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Vonage, Verizon settle patent spat for up to $120 million

Companies say they have "resolved" a dispute over three VoIP patents. Precise amount of settlement depends on whether appeals court agrees to review case.

Updated at 7:25 a.m. PDT Friday.*

Vonage said Thursday it had resolved an ongoing patent dispute with Verizon Communications at a price tag of up to $120 million, ending what has been a mostly gloomy saga for the struggling Internet phone company.

The announcement comes about a month after New Jersey-based Vonage, which has yet to turn a profit, lost the bulk of an appeal regarding three voice over Internet protocol patents held by the nation's second largest telephone company.

The appeals court upheld a jury finding that Vonage had infringed on two patents that are arguably central to its service. It ordered a new trial on a patent infringement finding, dealing with a feature considered less significant to Vonage's service, but the settlement covers that patent, too, so that court action appears unlikely to proceed. Because the jury deciding the case did not distinguish which damages applied to which patents, the court also threw out a $58 million judgment against Vonage.

The precise amount of Vonage's final payout to Verizon depends on whether the federal appeals court grants a rehearing Vonage has requested on the two central patents, Vonage said in a statement.

If Vonage wins a rehearing or manages to secure relief from an injunction affecting one or both of the two core patents, it has agreed to pay Verizon $80 million. If Vonage is not granted a rehearing or if the injunction, which is currently on hold, is reinstated, Vonage said it will pay $120 million, of which $2.5 million will be "payable to certain charities." Vonage said it has already deposited $88 million into an escrow acount.

"We're pleased to put this dispute behind us and believe this settlement is in the best interests of Vonage and its customers," Sharon O'Leary, the company's chief legal officer, said in a statement. "This settlement removes the uncertainty of legal reviews and long-term court action and allows us to continue focusing on our core business and customers."

Verizon representatives declined to comment on the settlement.

Vonage has claimed all along that it has a technical work-around that will allow its service to continue working without disruption to its customers, even if a court ultimately decides to enforce an injunction prohibiting it from using Verizon's patents.

The settlement decision struck Stifel Nicolaus analyst Rebecca Arbogast as a bit surprising--at least from the perspective of Verizon, which she described as "in the catbird seat."

"Unless Vonage had an airtight work-around, which was unlikely, Verizon was in a position to enforce an injunction against a core aspect of Vonage's service, which could have put them over the brink," she told CNET after the settlement announcement, which arrived just after the 4 p.m. EST close of the stock market. "I would expect that Verizon ultimately decided they'd rather have Vonage alive than dead. And some settlement money to boot."

In addition to the Verizon deal, Vonage has now settled patent disputes in recent weeks with Sprint Nextel for $80 million and Klausner Technologies, a privately held company that specializes in voice-messaging technology, for an undisclosed amount.

But Vonage's legal woes aren't over yet. The company revealed in an federal regulatory filing last week that it's facing a new patent infringement suit from AT&T in Wisconsin federal court.

*This blog was updated to note Verizon's decision Thursday not to comment further on the settlement.