March 8, 2007 4:15 PM PST

Vonage to pay $58 million in Verizon patent case

Internet phone provider Vonage has been ordered to pay $58 million to Verizon Communications for infringing on three of the company's patents.

Vonage, which provides a service that turns broadband connections into phone lines, was found by a Virginia jury to have infringed patents that cover the technology used to connect these voice-over-Internet-Protocol (VoIP) calls to the regular phone network, as well as some features for implementing call-waiting and voice-mail services.

The monetary damages and the ongoing royalties awarded Verizon could have a significant impact on Vonage, if it doesn't come up with a solution that doesn't infringe the patents. The Internet phone service provider has yet to turn a profit.

"Vonage is already losing money," said Clayton Moran, an equities analyst with Stanford Group. "If you add the expenses of the damages, royalties and the ongoing legal battles, it just throws their future profitability into question."

But the biggest risk for Vonage is that the company could also be forced to shut down its service. In addition to the damages, Verizon is asking the court for an injunction. On March 23, U.S. Judge Claude Hilton will hear arguments to decide whether Vonage's service should stop offering service until an acceptable licensing agreement can be worked out. Vonage said in a press release that it doesn't expect any interruption in service.

"We don't believe there is any basis to support Verizon's request for an injunction," it said. "If the trial court does impose an injunction, we will seek an immediate stay from the Federal Court of Appeals. Vonage's customers should see no change to any aspect of their phone service."

The threat of an injunction and a long legal battle could adversely impact the company's sales, as new customers may be reluctant to sign up for a service that could be shut down. That's what happened to Research in Motion, the maker of the Blackberry email devices and service.

In 2002, a jury found that RIM had infringed on patents held by the patent holding company NTP. A judge then imposed an injunction, which was stayed pending RIM's appeals. The situation came to a head some three and a half years later when the judge in the case was about to impose the injunction. In the eleventh hour, RIM and NTP settled the case. But the ongoing threat of a shutdown spooked potential customers, causing RIM's sales to dip during the quarter preceding the settlement, RIM said after the case was settled.

Verizon filed a lawsuit against Vonage in June 2006 in the U.S. District Court for the Virginia Eastern District accusing the IP telephony service provider of infringing several patents.

When Verizon first filed its lawsuit, it said that Vonage was infringing on seven of its patents. It later revised its complaint, and the jury ultimately considered five patents. The jury was asked not only to decide whether Vonage had infringed on its patents, but also whether the patents themselves were valid. The jury found that all five patents were valid, but it only decided that Vonage violated three of them.

The jury also found Vonage infringed on a patent involving VoIP calls using Wi-Fi handsets. Vonage was cleared of infringing two patents related to billing systems designed to prevent fraud.

The eight jurors rejected Verizon's argument that the infringement was willful. If the jury had found that the infringement was willful, it could have tripled the damages it awarded to Verizon.

Still, Verizon was delighted with the outcome.

"Patents encourage and protect innovations that benefit consumers, create jobs, and keep the economy growing," John Thorne, Verizon senior vice president and deputy general counsel, said in a statement. "We are proud of our inventors and pleased the jury stood up for the legal protections they deserve."

Verizon had sought $197 million in damages. But an expert testifying for Vonage during the trial had said that the most the company should be expected to pay would be $69 million in damages. Ultimately, the jury awarded $58 million in damages using a formula that calculated Vonage pay a royalty fee of 5.5 percent on the revenue it makes for each Vonage customer line per month. Vonage has said it has about 2.2 million subscriber lines. The same formula could be used for the ongoing royalty fee, a Verizon representative said.

Throughout the entire lawsuit Vonage has denied that it has violated any patents. It claims that most of the technology it uses is standards-based and widely available throughout the industry. The company said it plans to appeal the verdict.

The verdict comes at a time when Vonage is struggling to become profitable. Last month it reported during its fourth-quarter earnings call for 2006 that it had lost $286 million for the year, on revenue of $607 million.

Vonage's heavy losses are due in large part to the company's massive marketing budget. In 2006, it spent $365 million on marketing, a 50 percent increase in marketing spent from the previous year. But even though Vonage is spending more on marketing to acquire new customers, it has started to lose momentum in signing up new customers. In the fourth quarter, Vonage added only 166,000 new subscribers for its VoIP service. That was down from 204,591 subscribers in the third quarter 2006, and from 256,000 in the second quarter 2006.

Despite its losses, Vonage has a strong cash position. The company ended the quarter with almost $500 million in cash, which means that the $58 million in cash damages it was ordered to pay to Verizon accounts for only about 12 percent of its total cash. But still financial analysts say it's a serious enough blow to set the company back.

"Even though the damages could have been worse, the royalty fees and ongoing legal battle, will add more expenses," Moran said. "And that could impact the future profitability of the company."

Shares in Vonage ended the day down $0.19 or 3.76 percent to $4.86.

See more CNET content tagged:
Vonage Holdings Corp., injunction, patent, jury, Research In Motion Ltd.

19 comments

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Corporate Moneygrubbers
In my area Verizon is without much competition. As a Verizon wireless customer, I have been disgusted with their nickle and diming for services. Patents should be protected but this seems a little like Microsofts attemps to squash out competition in the browser market. Can someone say monopoly?
jq,
<a class="jive-link-external" href="http://www.monumentsinstone.com" target="_newWindow">http://www.monumentsinstone.com</a>
Posted by monumentsinstone (6 comments )
Reply Link Flag
Software patents
Well this is what happens when you permit software patents. Europe does NOT permit software patents, for exactly this reason. It's bad for the consumer and competition and the economy.

How many of Vonage subscribers are aware that their lives are about to be made more expensive and something they like is about to be removed from the world because of software patents?

If you know one, tell one.
Posted by asdf (241 comments )
Link Flag
the bull the big companys are trying
it just goes to show you that the big company's are going after the small ones. the small company's are offering service for a great price, and they do not like it. and if we the working class just stick with the small companys in there time of need we all will get great service for a great price.
Posted by cjackson642003 (5 comments )
Reply Link Flag
Software patents strike again
Yet again the stupidity of software patents takes value from the market place and trashes it . Good so Verizon is doing everything it can to get Net Neutrality into the gas chamber. Software patents only reinforce their useless, sorry position.

When are Americans going to wake up and realize that corporate America is a monster out of a science fiction. This is not about competition; rest assured that any sophomore would have reconceived of these patents if left alone for two weeks to solve the same problem.


This WILL ruin your company too. You have to take action and that action has to be to tell your Congressman that software patents are bad for the market, bad for the consumer and bad for this country.
Posted by asdf (241 comments )
Link Flag
Sign up for Vonage
I have enjoyed Vonage service since 2003. I think more people
should sign up for Vonage and stop wasting money on the bloated
telcos who continue to charge excessive rates for their services.
Vonage will cost you about $25/month for unlimited calling and
ALL the call features. My neighbors were paying over $60/month
for less service from the local telco and they hardly use their home
phone. After seeing my bills, they switched.
Posted by mwhitman (2 comments )
Link Flag
Verizon should buy Vonage
And then kill off Verizon's hideous VOIP service, VoiceWing. If
Verizon holds key patents, it sure doesn't know how to use them to
create a decent VOIP product.
Posted by nicmart (1829 comments )
Reply Link Flag
You gotta be kidding
We don't need any already powerful company like Verizon grabbing up another company to give it even more market share...(I define grabbing up as putting them out of business in this case) Legal death to a good company that has made a strong committment to compete. I applaud them and hope they will survive.
Posted by Gerry S (18 comments )
Link Flag
Verizon
If you people only knew how truly ass backwards Verizon is. I have
friends who work for the company, and some of the stories they
tell are wild when it pertains to their use/lack of use of technology.
I have been with Vonage since 2001/02 and I truly like their
service. I have turned a couple of my neighbours on to Vonage,
and they could not be happier. I hope they can somehow prevail.
Posted by cashaww (77 comments )
Reply Link Flag
Solution: Peer
Currently calls placed from Vonage VoIP to anyone not also on Vonage end up on the switched phone network.

This is the same policy in place by most other VoIP companies as well because early on the number of VoIP customers out there were not significant enough to worry about the small cost savings of bypassing the telephony network.

Unfortunately, this method means that phone companies still enjoy some level of control.

I think the long term solution will be to peer with other VoIP carriers and just avoid the circuit switched networks where possible.

Currently when a call is placed by a Vonage subscriber the soft switch checks something like a telephony routing table for a local route, if a local route does not exist (ie. They don?t own the phone number), the call is trunked back to a gateway that communicates with the Telephony/SS7 network.

If they peer with another carrier like Packet8 for instance, all of Packet8's local routes will be handed off to a database that that the soft switches will also check before passing the call off to the gateway for the telephony network.

This has been standard practice on the internet for a while with BGP, but not so common with VoIP.

I think ironing out the technical challenges here will be one of the best ways for the VoIP companies to strike back.
Posted by Dachi (797 comments )
Reply Link Flag
Verizon
As a time when Skype, Paltalk and other companies implement VOIP which allow people to talk PC to PC and PC to local phone before Verizon implement into Verizon's network. How can Verizon win this case against Vonage? Are these juries have knowledge and timeline of VOIP implement into world wide? I think just sue back to Verizon and check when did they invent how this.
Posted by Wander9s (15 comments )
Reply Link Flag
Woohoo hoo hoo hooo
If you don't control the pipes (phone lines), then how do you think you'll benefit? Verizon corp likely sat back (like they've done since Bell Telephone days) and watched to see what came out of Vonage's spending. Then wait. It is what Verizon is could at: wasting time and other's money.
Posted by Below Meigh (249 comments )
Reply Link Flag
Impact on existing subscriber
What happens to existing subscriber. In case Vonage is forced to stop its service, it better pay damage charges to subscribers as well ? I think it is high time for the Industry to realize the biggest impact is to Consumers. Consumers should learn how to drive the market. Hope i see this happening.
Posted by sagiraju (5 comments )
Reply Link Flag
A funny thing happened
Thursday morning, all of a sudden I could not receive calls from local Verizon customers on my Vonage phone!
This problem lasted prox 27 hrs.
A coincidence? Hmmmmmmmm.
Posted by coachgeorge (233 comments )
Reply Link Flag
Gestopo tactics and predatory conduct
In my opinion, Verizon has taken on the old GTE predatory approach to eliminate any and all competition anyway they can. (GTE - Gestopo Telephone Exchange?). They could care less about anyone's customers, even their own...all they want it power, market share and to eliminate competition while increasing recurring revenue. Verizon is not a nice corporate citizen although they will put up a pretty good front...but behind the curtain, wizzards are working full time to sustain and conquer by any and all means. If Vonage should lose customers because of the inconsiderate predatory conduct of Verizon, I sure hope those with loss of service will send a strong message to the gestopo boys at Verizon and not do business with them under any circumstances. Corporate power is definitely out of control today and government regulators are certainly less than reasonably responsible. They do things to encourage competition, but never level the playing field for new or smaller companies that can't compete with the giants like Verzon and their Gestopo tactics and predatory conduct.
Posted by Gerry S (18 comments )
Reply Link Flag
Suppose it was the other way around...
You'd all be standing up cheering to high heaven that big, bad "monopoly" was getting it where the sun don't shine. You can not have it both ways. The patent process must work for everyone?including big corps like Verizon. That would be like me changing the logo of Windows XP and calling it Doors PX. As much as I am not a fan of Billy?he's done pretty well for himself!

All in all Verizon is right! Should they be able to shut down 2.2 million customers...no. They should not have let it get this far! Take the $58 mil, find an agreement with Vontage and scratch the royalties. It's good PR!
Posted by kaptandrews (4 comments )
Reply Link Flag
Another void patent
Ya but the patent was filed after other voip services used the tech
Posted by tagno25 (20 comments )
Link Flag
US Patent Office
The purpose of a patent is to reward inventors for their work and encourage them to undertake research to the good of the community. Part of the process of granting patent is an assessment as to whether the idea is a genuine invention and not subject to prior art.
Did the US Patent office ask those questions of Verizon prior to granting the patent? Did Verizon invest $58 Million in the invention of the patented ideas? Were Verizon intending to develop the patents or just use them as a suppression tool to protect their old business lines?
There sure have been some dumb patents issued in the past which do not benefit the greater public? The whole US Patent system needs a thorough shake up or you will find that India/China will make the running in new inventions whilst the current lawyers and Company Execs enjoy their fat pensions that were generated by legal niceties.
Posted by Brockleybadger (10 comments )
Reply Link Flag
This is software patents at work folks
Well this is what happens when you permit software patents. Europe does NOT permit software patents, for exactly this reason. It's bad for the consumer and competition and the economy.

How many of Vonage subscribers are aware that their lives are about to be made more expensive and something they like is about to be removed from the world because of software patents?

If you know one, tell one.
Posted by asdf (241 comments )
Reply Link Flag
 

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