Sprint Wins Patent Case Against Vonage

Reston Firm Awarded $69.5 Million in Second Blow to Internet Phone Company

By Kim Hart
Washington Post Staff Writer
Wednesday, September 26, 2007

A federal jury yesterday ordered Vonage Holdings to pay Sprint Nextel $69.5 million in damages for violating six of its patents, prompting analysts to question whether the troubled Internet phone company could survive.

Vonage, which lost another major patent case earlier this year, said it would appeal the decision that sent its shares plummeting 33 percent.

Vonage must also pay Sprint a 5 percent royalty on future revenue, the jury decided after the three-week trial in U.S. District Court in Kansas. Sprint, which is based in Reston, said it planned to ask the court to permanently ban Vonage from using its patented technology, and District Judge John Lungstrum can triple the damage award if he agrees with the jury's decision that Vonage deliberately infringed the patents.

In a statement, Sprint said it was pleased with the verdict and viewed it as a "validation of the strength and depth of its patent portfolio."

Vonage's chief legal official, Sharon O'Leary, said the company's 2.4 million subscribers would not be affected. "Vonage has already demonstrated that it can keep its focus on customers and on its core business while managing ongoing litigation," she said.

Sprint's victory is the latest blow to Holmdel, N.J.-based Vonage, which lost a separate patent case to Verizon Communications in March. Analysts said they did not expect yesterday's verdict to affect Vonage's appeal in the Verizon case.

That verdict called for Vonage to pay Verizon $58 million in damages and 5.5 percent of its future revenue. Vonage's appeal is pending in the D.C. Circuit Court of Appeals.

An apparent delay in that court's decision has given Vonage additional time to devise a technology that does not infringe on Verizon's patents, according to several analysts. But the two cash-guzzling losses deepen the company's troubles as it struggles to maintain the confidence of customers and investors.

"Each case in isolation isn't the death knell for Vonage, but the accumulation of the two losses is pretty grim," said Rebecca Arbogast, regulatory analyst with Stifel Nicolaus. "It's a real one-two punch."

Richard Doherty, research director with Envisioneering Group, a market-research firm, said the two firms could reach a revenue-sharing agreement. "Sprint doesn't want those royalties as much as it wants access to those customers," Doherty said, adding that the decision gives Sprint more leverage in either reaching a settlement with Vonage, or acquiring the company, as was rumored earlier this year.

Vonage shares fell to $1.30, and trading was halted after news of the verdict. Sprint shares rose 13 cents to $18.43.