Monday, February 23, 2015

Valuing Cell Phones: A Restitution Conundrum

Let's say that an individual obtains corporate customer account numbers for Sprint stores, goes to Sprint stores, uses the accounts to buy cell phones, then sells the phones for online resale. Perhaps not surprisingly, this happens. Joshua Ferdman did it, but got caught, convicted in federal court, sentenced to 15 months in prison, and ordered to pay $48,715.59 to Sprint for the "retail unsubsidized price" of 86 cell phones, plus shipping and investigative costs (as far as we can tell, he could not return any of the phones for an offset on his restitution order).
His appeal is all about restitution.
A few preliminary matters: (1) the government has the burden of proof on the amount of restitution; (2) that burden is a preponderance of the evidence; (3) a victim recovers no more than the value of its "actual loss;" and (4) speculation is off limits; there must be some evidentiary basis to support a restitution order.
The government thought the district court's number correct, relying on an unsworn two-page letter from a Sprint employee. That letter relied on the "retail unsubsidized price," which is an annoying way of saying the value of the phone without buying into Sprint's network (imagine someone walking into a Sprint store and simply buying a phone (and for the record, this might actually be a better option)). The reality was that the defendant paid from $149 to $199 for the phones. The letter also includes estimates of expenses Sprint incurred because of the thefts (investigative costs, including "manhours;" shipping costs for replacing phones w/in stores; that sort of stuff).
Alright, to the point: the government lost this one. The Tenth was particularly unimpressed with the unsworn letter from Sprint that did nothing more than estimate losses. So, two significant points in restitution battles: ensure the government's proof is sworn and more precise than estimates.   
Now, about the value of the phones. It seems that the Tenth expects the government to value the phones, not based on their retail price, but on lost retail sales (via proof of lost sales). At least, the government has the burden to establish that the victim lost the entirety of the retail price because of the defendant's theft (or whatever), instead of some portion of the retail price. Think of a portion of the 86 phones sold downstream to paying users of Sprint's network. In that situation, Sprint has not lost the "unsubsidized" value of the phones because the phones operate more akin to a subsidized phone (Sprint receives profits from the sale and use of the phones, allowing for a subsidized, or cheaper, retail price). Then there is also the problem of proof on whether the defendant's actions kinked the supply chain. In other words, was Sprint unable to sell phones to customers because of the defendant's actions? Apparently, the Tenth wants proof of this (from the government). So, if we understand this correctly, the sale of a different phone at a subsidized price lowers the loss on a stolen phone (so long as Sprint's inventory never lagged behind demand). The better measure, then, is "something akin to replacement or wholesale cost." After all, cell phones are fungible and "readily replaceable."
This is fascinating stuff. The decision is a must read if you find yourself in the throws of a restitution rumble involving items sold at retail prices (or not).
The New Mexico Federal Public Defender (AFPD John Butcher) cracked this code (impressively).

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