Global Insight Perspective | |
Significance | While not outright victory for Verizon, Vonage has seen its position debilitated by this decision while Verizon adds to the defensive armoury against competition from VoIP telephony. |
Implications | Although this judgment will be appealed, when confirmed this will have an immediate cash impact on Vonage, which is already making significant losses. |
Outlook | This would further add to the operating costs for Vonage and potentially other VoIP providers, while Verizon has significantly strengthened its competitive position. |
Vonage has been ordered to pay Verizon US$58 million plus 5.5% per line in monthly royalties to Verizon for infringing on three patents relating to VoIP services, the Virginia Eastern District Court has ruled (see United States: 22 February 2007: Patents Wars: AT&T vs. Microsoft vs. Alcatel; Vonage vs. Verizon). The jury found five patents (from an original seven) to be valid but found the claim (rather than the patents) on two patents relating to billing, account management, and fraud minimisation to be invalid. The jury also found that the infringement was not wilful, which would have tripled the award—maximum liability would have been in the region of US$197 million and 19% royalties claimed by Verizon.
The patents infringed cover call translation from the internet to the PSTN, call waiting features, and Wireless VoIP handsets. Vonage also stated that it will immediately file an appeal and has argued that Verizon was not actively pursuing utilisation of the patents until competitors such as Vonage came to market. Verizon has countered that it was unable to do so because of regulations in place at the time.
Outlook and Implications
Suspension of Service? Verizon has also asked for an injunction that would prevent the company from providing phone services that connect to the PSTN, which will be heard on 23 March, to which Vonage countered by asking for an immediate stay on any injunctions to halt use of the technology, which it claimed would be baseless. Injunctions have been harder to obtain in cases such as these since a Supreme Court ruling following a finding of infringement of a patent owned by MercEXchange, by eBay in May 2006. Permanent injunctions are now issued based on four tests:
- Irreparable Injury: Verizon claimed that it has lost 600,000 customers to Vonage because of the patents
- Legal remedies, e.g.,, monetary damages are not sufficient compensation
- Considering of the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted
- The public interest would not be disserved by a permanent injunction
While Verizon has focused on the harm caused to it by the presence of Vonage as a competitor, the final test means that an injunction, which would effectively suspend services for Vonage's 2.2 million customers, is in the balance, but unlikely to be forthcoming. Further, the opinion at the time from Justices Anthony Kennedy, John Paul Stevens, David Souter, and Stephen Breyer referred to potential vagueness and suspect validity of some patents (particularly those covering business methods) and indicate that such an injunction would not be looked upon favourably: "…an injunction, and the potentially serious sanctions arising from its violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent. When the patented invention is but a small component of the product the companies seek to produce and the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest."
Costs and Options: Vonage generated revenues of US$607 million in 2006 but has been dogged by continued high marketing costs that have so far prevented the company from making a profit, with losses of US$286 million in 2006 against US$261 million in 2005 (see United States: 16 February 2007: Vonage Growth and Losses Fall). Although the case will rumble through the appeals process, this result will obviously not assist Vonage to improve its income position. In the longer term, Vonage CEO Mike Snyder has previously stated that "…our financial reserves would allow us to continue normal operations regardless of the outcome. In addition, we are confident that regardless of how this litigation is ultimately decided, Vonage's customers will see no change whatsoever to any aspect of their phone service." Vonage has also indicated that it would be able to re-design systems so that they do not infringe on the patents, and Vonage bought several patents in June 2006 from Digital Packet Licensing to strengthen its intellectual property portfolio and work around the Verizon claims. There are also questions over whether the 5.5% royalty would be applied to the whole revenue or limited to the affected elements—although how the separation components would be determined is unclear.
There Will Be Troubles Ahead: In a two-pronged attack by incumbent operators, a subsidiary of Sprint-Nextel has also filed patent disputes against troubled Vonage, Voiceglo, and theglobe.com over patents that "protect a series of innovations that enable the processing and delivery of packetized voice and data communications, including Voice over Internet Protocol (“VoIP”) communications". Vonage also faces a US$180-million claim from patent holding company Klausner technologies relating to voicemail on VoIP systems. Vonage launched an initial public offering (IPO) in 2006 at US$17 per share, but initial errors in marketing the IPO to users and poor financial controls have seen the price continue to fall and after the result hit US$4.50 before ending Thursday at US$4.86 (see World: 25 May 2006: Vonage Debut Disappoints).
Further Implications: The case could have implications for other VoIP providers and many will be examining the design of their systems to eliminate risks. The successful conclusion of this case for Verizon will reduce the options available to VoIP providers and may increase the costs of providing services. For the large incumbent (Verizon), this will significantly improve its competitive position as it faces growing losses of access lines and minutes of use to VoIP and mobile services (see United States-Canada: 22 September 2006: VoIP Telephony Powers Cable Operators' Growth). The impact of sometimes questionable patents and resultant litigation in the United States continues to affect innovation, with massive retrospective awards severely affecting major companies (see United States: 23 February 2007: Microsoft Loses US$1.5-bil. MP3 Patent Claim against Alcatel). For the sake of innovation and operational efficiency, it can only be hoped that it will not be long before tightening of rules on the patenting of sometimes vague business methods, the retrospective application of patents and applicable fees, and the disregard for prior art and obviousness is instigated.