJ Document 231 Filed 02/28/19 Page 5 of 19 CYPRESS’ OPPOSITION TO SK HYNIX AMERICA INC.’S ADDITIONAL MOTION IN LIMINE - 5 LAW OFFICES OF COZEN O’CONNOR A PROFESSIONAL CORPORATION 999 THIRD AVENUE SUITE 1900 SEATTLE, WASHINGTON 98104 (206) 340-1000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 selling parts to our customers because of the Wuxi fire.”). Importantly, these same witnesses could not provide any information of the number of DRAM chips that Hynix was unable to provide for reasons other than the fire. (ECF No. 155.1, Ex. G, Lee Dep., p. 64:10-14; ECF No. 155.1, Ex. J, Kaye Dep., p. 108:2-11). C. During the Adjustment of Microsoft’s Loss, the Measure of Damages for Incremental DRAM Chip Costs Was at Least $97,714,236 During the adjustment of the loss, William Bradshaw of Matson Driscoll & Damico performed an analysis and evaluation of Microsoft’s contingent business interruption loss based upon the coverage in force on the date of the loss. (Ex. A, Bradshaw Dep., pp. 9:13-11:9). As part of his analysis for the adjustment of the claim, Mr. Bradshaw, considered increased costs of obtaining chips to continue the Xbox One production, as well as expedited freight and other costs. (Ex. A, Bradshaw Dep., pp. 17:15-18:12). Further, Mr. Bradshaw’s analysis considered the time period for Microsoft’s damages to be from the date of the Wuxi fire on September 4, 2013 through June 30, 2014. (Ex. A, Bradshaw Dep., pp. 28:10-29:13). Importantly, the contract with Hynix was effective through August 14, 2014. (ECF No. 155.1, Ex. C). Mr. Bradshaw also considered the Samsung contract during his work on the adjustment because Samsung became the main provider of 2133 MHz DRAM chips to Microsoft after the fire. Therefore, “the pricing on the Samsung contract and the quantities of chips that they got from Samsung became the key measurement component of the increased cost of chips during this time period.” (Ex. A, Bradshaw Dep., pp. 34:23-35:11). The Samsung contract covered pricing through 2013 to at least the end of 2015 and was a long-term fixed price contract because Microsoft was forced to execute a long-term contract to receive the 2133 MHz DRAM chips that were needed for the launch of the Xbox One in late 2013. (Ex. A, Bradshaw Dep., pp. 56:8- 57:17). Case 2:17-cv-00467-RAJ Document 231 Filed 02/28/19 Page 6 of 19 CYPRESS’ OPPOSITION TO SK HYNIX AMERICA INC.’S ADDITIONAL MOTION IN LIMINE - 6 LAW OFFICES OF COZEN O’CONNOR A PROFESSIONAL CORPORATION 999 THIRD AVENUE SUITE 1900 SEATTLE, WASHINGTON 98104 (206) 340-1000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Based upon MDD’s analysis and evaluation of the claim documents, Mr. Bradshaw prepared two reports during the adjustment. His first report was dated March 11, 2014 (Ex. B, Dep. Ex. 36), and his second report was dated April 24, 2014 (Ex. C., Dep. Ex. 133). Mr. Bradshaw was questioned by Hynix during his fact deposition on April 19, 2018 regarding the computations in these two reports. Hynix deposed Mr. Bradshaw a second time for his expert deposition which took place on October 2, 2018. In the March 11, 2014 Report, Mr. Bradshaw explained that he prepared an analysis of the claim Microsoft submitted for loss based upon “a supplier event at SK Hynix” referring to the fire. (Ex. A, Bradshaw Dep., pp. 115:8-116:4; Ex. B, CYPRESS000228-29). Mr. Bradshaw explained in his March 11th Report that as a result of the interruption in DRAM chips from Hynix to Microsoft, Microsoft “sought alternative supply and logistical options to bring the Xbox One product to market on a timely basis.” (Ex. B, CYPRESS000229). This alternative supply “was accomplished by agreeing to unfavorable DRAM chips supply terms with Samsung….” (Ex. B, CYPRESS000229). For documentation received by MDD through February 19, 2014 and presented in the March 11th Report, Microsoft incurred a loss for incremental DRAM chip costs of over (Ex. B, CYPRESS000231, 000236). Mr. Bradshaw then concluded that based upon the forecasts through June 2014, the claim amount would likely exceed $175 million by the end of March 2014. (Ex. B, CYPRESS000232). To arrive at that conclusion, Mr. Bradshaw calculated that the incremental DRAM chip pricing for February 2014 and March 2014 would equate to , and incremental DRAM chip pricing from April 2014 to June 2014 would equate to for total damages incurred by Microsoft of $194,251,464. (Ex. B, CYPRESS0000233). Case 2:17-cv-00467-RAJ Document 231 Filed 02/28/19 Page 7 of 19 CYPRESS’ OPPOSITION TO SK HYNIX AMERICA INC.’S ADDITIONAL MOTION IN LIMINE - 7 LAW OFFICES OF COZEN O’CONNOR A PROFESSIONAL CORPORATION 999 THIRD AVENUE SUITE 1900 SEATTLE, WASHINGTON 98104 (206) 340-1000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Approximately six weeks later and after analyzing additional information, Mr. Bradshaw and MDD performed an additional interim analysis. In the April 24th Report, Mr. Bradshaw forecast the incremental chip costs through June 2014 because as a result of the fire, Microsoft was forced to receive chips from suppliers other than Hynix at a higher price than the chips from Hynix. (Ex. A, Bradshaw Dep., pp. 137:9-138:6). The measure prepared by MDD was based upon the current measure of damages through January 2014 with “projected incremental DRAM chip costs for February 2014 through June 2014 based upon the alternative supply agreement pricing with Samsung.” (Ex. C, MDD_000566). From September 2013 until January 2014, Mr. Bradshaw calculated the incremental DRAM chip costs at , but noted that incremental DRAM chips costs from February 2014 to June 2014 would equate to . (Ex. C, MDD_000567). Thus, the measure as of the April 24th Report and the projected amount of Microsoft’s losses totaled $192,260,024 million, which is based on the “actual and expected DRAM receipts from Hynix, Samsung, and Micron through June 2014 for the continuing build of Xbox One products.” (Ex. C, MDD_000567). Mr. Bradshaw explained that the impact of the fire on the incremental DRAM chips costs likely continued past June of 2014 because of the effects of the increased long-term pricing impact of the Samsung contract. (Ex. A, Bradshaw Dep., pp. 132:1-133:5). D. The Court’s Ruling on Damages Other Than Incremental Chip Costs The Court’s February 6, 2019 Ruling held that “Cypress may not recover any indirect, incidental, consequential, punitive, special or exemplary damages.” (ECF No. 195, p. 18). Thus, the Court has ruled that Cypress is not entitled to incidental and consequential damages in the amount of $77,285,747, which represents incremental freight and other additional costs. (ECF No. 195, p. 18). The Court has imposed no limitation on Cypress’ ability to claim and recover all Case 2:17-cv-00467-RAJ Document 231 Filed 02/28/19 Page 8 of 19 CYPRESS’ OPPOSITION TO SK HYNIX AMERICA INC.’S ADDITIONAL MOTION IN LIMINE - 8 LAW OFFICES OF COZEN O’CONNOR A PROFESSIONAL CORPORATION 999 THIRD AVENUE SUITE 1900 SEATTLE, WASHINGTON 98104 (206) 340-1000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 of the incremental chip costs incurred by Microsoft as a result of Hynix’s breaches of the contract in relation to the Wuxi fire. E. Iteration No. 4 Is Simply the Total Amount Paid by Cypress Less Incidental and Consequential Damages, Which are the Fully Recoverable Incremental Chips Costs in This Lawsuit Iteration No. 4 for $97,714,253 is derived by simple math. Cypress’ total claim is for $175 million, which represents the $150 million sublimit and Microsoft’s $25 million deductible. The Court has ruled that Cypress is not entitled to incidental and consequential damages in the amount of $77,285,747, which represents incremental freight and other additional costs. (ECF No. 195, p. 18). By subtracting the $77,285,747 in incidental and consequential damages from $175 million of the covered loss to Microsoft, the measure of damages for increased DRAM chip costs is $97,714,236, which is the amount of incremental DRAM chip costs as calculated by Cypress and MDD to support payment of the covered claim to Microsoft during the adjustment of the loss. As Mr. Bradshaw testified, the payment by Cypress and its Reinsurers was based upon the MDD report “which laid out exactly what they were paying for.” (Ex. A, Bradshaw Dep., p. 135:10-17). Cypress is entitled to present evidence to the jury of the total amount of incremental DRAM chip costs that it calculated during the adjustment of the loss as a result of the covered loss at the Wuxi fabrication facility. Contrary to Hynix’s arguments, Cypress is not any way attempting to circumvent the Court’s February 6, 2019 Ruling on incidental and consequential damages. Instead, as explained above, as a result of the voluntary payor defense and Hynix’s attempts to argue that no coverage existed for Microsoft’s loss, Cypress must present to the jury evidence to substantiate the payment by Cypress and the Reinsurers of $175 million in total damages, less incidental and consequential damages. Case 2:17-cv-00467-RAJ Document 231 Filed 02/28/19 Page 9 of 19 CYPRESS’ OPPOSITION TO SK HYNIX AMERICA INC.’S ADDITIONAL MOTION IN LIMINE - 9 LAW OFFICES OF COZEN O’CONNOR A PROFESSIONAL CORPORATION 999 THIRD AVENUE SUITE 1900 SEATTLE, WASHINGTON 98104 (206) 340-1000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Based upon the calculation performed by Mr. Bradshaw during the adjustment, Microsoft incurred losses for increased incremental DRAM chips costs well into June 2014. In other words, those incremental DRAM chip costs are damages that Microsoft directly incurred because if the fire had not occurred, Microsoft would have not entered into a contract with Samsung for the sale of 2133 MHz DRAM chips well into 2014 and beyond, and instead, would have purchased those chips from Hynix pursuant to the terms of the Ninth Amendment. These incremental DRAM chip costs which Hynix’s breach of contract forced Microsoft to incur by entering into an unfavorable price and increased quantity chip supply contract with Samsung (due to the scarcity of the product created by the Hynix fire) are direct damages under RCWA 62A.2-713.3 They are fully recoverable cover damages in this lawsuit reasonably incurred by Microsoft as a result of the Wuxi fire. The difference in the amount paid and the amount of the incidental and consequential damages are straight cover damages, which are recoverable if Microsoft entered into a contract to purchase substitute goods for those due from Hynix. RCWA 62A.2-712.4 And, the amount is the difference between the cost of cover and the contract price. Id. Here, the amount of $97,714,253 in Iteration No. 4 represents, as described by Mr. Bradshaw in his two reports, the difference in the amount that Hynix would have charged for the DRAM chips had it not breached its contract and 3 The Court’s Order Granting in Part and Denying In Part the Parties’ Motions for Summary Judgment distinguishes direct damages as excluding freight charges and miscellaneous costs, but not damages for increased incremental chips incurred by Microsoft due to the fire. (ECF No. 195, P. 18). 4 Contrary to Hynix’s assertion, these losses cannot be consequential damages under RCWA 62A.2-715; rather, they are losses which “reasonably could be prevented by cover.” By purchasing the substitute DRAM chips from Samsung and Micron, Microsoft prevented the astronomical losses that Cypress has established Microsoft would have incurred had Microsoft not timely obtained the chips to timely launch the Xbox One. Samsung conditioned its willingness to provide the time-critical chips to Microsoft upon: 1) Microsoft both paying a higher price for the chips than it paid under the Amendment, and 2) Microsoft’s purchasing of additional quantities of chips through June, 2014. Had the fire not occurred, and therefore had Microsoft not been compelled to enter into the unfavorable agreement with Samsung, Microsoft would have ordered all of those chips from Hynix, its launch partner, pursuant to the Amendment, which extended into August, 2014. The costs to Microsoft of Samsung’s requirement of higher prices for some chips and the requirement for Microsoft to buy more chips from Hynix into June, 2014 are inextricably bound together as one collective cover cost package – they cannot be dissected and separated, as Hynix wrongly suggests, to convert some of those costs into consequential costs. Rather, they are a bundled package of cover costs which Microsoft incurred – indeed costs which Microsoft had to incur – in order to obtain substitute chips due from the seller which Microsoft would otherwise have purchased from Hynix. Case 2:17-cv-00467-RAJ Document 231 Filed 02/28/19 Page 10 of 19 CYPRESS’ OPPOSITION TO SK HYNIX AMERICA INC.’S ADDITIONAL MOTION IN LIMINE - 10 LAW OFFICES OF COZEN O’CONNOR A PROFESSIONAL CORPORATION 999 THIRD AVENUE SUITE 1900 SEATTLE, WASHINGTON 98104 (206) 340-1000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 the cost that Samsung charged for the DRAM chips. In other words, these are straight cover damages.5 Moreover, the approximately $98 million amount is a conservative figure as Microsoft incurred even more costs but its subrogee, Cypress, is only entitled to recover the amounts that were paid. Because of the legal voluntary payor defense Hynix has injected into this trial and Hynix’s assertions that coverage did not apply to the Wuxi fire loss, Cypress must address to the jury and explain the reasons why it paid $175 million for the contingent business interruption loss to Microsoft. As explained by Mr. Bradshaw in his deposition and in his two reports that he was questioned upon during his deposition, Microsoft incurred well in excess of $192 million for its overall loss, including almost in actual cover damages. The Cypress Policy, however, contained a sublimit of $150 million. That amount coupled with Microsoft’s $25 million deductible equates to a total loss of $175 million, well below the actual incurred damages of Microsoft. Cypress, however, can only “step into the shoes” of Microsoft to the extent of the loss and what was paid pursuant to the Cypress Policy. Therefore, the cover damages paid by Cypress in the amount of $97,714,253 is actually a conservative figure but one that must be presented to the jury so as not to mislead the jury that Cypress was under no legal obligation to pay the claim based upon the evidence presented to it in the adjustment.6 5 The “Purpose” section of the Uniform Commercial Code Comments to RCWA 62A.2-712 provides in pertinent part: “The definition of “cover” under subsection (1) envisages . . . contracts on credit or delivery terms differing from the contract in breach, but again reasonable under the circumstances. The test of proper cover is whether at the time and place the buyer acted in good faith and in a reasonable manner, and it is immaterial that hindsight may later prove that the method of cover used was not the cheapest or most effective.” Here, Microsoft entered into a supply contract with Samsung in good faith – with no viable alternative option - for substitute chips at higher prices and for the supply of chips by Samsung through June, 2014 (which Microsoft would have procured from Hynix pursuant to the Amendment had the fire not occurred) to avert catastrophic losses had Microsoft not timely launched the Xbox One. Under the circumstances, all of those chips costs incurred by Microsoft via that contract are recoverable, reasonably cover damages necessarily incurred by Microsoft in good faith. 6 This evidence alone should preclude any evidence of the voluntary defense to the jury as a payment is not voluntary and the right of contribution is not lost if an insurance company is subject to suit it if does not pay. See Jacob’s Meadow Owners Association v. Plateau 44 II, LLC, 139 Wash.App. 743, 768, 162 P.3d 1153 (2007) citing Clow v. Case 2:17-cv-00467-RAJ Document 231 Filed 02/28/19 Page 11 of 19 CYPRESS’ OPPOSITION TO SK HYNIX AMERICA INC.’S ADDITIONAL MOTION IN LIMINE - 11 LAW OFFICES OF COZEN O’CONNOR A PROFESSIONAL CORPORATION 999 THIRD AVENUE SUITE 1900 SEATTLE, WASHINGTON 98104 (206) 340-1000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 F. Cypress’ Iteration No. 4 Is Not a New Theory That was Untimely Disclosed Cypress timely disclosed the evidence related to its total cover damages. The insurance documents relating to the adjustment of the Microsoft claim were disclosed during discovery. In fact, MDD’s two reports regarding the calculation of damages are deposition exhibits used by Hynix. In addition, Mr. Bradshaw was deposed twice, once as a fact witness and once as an expert which permitted Hynix more than enough opportunity to question Mr. Bradshaw concerning his analysis and investigation during the adjustment of the Microsoft loss. In addition, the First Amended Complaint requests $175 million dollars for Hynix’s breach of contract. As explained above, this calculation is a simple mathematics exercise arrived at by subtracting the consequential damages from the amount of payment made by Cypress once the Court ruled on the Limitation of Liability provision in the Amendment. The disclosure of this calculation was not untimely but was made following the Court’s ruling and to defend against Hynix’s assertions of coverage questions regarding the underlying claim. This disclosure is far from the facts of Wong v. Seattle School Dist. No. 1, C16-1774-RAJ, 2018 WL 4630385, *4-6 (W.D. Wash. Sep. 27, 2018), cited by Hynix, as there, the plaintiff failed to provide responses to discovery requests, and when information was finally provided it was well in excess of the estimates provided in discovery. Here, Hynix deposed Mr. Bradshaw on his two reports and the damages have not changed in total amount, but merely in the manner in which they were calculated based upon the Court’s ruling. Moreover, these figures will not be addressed as any expert opinion by Mr. Bradshaw, but will be presented as part of the factual basis for the claim. Accordingly, Cypress should not be precluded from presenting to the jury the total cover damages it paid, which are fully recoverable by Cypress in this lawsuit. Hynix seeks to introduce Nat’l Indem. Co., 54 Wash.2d 198, 208, 339 P.2d 82 (1959); see also Newcomer v. Masini, 45 Wash.App. 284, 289, 724 P.2d 1122 (1986). Case 2:17-cv-00467-RAJ Document 231 Filed 02/28/19 Page 12 of 19 CYPRESS’ OPPOSITION TO SK HYNIX AMERICA INC.’S ADDITIONAL MOTION IN LIMINE - 12 LAW OFFICES OF COZEN O’CONNOR A PROFESSIONAL CORPORATION 999 THIRD AVENUE SUITE 1900 SEATTLE, WASHINGTON 98104 (206) 340-1000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 evidence at the trial of this matter to the jury on a pure legal issue. Even though Hynix has admitted that the fire was at least partly responsible for its failure to meet the demands for 4Gb 2133 MHz 1.5v DRAM chips, Hynix continues to argue that Cypress paid the claim to Microsoft for a loss that was not covered by the terms of the Cypress Policy. In effect, Hynix is arguing that no coverage existed for the Microsoft loss masquerading as a voluntary payor defense. And, Hynix makes these arguments despite judicially admitting that the fire caused its failure to deliver the 2133 MHz DRAM chips to Microsoft. By not presenting the evidence to the jury, Cypress would sustain undue prejudice because this relevant, probative evidence would be excluded. Therefore, because of Hynix’s failure to reconcile its defenses with its admissions as a matter of law, Cypress should be entitled to present evidence of what information was relied upon and what analyses was performed as to damages during the adjustment of the Microsoft claim. III. CYPRESS SHOULD BE PERMITTED TO PRESENT DAMAGES ITERATION NO. 5, WHICH ARE FULLY RECOVERABLE DAMAGES IN THIS LAWSUIT Cypress should be permitted to present Iteration No. 5 to the jury. These damages relate to Cypress’ entitlement to damages in the amount of as a result of Hynix’s breach of the buffer inventory provision of the Agreement and the Amendment. Hynix makes the misplaced and disingenuous argument that Cypress is not entitled to these damages because the lack of buffer inventory existed pre-fire. The contractual buffer inventory requirement, and Hynix’s breach of that requirement, existed at the time of the fire and afterward. Cypress’s expert, Mr. Bradshaw has expressed the opinion that “the availability of buffer inventory would have allowed Microsoft to avoid acquisition of DDR3 DRAM chips from Samsung and Micron.” (ECF No 173.1, p. 11). Thus, the increased costs of acquiring those chips from September and December 2013, solely due to Hynix not having maintained the buffer inventory at the time of the fire in Case 2:17-cv-00467-RAJ Document 231 Filed 02/28/19 Page 13 of 19 CYPRESS’ OPPOSITION TO SK HYNIX AMERICA INC.’S ADDITIONAL MOTION IN LIMINE - 13 LAW OFFICES OF COZEN O’CONNOR A PROFESSIONAL CORPORATION 999 THIRD AVENUE SUITE 1900 SEATTLE, WASHINGTON 98104 (206) 340-1000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 breach of contract, equates to as a result of the failure of Hynix to maintain a buffer inventory when the fire occurred. Both cases cited by Hynix as inapposite. See Ohio Sec. Ins. Co. v. Puget Sound Energy, Inc., No. C18-987-MJP, 2018 WL 4501743, at *3 (W.D. Wash. Sept. 20, 2018); Absher Const. Co. v. N. Pac. Ins. Co., No. C10-5821JLR, 2012 WL 13707, at *5 (W.D. Wash. Jan. 3, 2012). These cases address the issue of which party is the real party in interest when dealing with a subrogated claim and an assignment, issues not involved in this litigation. Hynix continues to muddy the waters regarding subrogation and assignment issues despite the Court’s ruling that Cypress has a cognizable subrogation claim, whether conventional or equitable. (ECF No. 195, pp. 5-6). Instead, the issue at hand is whether the Microsoft claim is a covered loss - which Hynix has readily judicially admitted and by deposition testimony of its employees. (ECF No. 155.1, Exs. E, G, I, J, and K). Upon payment of the covered loss by Cypress to Microsoft, all of Microsoft’s rights were transferred to Cypress to the extent of the payment. All of the damages sought by Cypress in this litigation relate to the loss – the breach by Hynix of the Agreement and Amendment in relation to the Wuxi fire which caused Microsoft’s damages. If Hynix had the buffer inventory on hand on the date of the fire it could have satisfied Microsoft’s next series of Purchase Order delivery requirements at the contract price. By not meeting the buffer requirement, Hynix gambled that it would not have a supply disruption which would have required that it use the buffer to meet Microsoft’s Purchase Orders. Hynix lost that bet. Due to the Wuxi fire, Hynix could not meet Microsoft’s next delivery dates because it had no buffer inventory to satisfy those requirements. Instead, Microsoft had to cover by purchasing those chips from Samsung at a considerably higher price. All of those numbers are easily calculated and have been before Hynix since the claims file was first produced. Case 2:17-cv-00467-RAJ Document 231 Filed 02/28/19 Page 14 of 19 CYPRESS’ OPPOSITION TO SK HYNIX AMERICA INC.’S ADDITIONAL MOTION IN LIMINE - 14 LAW OFFICES OF COZEN O’CONNOR A PROFESSIONAL CORPORATION 999 THIRD AVENUE SUITE 1900 SEATTLE, WASHINGTON 98104 (206) 340-1000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 IV. CYPRESS SHOULD BE PERMITTED TO INFORM THE JURY OF THE COURT’S RULINGS HYNIX BREACHED THE BUFFER INVENTORY AND DISASTER RECOVERY PLAN PROVISIONS OF THE CONTRACT Cypress should be permitted to inform the jury, including from the outset of the trial, that the Court has ruled as a matter of law that Hynix breached the buffer inventory and disaster recovery plan requirements of the Agreement and Amendment. It would be misleading and confusing for the jury not to be informed from the outset of the trial of those critical rulings, but only be informed (theoretically) via jury instruction at the end of the trial that they must find or accept that Hynix breached the contract in those ways, without having the benefit of considering the evidence of damages relating to those breaches contemporaneously and in context with the Court’s rulings. Also, if the Court allows the jury to ask questions relating to the relationship between the established breaches and damages resulting from the breaches, that opportunity would be diminished or lost altogether. Cypress would be forced to introduce evidence of the breaches, which the jury could then choose to accept or not accept during the course of the trial, even though the Court has already ruled that Hynix breached the contract in these two ways. Conceivably, the jury could decide for itself during the course of the trial that Hynix did not or may not have breached the contract in these ways, and then have to reconcile their own finding with a jury instruction or other admonition from the Court to the contrary. The jurors could develop a negative impression of Cypress for not having informed them early during the trial that they must find or accept that Hynix breached the contract in at least these two critical ways. Hynix could attempt to present the evidence in such a way as to try to convince the jury that Hynix did not breach either of those contractual provisions, despite the Court’s contrary ruling, further confusing the jury. It would be highly prejudicial to Cypress for the trial to proceed without the jury being made aware from the outset that whether Hynix breached the contract in these two ways is not at issue – it has already been determined and they must find or accept the Court’s finding as such and Case 2:17-cv-00467-RAJ Document 231 Filed 02/28/19 Page 15 of 19 CYPRESS’ OPPOSITION TO SK HYNIX AMERICA INC.’S ADDITIONAL MOTION IN LIMINE - 15 LAW OFFICES OF COZEN O’CONNOR A PROFESSIONAL CORPORATION 999 THIRD AVENUE SUITE 1900 SEATTLE, WASHINGTON 98104 (206) 340-1000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 properly consider during and throughout the trial what damages resulted from those breaches. In essence, informing the jury in advance that they must find or accept that Hynix breached the contract in at least these two ways is tantamount to a Court informing a jury in advance that liability, or a portion of liability, has already been determined and the only issue is for the jury to assess as to those liability determination is the damages for the found wrongdoing.7 It is straight forward, fair, and commonly done. Moreover, Hynix provides no evidence or reasoning to explain why the introduction of this evidence would be unduly prejudicial. Relevant evidence should only be excluded “if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury, or by considerations of undue delay, waste of time, or needless presentation of cumulative evidence.” Fed.R.Evid. 403. The Ninth Circuit has held that Rule 403 “is an extraordinary remedy to be used sparingly because it permits the trial court to exclude otherwise relevant evidence.” United States v. Mende, 43 F.3d 1298, 1302 (9th Cir.1995). And, the danger of prejudice must be “substantially” outweighed by the probative value of the evidence. Id. “Unfair prejudice” refers means “the undue tendency to suggest decision on an improper basis, commonly ... an emotional one.” United States v. W.R. Grace, 504 F.3d 745, 759 n. 6 (9th Cir.2007) (internal quotations omitted). In this case, the Court’s prior rulings do not rise to the level of unfair prejudice because they do not suggest anything improper. To the contrary, as explain above, Cypress would suffer substantial prejudice if it is not permitted to inform the jury from the outset that the Court has ruled, or that the jury must find or accept, that Hynix breached the contract by failing to maintain a buffer inventory and by failing to maintain a Disaster Recovery Plan. Furthermore, Cypress does have to tell the jury about 7 Cypress notes the Court has approved a limiting instruction to the jury which informs the jury that it is not to consider the freight and extra expenses charges as part of Microsoft’s (Cypress’) damages, without specifically referencing the Court’s ruling as to the non-recoverability of incidental and consequential damages. Similarly, here the Court can allow Cypress to inform the jury that for the purpose of this trial that the jury must find or accept that Hynix breached the contract by failing to maintain a buffer inventory and by failing to maintain a Disaster Recovery Plan, without specifically referencing the Court’s ruling, if the Court is so inclined. Case 2:17-cv-00467-RAJ Document 231 Filed 02/28/19 Page 16 of 19 CYPRESS’ OPPOSITION TO SK HYNIX AMERICA INC.’S ADDITIONAL MOTION IN LIMINE - 16 LAW OFFICES OF COZEN O’CONNOR A PROFESSIONAL CORPORATION 999 THIRD AVENUE SUITE 1900 SEATTLE, WASHINGTON 98104 (206) 340-1000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 the Court’s ruling on consequential damages given the voluntary payment defense so as to explain why Cypress paid $150 million in addition to the $25 million deductible, but yet is seeking less than that amount in this breach of contract action. V. CONCLUSION For the foregoing reasons, Hynix’s motions in limine should be denied. Further, consistent with this Opposition, Cypress respectfully requests that this Court: 1. Permit Cypress to pursue at trial the full extent of the cover damages incurred by Microsoft; 2. Permit Cypress to advise the jury from the outset of the trial that it must find, or accept the Court’s finding, that Hynix breached the contract by failing to maintain a buffer inventory and by failing to maintain a Disaster Recovery Plan; and 3. Strike Hynix’s voluntary payor defense in its entirety. DATED this 28th day of February, 2019. COZEN O’CONNOR By: /s/ Mark S. Anderson Mark S. Anderson, WSBA 17951 999 Third Avenue Suite 1900 Seattle, WA 98104 Telephone: 206.340.1000 Toll Free Phone: 800.423.1950 Facsimile: 206.621.8783 Email: manderson@cozen.com James B. Glennon (Pro Hac Vice) George D. Pilja (Pro Hac Vice) FORAN GLENNON PALANDECH PONZI & RUDLOFF PC 222 North LaSalle Street, Suite 1400 Chicago, Illinois 60601 Phone: (312) 863-5000 Facsimile: (312) 863-5099 Email: jglennon@fgppr.com Email: gpilja@fgppr.com Diana R. Lotfi (Pro Hac Vice) Case 2:17-cv-00467-RAJ Document 231 Filed 02/28/19 Page 17 of 19 CYPRESS’ OPPOSITION TO SK HYNIX AMERICA INC.’S ADDITIONAL MOTION IN LIMINE - 17 LAW OFFICES OF COZEN O’CONNOR A PROFESSIONAL CORPORATION 999 THIRD AVENUE SUITE 1900 SEATTLE, WASHINGTON 98104 (206) 340-1000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 FORAN GLENNON PALANDECH PONZI & RUDLOFF PC 450 Newport Center Drive, Suite 630 Newport Beach, California 92660 Phone: (949) 791-1060 Facsimile: (949) 791-1070 Email: dlotfi@fgppr.com Attorneys for Plaintiff Case 2:17-cv-00467-RAJ Document 231 Filed 02/28/19 Page 18 of 19 CYPRESS’ OPPOSITION TO SK HYNIX AMERICA INC.’S ADDITIONAL MOTION IN LIMINE - 18 LAW OFFICES OF COZEN O’CONNOR A PROFESSIONAL CORPORATION 999 THIRD AVENUE SUITE 1900 SEATTLE, WASHINGTON 98104 (206) 340-1000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 CERTIFICATE OF SERVICE I hereby certify that on this day I electronically filed the foregoing with the Clerk of the Court using the CM/ECF system which will send notification of such filing to the following: Alex A. Baehr, WSBA No. 25320 Summit Law Group PLLC 315 Fifth Avenue South, Suite 1000 Seattle, WA 98104-2682 alexb@summitlaw.com Timothy B. Hoo, CA Bar No. 254332 Ekwan E. Rhow, CA Bar No. 174604 Jennifer C. Won, CA Bar No. 307807 Bird, Marella, Boxer, Wolpert, Nessim Drooks, Lincenberg & Rhow, P.C. 1875 Century Park West, 23rd Floor Los Angeles, CA 90067-2561 tyoo@birdmarella.com dchao@birdmarella.com erhow@birdmarella.com Attorneys for Defendant Dated: this 28th day of February, 2019 /s Renita Cook Renita Cook Legal Assistant Case 2:17-cv-00467-RAJ Document 231 Filed 02/28/19 Page 19 of 19