Cell phone firms tackle trafficking

Tweaks allow network switches

By Curt Anderson, ASSOCIATED PRESS | Monday, July 21, 2008

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MIAMI | For less than $15, you can buy a cell phone loaded with minutes. You can buy more as you go whenever those minutes run out. Best of all, you aren't locked into a long-term contract.

But in South Florida, New York, California, Georgia, Texas and elsewhere, traffickers have figured out they can make big profits by purchasing thousands of these low-cost phones and tweaking the software so that calls can be made on any cell network.

The altered phones are then sold all over the world, costing the phone companies tens of millions of dollars.

Some traffickers employ dozens of people full-time as "runners" to buy the phones at retail stores so they can later be hacked into and resold. The problem for the phone companies is that they often sell the phones at a loss, instead making their money when customers have to buy additional minutes from them - a guaranteed profit once the phone is sold.

But the phone companies have no guarantee that customers will buy minutes from them after the phones are hacked or shipped to a far-off country.

It's technically not illegal to unlock the software on your personal cell phone - but the companies are hoping to put a stop to traffickers that they say are siphoning away profits. Led by Miami-based TracFone Wireless Inc., makers of the low-cost prepaid cell phones are suing traffickers in federal courts across the country.

One such lawsuit resulted in a criminal conviction in Houston when a man disobeyed a court order by refusing to stop selling the phones.

"There is a lot of profit in it," said James Baldinger, a West Palm Beach lawyer with the Carlton Fields firm that represents TracFone. "Even as we continue to shut people down, we do find there are people still engaged in it. TracFone is going to keep going after them."

These phones are typically sold by traffickers for between $40 and $60 above the discounted TracFone price - and they are frequently marketed in lots of 10,000 or more. Web sites catering to these dealers boast about having huge numbers of unlocked cell phones.

TracFone has filed 39 lawsuits in recent months - more than half of them in South Florida - seeking to stop companies and individuals from trafficking in its phones. Similar lawsuits have been filed by AT&T, Nokia Corp., Virgin Mobile USA Inc. and Motorola Inc.

TracFone and the others argue that federal laws protect their trademarks and copyrighted software. They say the phones must be used with minutes bought from the company that sold the phones. TracFone and other companies lose customers - and therefore profits - when people buy minutes from other cell phone companies.

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