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Vonage, Verizon’s patents, and the FCC

Mon, 04/30/2007 - 8:00pm
Jeffrey Krauss, President of Telecommunications and Technology Policy

In late March, a jury found Vonage guilty of infringing three Verizon patents covering various aspects of voice-over-IP technology. The jury calculated that Vonage owed Verizon $58 million in damages and royalties. In addition, Verizon got an injunction to shut down Vonage’s service. Both the injunction and the $58 million assessment were recently stayed while Vonage appeals.

Capital Currents Jeffrey KraussI was told that this lawsuit was just the tip of the iceberg. There are evidently other patent owners with relevant patents, and other VoIP operators at risk. Look for the FCC to get involved, first because of its little-known patent policy, and second, because this all ties in to network neutrality issues.

What do the patents cover? According to Verizon, they cover gateway interfaces between the Internet and circuit switched telephone networks; they cover fraud protection by ensuring that the caller has a valid account; and they cover signaling for caller ID, voicemail and call forwarding.

Patents are monopolies granted by the federal government. A patent holder can decide whether or not to license the patent to other users, and if so, how much to charge for royalties. But if a patent owner tries to use its patent to create a monopoly in a line of business, that might violate the antitrust laws.

In the consumer electronics (CE) industry, manufacturers develop new technology and own large portfolios of patents. They routinely grant licenses to other manufacturers. Either they engage in bilateral cross-licensing agreements, or they form patent licensing pools, whereby the patent owners can minimize administrative costs and divide up the royalties they receive from companies that don’t own relevant patents. MPEG-LA is an example. CE technology is based on standards, and when a patent gets incorporated into a standard, the patent owner must agree to license it on reasonable and non-discriminatory terms.

The telecom manufacturers do not have the same traditions as the CE industry. While they negotiate patent licenses, they don’t have the tradition of cross-licensing and patent pools. And the telecom operators, particularly the Bell companies, certainly have the tradition of using monopolistic tactics to limit competition. So when Verizon asks for an injunction, maybe it intends the injunction as a negotiating ploy to get more royalties out of Vonage. More likely, Verizon really does want Vonage shut down.

The FCC has a patent policy, stemming from its 1961 proceeding to adopt a standard for FM stereo. The FCC said that if a patented technology were to be incorporated in the standard, the patent owner would have to agree to license it on reasonable and non-discriminatory terms. A 1988 FCC statement in the HDTV proceeding says more or less the same thing. In 1999, the FCC extended this principle to the National Coordination Committee that it established to implement Public Safety land mobile interoperability standards in the 764-776 MHz and 794-806 MHz bands.

Those policies deal with the radio spectrum, where the FCC’s authority flows from Title III of the Communications Act that requires the FCC to promote the efficient use of the radio spectrum. In 2000, for the first time, the FCC adopted a similar policy for the telephone network under Title II.

That case dealt with unbundled network elements supplied by incumbent local exchange carriers (LECs) and used by competitive LECs. Some of those network elements include patented vendor technologies that the vendor had licensed to the incumbent LECs, and the incumbent LECs argued that they could not make those technologies available to the competitive LECs until the vendors granted licenses to the competitive LECs. Basically, the FCC decided that the incumbent LECs had the obligation to facilitate the patent licensing for the competitive LECs.

That case dealt with the patent rights of third parties, the equipment vendors, so the FCC had to carefully explain that it was not regulating those vendors or their patent rights; it was regulating the incumbent LECs. But it is clear that if the incumbent LECs themselves owned any of the relevant patents, then the FCC’s decision was in fact regulating the patent rights of the patent owners. And that is the case with Verizon’s VoIP patents.

On March 22, the FCC began a new inquiry on the market practices of broadband service vendors. “Broadband market practices” is evidently the latest euphemism for network neutrality. Clearly Verizon is such a vendor, and its patent licensing practices are as much at issue in this proceeding as its Internet access policies. Does it distinguish between different Internet content providers based on whether they charge users for content or not? Does it block VoIP traffic that Verizon Wireless customers on unlimited data plans try to send in order to bypass their voice minutes-of-use limits? Does it offer to license its VoIP patents to Vonage on reasonable terms and conditions? (Neither the Verizon complaint nor any press reports suggest that Verizon made any attempt to negotiate patent royalties with Vonage before filing its lawsuit.)

So this lawsuit could very well be just the tip of the iceberg.

Jeffrey Krauss

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