A U.S. court upheld its previous ruling against Boston Communications Group, a provider of prepaid wireless services, threatening a shut off for roughly 3 million customers, including people buying the minutes from Cingular Wireless and Alltel.
On Tuesday, the U.S. District Court of Massachusetts ordered the firm, better known as BCGI, to halt sales of some of its prepaid services within the next 90 days, and told the company to pay licensing fees during that time to Freedom Wireless, which filed a patent infringement suit against the company in 2000. BCGI markets prepaid wireless technology that manages payment and billing services to a handful of vendors including Cingular and Western Wireless Corp., which is being acquired by Alltel Corp.
Based on the ruling, BCGI will be forced to pay a licensing charge of 2.5 cents per minute for calls made using its services until it stops providing the wireless minutes altogether. Under the companys service agreements with its customers, both Cingular and Alltel are legally protected from paying any of the related fines. However, BCGI said during the case that the ruling would affect roughly 3 million prepaid wireless customers, including some 400,000 buying service via Cingular.
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In May 2005, the court found that BCGI had willingly infringed on a Freedom patent for prepaid services management technology, and ordered the company to pay $128 million in damages. As part of its ruling this week, the court levied additional charges against BCGI that pushed the entire judgment to just more than $148 million.
The Woburn, Mass.-based prepaid company said that it will continue to appeal the rulings, but indicated that the fines could force it to file bankruptcy. BCGI claims that it currently charges roughly 1 cent per minute of use for its real-time billing, rating and support services, which utilize the companys proprietary software and network.
“Our fight is far from over,” said E.Y. Snowden, chief executive of BCGI, in a statement. “We will bring our appeal to the U.S. Court of Appeals for the Federal Circuit, which has nationwide jurisdiction over patent issues and is especially skilled at reviewing complex patent cases, where we hope to prevail.”
Neither BCGI nor Freedom immediately returned calls seeking further comment on the litigation.
For its part, Cingular issued a statement that said it intends to seek a stay of the latest injunction while it appeals the entire case, but said that it will continue to provide service to all of its customers. Cingular said further that the injunction affects only a small proportion of its prepaid customers, as most of its subscribers utilize other services.
BCGI maintains that the patents in question are invalid in light of so-called “prior art” and claims that the size of the award to Freedom significantly exceeds the sort of royalties that any company would be forced to pay for a license to such patents. The company, which has more than 400 employees and had 2004 revenue of $108 million, said it would seek an emergency stay against the latest ruling, that would block the licensing fees and grant it permission to continue to market the services in question while the legal matter is being resolved.
Court Ruling Imperils Prepaid
BCGIs stock has plummeted as the ruling has moved forward, trading at just over $1 on Thursday, compared to a yearly high more than $10 in December, 2004.
Freedoms patent, granted in 1999, covers technology related to managing prepaid wireless services that makes it possible to measure usage without forcing subscribers to enter access codes into their handsets. Part of the patent relates to software needed to shut off service when a customer has run out of minutes.
The company was founded in 1999 by businessmen who had first applied for the patent as independent owners of prepaid their own companies. The company has since sold licenses to the technology to several companies, including Convergys Corp. and Telcordia Technologies Inc. Freedom maintains that BCGI generated $1.5 billion in revenue using its patented tools.
Freedom previously lost a similar patent suit against GTE Wireless Corp., which successfully argued that other vendors had offered nearly the same type of technology before it had launched its own prepaid services.
Some industry watchers have observed that BCGI was found guilty of patent infringement even though no Freedom Wireless designs were employed or referred to in the development of BCGIs systems.
According to Keith Mallinson, analyst with Boston-based researchers Yankee Group, the ruling awarded to Freedom, which he identified as “a four-employee company with no business operations, services, software or products for sale,” affects one-fourth of BCGIs prepaid business and poses a severe threat of bankruptcy for the firm.
Mallinson also said that the case could deter growth of the larger prepaid market, as the BCGI case is “merely the beginning for Freedom Wireless and its lawsuits.” The company has already filed suit against Nextel and Alltel, and the May 2005 decision could lead to action against other vendors and service providers, including Ericsson, Telcordia, Lucent, VeriSign, Alcatel and Intervoice.
“The US prepaid wireless market landscape has been severely altered from this recent decision,” Mallinson wrote in a recent report. “The example set by this broad interpretation on Freedom Wireless patents will not only harm prepaid billing vendors and wireless providers, but it will also languish consumer adoption.”