Vonage Dodges Bullet

The U.S. Court of Appeals for the Federal Circuit yesterday granted New Jersey-based VoIP provider Vonage a new lease on life, as it issued a permanent stay of an earlier U.S. District Court injunction barring the VoIP provider from signing up any new customers, following that Court’s March 8 decision in the patent-infringement suit brought by Verizon.

Under the District Court’s ruling, Vonage was ordered to pay a $58 million damage award to Verizon, as well as post a $66 million appeals bond pay an ongoing royalty for use of Verizon’s technology in serving existing customers.

Most immediately troubling to Vonage, however, was the Court’s injunction banning its acquisition of new customers—given a customer turnover rate approaching 25 percent annually—a move Vonage argued threatened the company with bankruptcy.

“We thank the appellate court for its thoughtful consideration of the merits of our case,” said Jeffrey Citron, Vonage chairman and interim chief executive officer in a statement. “We continue to believe we have not infringed on any of Verizon’s technology and remain optimistic that we will ultimately prevail in this litigation,” Citron concluded—adding that “it’s business as usual for us” now.

Indeed Vonage remains highly confident in the strength of its legal appeal.

“We believe the original verdict was based on an erroneous claim construction”—said Sharon O’Leary, Vonage’s executive vice president and chief legal officer—”meaning the patents in this case were defined in an overly broad and legally unprecedented way. We believe the district court’s decisions repeatedly neglected well-established law on claim construction and, as a result, artificially expanded the coverage of Verizon’s patents well beyond what was intended by the patent trademark process.”

Vonage’s contention—that Verizon’s disputed patents relate to technologies that are fundamental to voice over IP, technologies, moreover, described by technical standards bodies—is not without support in the VoIP community.

Industry analyst Daniel Berninger (Tier1Research)—formerly an engineer who once worked for VocalTec and had a hand in launching Vonage—has been outspoken in questioning the court’s construction of Verizon’s patents. In a recent posting on the GigaOm blog, Berninger characterized them as looking like “prototypical ‘garbage patents.’ ”

“Five years of graduate engineering education, five years at Bell Labs, and five years working on VoIP startups should equip me to appreciate the innovation content of Verizon patents,” Berninger said. “Reading and re-reading the patents leaves me at a loss as to their innovation content.”

Suggesting that under the court’s current construction of the patents that virtually every VoIP provider will be found to infringe, Berninger contends that “the future of the VoIP industry depends on challenging vague, generic, overly broad patents.”

Indeed, two of the three patents in question (see them here) relate to methods for number translation—the conversion of IP addresses to telephone numbers—without which no interconnection between IP-based telephony and the public switched telephone network (PSTN) would be feasible.

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