Tuesday, February 20, 2007

Future of Net phone firm Vonage hangs in balance

By Leslie Cauley, USA TODAY
Tue Feb 20, 6:57 AM ET

NEW YORK - Verizon and Vonage on Wednesday will present opening statements in a patent-infringement case that could have a big impact on consumers and the nascent Internet telephone industry.

Most immediately at risk is the future of Vonage (VG).

Vonage, one of the best-known brands in the Internet phone world, acknowledged last week that it doesn't have a plan for getting around use of technology that Verizon (VZ) claims violates patents it owns.

The upshot: If Verizon prevails in court, Vonage could be forced to shut down, at least temporarily, while it redesigns its service. That could cause a lot of heartburn for Vonage's 2 million customers.

Brooke Schulz, a Vonage spokeswoman, said Monday that Verizon's claims are baseless. "This is about Verizon trying to stifle competition," she said. "We have not infringed on their patents, period."

As for the prospect of Vonage shutting down, Schulz says, customers shouldn't worry. "We're working on a redesign plan."

Internet telephony, also known as VoIP, for Voice over Internet Protocol, is a Web-based phone service that closely mimics traditional phone service but sends calls over the Internet. VoIP costs only about $20 a month - though it requires an existing high-speed Internet connection - compared with $40 to $60 a month for regular phone service.

By the end of 2006, there were 8.6 million VoIP users in the USA, estimates JupiterResearch. By 2010, the number is expected to reach 22.5 million. Many of those customers are coming from traditional local phone providers such as Verizon and AT&T.

Verizon sued Vonage in June, claiming broad patent violation. An amended complaint in January alleged that Vonage "has appropriated the results of years of research conducted by Verizon and its predecessors.

"Vonage does not currently own any issued U.S. patents," the complaint continues. "Instead, Vonage relies on the intellectual property developed by Verizon in delivering its infringing product and services."

Verizon wants unspecified monetary damages and for Vonage to stop using what it says is Verizon's technology.

That may not be easy for Vonage. The patents Verizon claims have been violated cover, among other things, the "gateway interfaces" - critical for providing VoIP phone services that mimic traditional phone service - fraud detection, billing and features such as call-forwarding. In short, the patents are a road map for providing Bell-quality VoIP.

In total, Verizon has 48 different "terms," or patent claims in dispute. In pretrial rulings, Verizon has succeeded in getting broad interpretations of its claims.

William Bosch, a Vonage lawyer, conceded last week that it's been a tough slog. "Frankly, we didn't anticipate that all 48 terms would be construed to Verizon's favor," Bosch told the judge.

As a result of the court's rulings, Bosch said, Verizon's "patents are now so broad, it may be that nobody can design around them."

That begs a larger question: If the court orders Vonage to stop using Verizon's patented technology, can Vonage work around that?

Asked this very question by the judge, Bosch didn't mince words: "Given the claim construction that we have now, my understanding is we cannot do that because (the patent claims) are so broad."

He said other VoIP players could also be at risk. "It may be that the entire VoIP universe now infringes the patents given how broadly they have been defined."

Bosch also offered a prediction: "We think there is an extremely good likelihood this jury is going to find that (the Verizon patents) are invalid, that they never should have been granted in the first place."

Jeffrey Citron, Vonage's chairman and chief strategist, has been subpoenaed to appear as a witness - for Verizon. That has put him, potentially, in the awkward position of testifying against his own company. Vonage is fighting the subpoena, Schulz said.

The case is being heard in federal court in Alexandria, Va.