KANSAS CITY, Kan. - A 41 Action News investigation uncovered a debate over whether you have the right to sell your cell phone upgrade. It's the question at the heart of more than a hundred lawsuits targeting business owners who have purchased upgrades from consumers hoping to make some quick cash.
How does it work? A customer who is eligible for an upgrade cashes in that upgrade. That customer then keeps their old phone but sells the brand new phone to a 3rd party and pockets the cash. The third party then marks the phone up slightly, and sells it to someone who isn't eligible for an upgrade. The price is still less than the face value of the phone so the buyer gets a bargain and the seller also makes a profit.
Wireless companies call this practice "stealing subsidies." Business owners believe it's just consumers taking advantage of an opportunity.
KCK business hit with lawsuit
From his home in Kansas City, Kan., Brian Vazquez runs a small wireless service business called Middle Man, Inc. The company operates as a "middle man" between corporate clients and their wireless provider.
Vazquez explained he evaluates clients' needs and usage data. Then, he helps them find which plan and carrier will offer the best deal.
His business handles order procurement, help desk support, repairs, billing, and customer care services.
In 2012, he said he was surprised to receive a knock on his door. When he answered, someone served him with a lawsuit from Sprint.
"When I first got it I was really shocked," Vazquez said.
The lawsuit outlined several allegations. Some of those included claims Vazquez operated an overseas cell phone trafficking ring, caused a shortage of Sprint phones, and sent runners to steal phones from stores by signing up for contract for multiple phones, then walking away from those accounts.
"We don't do none of that stuff," Vazquez asserted.
The suit stemmed from a stockpile of phones Vazquez keeps on hand to serve his customers. He gets them by buying back phones both used and new from customers and from Craigslist and eBay.
Vazquez offers those phones on his website and to his customers who need to upgrade or replace their phones, but don't want to be locked into another contract.
"I believe this is just one way Sprint is trying to reach out and take out these third party vendors nationwide. I think we present a challenge for them with our "buy back" programs and different aspects we offer," Vazquez said.
Next - Cell Phone Underground
Wireless providers like Sprint see it a different way. West Palm Beach attorney Jim Baldinger, who represents Sprint and several other wireless carriers, said his clients' concern is about an issue he calls "stealing subsidies."
Baldinger believes Vazquez's buyback program encourages customers to cash in their upgrade for a new phone, keep their old phone, and pocket some cash.
Here's why that matters to wireless companies:
A brand new iPhone 5 costs $649 dollars on Apple's website. However, if you buy the phone through Sprint or another carrier and sign a contract, the phone costs $199.
That's a price difference of $450.
The wireless carrier pays that difference to give customers the best technology to use their network and to keep customers.
If you upgrade and then sell the new phone, they are out that cash.
The United States is one of the few places in the world where carriers pay these subsidies to make phones affordable for their customers. Baldinger told 41 Action News that makes phones purchased in the United States less expensive and in turn more valuable overseas.
"What happens is people have found ways to buy subsidized phones in the United States and then resell them typically overseas and make tremendous profits," Baldinger explained.
Opportunity for Criminal Networks
Baldinger has filed 167 cases nationwide to stop people from "stealing subsidies." He believes the profits made off of selling phones purchased in America can end up funding criminal networks.
"We find out time and again that these phone trafficking cases lead to all sorts of other crimes including terrorism," said Baldinger.
The Federal Bureau of Investigation has made several high profile busts of cell phone trafficking rings in Baltimore, Detroit and in Philadelphia.
According to the FBI, the bust in Philadelphia resulted in the arrest several members of Hezbollah.
The demand for less expensive cell phones overseas has also created problems with street crime in the Kansas City metro.
In early October 2013, police warned of a "stranger danger" situation near Northeast high school. The suspects were following several girls as they walked to school.
Police later released that they believe the suspects weren't trying to kidnap students. Investigators believed they were following the girls hoping to eventually steal their cell phones.
Next - Upgrade for sale
Vazquez told 41 Action News that he has never sold a phone to anyone overseas. He insisted all of his customers are in the United States.
He and his attorney also argue there is no law prohibiting people from selling their upgrades. (Sprint's attorneys disagreed with this saying there are many laws that address people taking things that do not belong to them)
Jim Kernell, the attorney representing Vazquez, said he doesn't believe anyone is taking anything that doesn't belong to them. In his opinion, the wireless providers still make their subsidy money back by continuing to have that customer under contract.
The 41 Action News investigators found many people trying to take advantage of that opportunity on Craigslist. There are many listings from people offering to cash in their upgrade for the right price.
Baldinger told 41 Action News the wireless carriers don't plan on taking action against their own customers selling their upgrades. However, he cautions customers against doing it.
He said by not using the upgrade themselves, they are not getting the best equipment to access the network. Also, if their phone happens to break, they may be out of luck getting a new phone because they have already cashed in their upgrade opportunity.
Stopping the "Middleman"
Vazquez told 41 Action News he believes the suit is really about Sprint trying to silence him from showing customers their wireless options.
"I think this is a pattern of bullying that's going on nationwide," Vazquez said.
Baldinger said the company is concerned that the Middleman is getting in between Sprint and its customers. He said many of the services that the Middleman offers Sprint offers for free. Baldinger also expressed concern about whether customers were aware of how Vazquez was utilizing their accounts.
Vazquez and Kernell both say the Middle Man, Inc., has received positive reviews from customers. Vazquez insisted to 41 Action News his customers always were aware of how and when he was representing their needs to Sprint.
Cases settle out of court
In many of the cases, the businesses named in these lawsuits have settled out of court. The law firm filing these suits on behalf of wireless carriers boasts it has not yet lost one of these cases.
Vazquez told 41 Action News he believes that is because small business owners do not have the financial resources to wage a legal battle with large wireless carriers.
Vazquez is the only case 41 Action News could find where the business owner decided to challenge the suit.
Thursday afternoon, a federal judge in Kansas issued a ruling in the case between Sprint and the Middle Man, Inc. In his decision, the judge writes that the Sprint user contract "does not prohibit the resale of phones that are not active on the customer's Sprint account." One of the attorneys representing Vazquez, David Marcus, told 41 Action News that this decision upholds the customer's right to sell their phones and their upgrades.
We reached out to Sprint and the company's attorney, Jim Baldinger, for their reaction on today's ruling. As of the time of publication, we had not heard back from them. We'll update this story when we hear from them.