Yesterday Patently Apple posted a report titled "The iPhone 7 is only Five Days Old and a Class Action has already begun over Apple's Upgrade Program." Today, the full formal lawsuit filing became public. The plaintiff that wasn't mentioned in announcement by law firm Block and Leviton is now known to be Emil Frank, an individual residing in Brooklyn, New York. He signed up for the iPhone Upgrade Program in September 2015 and currently owns an iPhone 6s Plus 64 GB in Space Gray which he purchased using the program. He tried to purchase an iPhone 7 Plus in either Black or Jet Black in either 128 GB or 256 GB on September 9, 2016 under the program, but was not able to do so. The Class Action covers five specific counts including Breach of Contract; Breach of the Covenant of Good Faith and Fair Dealing; Unjust Enrichment; Violations of the Consumer Legal Remedies Act; and Violations of the Unfair Competition Law. Our report extensively covers the Summary of the Action; Substantive Allegations; Plaintiff Experiences; and Class Action Allegations.

 

Summary of the Action

 

"Each year, Apple's most loyal fans wake up in the middle of the night to order the newest iPhones. Seeking to take advantage of this fervor among their most loyal fans, Apple introduced in 2015 a program called the "iPhone Upgrade Program." The promise of the program was that customers could make a simple monthly payment and then, each year, upgrade their iPhone to the newest model. Apple promised iPhone Upgrade Program customers a new phone every single year.

 

While scores of customers signed up for the program and were ready to take advantage of the every-year upgrade with the release of the new iPhone 7 and 7 Plus on September 9, 2016, Apple had a different plan in mind. It allowed non-iPhone Upgrade Program customers to snap up the limited inventory of the new devices while telling countless iPhone Upgrade Program customers to "check back later."

 

iPhone Upgrade Program customers are left waiting for new phones while they continue to make payments on their old phones. Even worse, their eligibility to get a new phone immediately upon release in 2017 or other future years without making extra payments will be limited by the terms of the program.

 

This action seeks to hold Apple responsible for its misleading marketing of the iPhone Upgrade Program. Specifically, Plaintiff seeks compensatory and injunctive relief that (a) reimburses the class for any extra payments they have made or will need to make on their 2015- purchased iPhones while they wait for a new iPhone; (b) retains their eligibility for an iPhone upgrade in September 2017 even if they have not been able to make 12 payments on their 2016 device because of the Apple-imposed delay; (c) requires Apple to offer their full inventory to all customers, and to stop limiting the availability of devices to customers using the iPhone Upgrade Program; and (d) allows aggrieved consumers to return their 2015-purchased iPhones and end their participation in the iPhone Upgrade Program with no further obligations."

 

Substantive Allegations

 

As has become the custom in September of each year, on September 9, 2015, Apple introduced their then-newest iPhones: the iPhone 6s and iPhone 6s Plus.

 

At the same time as it introduced iPhone 6s and 6s Plus, Apple also unveiled what it called the "iPhone Upgrade Program." The program was described by Apple as a way to get a "new iPhone every year and the coverage you want from AppleCare+."

 

Using marketing language such as "Get a new iPhone every year," and "Getting the latest iPhone has never been easier," Apple encouraged customers to make monthly payments to Apple in exchange for the promise of consistently getting access to the newest iPhone each year.

 

The iPhone Upgrade Program offered Apple's biggest fans and most loyal customers a way to make simple monthly payments in exchange for the newest iPhones, with a promise that "every year" the customer would be able to trade in last year's iPhone and receive the newest version of the phone.

For example, a customer who was interested in purchasing a 64 GB iPhone 6s Plus could pay $40.75 per month to receive the phone and AppleCare+ warranty service.

 

Under the terms of the program, so long as the customer waited at least six months and had made at least 12 payments, they could trade in their old iPhone and receive a new one at a similar monthly fee. Once the customer makes 24 payments on a single phone, she is entitled to keep the device and the contract ends.

 

Importantly, the payments account for more than the price of paying outright for the iPhone device. Customers pay an extra fee to Apple in order to have access to the newest devices on an annual basis and are required to bundle AppleCare+ warranty service as part of their plan.

 

Because Apple typically releases new iPhones in September each year, Apple's message was simple: make 12 monthly payments on the iPhone 6s or 6s Plus and then, next September, use the Upgrade Program to immediately upgrade to the newest iPhone technology.

 

As Apple's marketing page explained it, "[Y]ou can also upgrade to a new iPhone after just six months, if you've made at least 12 payments. Just trade in your current iPhone and start a new plan. It's that easy."

 

The program was a huge success. One analyst, Gene Munster of Piper Jaffray, estimated that "15% of new iPhone customers" might opt-in to the program when it was first announced. By November, Munster had raised his estimates to "as high as 50%," after a survey indicated that at least 37% of respondents joined the program.

 

20.    At the first opportunity that iPhone Upgrade Program customers had to use the program, however, they found out that the program was anything but "easy." Instead, it was a marketing scheme that utterly failed its participants.

21.    On September 7, 2016, Apple announced the iPhone 7 and iPhone 7 Plus.

As Apple explains it, the iPhone 7 and 7 Plus are the "best, most advanced iPhone[s] ever," and are "packed with unique innovations that improve all the ways iPhone is used every day."

 

The new iPhones promoted better performance, better battery life, innovative new cameras, an "amazing audio experience," and water resistance, among other breakthrough features.

 

Apple announced that customers could start ordering the iPhone 7 and 7 Plus on Friday, September 9 (at 12:01 a.m. Pacific time), and that the phones would be available in stores and delivered to customers beginning on Friday, September 16.

 

Like many Apple customers, iPhone Upgrade Customers, including Plaintiff, stayed up late or set their alarms to wake up in the middle of the night so that they could be among the first to pre-order the new phones.

 

As promised, sales of the iPhone 7 and 7 Plus became available at apple.com and on the Apple Store "app" at 12:01 a.m. on September 9.

 

While traditional, non-program Apple customers were directed to add phones to their shopping carts and proceed to checkout, Apple's iPhone Upgrade Program customers were sent a different route.

 

What became clear to these Upgrade Program customers very quickly was that Apple was providing extremely limited inventory for them to reserve for pickup at specific Apple Stores. While other non-plan customers snapped up popular iPhone 7 and 7 Plus devices in various sizes and colors, most iPhone Upgrade Program customers had access to almost no iPhone inventory to choose from for their upgrade.

 

Before long, certain iPhone models were backordered until at least November 2016. But iPhone Upgrade Customers could still not even place orders that would arrive when inventory became available the way Apple's traditional customers could. Instead, they were simply shut out of reservations and told to check back later for future appointments and inventory.

 

iPhone Upgrade Program customers were told bluntly: "We're not taking any more reservations to upgrade your iPhone right now. Reservations will reopen at 8:00 a.m. on September 17. Please come back then to make a reservation."

 

Outrage was immediate. For example, the MacRumors website reported that this message appeared "just minutes after pre-orders began," and while Apple's traditional customers were still snapping up iPhones set to be delivered on September 16.

 

As online publication Motherboard put it: Apple created "two separate pools of phones to order from. If you paid up front, you were pulling from what appeared to be a universal stock list. But to upgrade your old iPhone using the upgrade program, stocks were allocated to specific stores. . . The in-store requirement makes it harder, obviously, to get your desired iPhone if you're part of the upgrade program."

 

Motherboard continued: "Another thing making it hard to get the specific iPhone you want [if you are an iPhone Upgrade Program customer] is the fact that . . . Apple isn't even offering the option to preorder or get on a waitlist for phones that aren't in stock."

 

iPhone Upgrade Program customers—some of whom had woken up at three in the morning to place their orders—were shocked.

 

News outlets covered the disappointment. Motherboard ran a story headlined 'iPhone 7 Shortages Are Turning Apple's iPhone Upgrade Program into a Big Mess.'

 

This is not just a problem created by the limited supply of the newly released iPhones. Rather, Apple intentionally limited the inventory available to iPhone Upgrade Program customers (who are already contractually locked into making monthly payments for their old devices) to capture sales from new customers who weren't already part of the program.

Indeed, customers who purchased their devices from carriers (such as AT&T or Verizon) or from Apple without being part of the program were able to secure their iPhones long after iPhone Upgrade Program customers were shut out. Even customers on similar plans offered by the carriers (such as AT&T Next) were provided more access than iPhone Upgrade Customers were.

 

The consequences for iPhone Upgrade Program members are severe.

 

First, they are not able to get a new iPhone "every year" as Apple promised, as they will now be delayed weeks or months (unlike many of Apple's other customers, who were able to order what they wanted during the launch and who will start to receive their desired devices as soon as Friday, September 16.) For these customers, having quick access to the latest technology is the very reason they signed up for the program in the first place.

 

Second, iPhone Upgrade Program customers will now be forced to make additional payments on their old phones while they wait for availability of new ones, violating the promise of the program. If an iPhone Upgrade Program customer is not able to get her choice of iPhone until November, they might make two or three additional payments on their old phone.

 

Third, the knock-on effects are even worse. Because the terms of the program require a customer to make twelve payments before upgrading to a new phone, if Apple introduces another revolutionary new phone in September 2017 (as most pundits expect), iPhone Upgrade Program customers that are now forced to wait until November or later to purchase their 2016 iPhones will be shut out completely from receiving the new phone (without making extra payments) until at least November 2017, months after everyone else receives their phone.

 

For example, imagine an iPhone Upgrade Program customer who signed up for the program in September 2015 and purchased an iPhone 6s Plus. The customer has made 12 monthly payments as of September 2016 and logs in to take advantage of the upgrade and receive a new iPhone 7 Plus, but instead is told to come back later and must wait until November (or later) to receive the phone she wants. The customer will have to make at least two additional monthly payments on the iPhone 6s Plus (costing her $80 or more) before receiving the new iPhone 7 Plus as promised. When Apple releases the next iPhone in September 2017, that customer will have only made 10 payments on their iPhone 7 Plus. Even if there is plenty of inventory set aside for iPhone Upgrade Program customers in 2017, that customer will need to make two extra payments (an additional $80 or more) to be eligible for the immediate upgrade, or will instead need to wait months to receive her new phone.

 

What is worse, iPhone Upgrade Program customers still can't place orders for new phones. Instead, they have been told to check back on September 17 at 8:00 a.m. to see if they can make an appointment at a local Apple store to receive a new device. The appointment will be successful only if the local store has inventory of the desired device.

 

But for devices which are backordered and unavailable, iPhone Upgrade Program customers will be forced to check back every day to make an appointment. No other iPhone customer is required to be so actively involved in securing the newest phone. Other customers can simply place their orders now and receive their phones as soon as they are available. Shockingly, the very customers who are most likely to value receiving new iPhones as soon as they are available are the ones Apple courted with their iPhone Upgrade Program. These customers are now in a worse position than every other iPhone customer because they joined the program.

 

Plaintiff's Experiences

 

According to the formal complaint, "Emil Frank is a loyal Apple customer who chose to join the iPhone Upgrade Program because he saw it as a premium option for the luxury of having a new phone every year.

 

He relied on Apple's unambiguous promise of a 'new iPhone every 12 months.' It was this promise that caused him to join the program, and this promise that Apple violated.

 

Mr. Frank woke up at 2:45 a.m. New York time and was shocked to find that within moments, it was impossible to find an iPhone under the program anywhere near his location in New York City. He began searching in other parts of the state, as he was willing to drive to Buffalo or Albany to get access to his new phone, all to no avail.

 

He expanded his search as far as North Carolina and Maine: nowhere was he able to get the iPhone model he desired. Mr. Frank checked inventory at every Apple store in New York, New Jersey, Pennsylvania, Connecticut, Rhode Island, Massachusetts, Vermont, New Hampshire, Maine, Maryland, Delaware, Virginia, and North Carolina: none would offer him any of the four devices he was interested in, nor would any allow him to order the device and be notified when it was ready.

 

At the same time as he was being shut out, customers outside the program were snapping up 128 and 256 GB iPhone 7 Plus devices in Black and Jet Black. Non-upgrade customers were able to place orders that guaranteed in-store pickup or promised to deliver as early as September 16 or shortly thereafter.

 

Now, Mr. Frank is left waiting—likely into November or December. Customers outside the program were securing phones that would have been acceptable to Mr. Frank for hours after he was completely shut out. Having lost all faith in the iPhone Upgrade Program, Mr. Frank decided to purchase a new phone for approximately $950; his best hope of receiving the phone will be sometime in October, three weeks or more after it was made available to others.

 

He is now stuck with an obligation to make twelve additional payments on the Upgrade Program phone he wasn't able to use as intended.

 

Class Action Allegations

 

Plaintiff brings this action as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure on behalf of a class of all persons and entities who joined the Apple iPhone Upgrade Program prior to September 2016, fulfilled their obligation to make twelve monthly payments under the Program or are willing to fulfill that obligation, and have been unable to reserve or acquire a new iPhone 7 or 7 Plus. Excluded from the Class is the Defendant, directors and officers of Defendant, as well as their families and affiliates.

 

The members of the Class are so numerous that joinder of all members is impracticable. The disposition of their claims in a class action will provide substantial benefits to the parties and the Court.

 

There is a well-defined community of interest in the questions of law and fact involved in this case. Questions of law and fact common to the members of the Class which predominate over questions which may affect individual Class members include, but are not limited to:

 

a.    Whether Apple breached their contracts with iPhone Upgrade Program customers by refusing to allow them to reserve phones or access new iPhone inventory

 

b.    Whether Apple's implementation of the iPhone Upgrade Program violates the duty of good faith and fair dealing;

 

c.    Whether Apple's implementation of the iPhone Upgrade Program was unfair and/or deceptive;

 

Plaintiff's claims are typical of those of the Class because Plaintiff and the Class sustained similar damages from Defendants' wrongful conduct alleged herein.

 

Plaintiff will adequately protect the interests of the Class and has retained counsel who are experienced in class action securities litigation. Plaintiff has no interests that conflict with those of the Class.

 

A class action is superior to other available methods for the fair and efficient adjudication of this controversy."

 

The Class Action presented in today's report was filed in the California Northern District Court, San Jose Office. The Presiding Judge in this case is noted as being Judge Nathanael M. Cousins.

 

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