Vonage Reeling from Patent Infringement Decision

Last Friday, a federal court judge held that Voice-over-internet-Protocol phone company Vonage had violated Verizon Communications’ patents. Despite holding off on signing an injunction against Vonage for two weeks, and despite the appeals process that will allow Vonage to continue providing phone service, the stock has plummeted. It’s a classic case investors avoiding uncertainty, especially uncertainty that could force a company to start paying a competitor.

In the interests of complete disclosure, this journal has used Vonage for its telephone service for around two years after several unsatisfactory months with Verizon as the carrier.

Vonage went public less than a year ago, when it offered its common stock at $17 a share in its IPO. The stock hasn’t performed well, and on Friday, it closed at $3 per share, a huge loss for any portfolio. In the last few days, it has enjoyed some support, but clearly, the stock is in trouble.

As a result of a March 8 jury decision, in which the jurors were convinced Vonage had infringed on three Verizon patents, Vonage owes $55 million to Verizon and a 5.5% royalty on future sales. In the appeals court, Vonage will have to convince the court that the patents aren’t as broad as the jury decided. “We do not agree that we infringed on their patents still to this day, for a good reason -- because we do not agree with the patent construction,” said spokeswoman Brooke Schulz. “We not only disagree with it, it’s the basis of our appeal.”

As a back up, Vonage is developing, or may have developed, software work-arounds that accomplish the same thing as the existing technology that also steer clear of the patents. That would be OK, but as of Monday, the company also faces a class action lawsuit in California in which Vonage is alleged to have misled consumers about the quality and reliability of its service and that it engaged in false advertising and deceptive business practices. The stock won’t be at $17 again any time soon.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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