Vonage, Verizon spar in court over patents

Net phone company says it didn't copy Verizon's patents, but the telecommunications giant says harm has been done and its VoIP rival must pay.
Written by Anne Broache, Contributor
ALEXANDRIA, Va.--A Vonage co-founder insisted in federal court Tuesday that his company never copied Verizon's Internet telephony systems, while a Verizon executive maintained that the rival company's alleged infringement has done serious harm.

Highly technical discussions typically dominate patent trials, but that wasn't the case during most of the fourth day of a jury trial at a U.S. district court here. In the morning, a Verizon company executive described perceived losses caused by Vonage's existence, and an economist hired by Verizon suggested the leading Internet phone provider should owe nearly $200 million if the jury rules against it.

Later, attorneys for Vonage began their witness lineup with two executives from the Internet phone company, who attempted again to distance their services from what Verizon's patents cover.

Vonage co-founder Louis Holder, for instance, testified that he had no idea Verizon held patents covering Internet telephony when the young enterprise began working with hardware and software makers like Cisco Systems and Dynamicsoft several years ago to license their technologies and put together its own system.

Under questioning by Vonage attorney Roger Warin, Holder also said Verizon never approached the Vonage about possible violation of its patents until it filed suit last June. (Vonage had gone public less than a month earlier.)

"Did you or anyone at Vonage ever do a search (for existing patent filings) in the U.S. Patent and Trademark Office?" asked Verizon attorney Peter McCabe, who went on to repeatedly grill Holder with variations on that question.

"No...we did not feel we had to, because we pieced together components generally available to the public," replied Holder, who now serves as president of Novega Venture Partners, a company subsidiary focused on new product development.

The broader dispute rests on allegations by Verizon that features central to the success of Vonage's offerings infringe on five of its patents. They relate to various aspects of commercial voice over Internet Protocol, or VoIP, service, including methods of connecting Internet calls to the public-switched telephone network, enabling features like call forwarding and voice mail, and allowing Internet phone usage via Wi-Fi hot spots.

Questioning the patents' validity
Vonage maintains that it does not violate any of the patents in question. It also contends they are invalid, in part because the company claims inventions by Net phone engineers and other companies, such as Net2Phone and VocalTec, predate the mid-1990s Verizon patents.

Verizon, meanwhile, has begun more aggressively pricing its VoiceWing service, which launched in 2004. Verizon Chief Marketing Officer Bob Ingalls testified Tuesday that the company has lost as many as 585,000 customers since 2002 and $300 million to $400 million per year in revenue because of a growth in Vonage subscribers, which now number about 2.2 million.

Under questioning from Vonage's Warin, he admitted the company's primary competitive threat, however, comes from cable operators. Between January 2006 and April 2006, a survey of more than 12,000 customers who dumped Verizon found that 14 percent of them went to Vonage and 71 percent opted for cable services, he said.

A victory for Verizon in the patent suit could mean a multimillion dollar setback for Vonage, which has already been witnessing slower subscriber growth when compared with its competitors in the cable sphere. In the fourth quarter of 2006, Vonage added only 166,000 new subscribers for its VoIP service. That figure was down from 204,591 subscribers in the third quarter, and from 256,000 in the second quarter of that year.

In his testimony Tuesday, Harvard Law School Professor Steven Shavell, an economist hired by Verizon, said a "reasonable royalty" payment in the case of infringement would be $4.93 per Vonage line per month of service, or a total payout of more than $197 million to cover the period its service has existed. Shavell said he arrived at that number by analyzing the number of land-line customers who dropped Verizon to subscribe to Vonage and Verizon's estimated lost profits per customer.

Later in the trial, Vonage may call its own damage expert, who is expected to say the company would owe only about $72 million by his method of calculation, according to Verizon attorney Dan Webb. Under questioning by Webb, Shavell criticized the Vonage expert's methodology, saying that figure assumed Verizon would have made a licensing deal that caused it to lose money.

"No company would do that," particularly with a competitor, Shavell said.

Vonage has suggested the suit is nothing more than a ploy by Verizon to stifle a competitor. The Net phone company even issued a press release Monday blasting media coverage of the trial as "inaccurately speculating" on the trial's outcome and impact on its business.

"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," company CEO Michael Snyder said in that statement.

Testimony is expected to continue into next week, with closing arguments tentatively set for next Wednesday morning. Then it will be up to the jury to reach a verdict.

CNET News.com's Marguerite Reardon contributed to this report.
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