Vonage Buffeted By Legal Setbacks

By Greg Scoblete On Apr 9 2007 - 6:00am

VoIP provider Vonage was dealt two successive legal blows in the past month by a judge and jury in a patent suit brought by Verizon.

First, a jury in the U.S. District Court in Virginia found Vonage guilty of infringing on three of seven disputed Verizon patents concerning VoIP technology. The court ruled that Vonage had to pay $58 million to Verizon and 5.5 percent of royalties on future sales.

On March 23, a judge issued an injunction against Vonage to bar it from using the infringed patents, which concerned moving calls from the Internet to the PSTN network, and wireless VoIP calling.

Vonage appealed both the fine and the injunction.

Both sides were quick to claim victory, or a measure of vindication, from the jury verdict. In a statement, John Thorne, Verizon senior VP and deputy general counsel, said the company was "proud of our inventors and pleased the jury stood up for the legal protections they deserved."

Vonage issued its own statement, saying it expected the verdict to be reversed on repeal and noting that the damage award of $58 million was 70 percent less than the $197 million demanded by Verizon. Vonage also noted that the jury rejected Verizon's claim that the company willfully infringed on its patents.

Immediately following the injunction, Vonage released a statement noting that the injunction would not take effect immediately and that the company "is confident its customers will see no change in their phone service."

If the court rebuffs Vonage's attempt to stay the ruling, the company plans to seek a stay through the Federal Circuit Court of appeals.

"Our fight is far from over," said Mike Snyder, Vonage, CEO. "We remain confident that Vonage has not infringed on any of Verizon's patents — a position we will continue vigorously contending in federal appeals court — and that Vonage will ultimately prevail in this case."

Snyder also took a shot at the market for "overreacting" to the firm's legal set-backs. The company's stock fell $0.91 on news of the injunction.

"To paraphrase Mark Twain, the rumors of Vonage's death have been greatly exaggerated," he said.

He characterized the ruling as "one small step" in a "long legal battle."

Snyder also criticized the market for demonstrating "an unfortunate lack of understanding of the judicial/appellate system, a lack of appreciation of Vonage's resourcefulness, or, perhaps, both. Anyone who's counting Vonage out is making a huge mistake."

If Vonage is slapped with a permanent injunction and the judge does not grant the company's request to stay the injunction pending its appeal, Vonage plans to go to the Federal Circuit court seeking a stay.

Vonage also plans to appeal the jury verdict which found the company guilty of infringing on three of seven Verizon patents.

"The reality is this litigation is going to take years to make its way through the legal system," said Sharon O'Leary, chief legal officer, Vonage.

"It's a tough break for a company that doesn't seem to catch a break," said Stephan Beckert, research director, TeleGeography. It remains an open question whether the legal onslaught will substantially cripple the company or force them to the negotiating table with Verizon, he said.

"When you look at the 5.5 percent of royalties, that's about $1.50 per customer," he said. "If Vonage passes that onto their customers, they're still a very inexpensive" phone service, Beckert said.

A larger issue could be the precise nature of Verizon's patents, Beckert said. Depending on the specific technology at issue, other VoIP providers could be vulnerable to similar lawsuits, he said.