What is Wrong With Vonage’s Attorneys?

For those of us who have been following the Vonage saga (full disclosure: I’m an early and generally happy customer, and even used their service in Australia, which allowed people to call my 212 number and reach me in Sydney), the trial results are baffling.

By way of background, Vonage is the largest commercial provider of voice-over-Internet telephony, also known as VOIP (voice over Internet protocol). Telephone companies hate them because they compete with their highly profitable but declining fixed line business. And they have gone after them tooth and nail.

Wednesday, a jury found that Vonage had infringed on seven of Sprint Nextel’s patents and awarded $69.5 million in damages.

Verizon was the first to go after Vonage for alleged patent infringement. As CNET reported:

Verizon filed a lawsuit against Vonage in June 2006 in the U.S. District Court for the Virginia Eastern District accusing the IP telephony service provider of infringing several patents.

When Verizon first filed its lawsuit, it said that Vonage was infringing on seven of its patents. It later revised its complaint, and the jury ultimately considered five patents. The jury was asked not only to decide whether Vonage had infringed on its patents, but also whether the patents themselves were valid. The jury found that all five patents were valid, but it only decided that Vonage violated three of them.

The jury also found Vonage infringed on a patent involving VoIP calls using Wi-Fi handsets. Vonage was cleared of infringing two patents related to billing systems designed to prevent fraud.

The eight jurors rejected Verizon’s argument that the infringement was willful. If the jury had found that the infringement was willful, it could have tripled the damages it awarded to Verizon.

Now I will be the first to admit that I have neither read the patents nor the trial rulings. But based on what I’ve read on Slashdot (a geek news/comment site), the strong consensus among the cognoscenti is that most if not all of the patents being successfully asserted against Vonage are overly broad. As the Nattering Naybob put it

Allowing patents like this to stand would be analogous to allowing Verizon and Sprint…to patent the common practice of placement and use of salt and pepper shakers on public restaurant and cafeteria tables. And should they stand, perhaps photosynthesis and defecation will be patented next by Verizon and Sprint…

Overreaching patents are a real problem. As Timothy Lee, an adjunct scholar at Cato Institute (meaning he is a card carrying defender of private enterprise) said in a New York Times op-ed:

In a memo to his senior executives [in 1991], Bill Gates wrote, “If people had understood how patents would be granted when most of today’s ideas were invented, and had taken out patents, the industry would be at a complete standstill today.” Mr. Gates worried that “some large company will patent some obvious thing” and use the patent to “take as much of our profits as they want.”….

Nothing illustrates that better than the conflict between Verizon and Vonage.

Vonage developed one of the first Internet telephone services and has attracted more than two million customers. But last year, Verizon — one of Vonage’s biggest competitors — sued for patent infringement and won a verdict in its favor in March.

The Gates memo predicted that a large company would “patent some obvious thing,” and that’s exactly what Verizon has done. Two of its patents cover the concept of translating phone numbers into Internet addresses. It is virtually impossible to create a consumer-friendly Internet telephone product without doing that. So if Verizon prevails on appeal, it will probably be able to drive Vonage out of business. Consumers will suffer from fewer choices and higher prices, and future competitors will be reluctant to enter markets dominated by patents.

But don’t software companies need patent protection? In fact, companies, especially those that are focused on innovation, don’t: software is already protected by copyright law, and there’s no reason any industry needs both types of protection. The rules of copyright are simpler and protection is available to everyone at very low cost. In contrast, the patent system is cumbersome and expensive. Applying for patents and conducting patent searches can cost tens of thousands of dollars. That is not a huge burden for large companies like Microsoft, but it can be a serious burden for the small start-up firms that produce some of the most important software innovations.

Yet, as the Vonage case demonstrates, participating in the patent system is not optional. Independent invention is not a defense to patent infringement, and large software companies now hold so many patents that it is almost impossible to create useful software without infringing some of them. Therefore, the only means of self-defense is the one Mr. Gates identified 16 years ago: stockpile patents to use as bargaining chips in litigation. Vonage didn’t do that, and it’s now paying a very high price.

With all due respect to Lee, who is using Vonage to prove that our patent system is skewed towards the rich (and patent lawyers), it is possible to get patents overturned. And it has gotten easier since a recent Supreme Court ruling. As the New York Times reported:

The Internet phone company Vonage Holdings said on Tuesday that it was seeking a retrial of a patent infringement case against the company in light of a landmark patent ruling by the Supreme Court on Monday.

Vonage said that it had filed a motion with a federal appeals court asking it to vacate a March 8 patent infringement verdict that went against the company and in favor of Verizon Communications and to send the case back to a lower court for a new trial.

The Supreme Court ruling on Monday loosened a crucial legal standard making it easier to invalidate some patents on the ground that they were obvious inventions.

Vonage said the lower court should be instructed to review the case taking into account the Supreme Court’s call for ”a more expansive and flexible approach that allows for consideration of common sense when assessing whether an invention is ordinary or obvious, and thus ineligible for patent protection.”

Verizon is seeking to bar Vonage from any use of its patented technologies after a jury in March found Vonage had infringed three patents.

PC World today reported some positive news:

Vonage Holdings Corp. is downplaying an appeals court decision affirming an earlier verdict of patent infringement on two patents owned by Verizon Communications Inc.

The decision, made Wednesday, calls for the U.S. District Court in Virginia to retry the infringement judgment on a third patent. It also vacated the original US$58 million in damages and 5.5 percent royalty imposed in the original judgment.

The lower court will reconsider the size of the damage award and Vonage expects it to be reduced, said Charlie Sahner, a Vonage spokesman. In addition, Vonage expects a return soon of part of the cash it put up as bond after the ruling was made, he said.

The decision comes a day after Vonage lost another high profile patent infringement case brought by Sprint-Nextel Corp. The jury in that case awarded Sprint $69.5 million in damages. Vonage vowed to appeal that decision too.

Vonage has already deployed technology so that it doesn’t require the two patents upheld in the Verizon case, it said. That means that if the lower court upholds the decision to require Vonage to pay royalties for using the patents, the company will only have to do so related to the period of time before the workaround was implemented, Sahner said.

The company maintains that it did not infringe on the remaining Verizon patent in question and plans to defend itself against any new damages judgments. That technology applies to less than 10 percent of Vonage’s network and the company has already completed development of a workaround should the court decide that Vonage infringes on the patent, Sahner said

But the foregoing still begs the question, how did Vonage’s attorneys get thrashed so badly? Part of it may be that they lost the battle by having hte case hearad by a jury (my patent litigator friend never pleads beofre a jury). Jury selection and presentation is a tough and high skill game, and the Vonage lawyers appear to have been substantially outmatched. But you would think the company would have figured it out and have gotten new representation for the Sprint suit.

Some lessons are costly. Let’s hope Vonage learns them before it runs out of dough.

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