Vonage Settles Patent Dispute with AT&T

The tentative deal clears the VOIP provider of major carrier lawsuits, but settlements are battering its bottom line.

Vonage Holdings said Nov. 8 it has reached an agreement in principle to settle a patent infringement lawsuit brought against the VOIP provider by AT&T. The general terms would require Vonage to pay AT&T $39 million over five years.

If the deal is finalized, Vonage will have settled all its infringement legal woes brought by the countrys three major telecommunications carriers. In October, Vonage agreed to pay Sprint Nextel $80 million and settled with Verizon for a still undisclosed amount between $80 million and $120 million.

However, the settlements continue to batter Vonages bottom line. The company said Nov. 8 it lost $161.7 million in the third quarter ending Sept. 30. The losses included $132 million in patent infringement settlements. Third-quarter losses in 2006 were $62.1 million.

Driven by an increase in net subscriber lines, Vonage also reported third quarter revenue of $211 million, a 30 percent increase over the year ago third-quarter revenue. The company added 78,000 new subscribers in the third quarter and reported the average monthly revenue per line was $28.24.

Overall, Vonage claims 2.5 million subscribers, an increase of almost 500,000 customers over last year. Customer churn rose to 3 percent in the third quarter, up from 2.5 percent in the second quarter.

"We are executing against our strategy to fix the fundamentals of our business," Vonage chairman Jeffrey Citron said in a statement. "We are acquiring customers more effectively and running the business at an improved cost structure. While this has resulted in positive changes in our business, we have much more to do."

On Sept. 26, the Court of Appeals ruled Vonage infringed two patents held by Verizon and remanded a third infringement claim back to a lower court. The appeals panel also vacated the entire award of $58 million in damages and ordered the lower court to reconsider and recalculate the damages.

After Vonage agreed to the settle the dispute Oct. 26, the company and Verizon agreed that if Vonage wins rehearing on either of the two patents or if the injunction is vacated, Vonage will pay Verizon $80 million. If Vonage does not win a rehearing on either of the patents, or if the stay is lifted reinstating the injunction, Vonage will pay $120 million, which includes $2.5 million payable to certain charities.

The Verizon patents, filed in 1997, cover the translation of domain names and IP addresses to telephone numbers when Internet calls are passed off to the traditional telephone system. Vonage claims the solution was obvious to those skilled in the art and that the Patent and Trademark Office should have never issued the patents to Verizon.


Check out eWEEK.coms for the latest news, reviews and analysis on mobile and wireless computing.