The mad scramble over VoIP patents

Anthony Cataldo, chief executive of Internet-calling provider VoIP, Inc. (VOII), closely watched the recent patent dispute between Verizon Communications (VZ) and Vonage Holdings (VG). Upon learning of the Mar. 8 decision by a jury that Vonage infringed on Verizon patents, Cataldo asked lawyers to start proceedings against companies that he says are using his company's technology. 'You are going to see a lot of demand letters going out from us,' he says.

Letters will go out from him"”and a lot of others. On the heels of the Verizon verdict, expect a flurry of lawsuits by holders of patents on the technology that delivers phone calls the same way e-mail travels over the Internet, legal experts and industry executives say. 'We were waiting to see how [the Verizon-Vonage case] was going to work out,' says VoIP Chief Operating Officer Shawn Lewis. '[The verdict] has opened up the validity of protecting the patents.'

There are plenty of VoIP (voice-over-Internet Protocol) patents to protect. The Patent & Trademark Office says there are 2,273 such patents. Many belong to telecom stalwarts like Verizon, AT&T (T), Motorola (MOT), Broadcom (BRCM), and Cisco Systems (CSCO). More than 150 patents, filed as early as 1999, were granted as recently as 2007.

Settlements Likely

Lawsuits could come from inventors both big and small. A Long Island (N.Y.)-based patent holder, Rates Technology, which has received payments from the likes of Cisco and Verizon, has claims pending against Cablevision (CVC) and a small telecom equipment manufacturer in New York. 'Where the monetary temptation looks high, there's a greater incentive to bring the suits,' explains Jerry Cohen, partner and co-chair of intellectual-property practice at Boston law firm Burns & Levinson.

Before the ruling in the Verizon case (which Vonage is appealing), the benefits of suing for patent infringement in VoIP cases were far from clear (see, 3/9/07, 'What the Verizon Verdict Means for Vonage'). Last year, the U.S. District Court for the Eastern District of Texas ruled that Comcast's (CMCSA) Digital Voice service did not infringe on a patent held by Caritas Technology. In 2006, Time Warner's (TWX) AOL settled a $200 million lawsuit from Klausner Technologies alleging it infringed on Klausner's technology for visual message notification; the terms were not disclosed. Indeed, terms of many VoIP dispute settlements have not been made public.

In the future, much litigation may remain out of public view. In light of the Verizon decision, Vonage may choose not to risk another lengthy trial and instead settle with service provider Sprint Nextel (S), says John Rabena, partner at Washington law firm Sughrue Mion. Sprint Nextel is suing Vonage, alleging the Web-calling outfit infringes on seven of its patents. Sprint's complaint, filed with the U.S. District Court for the District of Kansas, is set to go to trial on Sept. 7.

Good-Bye to Open Standards‾

Wherever the litigation plays out, the view of Web calling will change. It's long been viewed as an open-standards, off-the-shelf technology, rather than one protected by patents. While Web calling does use Internet Protocol (IP), an open standard, 'that doesn't mean that anything that touches Internet Protocol isn't protectable,' says Glenn Woroch, executive director of the Center for Research on Telecommunications Policy at the University of California Berkeley's Haas School of Business. Verizon's patents, for instance, apply to older technologies such as call-waiting and a method of ensuring call security.


Others say they hold patents on wide-ranging capabilities such as how to make traditional phone and IP networks talk to one another, and for enabling wireless Web calls.

Some Web-calling outfits might now find themselves surrounded by patent holders demanding royalties. 'Part of what's happened here is the VoIP industry has met with the real world,' says David McClure, president and CEO of the U.S. Internet Industry Assn., representing Internet service and content providers. 'In the real world, there are patents. Before, this was about running around, thumbing your nose at big, bad phone companies.'

And when big, well-funded phone companies thumb their noses back, smaller players may pay dearly. 'You will see more companies exiting the business,' says McClure. 'There's no question that VoIP is the future. The question is to what extent a new company can go head to head with a telco that's been around for 100 years.' Not only do smaller Web-calling providers have potential legal fees to contend with, but the business is becoming increasingly price-competitive. On Feb. 28, AT&T cut rates for its Web-calling service, CallVantage.

Other by-products of the decision in the Vonage case include patent filings and acquisitions. 'The message this sends to the VoIP industry is, if you build a patent portfolio, it helps you negotiate in these situations,' says Rabena. Engineers at telecom-services provider Jajah regularly discuss what features they might be able to patent, says company CEO Trevor Healy. 'Intellectual property will always be important in telecommunications.'

Kharif is a reporter for BusinessWeek Online in Portland, Ore.

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