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Vonage, Verizon Fight to Go Into Late Rounds

Friday's injunction against Vonage is just the beginning of a battle that will drag on for a year or more

March 27, 2007

3 Min Read
Vonage, Verizon Fight to Go Into Late Rounds

Some are already hearing the bell toll for Vonage Holdings Corp. (NYSE: VG), but the fact is the company's legal tussle with Verizon Communications Inc. (NYSE: VZ), will trudge on for another year or more, both companies say. (See Is Vonage Dead?.)

On Friday, U.S. Dist. Judge Claude Hilton issued an injunction prohibiting Vonage from using certain Verizon VOIP technology. Vonage shares took a 25 percent hit that day. Vonage stock rebounded Monday, closing up $0.38 (12.7%) at $3.38. In early morning trading on Tuesday, Vonage shares were down again -- this time off $0.11 (3.25%) to $3.27. (See Jury Rules on Vonage.)

On March 8, a jury in Hilton's court found Vonage guilty of infringing three Verizon VOIP patents. The jury ordered Vonage to pay damages of $58 million plus future royalties. Verizon requested the injunction that day. (See Vonage Ordered to Pay $58M to Verizon.)

Friday wasn't D-Day for Vonage. Judge Hilton said he'd wait until April 6 to sign the injunction. Also on April 6, the judge says he'll decide whether or not to grant Vonage a "stay" on the injunction. Vonage attorneys are asking for a stay of 120 days, or for the length of its planned appeal.

Vonage claims April 6 won't be D-Day either. "We are optimistic the trial court judge will stay the injunction," Vonage's chief legal officer Sharon O'Leary said in a statement Monday. "If he doesn't, however, we're very confident the Circuit Court of Appeals will stay the injunction through the entire appeal process." (See Vonage Reaffirms Appeal.)

So the game goes on. "It's a very high-stakes poker game here," says Frank Dzubeck, telecom analyst and president of Communications Network Architects. "In this particular case, now that the game has shifted and the cards are all in Verizon's hands, you have Vonage doing a great deal of backpedaling," Dzubeck says.

In appeals court, Vonage's legal strategy will shift. Sources who attended the jury trial say Vonage attorneys waved their right to challenge the actual evidence in the original patent infringement case. So, on appeal, they will challenge Judge Hilton's interpretation of what is covered by the three Verizon patents and what is not. In legalese, his "patent construction."

"We do not agree that we infringed on their patents still to this day, for a good reason -- because we do not agree with the patent construction," says Vonage spokeswoman Brooke Schulz. "We not only disagree with it, it's the basis of our appeal."

Vonage, then, will try to convince the appeals court that Hilton's definition of the Verizon patents was too broad -- that, under a narrower definition of the patents, Vonage could not have been found guilty of infringement.

So what happens if Vonage loses on appeal? Plan C: Workarounds. (See Vonage 'Workarounds' May Ease Patent Pain.)

Vonage says it’s been working for months on homegrown technology that would circumvent the need for Verizon's patented stuff. "We're continuing to evaluate and develop workarounds for the technologies the jury found we're infringing upon -- WiFi and what we call Name Translation," says Vonage's Schulz. By "name translation" Schulz refers to technology used to convert packet-based calls onto circuit-switched calls, and vice versa.

Schulz says the workarounds will be put in place only when Vonage's legal options have run out. She denies said "workarounds" rely on technology licensed from third parties. She also puts down speculation that her company is in talks with Verizon to license the technology Vonage was found guilty of infringing.

Now for Some Class Action
Vonage got more legal trouble on Monday, when a consumer class action suit was filed in U.S. District Court in California. The suit claims Vonage misled consumers about the quality and reliability of its VOIP service, and engaged in false advertising and deceptive business practices.

The suit claims that Vonage provides doesn't set-up and support its customers as promised, and that the company makes cancelling the service a costly choice.

— Mark Sullivan, Reporter, Light Reading

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