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Vonage loses bulk of Verizon patent appeal
Not a good week for the VoIP provider...

By Marguerite Reardon

Published: Thursday 27 September 2007

After months of battle, Vonage has lost the bulk of its appeal in the Verizon Communications patent infringement case.

In March, a jury in Virginia found Vonage had infringed on three patents held by Verizon. And it awarded Verizon $58m in damages along with future damages of 5.5 per cent of the revenue that Vonage was making during the appeal process.

The judge in the case imposed an injunction on Vonage that would force the company to stop delivering a service using technology that infringes on Verizon's patents. But because Vonage has been appealing the case, the injunction has not yet gone into effect.

Now Vonage's appeal has essentially come to an end. And as the legal dust settles, the small voice over IP company now faces the possibility of paying hefty monetary damages and a total shutdown of its IP telephony service.

But as is often the case in complicated legal disputes, the actual outcome of the case is still far from certain. In its final judgment, the US Court of Appeals threw out one of the three patent verdicts and upheld the other two. And because the total damage award was assessed based on Vonage violating all three patents, the appeals court asked the lower court to reconsider the entire $58m damage package awarded in March.

On the one hand, this sounds like a partial victory for Vonage. And the company has said as much. But the reality of the situation is altogether different. For one, the two patents the court upheld happen to be the most fundamental to Vonage's service. Essentially, US Patent No. 6,282,574 and US Patent No. 6,104,711 define how phone calls are routed over the internet, which essentially is the basis of Vonage's IP telephony service today.

By contrast, US Patent 6,359,880, which is the patent the appeals court said would have to be retried by the lower court, has to do with how public wireless and cordless internet gateways communicate with the internet. Because this technology is not a big part of Vonage's commercial service today, sending the case back to the lower court is likely to have little impact on Vonage's actual business.

And because the '880 is considered less significant, when the lower court reassesses damages, as it's been asked to do by the appeals court, it could just re-enter the same amount without holding an entirely new trial.

During the appeal, the injunction issued by the judge in the case was not in effect. But once the appeals court's decision is final, which should happen within two weeks to a month, the injunction barring Vonage from using any technology that infringes on Verizon's patents goes into effect.

Vonage is adamant that its service will continue.

Vonage's chief legal officer, Sharon O'Leary, said in a statement: "It's business as usual. We have had our workarounds for the '711 and '574 patents in place for some time and will remain focused on providing a great customer experience."

But these claims will have to be verified. Right now it's unclear how this will work. Either the court will step in to determine if the new fixes violate the patents as they were examined during the trial, or Verizon will have to challenge the new workarounds.

One thing is certain, Vonage's troubles are far from over.

Rebecca Arbogast, an analyst with Stifel Nicolaus, said: "I think there is definitely a threat that its service could be impacted. Vonage says it has a workaround but who's to really know? My hunch is that Verizon will likely aggressively challenge these fixes as well."

This latest legal blow comes just one day after a jury in Kansas found Vonage infringes on six patents held by Sprint Nextel. The jury awarded damages of $69.5m in that case. All in all, the news looks bleak for Vonage, said Arbogast.

She said: "These are different patents in a different court. But the damages in the Sprint case are significant, and it's just piling on one more shovel full of penalties on the company at a time when it already has a significant amount of money tied up in escrow over the Verizon case. Plus, there's the threat of an injunction, and it makes investors wary."

Indeed, Vonage's stock dipped another 26 per cent to close at 96 cents per share.

Marguerite Reardon writes for CNET News.com