Phone resale not infringing even when reseller defaults

T–Mobile USA, Inc. v. Chong, 2014 WL 1350896, No. C13–29 (W.D. Wash. Apr. 4, 2014)

T-Mobile moved for the second time for default judgment; the court only granted it in part, though giving T-Mobile what it wanted in the form of a permanent injunction. Chong sold T-Mobile branded prepaid cellphones and SIM cards without T-Mobile’s permission.

T-Mobile sought default judgment for breach of its service contract binding those who activate its phones, and for violation of the Lanham Act (and coordinate state-law claims).  The court found that T-Mobile should get judgment and nominal damages on its breach of contract claim, but not on the Lanham Act claim.

T-Mobile sells phones below cost, hoping that customers will eventually buy additional months of service/airtime.  The phones come with SIM cards preloaded with airtime minutes.  Phones must be activated, often with the assistance of the authorized retailer-seller and sometimes through a T-Mobile website.

Default meant that only T-Mobile’s version of the facts was available.  According to the complaint: Chong (and people acting at his direction) bought prepaid phones without activating them. He then resold them domestically and overseas by unlocking the phones (disabling/modifying software or hardware designed to ensure that they’re only used on T-Mobile’s network). Plus, Chong resold extracted SIM cards, sometimes by honestly stating the number of minutes on each card, and other times overstating the amount or falsely stating that the cards permitted unlimited minutes.  Sometimes he used T-Mobile activation codes, and since purchasers are inevitably T-Mobile customers, some blame T-Mobile when they discover that their cards provide less airtime than advertised and contact T–Mobile to complain. 

The only information provided to the court about Chong’s sales practices was “a collection of hundreds of pages of ads from the Craigslist website.” T–Mobile failed to present the ads “in a way that allows the court to draw meaningful conclusions about the way in which Mr. Chong advertises the T–Mobile phones he resells.”

T-Mobile’s contract applies to anyone who activates T-Mobile service after buying a prepaid phone. It bars “Misuse of Service or Device,” including “reselling or rebilling [T–Mobile] service,” “reselling T–Mobile devices for profit, or tampering with, reprogramming or altering T–Mobile Devices for the purpose of reselling the T–Mobile device,” and more. It concludes with a declaration that “[i]f you purchase a T–Mobile Device that is sold for use on T–Mobile Prepaid Service, you agree that you intend it to be activated on our Service, and do not intend to, and will not, resell, modify and/or export the T–Mobile devices, or assist someone in these activities.”  The court found that the complaint plausibly alleged that Mr. Chong both breached these provisions and assisted or directed others in their breaches of these provisions.

T-Mobile also sought default judgment on the §43(a)(1)(A) (not false advertising) claim. The court found that T-Mobile hadn’t alleged conduct that violates the Lanham Act.  Rather than falsely designating the origin of his products, he touted them as T-Mobile products, which is generally allowed by the first sale doctrine. T-Mobile argued that it could take advantage of an exception for goods that have been significantly altered.  “The problem is that T–Mobile’s complaint does not allege significant alterations. It alleges instead that Mr. Chong resells its phones and SIM cards out of their original packaging, stripped of manuals, warranty information, and the like.”  Even assuming that this voided the warranties, the Lanham Act doesn’t bar resale under these circumstances. Some courts are willing to consider requiring the reseller to include a repackaging notice, but barring resale entirely is different.  Maybe T-Mobile could prove a violation of the Lanham Act, but its allegations didn’t get the job done.  “With no adversary to challenge T–Mobile’s view of the Lanham Act, the court is reluctant to create precedent (even non-binding precedent) suggesting that the mere repackaging of goods is a violation of the Act.”

The court did not award damages for T-Mobile’s claimed $20,000 in investigative costs, and it didn’t show how much it lost when a subsidized phone left the T-Mobile network, so the court awarded nominal damages of $1, and no attorney’s fees since T-Mobile didn’t prevail on its Lanham Act claim.

T-Mobile did show irreparable harm; typically, monetary harm isn’t irreparable, but “[w]thout investing considerable resources in tracking Mr. Chong’s resale activity, T–Mobile has no way to assess the ongoing financial harm his continuing sales would cause. Financial harm that cannot practically be remedied is irreparable harm.”  Banning Chong from selling or activating T–Mobile cellular phones and SIM cards and from inducing/assisting others with the same was sufficient.