Down, Not Out: Vonage Rebounds on Settlement With Sprint

Vonage saw its stock soar some 75 percent Monday after the Voice over Internet Protocol (VoIP) firm settled a patent infringement dispute with Sprint Nextel that gives it the right to use Sprint technology going forward. The settlement could help Vonage turn a punishing legal setback into a positive development.

Vonage and Sprint announced Monday they had agreed to settle the case and enter into a licensing agreement that covers all six of the patents a jury late last month found Vonage willfully infringed upon.

Vonage agreed to pay US$80 million to Sprint in total, including $35 million for past use of the technology, plus $40 million for future licensing and an additional $5 million services fee.

Licensing VOP

A New Jersey jury found on Sept. 25 that Vonage had willfully violated six of Sprint’s patents and awarded Sprint $69.5 million in damages. Because the jury found the unauthorized use was intentional, the judge in the case could have tripled that award to nearly $210 million.

Under the agreement, Sprint will also license its entire Voice over Packet, or VoP, portfolio to Vonage. That intellectual property portfolio includes some 100 patents covering various ways to connect phone calls from Web-based networks to traditional telephone system.

“We are pleased to resolve our dispute with Sprint and enter into a productive future relationship,” said Sharon O’Leary, Vonage’s chief legal officer.

Sprint views the settlement as “a validation of the strength and breadth of our patent portfolio,” noted Harley Ball, Sprint Nextel’s vice president of intellectual property. “This is an affirmation of Sprint’s research and development.”

Vonage shares were up 75 percent in late morning trading Monday after the settlement was disclosed, to $2.02. Though that is still a fraction of the $17 the stock went public at last year, it is more than double the all-time lows the stock reached in the wake of the Sprint verdict.

One Down, One to Go?

The settlement is seen dramatically brightening Vonage’s future prospects, although the specific financial terms may hold the key as to whether the deal will push Vonage toward profitability or keep it in mired in red ink.

The Sprint verdict was the second major legal loss for Vonage this year following a jury’s verdict in the spring that found that the firm had used technology patented by Verizon without authorization. Vonage narrowly escaped almost certain demise in that case by winning a judge’s stay that puts on hold a ban on the firm signing up new customers.

It still faces a steep bill in that case, including $58 million in damages and an ongoing 5.5 percent royalty fee.

Last month, the U.S. Court of Appeals for the Federal Circuit in Washington upheld most of the Verizon ruling, though it did send one of the three patents back to the lower court for additional review that could lead to the penalty being reduced.

With the Sprint settlement in hand, Vonage can now point to a road map toward resolving the bulk of its legal issues, said Stifel Nicolaus analyst Rebecca Arbogast. Vonage has long claimed it has already developed software workarounds that eliminate the need for the technology in dispute in the Verizon case.

Vonage may rely on that argument to resolve the Verizon case, Arbogast told the E-Commerce Times, though whether it succeeds is another question. “Verizon is likely to put those workarounds under pretty intense scrutiny,” she added.

Winning Battles, Losing Ground

Vonage can ill-afford to either spend too much more on legal costs or to dish out heavy settlements or awards. Even though it dramatically cut back on its marketing spending earlier this year — all but eliminating its once-ubiquitous television ad campaign in the process — it has yet to reach profitability.

Perhaps as importantly, Vonage lost its title as the largest VoIP provider in the U.S. over the summer to cable giant Comcast, telecom analyst Jeff Kagan told the E-Commerce Times.

When combined with the demise of fellow VoIP startup SunRocket and last week’s news that eBay was dramatically writing down the value of its Skype acquisition, the trend in the VoIP marketplace is clear, Kagan added.

“The big cable and phone companies are coming in and taking away the customers those startups developed from scratch,” he said. “They proved the technology was a viable alternative to traditional calling and now other companies are in a much better position to deliver that service to customers.”

The settlement also comes at a time of disruption and transition at Sprint Nextel, with published reports over the weekend saying the company is set to announce it is seeking a new CEO to replace Gary Forsee.

“Sprint is in the middle of a major, multiyear transformation,” Kagan said, adding that the reasons the company is lagging AT&T and Verizon may have as much to do with perception as anything. “Whether fixing that requires a new CEO — we’ll find out.”