A new unsealed motion complete with sealed declarations from Microsoft employees suggests that Microsoft knew that the XBox 360 had a disc scratching problem.
Moreover, Microsoft allegedly considered three possibilities to actually fix the issue including: increasing the magnetic field of the disc holder, slowing the speed that the disc rotated and installing small bumpers. But all of these solutions were supposedly rejected due to practicality and cost.
To quote: Most of the declarations in the court case are sealed, but a newly unsealed motion (read it http://blog.seattlepi.nwsource.com/microsoft/library/motion_xbox.pdf) seeking class status quotes from the sealed declarations of Microsoft employees.
The motion says that Microsoft knew that when the Xbox 360 was reoriented with a disc playing inside, the disc could be damaged.
It quotes Hiroo Umeno, a Microsoft program manager, who said in a declaration, "This is ... information that we as a team, optical disc drive team, knew about. When we first discovered the problem in September or October (2005), when we got a first report of disc movement, we knew this is what's causing the problem."
After the Xbox 360 launch, according to the motion, Microsoft sent a team of engineers to stores across the country "to investigate complaints that the Xbox 360 was routinely scratching discs during demonstrations."
Microsoft determined that if the console was tilted, discs inside became "unchucked" and collided with the drive's optical pickup unit, leading to deep circular gouges on the discs.
Because of the complaints, Microsoft considered three possibilities to fix the problem, but rejected all of them.
One solution would have increased the magnetic field of the disc holder, but it was dismissed because it could have interfered with the disc opening and closing mechanism. Another solution -- slowing the speed at which the disc was rotated -- was rejected because it could have increased the time required for a game to load. A third solution, installing small bumpers, was too expensive. It would have cost between $35 million and $75 million.
Eventually, Microsoft did institute an Xbox 360 disc replacement http://support.xbox.com/support/en/us/xbox360/gamesandmedia/games/discreplacement/DiscReplacementPlan.aspx that sends out new discs to customers if their discs are damaged for any reason. The program only applies to Microsoft titles and costs $20 per disc.
A warning was also included in the product manual, telling customers to "remove discs before moving the console or tilting it between the horizontal and vertical positions." More PlayStation 3 News...