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Finding of infringement of two patents affirmed, one reversed, damages award vacated
September 27, 2007

In a highly anticipated recent decision, the Federal Circuit affirmed the judgment of infringement against Vonage with respect to two Verizon patents, holding that the district court did not err in its construction of the disputed claim terms and that the claims were not obvious. With respect to a third patent, the Federal Circuit held the district court improperly construed a disputed claim term and therefore vacated the judgment of infringement and remanded for a new trial.

The Federal Circuit vacated the $58 million damages award and 5.5% royalty in its entirety because the jury did not indicate the portion of the damages award that applied to each patent. As a result, the court could not determine whether the full amount of damages was still warranted based on infringement of only two of the three patents. The court also affirmed the injunction as to the two infringed patents.More detail of Verizon Services Corp. v. Vonage Holdings Corp. after the jump.

Vonage provides telephone service using Voice over IP technology (VOIP ), which allows subscribers to its service to receive and place telephone calls which use the internet to transmit telephone signals, versus the "traditional public switched telephone network." Vonage subscribers can connect to the Vonage system using a traditional telephone connected to a terminal adapter, or can use a Vonage telephone which has a built in terminal adapter, or software can be installed on computers which allows a user's computer to be used as a telephone. Three Verizon patents were at issue in the case. Verizon's '574 and '711 patents are directed towards a server used for enhanced name translation. Specifically, "[t]he specification describes how the invention enhances the existing Domain Name System ("DNS"), which translates domain names (such as "www.cafc.uscourts.gov") into Internet Protocol ("IP") addresses. The invention enhances that system by allowing for a greater number of translations, including translations to and from telephone numbers." The '880 patent is directed towards "a localized wireless gateway system that allows wireless telephones to register with the system and make calls." Vonage challenged the district court's claim construction of four terms of the '574 and '711 patent's claims. With respect to the term "name translation request" in claims 26 and 27 of the '574 and claims 15 and 20 of the '711 patent, the district court construed the term as "a query for translation of a name into routing information for a public packet data network." Vonage argued that the recitation "translation" should have been further limited to "require that the system 'directly convert a higher level protocol identifier of a node to a different lower level protocol.'" The Federal Circuit affirmed the district court's construction, stating that "[t]he mere fact that the specification's examples of translation may involve a change in protocol from a higher to a lower level protocol does not establish that such a limitation should be imported into the claims." The Federal Circuit additionally noted there was no evidence that the ordinary meaning in the art suggested such a restriction. Regarding the term "conditional analysis," the district court defined it as "a determination that generates a first result based on a first condition or data, and a second result based on a different condition or data." Vonage argued that the term should have been limited the analysis "performed to one that is 'based upon the called party's preferences.'" The Federal Circuit again affirmed the district court's construction, noting that nothing in the specification Vonage's interpretation of the claim term.The district court construed the disputed term "server" as "a computer system, such as one or more computers and/or devices, that provides services to other computer systems over a network." Vonage argued that the term server must "manage[] an enhanced name translation service." The Federal Circuit also affirmed the district court's construction of this term, noting that the claims specify "receiving a name translation request at a server" and that "[t]he fact that such functions are mentioned separately when a 'server' is mentioned in the claims weighs against limiting a 'server' to one that performs the functions." The Federal Circuit additionally noted that the district court did not err in not adopting Vonage's proposed construction of the term "destination address." The Federal Circuit noted that Vonage's cited passage from the '711 specification as well as the ordinary meaning did not limit the term as proposed by Vonage. Moreover, Vonage's proposed construction would exclude several examples from the specification. With respect to the term "localized wireless gateway system" in claims 1 and 6-8 of the '8800 patent, Vonage argued that the term should have been limited to mean "a plurality of base station transceivers with a limited range of a few feet and a packet service gateway that compresses/decompresses and packetizes voice signals." The Federal Circuit agreed with Vonage, noting that "a clear disavowal" of claim scope had been made in the prosecution history of a related patent. The court noted that "a statement made by the patentee during prosecution history of a patent in the same family as the patent-in-suit can operate as a disclaimer." The '880 patent claims originated in the prosecution of U.S. patent application No. 08/814,291. In prosecution of the '291 application, the examiner issued a restriction requirement and the applicants subsequently filed a divisional application, which was ultimately allowed as the '880 patent. The '291 application also was allowed as U.S. Patent No. 6,542,497. The applicants gained allowance of the '291 application after stating that the present invention was "restricted to operate within a few feet from a base station (i.e. wireless handsets)." The court rejected Verizon's argument that the disclaimer "should not apply to the '880 patent because it occurred after the '880 patent issued." The Federal Circuit stated that the "district court erred in failing to construe the localized system as requiring a range of a few feet" and held that because Vonage was prejudiced by the district court's construction, a new trial was warranted. The Federal Circuit additionally construed the term "localized wireless gateway system" in the '880 patent, agreeing with Vonage that the district court erred in "failing to require that the patented gateway system 'compress[]/decompress[] and packetiz[e] voice signals." The court noted that "when a patent thus describes the features of the 'present invention' as a whole, this description limits the scope of the invention." Vonage additionally argued that the district court erred in its jury instructions on obviousness, stating that the district court "instructed the jury to rigidly apply the [teaching/suggestion/motivation to combine] test rejected by the Supreme Court in KSR Int'l Co. v. Teleflex." The Federal Circuit declined to address the issue, noting that "[i]n light of that remand, we also think it best to allow the district court to consider in the first instance Vonage's argument concerning alleged error in the instruction under KSR, and to consider the issue of prejudice." The Federal Circuit also vacated the damages award of $58 million and the royalty rate of 5.5%, on the basis of its holding that a new trial was required regarding the '880 patent. Since the jury verdict did not indicate which portion of the damages award were allocated to infringement of the '880 patent, the Federal Circuit noted that "where the jury rendered a single verdict on damages, without breaking down the damages attributable to each patent, the normal rule would require a new trail as to damages". Citing the four prong test iterated in eBay v. MercExchange, the Federal Circuit affirmed the injunction with respect to the '574 and '711 patents. Two partial dissents were filed in the case. Chief Judge Michel joined Judge Dyk to make up the majority with regard to claim construction, invalidity, and injunction issues related to the '574 and '711 patents, but dissented as to the '880 patent issues. Chief Judge Michel argued that the district court had correctly construed the terms at issue in the appeal and that the jury instructions were consistent with KSR. Pointedly, Chief Judge Michel noted that "this case is yet another example of our court needlessly upsetting judgments by finding legal error in Markman rulings that, while perhaps less than perfectly explained, are correct and that follow the methods for claim construction as explained in our precedents."Judge Gajarsa joined Judge Dyk to form the majority with respect to the decisions to vacate the infringement judgment of the '880 patent, to affirm infringement of the '574 patent, and to remand the issue of obviousness of the '880 patent, but dissented with respect to the district court's decision to not adapt Vonage's proposed construction of "destination address."To read the full decision in Verizon Services Corp. v. Vonage Holdings Corp., click here.Vonage's patent woes continue even apart from this case, as it was found on Tuesday to infringe patents held by Sprint Nextel, and was hit was a $69.5 million damage award, which represented a 5% royalty on its sales.

Update (10/8): Sprint and Vonage have settled their case and entered into a business relationship.

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