Microsoft is facing a lawsuit filed under the California's consumer protection statutes with the Sacramento County Superior Court. The lawsuit points to an abnormally large number of “General Hardware Failure” rates (also known as the Red Ring of Death due to the three flashing red lights around the power button) in the Xbox 360. It alleges that an abnormally large number of the consoles have suffered from the flaw, and that Microsoft new about the issue but concealed it, in order to better compete with the rival Sony Playstation 3 and Nintendo Wii.

Plaintiffs cite a number of popular gaming news websites, such as dailygamesnews.com, VentureBeat, Digital Media and Yahoo! according to which, Microsoft knew about the defective consoles as far back as November 2005, and that their rate of incidence was over 50%.

That figure is obscenely high in an industry which considers 3% a maximum accepted hardware failure rate.
The objective of the lawsuit, which was filed on September 19 by Reshelle Cable of Folsom, Calif., is to obtain an order forcing Microsoft to pay the affected Xbox 360 owners with all profits made from the console by publicly announcing and implementing a refund program in the state of California.

A Microsoft spokesman did not comment, saying that the company had not yet been served with the lawsuit.
If Microsoft loses this lawsuit, it will set a dangerous precedent for the company, as more and more states could require them to fully refund customers for the defective hardware, causing tremendous losses for them.