Vonage's travails grow with suit

Verizon accuses Web-phone leader of patent violations

June 20, 2006|By NEW YORK TIMES NEWS SERVICE

Vonage, the Internet telephone startup, said yesterday that it was being sued by Verizon Communications in a dispute over the underlying technology that allows voice calls to be delivered over the Internet.

The lawsuit adds a new challenge for Vonage, which has seen its stock price slide precipitously since it went public last month.

Word of the suit send Vonage's shares down 11.7 percent to $8.48 yesterday. They were initially sold for $17 and have lost more than half of their value.

Verizon is accusing Vonage of violating "at least" seven patents, according to the complaint, which was filed June 12 in U.S. District Court in the Eastern District of Virginia.

Among its claims, Verizon alleges that Vonage has used some of Verizon's technology that enables voice calls to be transferred from the Internet onto the traditional telephone network.

It is unclear whether the technology covered by those patents is being used in Verizon's consumer Internet phone service, called VoiceWing.

Significantly, the lawsuit - as is sometimes the case in patent lawsuits - does not ask the court to halt Vonage's operations immediately, but does ask the court to do so if the matter is resolved in Verizon's favor. Legal experts said it could take more than a year for the case to work its way through the system.

In a news release, Vonage said it respected the valid intellectual property rights of others and that it believed its services were built on technology it developed or licensed from other companies. Vonage said it "intends to vigorously defend" itself.

Brooke Schulz, a Vonage spokeswoman, declined further comment. Vonage executives have declined comment since their public offering, noting a quiet period required by the Securities and Exchange Commission, but that period expired yesterday.

Vonage, despite being the early leader in the Internet phone market and enjoying relatively strong name recognition, faces growing pressures from much larger competitors. In particular, cable companies, such as Time Warner Inc. and Comcast Corp., and telephone companies, such as Verizon, are investing more heavily in developing and marketing services that deliver voice traffic over the Internet.

Telecommunications industry analysts have said that the steep slide in Vonage's stock price reflects not just rough market conditions but also a perception by investors that Vonage will be unable to fend off competition from larger companies with deeper pockets and longer-standing customer relationships.

Analysts who are more optimistic about Vonage's prospects argue that the company's early market lead, coupled with the strength of its brand name - which to some consumers has become synonymous with the new technology - will enable the company to hold onto a meaningful chunk of the growing Internet telephone market.

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