Grandfathered means that these people had their unlimited data plan back when ATT offered it. If those people never upgraded just bought their phones out right then they don't lose their plan so they are "grandfathered" into the new phone. Meaning the plan transfers over. Unfortunately no one can get an unlimited plan from them anymore.
You don't have to buy the phone outright - or at least haven't in the past. I've upgraded every year since they discontinued the unlimited plan (every other year I steal my husband's upgrade, he gets the year old phone) and have been able to carry it over to the new phone at the new 2 year contract price.