Authentication - $http's .then() success callback called instead of error callback

Take a closer look at this part of your code:

this.login = function (user) {
    return $http.post("http://localhost:8080/auth/login", user).then(function (response) {
        if (response.data.success) TokenService.setToken(response.data.token);
        return response;
    }, function (response) {
        return response;
    })
}

Here you've provided error callback with a return value which is passed to the next callback in promise chain. The source of your confusion is that you still need to return rejected promise of throw from the callback if you want the error to propagate further. Otherwise, it effectively means that you've recovered from error situation and the next step in the flow will be success. This is what you have now.

In your case you either remove error callback altogether

return $http.post("http://localhost:8080/auth/login", user).then(function (response) {
    if (response.data.success) TokenService.setToken(response.data.token);
    return response;
});

... or make sure you return failed promise

return $http.post("http://localhost:8080/auth/login", user).then(function (response) {
    if (response.data.success) TokenService.setToken(response.data.token);
    return response;
}, function (response) {
    return $q.reject(response);
});

... or throw:

return $http.post("http://localhost:8080/auth/login", user).then(function (response) {
    if (response.data.success) TokenService.setToken(response.data.token);
    return response;
}, function (response) {
    throw new Error(response);
});