Verizon wins $58m damages from Vonage

Internet phone provider Vonage has been ordered to pay $58m to Verizon Communications for infringing on three of the company's patents.

Vonage, which provides a service that turns broadband connections into phone lines, was found by a jury in the US to have infringed patents that cover the technology used to connect these voice over IP calls to the regular phone network, as well as some features for implementing call-waiting and voicemail services.

The monetary damages and the ongoing royalties awarded Verizon could have a significant impact on Vonage, if it doesn't come up with a solution that doesn't infringe the patents. The internet phone service provider has yet to turn a profit.

Clayton Moran, an equities analyst with Stanford Group, said: "Vonage is already losing money. If you add the expenses of the damages, royalties and the ongoing legal battles, it just throws their future profitability into question."

But the biggest risk for Vonage is that the company could also be forced to shut down its service. In addition to the damages, Verizon is asking the court for an injunction. On 23 March, US Judge Claude Hilton will hear arguments to decide whether Vonage should stop offering service until an acceptable licensing agreement can be worked out. Vonage said in a press release that it doesn't expect any interruption in service.

It said: "We don't believe there is any basis to support Verizon's request for an injunction. If the trial court does impose an injunction, we will seek an immediate stay from the Federal Court of Appeals. Vonage's customers should see no change to any aspect of their phone service."

The threat of an injunction and a long legal battle could adversely impact the company's sales, as new customers may be reluctant to sign up for a service that could be shut down - as happened to BlackBerry-maker RIM.

Verizon filed a lawsuit against Vonage in June 2006, in the US District Court for the Virginia Eastern District, accusing the IP telephony service provider of infringing several patents.

When Verizon first filed its lawsuit it said Vonage was infringing on seven of its patents. It later revised its complaint, and the jury ultimately considered five patents. The jury was asked not only to decide whether Vonage had infringed the patents but also whether the patents themselves were valid. The jury found all five patents were valid but it only decided Vonage violated three of them.

The jury also found Vonage infringed on a patent involving VoIP calls using wi-fi handsets. Vonage was cleared of infringing two patents related to billing systems designed to prevent fraud.

The eight jurors rejected Verizon's argument that the infringement was wilful. If the jury had found the infringement was wilful, it could have tripled the damages it awarded to Verizon.

Still, Verizon was delighted with the outcome.

John Thorne, Verizon senior vice president and deputy general counsel, said in a statement: "Patents encourage and protect innovations that benefit consumers, create jobs, and keep the economy growing. We are proud of our inventors and pleased the jury stood up for the legal protections they deserve."

Verizon had sought $197m in damages. But an expert testifying for Vonage during the trial had said that the most the company should be expected to pay would be $69m in damages. Ultimately, the jury awarded $58m in damages using a formula that calculated Vonage pay a royalty fee of 5.5 per cent on the revenue it makes for each Vonage customer line per month. Vonage has said it has about 2.2 million subscriber lines. The same formula could be used for the ongoing royalty fee, a Verizon representative said.

Throughout the entire lawsuit Vonage has denied it has violated any patents. It claims most of the technology it uses is standards-based and widely available throughout the industry. The company said it plans to appeal the verdict.

The verdict comes at a time when Vonage is struggling to become profitable. Last month it reported during its fourth-quarter profits call for 2006 that it had lost $286m for the year, on revenue of $607m.

Shares in Vonage ended the day down $0.19 or 3.76 per cent to $4.86.

Marguerite Reardon writes for CNET News.com