Vonage Settles With Verizon, Stock Soars

The provider of Internet-based telephone service will have to pay a maximum of $120 million for infringing on Verizon patents—and that's the good news.

By Larry Barrett | Posted Oct 25, 2007
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Vonage on Thursday announced it has settled a protracted patent lawsuit with telecom giant Verizon Communications that will cost the struggling VoIP firm a maximum of $120 million.

Ahead of the announcement, Vonage shares slid 7 cents a share, or four percent, to $1.53 a share before storming up $1.22 a share, or 80 percent, to $2.75 a share in after-hours trading following the news.

In March, a Virginia jury found Vonage had infringed on three Verizon patents and awarded the company $58 million in damages plus a royalty on future sales of its Internet-based telephone service. In September, an appeals court sent the remaining two patents in dispute back to a lower court for retrial.

Vonage had already set aside a $66 million cash-collateralized bond, a $12 million second-quarter escrow payment and a $10 million third-quarter escrow payment to cover the initial damages awarded to Verizon in March. While the Court of Appeals weights the merits of the two remaining patents, identified as '574 and '711, Vonage has effectively capped its maximum exposure to damages at $120 million. If Vonage wins a rehearing on either of the remaining patents in dispute, it will only pay a total of $80 million in damages to Verizon.

If Verizon wins the rehearing or if the injunction it initially received is reinstated, Vonage will pay Verizon $120 million to conclude the litigation.

"We're pleased to put this dispute behind us and believe this settlement is in the best interests of Vonage and its customers," Sharon O'Leary, Vonage's chief legal officer, said in the prepared release announcing the deal. "This settlement removes the uncertainty of legal reviews and long-term court action and allows us to continue focusing on or core business and customers."

Wrapping up the Verizon dispute, just as it did earlier this month with Sprint Nextel for $80 million, clears up some of the uncertainty surrounding Vonage's long-term prospects. Last year, the company raised more than $500 million from an initial public offering at $17 a share, only to watch its shares tumble below $2 a share amid a never-ending series of legal entanglements with major telecommunications carriers.

While the company still claims more than 2.5 million subscribers are connecting their phones to their broadband connections using a Vonage adapter, the legal uncertainty combined with the hefty settlement fees have conspired to erode sales growth as well as the company's stock price. Just last week, AT&T hit the Holmdel, N.J.-based company with yet another patent infringement lawsuit.

The Verizon patents, filed in 1997, cover the translation of domain names and IP addresses to telephone numbers when Internet calls are passed off to the traditional phone system. Since a VoIP call is nothing more than another packet on the Internet, VoIP providers must translate an IP address into a telephone number recognized by the PSTN for the call to connect.

Verizon claimed Vonage took away more than 1 million of its customers. Conversely, Vonage admitted it was losing about 600,000 customers as a result of its pending litigation and, without the ability to recruit new customers, was facing the very real prospect of going out of business altogether.

Verizon shares closed up 47 cents to $44.91 a share ahead of the announcement.

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