Vonage 2008 Annual Report Download - page 88

V
O
NA
G
EH
O
LDIN
GS CO
RP
.
N
O
TE
S
T
OCO
N
SO
LIDATED FINAN
C
IAL
S
TATEMENT
S
—
(C
ontinued
)
(
In thousands, except per share amounts
)
system.
W
e
d
o not
k
now
h
ow a
ll
t
h
ese
di
scuss
i
ons w
ill be
r
eso
l
ve
d
,
b
ut t
h
ere
i
s a poss
ibili
t
y
t
h
at we w
ill b
e requ
i
re
d
t
o
pa
y
or collect and remit some or all o
f
these Taxes in th
e
future. Additionally, some of these Taxes could apply to us
r
etroactively. As such, we have a reserve of $2,915 at
D
ecember 31, 2008 as our best estimate o
f
the potential tax
exposure for any retroactive assessment. We believe th
e
maximum estimated ex
p
osure for retroactive assessment
s
is
$
12,056 as of December 31, 2008
.
2007
P
atent
Li
t
i
gat
i
on
.
Sprin
t
. On October 4, 2005, a lawsuit was filed agains
t
us by
S
print
C
ommunications
C
ompany L.P.
(
“
S
print”
)
i
n
t
he
U
nited
S
tates District
C
ourt for the District of Kansas.
S
print alle
g
ed that Vona
g
e infrin
g
ed seven patents in con-
nection with providing VoIP services.
O
n
S
eptember 25,
2
007, a jury found Vona
g
e liable for havin
g
infrin
g
ed th
e
S
print patents at issue. The jury awarded dama
g
es in th
e
amount of
$
69,500, representing 5% of our revenue ove
r
t
he infrin
g
in
g
period.
O
n
O
ctober 7, 2007, we entered into
a
B
indin
g
Memorandum of Understandin
g
(the “MOU”) wit
h
S
print pursuant to which we agreed to settle our ongoin
g
patent
di
spute an
d
a
g
ree
d
to enter
i
nto a
li
cens
i
n
g
arran
g
ement under Sprint’s “Voice over Packet” paten
t
portfolio. Pursuant to the terms of the MOU, each part
y
a
g
reed not to assert infrin
g
ement a
g
ainst the other party fo
r
an
y
part
y
’s current commercial business activities as o
f
the
date of the MOU or previously provided commercial busi
-
ness act
i
v
i
t
i
es.
W
ea
l
so a
g
ree
d
not to assert any ot
h
e
r
infrin
g
ement action a
g
ainst Sprint unless Sprint first files
a
patent in
f
ringement claim against us
f
or activities no
t
licensed or not covered by the M
O
U. These covenants no
t
t
o sue are non-transferable. The MOU provided that we pa
y
S
print the following
:
>
$5,000 as a prepayment for telecommunications services
to be purchased from Sprint b
y
us over a two
y
ear period
;
a
nd
>
$75,000 for a license for
p
ast and future use of S
p
rint’
s
patents.
T
he
$
5,000 prepayment for services was recorded as
a
p
re
p
a
id
ex
p
ense
i
nt
h
e conso
lid
ate
db
a
l
ance s
h
eet
i
nt
he
f
ourth quarter o
f
2007 and will be expensed as we use the
services. We recorded
$
69,500, the amount of the jur
y
awar
d
,asse
lli
n
g
,
g
enera
l
an
d
a
d
m
i
n
i
strat
i
ve expense
i
nt
he
consolidated statements o
f
operations
f
or the three and
nine months ended September 30, 2007. The remainin
g
$
5,500 was recorded as an intangible asset in the con-
solidated balance sheet as of September 30, 2007 and i
s
being amortized over the remaining li
f
eo
f
the patents
.
T
he M
O
U also provided that
S
print may, at its option,
elect to accept the terms and conditions o
f
our settlemen
t
with Verizon in lieu of the terms of the MOU (the “Election
P
rovision”
)
. The M
O
U
p
rovided, however, that
Sp
rint shall
n
o
t
be e
ntitl
ed
t
o
th
ef
in
a
n
c
i
a
lt
e
rm
sofou
r
se
ttl
e
m
e
nt wit
h
Verizon
f
or an
yf
unds paid to Verizon a
f
ter the one-
y
ea
r
period following the execution of the M
O
U, and the Election
P
rov
i
s
i
on w
ill
not app
ly
to t
h
e extent t
h
at t
h
ere are o
bj
ect
i
ve
material adverse changes that would negatively e
ff
ect us
(
“Vonage Material Adverse
C
hange”
)
in the legal situation i
n
the Verizon matter. An example of a Vona
g
e Materia
l
Adverse Change that is expressly set forth in the MOU is if
the stay of the injunction is lifted that would prevent us from
addi
n
g
new customers.
W
e
did
not ma
k
e any a
ddi
t
i
ona
l
p
a
y
ment to Sprint as a result of our settlement with Verizon
.
V
er
i
zon
.
O
n June 12, 2006, a lawsuit was filed against
us an
d
our su
b
s
idi
ary
V
ona
g
e
A
mer
i
ca
I
nc.,
b
y
V
er
i
zo
n
S
ervices Corp., Verizon Laboratories Inc., and Verizo
n
C
ommunications, Inc.
(
“Verizon”
)
in the United
S
tates Dis-
trict
C
ourt for the Eastern District of Vir
g
inia. Verizo
n
a
lleged that we in
f
ringed seven patents in connection with
p
roviding VoIP services and sought injunctive relief, com
-
p
ensatory and treble dama
g
es and attorney’s fees. Afte
r
trial on the merits, a jury returned a verdict
f
inding tha
t
V
onage infringed three of the patents-in-suit. The jury
rejected Verizon’s claim for willful infrin
g
ement, trebl
e
d
amages, and attorney’s
f
ees, and awarded compensator
y
d
amages in the amount of
$
58,000 through February 2007
.
Th
etr
i
a
l
court su
b
sequent
ly i
n
di
cate
d
t
h
at
i
t wou
ld
awar
d
V
erizon
$
1,578 in prejudgment interest on the
$
58,000 jury
a
ward. The trial court issued a
p
ermanent in
j
unction with
respect to the three patents the jury found to be infrin
g
ed
eff
ective April 12, 2007. The trial court
f
urther
g
ranted
a
p
artial stay which permitted us to continue to service exist
-
i
n
g
customers pen
di
n
g
appea
l
,su
bj
ect to
d
epos
i
t
i
nto
e
scrow o
f
a 5.5
%
ro
y
alt
y
on a quarterl
y
basis. In addition, i
n
A
p
ril 2007, we
p
osted a cash-collateralized
$
66,000 bond
,
w
hich reflected the $58,000 jury award plus pre-and-pos
t
jud
g
ment interest and costs of $8,000, to stay execution of
the monetary judgment pending appeal. In July 2007, w
e
made an additional payment into escrow of $11,885 for the
ro
y
alt
yf
or the second quarter o
f
2007
.
On A
p
ril 6, 2007, we filed an amended notice of a
pp
ea
l
a
s well as a motion for a full stay pendin
g
its appeal with
the United States Court of Appeals for the Federal Circui
t
(
“CAFC”
)
.OnSe
p
tember 26, 2007, the CAFC issued a
n
o
pinion, affirmin
g
in part and reversin
g
in part, the jury ver
-
d
ict. In particular, the CAFC reversed the jur
y
verdict con-
c
erning infringement on one patent. The CAFC vacated the
$58,000 dama
g
e award, as well as the 5.5% royalty an
d
remanded the case to the U.S. District Court for further
p
roceedings. On October 10, 2007, we filed a motion for
a
review of the
S
e
p
tember 2
6
th
decision by the original three
-
judge panel or the full panel of the U.
S
.
C
ourt of Appeals for
the Federal
C
ircuit sittin
g
e
n
ba
n
c
.
O
n October 25, 2007, we resolved our litigation an
d
e
xecute
d
a sett
l
ement agreement w
i
t
hV
er
i
zon.
Th
e term
s
o
f the a
g
reement required us to make a payment to them
for
$
120
,
000
,
which was recorded in the consolidate
d
financial statements as of
S
e
p
tember 30, 2007. W
e
recorded $83,950 as a royalty expense included in cost of
revenue and
$
3,424 as interest expense related to the Ver-
i
zon patents, of which
$
51,345 and
$
1,170, respectively,
w
ere recor
d
e
di
nt
h
e year en
d
e
dD
ecem
b
er 31, 2006.
Th
e
remainin
g$
32,626 has been recorded as sellin
g
,
g
eneral
a
nd administrative ex
p
ense in the consolidated statemen
t
F-2
8
V
O
NA
G
E ANN
U
AL REP
O
RT 200
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