Verizon Suit Latest Setback for Vonage

The drumbeat of bad news continues for Vonage (NYSE: VG), with the VoIP startup, whose recent IPO has become something of a train wreck, saying Monday it has been sued by telecom giant Verizon for patent infringement.

Vonage said it had received notice that parent company Vonage Holdings Corp. and its U.S.-subsidiary Vonage America had been sued by Verizon Services Corp. and Verizon Laboratories, Inc., which allege Vonage violated seven patents related to carrying voice traffic over Internet protocol networks.

IPO Woes

“As a leading developer of VoIP technology, Vonage respects the valid intellectual property rights of others,” the company said in a statement. “Vonage believes that its services have been developed with its own proprietary technology and technology licensed from third parties and intends to vigorously defend the lawsuit.”

Vonage indicated it had not been contacted directly by Verizon about the patents prior to the legal action being taken.

For Vonage, the suit is the latest potential setback, with a steady stream of lawsuits and other issues arising in the month since the company went public. It already faces suits from shareholders, investigations into whether short selling helped fuel the sell-off in its shares and a stock market that has given its shares the cold shoulder since its IPO.

News of the suit gave Vonage shares another hit, with the stock losing nearly 10 percent to US$8.65 in afternoon trading Monday. The stock is now trading at half of its IPO price, making it by far the worst performer in that category this year.

Familiar Refrain

Vonage is no stranger to patent infringement actions. Last October, merger partners Sprint and Nextel sued Vonage, alleging infringement of seven patents.

Others who have claimed Vonage pilfered their technology on its way to becoming the top provider of VoIP calling services are Rates Technology and a North Carolina-based inventor who claims Vonage’s use of pre-programmed smart cards was an idea he developed.

In its complaint, which was filed in U.S. District Court in Richmond, Va. on June 12, Verizon said technology that Vonage borrowed covers the transition of a number of traditional telecom services to VoIP, including call forwarding, voice mail and the use of WiFi handsets.

“Through its product and service offerings, Vonage has appropriated the results of years of research conducted by Verizon and its predecessors,” Verizon said in the suit.

Verizon asks in the filing for an injunction, but unlike in some other patent cases, is not asking a court to shut down the Vonage service.

Taking the Gloves Off

The suit is a reminder of how aggressively major telecoms plan to deal with the rise of VoIP startups, which pose a significant risk to their core landline calling business, telecom analyst Jeff Kagan told the E-Commerce Times.

“The big telecoms have made it clear they’re going to protect their customer bases,” Kagan said, noting that every major telecom and cable company has rolled out its own VoIP service over the past year or so.

The complexity of the technical issues surrounding the technology, meanwhile, will likely make for a drawn-out legal battle in all of the cases, something which is seen favoring the larger, more well-financed incumbents.

“The window that startups like Vonage had [for gaining] customers before the big companies responded is being closed quickly,” Kagan added.

Fighting multiple legal battles will undoubtedly be seen by investors as a further drag on Vonage’s ability to become profitable, which is already a focus of attention as the company has invested heavily in TV advertising as well as other types of marketing in order to acquire customers as the VoIP market emerges.

Vonage’s recent woes began when its stock fell almost immediately after its debut on the New York Stock Exchange. They continued with a spate of shareholder lawsuits focused on the company’s customer share purchase program, which was meant to build loyalty, but is seen backfiring as customers who enrolled are on the hook for shares at the strike price of $17 — more than double what they’re currently worth. Last week, regulators said they were seeking information about potential short-selling of Vonage shares, which could help explain the precipitous drop in the price.

A bigger problem may be the company’s inability to keep customers it paid so dearly for up front. In fact, a “sell” rating from Pali Research analyst Richard Greenfield helped spark the drop. Greenfield reported that Vonage was offering discounts to customers who threatened to drop the service, which could further hamper efforts to stabilize the company’s finances, he said.

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