Apple hit with $1.2 billion class action for ‘bricking’ iPhones

October 12, 2007, 1:20 AM UTC

Last Friday, Apple (AAPL) was hit with a $1.2 billion class action for allegedly bricking — i.e., intentionally disabling — the iPhones of customers who had used unauthorized “unlocking” software on their phones (enabling them to use carriers other than AT&T) or unauthorized applications on their handsets (like non-Apple ringtone software). AT&T Mobility (T) is also named as a co-defendant.

The suit seeks $1.2 billion in damages, alleging violations of the federal antitrust laws, California unfair business practices laws, and the tort of “computer or chattel trespass.” It also claims that Apple’s customer warranty and license agreements, by forbidding customers from using third-party software on their phones, violate the Magnuson-Moss Warranty Act. (For the text of that act, see section (c) of the statute linked here.)

Both Apple and AT&T, through spokespersons, declined comment. Here is the complaint, and the suit’s official web site, set up by the plaintiffs lawyers, is here. (Don’t miss the picture of Steve Jobs in the iPhone screen looking suitably Satanic.)

The case stems from a series of unusual events that began with a carefully worded press release from Apple on September 24. (These events have been extensively covered in the blagosphere, but a good place to begin might be with my colleague Philip Elmer-DeWitt’s Apple 2.0 post, here.)

“Apple has discovered,” it said, “that many of the unauthorized iPhone unlocking programs available on the Internet cause irreparable damage to the iPhone’s software, which will likely result in the modified iPhone becoming permanently inoperable when a future Apple-supplied iPhone software update is installed.” It went on to warn that “unauthorized modifications” to the iPhone’s software violated the customer’s license agreement and voided the warranty.”

Four days later the company released version 1.1.1 of its iPhone operating system which did, indeed, cause problems, with many of the expensive phones being disabled — some permanently.

The suit alleges that none of these problems were actually inadvertent or inevitable byproducts of necessary upgrades, but were, instead, intentionally engineered efforts to punish customers for using competitors’ applications or services instead of Apple’s and AT&T’s. It also asserts that Apple customer service personnel were instructed to refuse to help customers restore the damaged phones to service, even though inexpensive fixes were technically feasible.

In an email, lead plaintiffs counsel Max Folkenflik, of New York’s Folkenflik & McGerity, says that he is seeking certification of a class that would include all purchasers of iPhones, regardless of whether the phones were actually disabled by Apple’s release of version 1.1.1. “All purchasers have less choice and pay higher prices than they would in a competitive market,” he writes. “Freedom of choice is worth money in the same way that markets value liquid investments over illiquid investments. The fact that unlocked iPhones sold for more than locked iPhones provides evidence for that conclusion if any were needed.”

He then totes up the damages as follows. “Our actual damage estimate of $200 million is based on a 2 million member class,” which is based on the number of iPhone customers that are predicted by December. He then theorizes that each purchaser suffered about $100 in injury due to “higher voice and data costs, avoidable roaming charges, fees for termination of T-Mobile plans, and the reduction of value based on the locked up technology.”

The antitrust laws and the California statute allow trebling of damages, which would bring the figure up to $600 milion. Then he also seeks punitive damages under the tort count (chattel trespass) of an additional $600 million, pushing the total figure up to $1.2 billion.

Though the suit raises many thorny issues, one of the more eyebrow-raising claims accuses Apple of monopolistic practices on the theory that the iPhone is such a distinctive device that it constitutes its own market — i.e., no other cell phone manufacturer even rises to the level of being a competitor. Since Apple obviously enjoys a monopoly over the iPhone market, the suit claims it is now illegally trying to extend that monopoly into other areas, including phone service and handset software.

To support the claim that the iPhone should be deemed to constitute its own market, the plaintiffs allege: “For many users, including the Plaintiffs and the Class, there was no product available which offered anywhere near the same combination of services and ease of use.”

It seems that being sued for antitrust violations may be overtaking plagiarism as the sincerest form of flattery.