The Vonage Trilogy: A Case Study in ‘Patent Bullying’

Abstract:     
This book chapter presents an in-depth case study of a series of infringement suits filed by “patent bullies” - large, established companies that threaten or institute costly patent infringement actions of dubious merit against smaller companies, usually in order to suppress competition or garner licensing fees. In an ideal world of high-quality patents and optimal patent licensing and litigation, infringement suits by incumbents would have a cleansing, almost Darwinian effect. Yet, defects and distortions in patent examination, licensing, and litigation - the very problems that are raised constantly in the context of so-called “patent trolls” - generally apply with equal and, often, greater force to patent bullies. Nonetheless, patent bullies have scarcely been discussed in the academic literature or popular press, especially in recent years.

Specifically, I examine three patent infringement suits filed by incumbent telecommunications carriers - Sprint, Verizon, and AT&T - against Vonage, an early-stage company that provides consumer telephone services over the Internet. Based on an exhaustive analysis of the patents-at-issue, prior art, court documents, and news accounts of the Sprint case, I conclude that while Sprint’s suit was quite weak on the merits, it was able to exploit defects in the patent system in order to prevent Vonage’s “disruptive” technologies from competing with its outmoded products and services. Because startups like Vonage typically lack the resources to vigorously defend against patent suits, even weak ones, patent bullying can result in severe anti-competitive effects. Indeed, the suits filed against Vonage wound up costing it more than $200 million in settlement payments. The incumbents achieved their intended result - drastically reducing Vonage’s stock price, severely weakening its position in the market, and placing it at the brink of insolvency.

The chapter concludes with reflections on the Vonage trilogy, particularly the potential for abuse that patent bullies can wreak on smaller companies. Ultimately, further theoretical and empirical study is needed to assess the full extent of the patent bully problem.

Number of Pages in PDF File: 20

Keywords: Patents, Vonage, VoIP, Patent Bullies, Telecommunications

Accepted Paper Series