Sapphire supplier files for bankruptcy, points to “oppressive and burdensome” conditions imposed by Apple

Information about GT Advanced Technologies, a sapphire crystal manufacturer, has been trickling out this week since the company filed for Chapter 11 bankruptcy protection Monday. The latest documents, made public Friday, indicate that GT Advanced Technologies (GTAT) is planning to shut down its factory in Mesa, Arizona, as well as another facility in Salem, Massachusetts. The operations winding down will likely result in 890 GTAT employees losing their jobs.

“Only if GT winds down these operations will it be able to stop its mounting losses and re-focus its resources on the operation of its core business of selling sapphire furnaces and other products,” GTAT said in a public court filing.

Although GTAT initially constructed its business around producing solar materials, most of the latest attention focused on its best known client: [company]Apple[/company]. The primary reason that GTAT is facing issues is its business agreements with Apple. One court filing reads: “The [Apple] agreements imposed oppressive and burdensome terms and obligations on GTAT.” Earlier this week, the Wall Street Journal reported that Apple withheld a $139 million payment from the sapphire crystal manufacturer.

GTAT is looking to terminate its agreements with Apple, and may be laying the groundwork for a future suit. “GTAT believes it has many claims against Apple arising out of its relationship with Apple,” one filing read.

What were the specific “oppressive and burdensome” terms of the agreements with Apple? They could remain secret. GTAT filed a motion to have hearings related to the bankruptcy kept closed because it could face damages to the tune of $50 million per disclosure due to a confidentiality pact with Apple. One document reads: “GTAT recognizes the unusual (and perhaps unprecedented) nature of the request in this Motion.”

In response, yesterday’s order from a judge said that while some details will remain sealed, details about the plants winding down would be public. Apple will have at least three days to review information about its dealings with GTAT that may come up during bankruptcy hearings and can request to have details barred. Details from Apple’s supplier contracts would be of intense interest not only to the parties involved in the case, but to Apple watchers worldwide, as well as Apple’s competitors. The $50 million disclosure penalty is fascinating in and of itself.

In November 2013, Apple signed a $578 million contract with GTAT. The deal was announced by both the state of Arizona (touting 700 jobs created) as well as GTAT itself. (Apple CEO Tim Cook later confirmed the deal in an interview.) As part of the agreement, Apple built the facility and leased it back to GTAT, which owned the expensive sapphire furnaces needed to produce the material. It was widely believed that the sapphire produced by GTAT would end up covering iPhone screens.

For a while, it did look like GTAT was going to produce hundreds of millions of dollars of sapphire crystal glass for Apple. Prototypes with sapphire screens were spotted in the supply chain. Bloggers were even able to get their hands on sapphire parts which looked like real Apple components. But when the iPhone 6 was announced in September, its screen was covered by [company]Corning[/company] Gorilla Glass, a competing product which has been the iPhone’s glass since it came out.

As it stands, GTAT may never supply sapphire crystal to Apple in meaningful quantities. Apple has said it plans to include sapphire faces on some Apple Watch models, but the sapphire-equipped watches will likely be the most expensive and produced in the lowest numbers. Sapphire crystal is currently used on the iPhone to cover the Touch ID sensor as well as the camera, but there are other sapphire producers that could be providing those parts.