Vonage to Pay Sprint $80 Million, Settling Patent Dispute

Forestalling a possible injunction of the sale of its voice-over-IP services that would likely have crippled the company, Vonage agreed this morning to pay Sprint Nextel a one-time fee of $80 million, for a license covering all past and future usage of Sprint's intellectual property. Two weeks ago, a jury found Vonage infringed upon Sprint's patents in the VoIP field, and had been ordered to pay $69.5 million plus 5% of its future revenues.

The deal effectively ends one of two disputes with major patent holders with whom Vonage has been competing for business. The other is with Verizon, and the judge in that case may yet issue an injunction unless Vonage has an inclination to settle there as well.

Sprint, as it turned out, held a significant number of patents that were important not just for acquiring revenue through litigation, but in building a broadband optical network using SONET protocols over an ATM backbone.

Since the 1990s, Sprint played an early role in building the infrastructure for a sophisticated, strong Internet backbone network capable of carrying metropolitan-area traffic. For nearly two decades, the major carriers have held out hope for a revenue source in commoditized data traffic processing.

But in 2002, along comes Vonage. Seizing the initiative from the telcos, its plan is to lease existing broadband infrastructure, not build it, but to utilize sophisticated switching equipment that enables ordinary telephone calls over IP lines. It was one of the payoffs companies like Sprint and Verizon were foreseeing, but it was Vonage - which built none of the infrastructure - that came to collect.

Vonage did have an infrastructure for itself, though, based on its switching technology. To fend off Vonage's claim for the VoIP grand prize, the telcos took advantage of the biggest opportunity both technology and the law made available: Vonage couldn't exactly snarf customers from Sprint's and Verizon's infrastructure unless they planned to use some of the same technological methods both companies that the telcos use for their own networks.

In other words, you can't use their doors unless you know how to open them, and that method is patented - in Sprint's case, by a substantial patent portfolio built up for an early broadband project called JCS2000.

Laws enacted just after the breakup of the original AT&T - laws intended to protect MCI - protect the rights of smaller companies to lease the services of bigger ones in order to sell services that compete with the bigger companies. Neither Sprint nor Verizon can keep Vonage from competing with them for voice telephone customers, but they can prevent it from using their technology in doing so.

The Sprint agreement gives Vonage complete access to that company's Voice-Over-Packet (VOP) portfolio, including the patents which a Kansas jury found Vonage infringed upon. Vonage no longer has to implement a workaround technology, the reliability of which may have been a little iffy. On the one hand, you might think Vonage could have saved itself a world of trouble and legal fees by having licensed Sprint's VOP portfolio in the first place.

But Vonage founder Jeffrey Citron raised his company's initial capital on the principle of going up against the big phone companies, not making deals with them; his initial investors were banking on Vonage as an alternative. Conceivably, had Citron spent some of that initial investment in licensing deals early on, he might not have had enough of his bankroll left over to maintain services.

Ironically, the settlement announcement comes on the same day of a New York Times report stating that Sprint Nextel's board of directors is actively searching for a replacement for current CEO Gary Foresee, citing declining revenue.