Judge Allows Consumers To Resell Some Sprint Nextel Cellphones

By: Juan Carlos Rodriguez | Law 360  |  November 5, 2013

A Kansas federal judge gave a partial win to a cellphone reseller in Sprint Nextel Corp.’s ongoing suit alleging trademark infringement and unfair competition, ruling Thursday that Sprint cellphone users can sell their phones to a third party as long as the phones are not activated on the customer’s Sprint account.

Sprint sued The Middle Man Inc. in March 2012, alleging it has suffered millions of dollars in losses due to The Middle Man’s practice of buying Sprint cellphones, “unlocking” them by disabling software that enables the phones to be activated on Sprint’s wireless system, and then reselling them. The company said Monday this case is one of many it is filing across the country as part of its effort to protect consumers from traffickers who “steal the subsidies that Sprint intends to benefit its legitimate customers,” and noted its claims in this lawsuit are still pending.

“The purpose of the software is to allow Sprint to offer the phones at a discount to the consumer while protecting Sprint’s subsidy investment in the phone. The illegally unlocked phones are trafficked and resold as new by defendants, at a premium, under the Sprint trademark,” Sprint said in its complaint. But U.S. District Judge J. Thomas Marten said a Sprint customer’s contract only prohibits the customer from selling a phone if it’s currently active on his or her account, and The Middle Man’s attorney said Monday the company has never bought or sold phones that were active on the Sprint network and does not intend to do so. “The contract states that the customer may not resell the services to another party, and these definitions make it clear that “services” refers to only the devices that are on the customer’s Sprint account. Any phones that are not activated on Sprint’s wireless network are not on the customer’s Sprint account; therefore, these phones may be resold,” Judge Marten said.

The terms and conditions are not a stand-alone contract, but are part of the consumer’s service agreement with Sprint, which is provided to the consumer “at activation,” according to the order. Until activation occurs, the wireless phone provides no Sprint services to the consumer and cannot be used until it is activated on a wireless network, at which point the consumer will have to agree to the provider’s terms, the judge said. “Absent an agreement, coverage will not be provided. There is no risk that a consumer will utilize Sprint’s network without paying for the privilege. This is also the case with wireless phones that were previously activated on the Sprint network but are not currently activated, either because the service agreement expired or because the consumer purchased an upgraded device,” Judge Marten said. But he did grant Sprint’s request that phone sales be blocked if they are activated on a customer account.

“When a phone is activated on the Sprint network, it becomes the instrument through which Sprint provides the consumer with wireless coverage. If the consumer could sell the activated phone to someone else, the purchaser of the phone would receive wireless coverage from Sprint without ever entering into an agreement with Sprint for such coverage. This is the situation the terms and conditions specifically prohibit,” the judge said. The Middle Man typically buys its phones from consumers who sell them online at sites like Craigslist.com, and those phones are in various states of use, from being unused and in the original packaging to showing signs of wear and tear, according to the judge.

Sprint said it is pleased that Judge Marten’s order narrows the scope of the defendants’ sole remaining counterclaim in the case, but said the order contains some legal and factual errors, and appears to be premised on a misunderstanding of Sprint’s agreement with its customers. “Contrary to the defendants’ assertions, Sprint only pursues claims against traffickers who steal customer subsidies, not against the legitimate Sprint customers we are trying to protect. We are currently preparing additional filings that we believe will straighten out this issue, but it is important to view this order in its proper context — Sprint’s 13 count complaint against the defendants remains pending and no trial date has been set yet, and the defendants’ other four counterclaims (including an attempt to assert a class action) have all been dismissed by the court.

We have no doubt that Sprint will prevail in this case, as it has in all of its other cases against phone traffickers,” the company said Monday. But The Middle Man attorney David Marcus of Bartle & Marcus LLC said Sprint’s lawyers have made a “cottage industry” of suing resellers like his client, and praised the judge’s ruling. “This is a tremendously positive development for The Middle Man and for other resellers of preowned wireless phones. Over the past few years, Sprint has sought to put these small businesses out of business, filing over 100 lawsuits in courts across the country. The Middle Man is one of the few companies with the courage to fight back. The court’s recent ruling was a resounding win,” Marcus said Monday.

Sprint is represented by Joe Rebein and Catherine C. Whittaker of Shook Hardy & Bacon LLP  and James B. Baldinger, Stacey K. Sutton and David B. Esau of Carlton Fields PA . The Middle Man is represented by James J. Kernell and Ginnie C. Derusseau of Erickson Kernell Derusseau & Kleypas LLC, and David L. Marcus of Graves Bartle Marcus & Garrett LLC . The case is Sprint Nextel Corp. v. The Middle Man Inc. et al., case number 2:12-cv-02159 , in the U.S. District Court for the District of Kansas.

Adapted from PDF – download original here.