Lawsuit Accusing Apple of Hiding Weakening iPhone Demand Prior to Early 2019 Revenue Warning Allowed to Proceed

U.S. federal judge Yvonne Gonzalez Rogers this week ruled that a class action lawsuit accusing Apple of fraudulently concealing weakening demand for iPhones between August 2017 and January 2019 can proceed in part, as reported by Reuters.

In January 2019, Apple lowered its revenue guidance to $84 billion for the first quarter of its 2019 fiscal year, down from its original forecast of $89 billion to $93 billion. In a letter to shareholders, Apple CEO Tim Cook said that lower than anticipated iPhone revenue, primarily in Greater China, accounted for the entire revenue shortfall.

On an earnings call in November 2018, a few months earlier, Cook touted the "very successful launch of iPhone XS and iPhone XS Max" and also noted that iPhone demand in China was particularly strong during the fourth quarter of its 2018 fiscal year. Apple made no mention of potential iPhone or China weakness on the horizon.

In her order, however, judge Rogers wrote that "absent some natural disaster or other intervening reason, it is simply implausible that Cook would not have known that iPhone demand in China was falling mere days before cutting production lines," likely referring to a Wall Street Journal report that claimed Apple slashed production orders for the iPhone XS, iPhone XS Max, and iPhone XR just days after its earnings call.

"It is also implausible that Cook was unaware of emerging market issues in China despite admitting two months later that the Company observed worrying signs throughout the quarter," added Rogers.

On its November 2018 earnings call, Apple also announced that it would no longer be disclosing iPhone, iPad, and Mac unit sales going forward. Rogers said this decision "plausibly suggests that defendants expected unit sales to decline."

Apple's stock price dropped up to 10 percent in the hours after it lowered its revenue guidance, resulting in losses for shareholders. The complaint is led by the Employees' Retirement System of the State of Rhode Island.