T-Mobile has won damages and an injunction (via Phone Scoop) against several companies that were taking bulk quantities of its prepaid handsets, unlocking them, and then reselling them. The company calls such activity "prepaid phone trafficking," when it's really just exploiting a poor business model. As in other suits filed by other operators, it sounds like T-Mobile based this one on copyright or trademark claims, saying "Consumers are harmed and may be misled about the source and origin of their mobile phones... Because the phones may still carry T-Mobile's brand, consumers may believe they are purchasing handsets manufactured for T-Mobile and covered by original warranties." That's slightly counter-intuitive: T-Mobile says the unlockers made their money by buying handsets locked to the operator, then unlocking them so they could charge a higher price when they were resold. According to T-Mobile, the phones carried a higher price, weren't sold in original packaging and didn't come with manuals. They were also, presumably, accompanied by advertising playing up the fact that they could be used on any operator's network. All of this combined would seem to make it pretty clear to buyers that they weren't buying an original, "official" T-Mobile product. So where's the basis for the confusion claims?

For a few years, we've been covering the various lawsuits over mobile phone unlocking, mostly involving the company TracFone. TracFone focuses on the "prepaid" mobile phone market. That is, rather than selling long term contracts to people with various total minutes, it just sells phones with a certain number of minutes already on them that can then be re-upped at the buyer's discretion. However, like typical mobile phone service providers, TracFone subsidizes the price of the phone in order to make it seem quite cheap (sometimes as low as $10 or $15). The idea is to hook people and make money on selling the minutes. However, there's no requirement that people buy more minutes.

What's happened, of course, is that people figured out a huge arbitrage opportunity. They buy TracFone phones on the cheap, unlock them, and then resell them for a higher price (often outside the country). The problem here is TracFone's choice of a business model. It decided to subsidize the phones and it set up a business model that doesn't require people to sign a long term contract or ever agree to buy more minutes. However, if you listen to TracFone tell the story, this is a case of felony interference of a business model, and anyone unlocking those phones must be stopped.

For a while it was abusing the DMCA for this purpose -- using it to claim that the unlocking was circumvention of copy protection. Of course, that's exactly how the DMCA is not supposed to be used -- and that was made even more clear when the Library of Congress explicitly carved out an exemption for mobile phone unlocking, making it quite clear that this is perfectly legal. TracFone has whined about this, but it still doesn't amount to much more than that the company just picked a bad business model.

However, the situation keeps getting more bizarre. Some folks involved in one of these arbitrage opportunities were eventually arrested for terrorism, after US officials assumed that anyone buying so many prepaid phones must be planning some sort of attack (don't ask). This had companies in the space suddenly claiming that this action of unlocking prepaid phones was a national security threat (seriously). What's scary is that some officials seem to believe it.

It turns out that TracFone actually is winning a bunch of the lawsuits it's filing, using both questionable copyright and trademark claims. However, the real kicker is that one man is actually facing jailtime for this. It's a little unclear from the wording in the article, as the jailtime may actually be as a result of him ignoring a judge's order to stop the practice of reselling unlocked TracFones -- but it's still not clear why it's illegal to unlock these phones that were legally purchased. The DMCA exemptions say that unlocking a phone is perfectly legal, and as long as the phone was legally purchased, it's now the possession of the buyer, who should be allowed to tinker with the software and resell it without having to worry about lawsuits or (worse) jailtime. Yes, TracFone is upset that it wipes out their business model, but the law isn't designed to protect their own poor choice of business models.

As was widely expected, it turns out that all the hype and fuss about the iPhone costing $199 was really hiding the key facts: it's only that price if you're buying it in the US, along with a long term contract with high service fees. At first it actually appeared as though the only possible way you could buy the phone was with one of those contracts. However, AT&T has now admitted that it will indeed sell the phone without a contract, but the price will be $599. While some unlockers may find that worthwhile, it's probably a bit much for most. Still, this once again highlights how Apple's predictions that it was going to change the economics of the mobile phone industry haven't actually been true. There are plenty of mobile phones out there that you can buy subsidized under a contract, which cost 3x as much without a contract. So, rather than changing the economics of mobile phones, Apple has now completely bought into them. Update: Of course, as some are realizing it's actually cheaper to buy the subsidized version and break the contract. The early termination fee is less than the difference here, so you end up doing better that way.

When we wrote about the iPhone pricing immediately after the Steve Jobs keynote, it wasn't entirely clear what the details were, and if AT&T/Apple had shifted to a typical carrier-subsidized model. However, the details quickly became clear. Indeed, Apple and AT&T ditched the deal they had last year, whereby Apple actually received a cut of AT&T's service fees. Instead, AT&T is buying the devices directly from Apple and then selling them (at a loss) to customers who will need to sign up for a more expensive service and a two-year contract (rather than the old one-year contract). Basically, this is back to the traditional model of mobile phone sales -- which Apple had suggested was a thing of a past just a year ago.

Either way, though, the deal works out fine for Apple. It still gets the full price it needs to get on the iPhones and doesn't have to worry about recouping service fees from folks who unlock iPhones. AT&T, on the other hand, now becomes a lot more reliant on service fees, first to make up for the loss on the device sale, and then to show growth in its 3G network usage. To that end, it appears that AT&T has totally ditched the old model where you could buy an iPhone and "activate" it on your own. No more. Now you have to both buy and activate the phone in stores. You can't order the phones online and have them delivered to be self-activated. In Engadget's post, the writer seems confused by this, and quotes AT&T's bogus claim that it did away with self-activation because the company "found that many others wanted to complete purchase and activation in one step so they could walk out of the AT&T store with their iPhone up and running." If that were the case, they could have just added in-store activation, without removing the option for self-activation.

The real reason seems pretty obvious: if you have to both buy and activate the phones at the same time and they require a two year contract, it's a lot trickier to get your hands on an iPhone for unlocking purposes. Since the full process is supposed to happen at once, it seems unlikely that stores will be letting people walk out the door with an iPhone that doesn't also have a contract. Those hundreds of thousands of unactivated iPhones that disappeared into China? Not so easy this time around (of course, you'll also note that the new iPhone will be available in 70 countries, so they're trying to stamp out the issue from the supply side too). Yes, there will still be 3G iPhones out there that can be unlocked, but that market is going to dry up significantly and cost a lot more.

It's quite interesting to see the way companies misuse intellectual property law in order to try to prop up what is otherwise a weak business model. We've covered the case of Tracfone, a prepaid mobile phone company, who sells cheap phones hoping to make it up on the service fees. However, when an exception was added to the DMCA allowing phone unlocking, Tracfone flipped out. The company even went so far as to claim that unlocking mobile phones could represent a national security issue. Tracfone, though, is a rather small player in the space. It turns out that AT&T is joining in on the fun and suing to stop prepaid phone unlocking. The company is not going after individual unlockers, but the bulk unlockers. What's interesting, though, is that the lawsuit appears to be over the issue of trademark violation. Why this isn't just a contractual issue isn't clear -- but it seems strange to make it a trademark issue. However, again, all this really shows is that the business model around prepaid phones, relying on subsidized phones, isn't a particularly good one. That's no reason to sue or pass laws that protect it, though.

With reports of huge numbers of iPhones being purchased to be unlocked and resold, it looks like Apple trying to clamp down a bit on the process by changing the rules for purchasers: requiring credit cards for purchases and limiting order to only 2 iPhones at a time. This is similar to what the original "launch day" limitations were. The credit cards let Apple track purchases more carefully (though, you have to wonder what good that really does) and the two person limit makes life harder for unlocker/resellers -- but also makes it more likely that parents will be able to pick up iPhones for their kids this holiday season. As for whether or not it's legal to turn down someone handing over the requisite amount of cash, we'll just let the US Treasury Department explain that it's perfectly fine. The whole "legal tender" bit doesn't mean anyone has to accept your cash.

A bigger question, though, is why Apple would bother? The resellers are likely to figure out ways around these limitations anyway, and it just seems more likely to cause problems for legitimate purchasers (especially younger ones who might not have a credit card yet). And, while it is true that Apple makes money from every iPhone with AT&T service, it's silly to completely shut off unlockers, who still are giving Apple plenty of money that they might not hand over if they were forced to go with AT&T service (especially those from foreign countries where iPhone service is not offered). This really seems like an unnecessary restriction that isn't likely to help Apple very much.

Just a few days after a class action lawsuit was filed in California against Apple for locking down the iPhone, the California Supreme Court ruled on a different case that may have an impact on the Apple case. It's given the go ahead on a separate lawsuit against T-Mobile for locking its phones and requiring an early termination fee. T-Mobile had argued that the terms of service required that any dispute go to binding arbitration, so that it didn't make sense to take it to the courts. Of course they want binding arbitration because companies almost always win in binding arbitration. The court found that it's perfectly reasonable to take this issue to court. How the courts will actually rule on the issue could make a big difference in the Apple/iPhone case -- as there is the possibility that the courts may find that (in California at least) locking a phone to a single network is not allowed. It may depend on the specific wording of state laws, as the specifics of such a case can get rather technical. To be honest, if a mobile phone operator wants to lock a phone to only their network, and people agree to it in the contract (or agree to an ETF), then that should be a contractual issue. It's a dumb business practice -- as many operators are starting to realize. However, that doesn't necessarily mean it should be illegal.

While the last class action lawsuit over the iPhone was pretty ridiculous -- claiming that the rapid price drop was illegal -- this latest one may have a bit more substance behind it. One of the victims of the infamous iPhone iBricking update has now filed a class action lawsuit against Apple, claiming that the iBricking action was a violation of California law. The specific arguments are a bit complex, but basically, the guy is claiming that in locking the handset to one carrier, Apple violated sections of the Cartwright Act, which is designed to prevent companies from creating artificial market barriers on products they sell in order to boost the price. On top of that, the lawsuit notes that unlocking a phone for use on other networks is perfectly legal under last year's DMCA exemptions. Therefore, to then brick the iPhones that were unlocked violates the California law, saying that it's illegal to take actions that "substantially lessen competition or tend to create a monopoly." It may be a bit of a stretch to say that applies in this case, and Apple can simply plead (reasonably) that the iBricking was not on purpose, and that the company has no requirement to support unlocked handsets -- but if this case actually does get some traction, Apple may need to be a bit more careful in future firmware updates.

Apple has warned iPhone customers who have used third-party iPhone-unlocking software that installing an upcoming firmware update could render their phones "permanently inoperable." This has generated a lot of outrage on Slashdot, with some commenters faulting Apple for trying to lock consumers into a contract with AT&T, while others suggest that this might be an unavoidable consequence of making unauthorized modifications to the device. It's hard to justify being too upset at Apple here. Reports indicate that the company isn't trying to damage peoples' iPhones on purpose, it just hasn't tested the update with all of the unlocking programs folks are using. Given that Apple has said from the outset that such hacks are unsupported and strongly discouraged, Apple is entirely within its rights to blame the customer if the combination of user modifications and an Apple firmware update break their phones.

But even if Apple is within their legal rights, releasing a firmware update that they know will break some phones is a terrible business strategy. It's never a good idea to anger your customers, and it certainly wouldn't be difficult for Apple to add a function to the firmware updater that checks the phone for unlocking software and warns the customer if a potential problem is detected. Users might still be annoyed at being unable to get the latest firmware, but that's better than silently turning their phone into a paperweight. More generally, Apple shouldn't underestimate the value of the unlockers to the iPhone product ecosystem. Those sorts of tech-savvy early adopters are the most likely to develop new and innovative uses for the product, thereby increasing its value for all customers. For example, podcasting has surely made the iPod more valuable; it was invented by tech hobbyists and only later integrated by Apple into iTunes. And if Apple plays hardball with phone-unlockers, that's not likely to enhance their bottom line. More likely, they'll most likely just persuade people who like tinkering with their gadgets to buy their next cell phone from another company.

There were several reports last week that the operator lock on the iPhone had been broken, meaning that people might be able to use the device with service from a company other than AT&T. The first to emerge was from a New Jersey teenager, who came up with a complex method involving soldering and software; then two separate companies later said they had software-only unlocking methods. To be sure, these unlocking methods and services will only ever appeal to a small number of users, as most general consumers won't really care, or won't want to go to the trouble. With that in mind, it really doesn't seem like AT&T has much at stake financially, but that apparently hasn't stopped its lawyers from threatening one of the software providers. The company claims it got a call from a law firm representing the company, tossing around things like copyright infringement and "illegal software dissemination" in what appears to be an attempt at intimidating the company to keep them from releasing the software (particularly since the DMCA doesn't cover phone unlocking). It's worth reiterating that these are supposedly AT&T's lawyers, not Apple's -- but it's not clear what standing AT&T would have to sue, making this look like little more than a SLAPP situation. Apple's remained quiet on the matter, but it wouldn't be surprising to see the company close the loophole or re-lock the phones with one of its software updates, since it has a financial stake in iPhone buyers activating and using their phones on AT&T thanks to its revenue-sharing deal with the operator. Of course, it could take the more enlightened view that it doesn't want to frustrate and annoy the customers who would go to the trouble of unlocking their iPhones -- but if it were going to do that, it wouldn't have locked the device to AT&T in the first place.