Cell Phone Licensee, Beware

When you buy a new phone, you get the phone itself, a receipt, and maybe some extras, like a carrying case or a car charger. But you do not get the software that makes the phone run, according to a Library of Congress ruling that recently took effect.

The ruling makes it illegal for purchasers of new phones to “unlock” those devices by manipulating their software to allow them to work with phone carriers other than the one that sold the phone. A 90-day grace period that allowed consumers a last chance to buy phones they can unlock expired in January.

People who bought their phones before Jan. 26 are still free to break them out of cell phone jail, and manufacturers are still allowed to sell phones that start out unlocked. But new phones that come with software binding them to a particular wireless network can no longer be legally modified for use on other networks.

The new rule reversed a 2010 decision that specifically created an exemption for phone unlocking under the Digital Millennium Copyright Act. The act prohibits users from tampering with software intended to protect copyrighted material, such as copy-protection schemes that are installed on some videos.

The issue of locking and unlocking applies primarily to phones that use Global System for Mobile (GSM) technology, which stores personal information on removable SIM cards. Once a GSM phone is unlocked, which can be done using instructions and tools available on the Internet, the SIM card can be replaced and the phone can be used on most other GSM networks. The alternative to GSM, Code Division Multiple Access (CDMA), instead relies on whitelists of devices maintained by carriers, meaning each carrier can choose which phones to accept into its network. Globally, GSM is far more common, but in the U.S. it is used by only two of the main carriers: AT&T and T-Mobile. Verizon, which relies on CDMA, also sells “global phones” that come equipped with both CDMA and GSM technology.

Locked phones are typically sold with service contracts. To entice new customers into the typical two-year commitment, carriers provide big subsidies on the cost of the phones. Even before to the new ruling, users who signed contracts in exchange for subsidies were bound to continue their service for the length of the contract or pay substantial termination fees. The difference is that, before, when contracts ended, users were free to do whatever they wanted with the once-subsidized phones – including taking them to another network. Carriers could make that more difficult using software locks, but they couldn’t do anything to prevent people with the skill and patience to unlock their phones from doing so. Now they can.

A key part of the Library of Congress decision questioned whether phone owners actually own the software on their mobile devices. In previous cases, some software producers have successfully argued that their customers are licensees, not owners of their individual copies of the software. This distinction allows companies to restrict users’ ability to transfer and alter their copies, as would otherwise be permissible under the “first sale” doctrine. The Library of Congress rule on the phone unlocking exemption noted that “the Register was forced to conclude that the state of the law – and its applicability to mobile phone software – remains indeterminate.” However, the decision to give carriers a continuing say over how cell phone software can be used, even after a service contract expires, appears to indicate that the Library of Congress sees phone users as software licensees rather than software owners.

The immediate impact of the decision may not be monumental. Most phones have life spans that more or less match the length of the service contracts they are sold with. Further, signing up with a new carrier usually comes with a new opportunity to buy another steeply discounted phone.

But even if few people really care about the ability to unlock their phones, the effect is chilling. Carriers have a right to expect something in return for the subsidies they hand out – and they get that in the form of contracts. If a carrier decides the payback of a two-year contract isn’t enough to recoup the costs of an initial $300 discount, it can either lower the subsidy or increase the length of the contract. It should not, however, be able to control what its customers can do with phones that have been fully paid for over the course of the contract period. Nor should it be able to prevent travelers from temporarily using their phones on other networks while abroad without having to pay steep fees for international roaming.

On a deeper level, we should consider what it means to accept a legal framework in which software is never sold to end users, but is only licensed. If this logic is applied to other consumer products in the future, it has the potential to create a wide array of anticompetitive nightmares. Imagine, for example, that someday you buy a washing machine from a company that happens to also sell soap. The machine comes with software that makes it inoperable if it detects any soap other than the manufacturer’s own brand. But because you don’t own your copy of that software, you are legally prohibited from applying a theoretical patch, readily available on the Internet, that would allow you to use the soap of your choice. There is no end to the ways this methodology could be applied to limit consumer choice.

If you think I am making this up, be advised that some printer manufacturers already include software that makes it difficult or impossible to use another manufacturer’s ink cartridges. That’s pretty much the same situation as my washing machine nightmare.

The Digital Millennium Copyright Act was a reasonable attempt to adapt to changing times. Since its passage in 1998, however, times have changed yet again, in ways that were then unpredictable. The Library of Congress decision is a sign that Congress needs to revisit the issue. Until it does, we will have to learn a new motto for shopping for consumer goods: caveat licensee.

About Larry M. Elkin 521 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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