Jury’s Patent Verdict Leaves Vonage in Critical Condition

A jury Tuesday delivered the second punch of a potentially staggering one-two legal blow to Vonage, finding the VoIP (Voice over Internet Protocol) provider had willfully infringed upon patents held by telecom giant Sprint Nextel.

Jurors awarded Sprint US$69.5 million in damages — the equivalent of an estimated 5 percent of its revenues during the period of infringement. Because the jury found the infringement was intentional, the judge can triple the monetary damages.

Vonage shares plunged more than 33 percent in afternoon trading Tuesday after the verdict was announced and continued to tumble in morning trading Wednesday, losing another 22 percent to fall to $1.02, a price that would represent a new all-time low for the stock.

Customer Focus

Vonage quickly announced it would seek to overturn the jury verdict, first by asking the U.S. District Court to set aside the decision and then by appealing to a higher court if necessary. The New Jersey-based company also said it would seek to develop a workaround for the patents in question.

The Sprint verdict comes as Vonage continues to operate under a stay of an injunction granted to Verizon after a jury found that company’s patents had also been infringed. That injunction would have prevented Vonage from signing up new customers, a penalty the company said would have led to its eventual demise.

An appeal of the Verizon case — which also came with a cash award of $58 million, but differs because the previous jury found Vonage’s infringement not to have been willful — is expected to begin soon.

“We are disappointed that the jury did not recognize that our technology differs from that of Sprint’s patents,” said Sharon O’Leary, chief legal officer at Vonage. “Our top priority is to provide high-quality, reliable digital phone service to our customers. Vonage has already demonstrated that it can keep its focus on customers and on its core business while managing ongoing litigation.”

Survival in Question

After a three-week trial, the jury found that Vonage deliberately infringed on six patents relating to the way Web-based calls are connected to traditional phone networks.

Vonage had argued that the patents should not have been issued.

The setback renewed speculation about Vonage’s cloudy future and raised new questions about whether it can survive on its own over the long term. The recent demise of the VoIP firm SunRocket seems to underscore a shift in the Web-calling market, with consumers embracing the technology in larger numbers but also more likely to buy it from their cable or telecommunications company rather than a pure-play startup.

“This was expected,” telecom industry analyst Jeff Kagan told the E-Commerce Times. “The company that captured the headlines in the beginning of VoIP popularity is becoming less and less important to the competitive landscape,” he said.

“[Vonage is] not really important as a competitor anymore so the risk of it failing is to the shareholders and that’s about it at this point. The big competitors in this space are the cable television companies and even the telephone companies as they offer it as part of a bigger bundle of services that customers use every day.”

Land of the Giants

If nothing else, the continued legal battles will likely further extend Vonage’s time frames for reaching profitability. In the wake of the Verizon ruling, the company focused on trimming costs — slashing marketing expenses, for instance — in a bid to demonstrate to investors that it could get into the black.

Nevertheless, the number of consumers using VoIP as a main home phone service remains relatively small, Forrester Research analyst Sally Cohen told the E-Commerce Times.

While the price benefits are attractive to cost-conscious consumers, startups such as Vonage are less equipped to drive mainstream adoption than cable and telecom companies, which can bundle VoIP with other services.

“VoIP technology still stands to alter the telecommunications market, but consumers aren’t yet comfortable with it as a replacement for their reliable home phone service,” Cohen said.

“The VoIP marketplace is still very young, but it is maturing past the early stage,” Kagan noted. “It started just a few years ago and this is the first squeeze that is typical in any market. The young entrepreneurs who were hot introducing it are losing ground to the big players who are getting into the space.”

Sprint has not decided whether to seek an injunction, the company said. Doing so could create the same situation that Vonage faced after the Verizon verdict, when the legal uncertainty about its ability to continue operating created a fertile ground for competitors to steal subscribers.