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What is Prepaid Mobile Phone Trafficking?
Cell phone traffickers have created a complex network of individuals and companies in the U.S. and around the world that divert subsidies from wireless companies used to lower the cost of their phones for legitimate customers. Traffickers profit from subsidized phones by hacking into their proprietary software and then reselling the phones in the U.S. and other countries where they can be used on other wireless networks.
Although there does not appear to be a single entity orchestrating all of the worldwide trafficking, the networks of traffickers identified thus far appear to share common structural elements. The schemes involve groups of “runners” who purchase prepaid mobile phones at deep discounts from major retail outlets. The runners travel from store to store, buying the maximum allowable number of phones.
Runners quickly resell the phones to “middlemen” or resellers who remove the phones from their original packaging and prepare them for resale. First, the phones’ proprietary software is hacked in order to allow the phones to operate on a network other than the one for which they were intended. This process often occurs in foreign countries with cheap labor prices and lax enforcement of intellectual property laws. The hacked or “unlocked” phones are then repackaged or “re-kitted” for resale.
The “re-kitting” process involves placement of the phones in new – often counterfeit – packaging along with a charger that operates on the target country’s electrical system, counterfeit batteries, instruction manuals, warranties and other materials, all of which is intended to deceive the consumer into believing they are buying a brand new phone. The unsuspecting consumer who ultimately buys the phone here in the U.S., or in Asia, Latin America or the Middle East, likely has no idea that their phone was originally sold as a prepaid phone in a retail store like Wal-Mart, Family Dollar or Target.
How it Hurts Consumers
Prepaid mobile phone trafficking is a nationwide concern for the wireless industry because it has the potential to drive up costs to consumers. To make wireless service affordable and accessible for everyone, TracFone heavily discounts the retail price of its phones far below its own cost, but expects to recoup its investment by providing service to customers through the sale of airtime cards and other services.
In addition to lost subsidy investment suffered by the American phone service providers and their legitimate consumers who are harmed by the losses that are ultimately passed along to them in the form of higher rates, the consumers who buy the hacked phones are deceived into buying inferior products. The phones were not designed or manufactured for use on their local networks, and the hackers often damage the phones’ software as they stumble through the process of trying to unlock and reprogram the handsets to work on other carriers’ networks. The counterfeit warranties are generally not valid, and the manufacturers either absorb the cost of fixing the damage caused by the hacker or refuse to fix phones that do not work properly because of the tampering. Consumers in this country also suffer because traffickers often buy up all the prepaid wireless phones in a store, leaving none for legitimate customers to buy.
Who is Taking the Lead to Stop Trafficking?
TracFone is working diligently through legislative and legal channels to stop this grey market activity and the millions in losses they suffer. TracFone has supported federal legislation to facilitate criminal prosecution of the perpetrators, and has filed numerous lawsuits in federal courts across the country.
Since 2005, TracFone has filed 63 lawsuits against more than 219 separate defendants in 11 judicial districts across seven states (California, Florida, Georgia, New York, Oklahoma, Pennsylvania and Texas), and has obtained 56 stipulated permanent injunctions and final judgments. A total of more than $142 million has been awarded in damages.
The court orders prohibit the defendants from continuing to purchase, sell, unlock, or alter TracFone prepaid mobile phones, and have awarded TracFone millions of dollars in damages. The orders find that the defendants’ conduct constitutes copyright and trademark infringement, violates the federal Digital Millennium Copyright Act and constitutes a breach of the terms and conditions that govern the provision of TracFone’s service.
Other major wireless service providers have also taken aggressive action to shut down trafficking. AT&T, T-Mobile, IDT and Virgin Mobile have all filed similar lawsuits and are succeeding in getting courts to enter injunctions and award damages. In addition, wireless handset manufacturers Nokia and Motorola have also filed lawsuits against traffickers, focusing on their use of counterfeit packaging and components.
TracFone is constantly looking out for additional targets for litigation, and many more lawsuits will be filed in the coming weeks and months. The industry wants the perpetrators to know that they are all being pursued.
Other Service Providers Pursuing Lawsuits
• AT&T
• T-Mobile
• Virgin Mobile
• IDT (TuYo)
Phone Manufacturers Pursuing Lawsuits
• Nokia
• Motorola
