Vonage, Verizon Wage War Over VoIP

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Washington— Vonage Holdings Corp., a pioneer in placing phone calls over the Internet, was in federal court last week defending itself against a nearly $200 million patent-infringement suit filed by Verizon Communications, the second-largest phone company in the U.S.

Although Vonage made a name for itself as an innovator in digital voice communications, Verizon claims that Vonage has been illegally using patented Verizon technologies at the core of voice-over-Internet Protocol (VoIP) service, including signaling interconnectivity, authorization, authentication, billing and fraud prevention.

Verizon, defending five patents in U.S. District Court in Alexandria, Va., is seeking $197 million in damages, equal to about 25% of Vonage’s current market value. Before its stock sank 70% on Wall Street, Vonage was briefly worth $2.8 billion after going public last year.

Verizon commercialized its patents partly through the development of its own VoIP service, called VoiceWing. Verizon does not disclose VoiceWing subscriber totals.

Verizon said it first became aware that patent infringement was occurring after reading material that Vonage had filed with the Securities and Exchange Commission in 2006.

“Verizon’s early research and development in providing VoIP services on a commercial basis resulted in patented inventions that cover many basic aspects of a successful commercial operational implementation of VoIP technology,” Verizon said in a court brief.

Holmdel, N.J.-based Vonage has about 2.2 million subscribers, giving it about 25% of the VoIP market. But Vonage is tiny compared to Verizon, which has more than 50 million wireline customers, second in the nation behind AT&T.

Vonage made a splash four years ago with the introduction of a low-cost, feature-rich phone service that rode on top of cable and phone-company broadband networks, eliminating the need to negotiate myriad phone-interconnection agreements that chewed up the time and money of many circuit switched phone entrants that tried to gain market share in the late 1990s, under favorable Federal Communications Commission regulations.

During the past two to three years, cable companies like Comcast, Time Warner Cable and Cablevision Systems rolled out their own VoIP services in an effort to grab a big share of a market that some estimate will grow to 23 million subscribers within the next five years.

Vonage vice president of communications Brooke Schulz was quoted in other publications saying Vonage was developing a plan to maintain service if it couldn’t rely on Verizon’s patents.

“Our primary argument is that not only did we not infringe on their patents, but the patents they claim we infringed upon are invalid,” Schulz told Multichannel News. “All the documentation is under seal due to the proprietary nature of the technology.”

An eight-person jury heard opening arguments last Wednesday and Thursday. Action resumes Monday when Verizon is expected to call Jeffrey Citron, Vonage’s founder, chairman and chief strategist, to testify.

Jeff Pulver, who helped created Vonage but didn’t stay with the company, said he didn’t believe a Verizon victory would spell the demise of Vonage. “They have proven that they are the Kleenex of voice over broadband. They are the team to beat,” he said. “Their model works wherever there is broadband.”

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