United States: Vonage May Soon Hang Up

In a high-visibility post-KSR case spawning three separate opinions from a three-judge panel of the U.S. Court of Appeals for the Federal Circuit, a majority of the panel upheld the claim construction jury instruction and obviousness as to two of the three patents in suit while vacating a $58 million jury award and the awarded royalty rate. Verizon Services Corp., v. Vonage Holdings Corp., Case Nos. 07-1240, -1251, -1274 (Fed. Cir., Sept. 26, 2007) (Dyk, J.), Michel, C. J., joins in part) (Gajarsa, J., joins in part).

Verizon filed suit against Vonage, asserting that Vonage’s system infringed three of Verizon’s patents: the ’574, ’711 and ’880 patents. The district judge held a claim construction hearing and issued a claim construction order construing a number of disputed terms.

After a jury trial, the jury found that the asserted claims of the ’574, ’711 and ’880 patents had been infringed and were not invalid as obvious. The jury awarded damages of $58 million and set a royalty rate of 5.5 percent to govern any future infringement. The district court issued a permanent injunction barring Vonage from further infringing the asserted claims, but stayed the injunction pending appeal as to present or existing customers. Vonage filed an emergency motion for stay seeking to extend the district court’s stay of the injunction pending appeal to new customers as well. The Federal Circuit fully stayed the injunction pending appeal and ordered expedited briefing.

Vonage contended that at the Markman hearing the district court misconstrued a number of pertinent claim terms in each of the three patents. The district court used the same claim constructions in the jury instructions as it had articulated in its Markman decision. Finding that the district court did err in its jury instructions construing the claim terms of the ’574 and ’711 patents, the Court declined to answer the question of whether raising claim construction issues at the Markman stage excuses compliance with the Rule 51 requirement that a party object to a jury instruction at the time the district court proposes it.

However, with regard to the ’880 patent the Court noted that "because the trial record establishes that it indeed would have been futile for Vonage to object, at the jury charge conference, to the district court’s construction of the [disputed] claim term," no further objection was necessary to preserve the claim of error. In fact, on the objection of Verizon’s counsel, the trial court excluded expert testimony relating to the issue of the alleged error, i.e., whether the term "localized wireless gateway system" should be limited to a system having a range of only a few feet. As to that claim term, the Federal Circuit reversed, finding "a clear disavowal" of the broader construction based on arguments made by Verizon to secure allowance of claims reciting the term in dispute in a later related application. The Court, citing Microsoft v. Multi-Tech Systems, rejected the argument that the disclaimer in the later application should not apply to the ’880 patent because it occurred after the ’880 patent issued.

As for the prejudice necessary to warrant a new trial, Vonage convinced the Court that "had the district court adopted Vonage’s proposed instruction," certain devices would not infringe and that at trial Vonage was precluded from introducing evidence to that effect. The Court ordered a new trial on the ’880 patent. The Court also further limited claim scope of the ’880 patent by reference to a summary of invention that "begins with a description of the gateway system of the ‘present invention,’" noting that "[w]hen a patent thus describes the features of the ‘present invention’ as a whole, this description limits the scope of the invention."

Vonage challenged the jury instructions on obviousness concerning the need to find a "suggestion in the prior art to combine the elements." As to the ’574 and ’711 patents, the Court found no prejudicial error because the obviousness evidence centered on a single reference "and thus any alleged error in instructions requiring a finding of motivation to combine several references would have been harmless." However, with respect to the remanded ’880 patent, the Court instructed the district "to consider in the first instance Vonage’s argument concerning alleged error in the instruction under KSR, and to consider the issue of prejudice."

After ordering a new trial on the ’880 patent, the Federal Circuit vacated the determination that Verizon is entitled to a damages award of $58 million and a royalty rate of 5.5 percent, "since the jury’s verdict gives no indication what portion of such damages were allocated to the infringement of the ’880 patent."

Finally, the Court affirmed the injunction with respect to the ’574 and ’711 patents, noting that the district court finding of irreparable harm was not based on lost sales alone but included evidence of both price erosion and lost opportunities to sell other services to the lost customers.

Dissent
In his dissent-in-part, Chief Judge Michel disagreed with the disposition of the issues regarding the ’880 patent, as well as vacating the damage award, concluding that the district court correctly construed the terms of the ’880 patent.

Chief Judge Michel further argued that the district court’s jury instructions on obviousness were consistent with "the precedents of this court," noting that the district court’s obviousness instructions did not require an explicit reason to combine to be found in the prior art references themselves. Rather, the district court instructed that such a reason could be gleaned from "the knowledge that was generally available to one of ordinary skill in the relevant art" and concluded that such an instruction passes muster under KSR

Practice Note: In a settlement announced on October 25, 2007 Vonage agreed to pay Verizon $120 million if the Federal Circuit denies its petition for rehearing, and $80 million if its petition for rehearing is granted. This settlement comes just 2 weeks after Vonage agreed to pay $80 million to Sprint Nextel to settle a similar patent suit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.