Friday, May 11, 2007

Wham! What Vonage’s $58 million surprise means to you

NVTC’s panel discussion on Verizon v Vonage was opened by Barry Goldsmith of Womble, Carlyle, Sandridge & Rice. He gave a brief overview of the patents in question and what the jury found. As I understand it, the case revolved around patents that allow a VOIP system to translate domain names into telephone numbers. Vonage has the right to appeal the case to the US Supreme Court, but the legal cost will be very steep.

In order to receive a patent, an invention must be judged to be “unique and non-obvious.” Goldsmith said that in the recent KSR case, the court expanded the definition of non-obvious. Goldsmith thought that the KSR decision might strengthen Vonage’s case.

Jim Kohlenberger, of the Voice On the Internet Coalition, spoke on behalf of a group of VOIP and Web 2.0 companies. He began by explaining that from the very beginning of electronic voice communications, there has been patent litigation. He said that what matters to society is the pace of innovation. Currently, there are 2,273 patents related to VOIP. During the last decade patent litigation has doubled. Kohlenberger suggested that rather than patenting inventions, people are inventing patents.

Congress is concerned about the problems with the system, and legislation has been introduced in the House and Senate in an attempt the remedy to situation. Kohlenberger said that according to a study by MiCRA, if the telephone companies are able to use patents to suppress the new companies, the cost to consumers would be a hundred billion dollars. Some countries are already pulling their analogue systems in favor of a fully digital network.

Marco Rubin, managing partner at Exoventure Associates, gave the venture capitalists’ view of intellectual property. Rubin explained that venture capital investments are easy to get into and hard to exit. Venture capitalists manage a funnel; they might look at a hundred deals, winnow it down to five, and settle on one.

He described the “venture molecule” as a triangle with a management team in a proven domain at the top, protected technology on one side, and a strategic place within a sizable market at the other side.

According to a survey by the Mid-Atlantic Venture Capital Association, lack of clearly protected technology is the number five reason venture capitalists reject deals. Rubin said that there were two kinds of business models for emerging technology: disruptive service, such as eBay, Skype, and Salesforce, or an intellectual property/technology model, such as Motorola, Cisco, and QUALCOMM. Clearly, the importance of intellectual property is dependent upon the business model.

Rubin then reviewed the common ways intellectual property is used: the ever popular litigation model (sue first, ask questions later), the “value creation” model (where an intellectual property portfolio is used as a strategic tool for licensing and cross licensing arrangements), and the tech transfer model (marry an IP/tech cluster with a proven team and seed capital).

Here, the floor was opened for questions. The first questioner asked if intellectual property really mattered for venture backed companies. Rubin responded that venture firms are not interested in investing in litigation.

The next questioner pointed out that Vonage does not actually make products, so was Verizon going after the manufacturers? Goldsmith replied that the components by themselves do not constitute infringement, but rather the way Vonage put them together.

There were questions about how the suit had affected Vonage’s ability to attract business and the size of their litigation war chest. Since only Vonage would know the answer to such questions, there were no clear answers.

One person asked if we would see more such litigation if Verizon prevails. Kohlenberger said that this question goes to the core of the issue; innovation could be stifled.

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