Vonage Reassures Customers After Lawsuit

The Associated Press
Friday, March 9, 2007; 12:09 AM

ALEXANDRIA, Va. -- Internet phone carrier Vonage assured its 2.2 million customers that their service will not be interrupted after losing a federal patent infringement lawsuit brought by competitor Verizon Communications Inc.

An eight-member jury in U.S. District Court found Thursday that Vonage infringed on three Verizon patents on technology for making phone calls over the Internet. Vonage was ordered to pay $58 million, plus future royalties if the infringement continues.

The judgment from the eight-person jury is far less than the $197 million Verizon had requested, and it was even slightly less than what Vonage had suggested would be fair if it were found liable.

But the big unanswered question is whether U.S. District Judge Claude Hilton will impose an injunction barring Vonage from future use of the patents. Verizon filed for such an injunction immediately after the verdict came down, and a hearing is scheduled for March 23.

Verizon says Vonage's service is heavily dependent on the Verizon technology, something Vonage disputes.

Vonage said it will appeal the verdict and told customers that service will not be affected.

"If the trial court does impose an injunction, we will seek an immediate stay from the Federal Court of Appeals," the company said in a statement.

If Vonage is hit with an injunction and cannot develop a workaround, the company will have to remove that part of the service, said John Rabena, a partner at the law firm Sughrue Mion PLLC. That would mean that Vonage customers would only be able to talk to other Internet telephone customers unless Vonage won on appeal or negotiated a license from Verizon.

Rabena said injunctions have become harder to obtain after the Supreme Court ruled last year that such injunctions should not necessarily be routine in infringement cases.

Since that ruling, companies are more likely to obtain an injunction when they are in direct competition with the infringer, Rabena said. That should help Verizon, which competes with Vonage.

Verizon sued Vonage last year, accusing it of infringing on five patents that it said Vonage uses to make its Internet telephone service network functional. The jury found Vonage infringed on three of the five.

Verizon said during the trial that it has lost 600,000 customers to Vonage as a result of the pilfered patents.

Vonage "has done very well with our patents and our technology for a number of years," Verizon lawyer Dan Webb said in closing arguments Wednesday.

Vonage lawyer Roger Warin argued not only that Vonage did not infringe on the patents, but also that Verizon's patents were invalid to begin with. He compared Verizon's patents to assembling a fir tree, colored lights and an electrical cord and claiming a patent for a Christmas tree.

"This case is about Verizon trying to do in a courtroom what they've been unable to do in the marketplace," Warin argued.

After the verdict, Verizon lawyer Dan Webb declared it a "significant victory" and said it demonstrates "that companies that infringe patents can be held liable."

The verdict also awards Verizon a 5.5 percent royalty on Vonage revenues for any future infringement. The practical impact of that is unclear. If, for instance, Vonage could develop a way to work around the infringed patents, it would not owe royalties.

Vonage spokeswoman Burke Schulz declined to comment on whether it would be easy to develop workarounds, saying it was premature to speculate because Vonage still disputes there is any infringement.

Schulz said she does not believe the royalty rate will apply to all of Vonage's revenues _ only that portion of revenue garnered through use of the infringed patents. Verizon has argued that nearly all of Vonage's revenue is dependent on Verizon patents.

Vonage is a leading provider of broadband Voice over Internet Protocol, which allows telephone calls to be placed over the Internet. Last year, Vonage lost $286 million on revenue of $607 million.

Verizon, a large telecommunications and cable services provider, earned $6.2 billion in 2006 on revenue of $88.14 billion.

Verizon shares were up 80 cents, or 2.2 percent, to close Thursday at $36.48 on the New York Stock Exchange.

Vonage Holdings Corp. shares were down 19 cents, or 3.8 percent, to $4.86 on the NYSE. They fell another 9 cents in after-hours trading.

The jury found in its verdict that Vonage's infringement was not willful. That means Verizon cannot collect triple damages, which can sometimes be awarded in patent infringement cases.

© 2007 The Associated Press