Is cable in Verizon's crosshairs?

A judge's broad interpretation of patents in Verizon's lawsuit against Internet telephony provider Vonage could give the phone company enough firepower to go after cable operators and other voice over Internet Protocol providers.

It's clear that Verizon may soon file suits against other stand-alone VoIP service providers, such as 8x8 and SunRocket, as it defends its VoIP patents. But some experts say it might also take on Internet companies like Skype, EarthLink and Yahoo, which offer VoIP services, or cable companies, which also sell telephony services using VoIP technology.

"I believe that anyone offering a VoIP service could be a potential Verizon target," said Joel Rosenblatt, a Florida-based patent attorney who has reviewed the patents in question. "These patents appear to be so broad that an argument could be made against just about any service that allows people to make calls from the Internet to a regular phone network."

"The cable industry must certainly have their eye on this case."

--Tim Wu
law professor, Columbia University

Verizon declined to comment on any future litigation.

It makes sense that Verizon would target cable companies, because they represent the largest threat to Verizon's business. The reason is simple: stand-alone VoIP services from companies like Vonage have had little impact on the total telephony market.

Vonage and others have signed up only about 5 percent of all U.S. households for their services as of the third quarter of 2006, according to Forrester Research. Meanwhile, cable operators such as Comcast, Time Warner and Cox Communications, which have been offering service for only about 18 months, have been adding subscribers at a much higher rate. In the third quarter of 2006, roughly 6 percent of American households said they were using a cable VoIP service, according to Forrester.

Cable companies are also considered much bigger threats because, like Verizon, they can offer entire packages of service to consumers that include TV, broadband, telephony and, very soon, wireless.

The cable telephony offering is also considered comparable to Verizon's traditional phone service in terms of quality, because cable operators are able to segment their voice traffic to carry it over dedicated Internet pipes, allowing them to guarantee quality of service. Companies such as Vonage do not own any piece of the broadband network, so their traffic must travel over the same pipes as other Internet traffic, like that generated by Web browsing or e-mail. When broadband pipes are congested, voice service can suffer.

"The cable industry runs their service differently than Vonage does," said Tim Wu, a law professor at Columbia University who closely follows legal issues involving the Internet. "But these patents appear to be very broad. The cable industry must certainly have their eye on this case."

Comcast, which is the largest cable operator in the U.S. and has more than 2 million voice customers, declined to comment for this story.

The legal battle
Last month, a jury in Virginia found that Vonage infringed on three of Verizon's patents and it ordered the company to pay $58 million in damages. Last week, the judge in the case ordered an injunction that would bar Vonage from signing up new customers, but the company was granted a temporary stay of the injunction by a federal appeals court.

Vonage, which plans to appeal the lower court's decision that it is infringing on the three patents, is hoping to get a permanent stay on the injunction that will last as long as the appeals process.

Vonage's legal team says it's confident it will win its case on appeal, but the process could take two years or more.

Meanwhile, Vonage's business is already suffering. For one, the recent legal troubles have not helped the company retain customers, who had already been fleeing before the court's decision. On Thursday, Vonage executives said they were changing course, cutting the company's hefty marketing budget and about 10 percent of its work force to reduce costs to help pay for the ongoing legal bills. The company also announced that CEO Michael Snyder has resigned, effective immediately.

To understand why cable operators or any other VoIP provider might be vulnerable to future Verizon litigation, the patents themselves must be examined. The first two patents, U.S. Patent 6,282,574 and U.S. Patent 6,104,711, define the process by which VoIP traffic is handed off to the traditional Public Switched Telephone Network (PSTN). Specifically, U.S. Patent 6,282,574 explains the process of mapping numerical IP addresses to textual domain names, like in an e-mail address such as maggie.reardon@cnet.com, and eventually to a phone number. This mapping process makes it possible for a Vonage customer to call someone whose phone service is on a traditional phone network.

U.S. Patent 6,104,711 explains how a service provider can offer advanced calling features like call waiting, caller ID and three-way calling on a packet network. This patent describes the process of translating an IP address to a textual domain name and eventually to a phone number to provide these enhanced services for people using a VoIP service.

The third patent, U.S. Patent 6,359,880, covers how public wireless and cordless Internet gateways communicate with the Internet. This patent describes the business process that allows users to make and receive VoIP phone calls over a short-range wireless network, such as one using standard Wi-Fi equipment.

"Patent litigation has become a real wild card in American business, especially in the high-tech and communications industries."

--Gerald Faulhaber
professor, The Wharton School of Business

The actual patents can be accessed online using the patent numbers through the U.S. Patent and Trademark Office.

Depending on how broadly the first two patents are interpreted, they could apply to just about any VoIP service that allows people to make phone calls from a packet network to a regular phone network, say some experts. This includes services, like the digital voice services that cable operators offer. It would also include services like SkypeOut, which allows people to make calls from their computers to a cell phone or landline phone, or SkypeIn, which allows people to receive phone calls from regular phones on their PCs.

But patent experts say that reading the patents as they've been filed with the U.S. Patent Office provides only part of the picture. In patent litigation, judges hold what is called a Markman hearing before the trial begins to determine the meaning and scope of the patent claims in dispute. It is in this hearing that the judge determines how broadly the patents will be applied. In this particular case, the court has sealed the judge's Markman decision, making it impossible for anyone in the public to truly understand exactly how broadly these patents have been interpreted.

During a conference call on Thursday, Sharon O'Leary, Vonage's chief legal officer, said that U.S. District Judge Claude Hilton had "artificially expanded the coverage" of the patents during this hearing. She claimed that both parties were very limited in the information they could supply to the judge and that the hearing, which typically takes days, was decided in little over an hour.

Patent confusion
She also said that the judge ignored and neglected to address certain terms during the hearing that had been in dispute. For example, she said the judge included in his interpretation of U.S. Patent 6,359,880 wireless devices that transmit signals wirelessly hundreds of feet, which would essentially include all Wi-Fi-enabled devices and hotspots. Vonage would argue that the patent is referring only to devices that transmit wirelessly in close range, which would not necessarily include Wi-Fi devices and Wi-Fi hotspots. The judge also construed the term server to mean a collection of devices as opposed to limiting the meaning to a single device, O'Leary said.

Rosenblatt said that Vonage has a decent chance of winning its appeal.

"It looks as though the Markman claims are astonishingly broad," he said. "So the first thing they need to do is challenge the scope of those claims. The second thing is there was a lot of prior art, or other patents filed before the Verizon patents, so there is a chance Vonage could challenge the validity of the patents."

Vonage has said that it plans to challenge the Markman decision, the patents' validity, as well as the jury's decision. Those appeals are all still pending.

Many economists and legal experts say the Vonage case is a good example of how confusing and dysfunctional the U.S. patent system has become. During the past decade, there have been thousands of patents filed pertaining to VoIP technology. Experts say it's almost been impossible for the patent office to keep up with the flood of patents being filed.

"Patent litigation has become a real wild card in American business, especially in the high-tech and communications industries," said Gerald Faulhaber, a professor in the business and public policy department for The Wharton School of Business at the University of Pennsylvania. "It has gotten out of control. People are getting patents for all kinds of crazy stuff."

The other major issue with the current patent system, experts say, is that decisions surrounding these highly technical patents are dealt with in the regular court system and decisions are made by lay juries who likely have no technical background.

"We often think of telecom policy in the U.S. as being set by the Federal Communications Commission or sometimes state regulatory agencies," Wu said. "But the courts are also exerting a lot of power too, and their decisions are based on questions of law. They have nothing to do with looking at the state of competition in a particular market."

He added. "It will be a disaster for the entire telecom industry if the fate of VoIP is determined by patents and the strangeness of our patent system."