Verizon v. Vonage: If Verizon Wins, Do We All Lose?

by Katherine Croswell September 6 2007, 14:59

     Many of us enjoy those cheeky, and admittedly strange, Vonage commercials.  A substantial number of us are also drawn to the very low price of Vonage services as evidenced by the fact that Vonage has approximately 2.2 million users.[1]  For only $24.99 per month one can get their local and long distance phone service through the internet,[2] but recent events indicate that this price maybe too good to be true.  When deals like this come along, one may wonder how the company in question was able to charge so little and yet still turn a profit.  The answer to that question may be that Vonage has infringed on patents held by Verizon, turning a profit on technology they do not legally own, according to the United States District Court for the Eastern District of Virginia.[3]  While the trial has concluded and Verizon has won the first round, this case continues on appeal.[4]  With Vonage’s demise arguably on the horizon, it is time to reflect on whether Verizon will likely emerge victorious, and also on the consequences of Verizon winning the day.

     Verizon Services Corporation v. Vonage Holdings Corporation involves a dispute over Voice over Internet Protocol (“VoIP”) technology, which enables consumers to communicate over the telephone using their internet connection.[5]  “VoIP involves converting voice sounds into digital format, assembling the resulting digital data into multiple packets, and transmitting those packets over the Internet.”[6] Verizon brought this suit, alleging that Vonage had infringed on several of its patents, and demanded injunction as well as damages totaling $197 million.[7]  
     Verizon did in fact win.[8] Jurors concluded that Vonage had infringed on three out of seven of Verizon’s VoIP patents.[9] Verizon, however, must console itself with $58 million in damages, in addition to 5.5% on each Vonage customer in the form of royalties on a per month basis (if Vonage continues using Verizon’s patented technology).[10] The jury did conclude that Verizon did not prove that Vonage’s infringement was willful.[11] This is possibly why Verizon received only $58 million in damages as opposed to the $197 million it originally sought.
     While Vonage, as a result of its loss to Verizon, was subject to an injunction that would prevent it from signing up new customers, the federal appeals court has issued a stay order which allows Vonage to continue enrolling new customers as its appeal proceeds.[12]
     After its loss at the District Court level, Vonage requested that this case be sent back to the district court for retrial due to the fact that the jury instructions given were not in line with the Supreme Court’s recent landmark ruling in KSR International v. Teleflex regarding an “obviousness test” to be applied in patent cases.[13] The U.S. Court of Appeals for the Federal Circuit, which hears all patent appeals, denied this request, though Vonage may still raise this issue on appeal.[14] Verizon is likely to counter Vonage’s argument by saying that Vonage did not properly preserve this issue for appeal, and also, that Vonage proposed the jury instructions they now challenge.[15]  Therefore, it seems unlikely Vonage will get to start their case over from scratch, thereby delaying further the final adjudication of this case.
     When this case proceeds to the Circuit Court for review, predictions are mixed as to which side will prevail.  According to Jeff Pulver, a pioneer in the VoIP field, “Verizon’s patent claims describe a process that Pulver helped create in 1995, well before the Verizon patent.”[16] If this is true, it certainly pokes holes in the Verizon patents and opens the door for the Court of Appeals to reverse the District Court.
     Verizon, however, already has one win in its column, which may have set the stage for an ultimate victory in the Court of Appeals.[17]
     If Verizon wins their case, smaller VoIP companies should be afraid…very afraid. The precedent would be set at that point, and if those smaller companies are using the same technology that Vonage now uses, and can Verizon can prove it, Verizon may find itself all alone in the VoIP industry until they license their patents or someone finds a way around Verizon’s patented technology.[18]
     Some claim that if Verizon wins, the way most of us have become accustomed to making calls could change significantly.[19]  It is also claimed that by going after Vonage, Verizon is effectively trying to limit the choices of the consumer to the detriment of a free market system.[20]  Freetocompete.com goes so far as to encourage people to contact Verizon to tell them they support Vonage – “It’s all about choice, freedom and savings, and it’s time that you have a voice in protecting the number of phone providers, competitive prices and future innovations you deserve.”[21] Sites like this paint Verizon as an evil large corporation that’s trying to “screw over the competition,”[22] but is that an accurate picture to be painting?  Does a win for Verizon really equal a loss for the consumer?
     In the end, only time will tell whether Verizon or Vonage come out on top.  One thing can be sure:  patents protect us all.  When someone invents some new great technology, we all benefit.  What encourages those inventors to invent the technology of tomorrow?  Dollar signs may be a powerful incentive.  To assure that those with a talent for innovation continue to do their best work, they must be rewarded handsomely for their toils.  It is capitalism at work, and it is what assures that those technologies we all know and love continue to improve, making life better and more convenient for all.  Therefore, if Vonage did infringe on patents legitimately held by Verizon, they should pay and possibly even go out of business. While this may be a temporary inconvenience to some, and an enormous blow to Vonage, it is important to uphold patents to ensure that great ideas continue to flow.

References

[1]  Andario Strange, The Future of Internet Telephony Could Hang on Vonage Case, Apr. 26, 2007,http://www.wired.com/techbiz/it/news/2007/04/vonage_appeal.

[2]  Vonage.com Homepage, http://www.vonage.com, last visited Sept. 4, 2007.

[3]  Wayne Rash, Vonage Barred from Using Verizon Patents, Mar. 23, 2008,http://www.eweek.com/article2/0,1759,2107270,00,asp.

[4]  Id.

[5]  Verizon v. Vonage, No. 06-0682, 2007 WL 528749, at *1 (E.D. Va. 2007).

[6]  Id.

[7]  Eric Bangeman, Vonage Found Guilty of Infringing Three Verizon Patents, Mar. 8, 2007,http://arstechnica.com/news.ars/post/20070308-verizon-asks-for-197-million-in-damages-from-vonage.html.

[8]  See Strange, supra note 1

[9]  Id.

[10]  Id.

[11]  See Bangeman, supra note 7.

[12]  See Strange, supra note 1.

[13]  Roger Parloff, Appeals Court Denies Vonage Quick Fix, May 3, 2007,http://legalpad.blogs.fortune.com/tag/vonage.  See also KSR International Co. v. Teleflex, 127 S.Ct. 1727 (2007).

[14]  Id.

[15]  Id.; Roger Parloff, Verizon Returns Serve: Vonage Wrote the Jury Instructions It's Complaining About, May 2, 2007, http://legalpad.blogs.fortune.com/tag/vonage.

[16]  Strange, supra note 1.

[17]  See Id.

[18]  Id.

[19]  Id.

[20]  Freetocompete.com Homepage, http://www1.freetocompete.com, last visited Sept. 4, 2007.

[21]  Id.

[22]  Id.

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