AT&T Mobility, the biggest US wireless company, is going after handset traffickers in Federal court. In the suit, filed February 5, 2008 in the Northern District Court of Texas against Wireless Exclusive USA, LLC, based in Dallas, TX, AT&T says that the damages of the trafficking exceed $76 million and also names 50 unknown “John Does” and 50 XYZ Companies, who AT&T said are involved in the scheme.

This latest suit by a US prepaid carrier against those who purchase heavily discounted handsets intended for use by its wireless customers, is the latest in a series of attempts by prepaid wireless companies to stem the losses due to the trafficking of their prepaid handsets. The international market for repackaged handsets is very large, and their ubiquitous availability in retail locations makes them tempting targets. AT&T notes in the suit that federal courts have recognized previous suits by others that this activity violates civil laws.



Illicit Bulk Resale Scheme

Named in the suit, in addition to Wireless Exclusive, was Moiz Khoja of Dallas, who the filing said was registered to do business in Dallas County under the assumed name of Wireless Exclusive.  AT&T said that the practice, which it called “Illicit Bulk Resale Scheme,” resulted in profits for Khoja and other unnamed co-conspirators.

The suit said that the defendants bulk sell and ship the modified and repackaged handsets to other co-conspirators, including buyers outside the US. As evidence, AT&T said that “massive quantities” of empty GoPhone packages and materials have been “observed” in and around the defendants’ business.  “I wonder if AT&T, for whom the name ‘dumpster diving,’ was created, is now engaging in the practice themselves,” asked one unnamed attorney.

The practice involves buying handsets from prepaid wireless carriers, which are sold at a heavy discount from carriers like AT&T Mobility, TracFone, T-Mobile and Virgin Mobile. They then remove the retail clamshell packaging, strip logos and other identifying marks, reprogram, “hack” the sets and sell them in Latin America, Asia and the Middle East at a premium.

AT&T’s suit maintains that this is in violation of trademark law and other statutes, including breach of contract, false advertising, unfair competition, tortuous interference, civil conspiracy and unjust enrichment. AT&T also notes that TracFone, T-Mobile, Nokia and Virgin have all filed similar suits in federal courts across the country.

Scheme Details

The practice is relatively unsophisticated, and uses labor intensive brute force methods. The companies enlist “runners” by advertising on the Internet. These runners then go to stores like Best Buy, Sam’s, Target, Wal-Mart and other retail locations. They buy the prepaid handsets, which are intended to be used to access AT&T’s GoPhone service.  To make sure that they can only be used in conjunction with the service intended, the handsets are “locked” to that service.

After buying the handsets at a retail location, they are then taken to a central location where they are removed from the retail packaging, and logos and other distinguishing marks removed. Finally, they are unlocked so they can be used on other networks and shipped overseas, where they are marked up and sold at often large profit margins.

Locking the handset means that the handset will only work when a SIM card that is connected with the carrier’s service is inserted. This stops someone from buying a handset, then inserting another carrier’s card in it. However, carriers will usually unlock the handsets on request.  To make the handset work with a carrier overseas, where they are usually shipped and sold, the handset must be unlocked. The process can be as simple as entering a series of codes, or as complex as requiring a PC to finish the procedure. The suit alleges that the defendants unlocked the handsets in violation of the license agreement that is attached to the retail packaging.



Traffickers Bypass Policies

AT&T told the court that it had implemented policies at the retail level in an attempt to thwart the traffickers. The number of GoPhones an individual could purchase was limited by policy, but AT&T said the defendants circumvented this by employing large numbers of runners to make multiple purchases.

As a consequence, according to the suit, AT&T Mobility is losing millions of dollars, and is asking the court to award it damages of $76 million. AT&T is represented by James Baldinger of Palm Beach-based Carlton Fields, who also represented TracFone in other cases in recent months against wireless phone hackers, and is working with federal law enforcement officials on the problem.  Carlton Fields said that it was also pursuing the matter with law enforcement officials.