Patent Rulings Against Vonage Upheld

By Jeff St. Onge and Susan Decker
Bloomberg News
Thursday, September 27, 2007

Verizon Communications won an appeals court ruling yesterday upholding most of a patent verdict over smaller rival Vonage Holdings, the second legal setback for the Internet phone company in as many days.

The U.S. Court of Appeals for the Federal Circuit in the District also upheld an order barring Vonage's use of Verizon's inventions, including a way of connecting Internet calls to standard lines. The court order blocking use of the inventions had been on hold pending the appeal.

Vonage has said the decision would not affect its 2.4 million customers because it had deployed workarounds for the two patents at issue.

The court upheld a finding that Vonage infringed two of three patents that were the subject of a March trial. It sent back a third patent that had been found to be infringed, as well as the jury's $58 million award. The patent that was remanded concerns a small portion of Vonage's business.

"We conclude that there was no error in the district court's jury instructions" on two of the patents, the court said in a decision written by Circuit Judge Timothy Dyk.

Vonage lost a patent trial to Sprint Nextel on Tuesday. A federal jury in Kansas awarded Sprint $69.5 million in damages, and Sprint has pledged to seek a court order to block Holmdel, N.J.-based Vonage from using its inventions.

The Verizon patent returned to U.S. District Judge Claude Hilton in Alexandria for a new trial relates to use of WiFi handsets in an Internet-phone network. The two patents the appeals court agreed Vonage infringed cover a way of connecting Internet calls to standard phone lines and functions such as call forwarding on an Internet-based phone system.

The appeals court said Hilton erred in interpreting terms within the WiFi patent. The three-judge panel ordered the judge to reconsider whether the patent was valid and infringed.

Chief Judge Paul Michel wrote that he would have upheld the entire verdict on all three patents, as well as the damages. Circuit Judge Arthur Gajarsa said he would have upheld infringement on one of the patents and remanded the other two.

Vonage, which first sold shares to the public in May 2006, has never reported a profit and said subscriber growth slowed in the second quarter as it cut back on marketing. The company has $248.2 million in debt due in 2010.

Michael Snyder quit as Vonage chief executive in April, after the original Verizon verdict. Chairman Jeffrey Citron cut the company's workforce by 10 percent and reduced spending on ads and marketing by $110 million for the year. The company has said it is developing workarounds to New York-based Verizon's patented technology to avoid paying royalties.

Charlie Sahner, a spokesman for Vonage, said the company hasn't finished reading the opinion and declined to comment.

David Fish, a spokesman for Verizon, said "the court decision speaks for itself."

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