Vonage Tastes Patent Leather

Vonage's (VG Quote) patent battle with Verizon (VZ Quote) may be a hint of things to come.

Patent holders are expected to increasingly assert their intellectual property rights as Internet phone service grows in popularity, according to patent attorneys.

"Lots of companies have been thinking about this," says patent attorney Dennis Crouch, who also publishes the blog Patently-O. "I could just imagine that there are going to be more and more" VoIP cases.

Vonage is already facing another infringement lawsuit from Sprint Nextel (S Quote). Another company, Rates Technology Inc., has a separate claim against Vonage seeking injunctive relief and more than $3 billion in damages. Rates Technology, which settled a patent infringement lawsuit against Google (GOOG Quote) earlier this year, is also seeking injunctive relief and as much as $2.8 billion in a case against Cablevision (CVC Quote).

Rates Technology was formed in 1983, and, according to Gerald Weinberger, the president of the company who invented the patented "least-cost routing" technology whose applicability to VoIP is at issue in these cases, it has agreements with more than 140 companies covering its patents.

Large companies usually settle patent disputes, which are expensive and time consuming, among themselves by striking licensing arrangements. But that's a route they may have little incentive to take with Vonage.

"The big guys have been building patent portfolios for years," says Mark Kesslen of Lowenstein Sandler. "It puts Vonage and others in that precarious position that the patent wars could kill them."

For Vonage, the dispute with Verizon comes as the Holmdel, New Jersey-based company tries to recover from its disastrous IPO. Verizon says it learned of the supposed infringement of seven patents by reviewing Vonage IPO documents.

"Vonage has been out there for a long time," says Timothy C. Meece, a partner with Banner & Witcoff in Chicago who has represented cable and telephony clients. "Verizon has never asserted these patents against anyone else. The timing of this is very interesting."

Vonage said in a statement June 19 that it hadn't been notified about the infringement until the lawsuit was filed.

This is the latest bad news for Vonage. The company recently corrected a press release that claimed the Federal Trade Commission had closed its investigation into its 9-1-1 service disclosures. The company later conceded it hadn't received the requisite letter to that effect. Negative publicity surrounding how Vonage handled the IPO is also weighing on the shares.

Vonage's plan to reward customers by setting aside stock in IPO for them backfired when the shares plummeted. Some investors have also complained that the IPO process was confusing and fraught with technical glitches.

At least two lawsuits have been filed in connection with the IPO. More are likely to follow.

Even without these snafus, Vonage would still be a tough stock for investors to like since the unprofitable startup is facing mounting competition from phone, cable and Internet companies.

Vonage, which has an accumulated deficit of $476 million, is one of the main sponsors of U.S. broadcast of the World Cup soccer tournament. It has been the largest Internet advertiser and a significant buyer of television time as well.