AT&T Sues Web Phone Company Vonage for Patent Infringement

October 22, 2007

Internet telephone company Vonage Holdings Corp. disclosed Friday that it’s the target of yet another patent lawsuit from a telephone company, in this case AT&T Inc.

That makes AT&T the third major phone company to sue Vonage, which until recently was a leader in selling phone service that rides the customer’s broadband connection.

Shares of Vonage fell 13 cents, or 7.8 percent, to $1.54 in Friday’s trading, before losing another 26 cents, or 17 percent, after hours.

In a filing with the Securities and Exchange Commission, Vonage said AT&T filed the lawsuit Wednesday in U.S. District Court in Madison, Wis. It said it has been in discussions with AT&T to resolve the dispute but can’t guarantee the case won’t go to trial.

The single patent in question, filed in 1996, appears to broadly describe the idea of routing telephone calls over data networks like the Internet. The listed inventor is Alexander Fraser, AT&T’s former chief scientist.

Two weeks ago, Holmdel, N.J.-based Vonage settled a patent dispute with Sprint Nextel Corp. for $80 million.

A suit filed by Verizon Communications Inc. is still in the courts, but Vonage suffered a significant setback in that process in March, when a jury awarded Verizon $58 million in damages, plus future royalties, after finding that Vonage violated three Verizon patents. Vonage denies infringement and says it has deployed workarounds for two of the patented technologies.

And last week, Vonage settled a fourth legal dispute, with Klausner Technologies Inc., a small company with patents on voicemail technology, for an undisclosed sum. Klausner had sued for $200 million.

The drumbeat of legal challenges and the sudden shutdown of Vonage rival Sunrocket Inc. in July have raised questions about the future of standalone Internet telephone companies and scared off potential customers.

Vonage’s growth stalled this year, leaving it with 2.3 million subscribers at the end of the second quarter.

Cable companies, meanwhile, have rolled out voice-over-Internet technology and have quickly gained customers among their video subscribers without having to match Vonage’s massive spending on advertising. Comcast Corp. ended the second quarter with 3.1 million phone subscribers.

Vonage’s stock went public last year at $17 a share. The stock has disappointed investors, but the high initial offering price gave Vonage a substantial cash pile, which has allowed it to weather the first litigation setbacks. According to its latest earnings report, it had $344 million in reserve cash on June 30.

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