Vonage Works Around Verizon Litigation

Beleaguered Vonage Holdings said today it has completed workarounds of
the Verizon patents that are a key part of a $58 million infringement
award against the struggling Internet telephone provider.

The Verizon patents fall into two key VoIP areas: WiFi and name translation. The Verizon Wi-Fi patent covers
wireless VoIP-enabled devices while the name translation technology
involves how Internet calls travel across traditional telephone networks.

“We have substantially completed the deployment of workarounds for the
two name translation patents and have completed the development of the
wireless patent workaround,” Vonage CEO Jeffrey Citron said on a
conference call. “This is a significant step toward moving ahead with
our business in the wake of the Verizon litigation.”

The workaround announcement came as Vonage issued its
second-quarter earnings report. The Holmdel, N.J.-based company said it
narrowed losses from $60 million a year ago to $18 million after job
cuts and other cost-saving measures. Vonage also said it gained 57,000
new subscribers during the quarter. Shares are at $2.37 in morning trading.

“We made significant strides this quarter in reducing costs and
narrowing our losses,” Citron said. “Despite the continued challenges
associated with the Verizon litigation, the company maintained its focus
on achieving adjusted operating profitability.”

In March, a Virginia jury ruled
Vonage infringed on three Verizon patents. In addition to the $58
million in damages, Judge Claude Hilton ordered a permanent injunction
against Vonage using the Verizon technology and ordered Vonage to stop
recruiting news customers.

The permanent injunction was stayed while Vonage appealed the decision.
While the stay is pending, Vonage is paying Verizon a 5.5 percent per
customer royalty to the nation’s second-largest telecom carrier. The
U.S. Federal Court of Appeals heard the
case in June and is now expected to rule sometime in September.

“The workarounds did not infringe on the Verizon patents as defined by
the court,” Citron said, adding the Verizon litigation has so far cost
the company $6 million. “We remain confident in the strength of our appeal.”

At the June appeals hearing, Vonage lawyer Roger Wren said that even if
Vonage loses the case, a permanent injunction is not justified,
contending the damage award and royalty payments more than compensate

Vonage is also under legal attack from Sprint Nextel, the country’s
third-largest wireless carrier, over seven patents Sprint Nextel claims
Vonage infringes. Wednesday, a federal judge in Kansas City refused to
grant Vonage a summary judgment, and the case is expected to begin on
Sept. 4.

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. Since a VoIP call is
nothing more than another packet on the Internet, VoIP providers must
translate an IP address into a telephone number recognized by the PSTN
for the call to connect.

Verizon claims Vonage has taken away more than a million customers from
the company, which also operates its own VoIP service. Vonage admits it
loses more than 600,000 customers a year and, without the ability to
recruit new customers, bankruptcy would loom for the company.

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