Vonage Settles AT&T Score

Only days after announcing another major new patent infringement lawsuit against it, Vonage (NYSE: VG) put to bed a dispute that sprang up in October from giant telco AT&T (NYSE: T). Vonage originally cited the settlement in its third-quarter earnings release, but said it was an agreement in principle. Terms hadn't been finalized until Friday.

When Vonage made the announcement, it didn't specifically say that the terms were identical to those outlined previously. If they were, however, Vonage would pay AT&T $39 million over five years for violating a single patent AT&T holds covering a packet telephone system.

Checking the litigation scorecard, here's what Vonage has agreed this year to pay in settlements:

• Verizon Communications (NYSE: VZ): $120 million
• Sprint Nextel (NYSE: S): $80 million
• AT&T: $39 million
• Nortel Networks: pending

In the first nine months of 2007, Vonage has recorded $168 million in expenses connected to these and other litigation settlements. The total far outdistances the $110 million Vonage had hoped to save by reducing marketing expenses this year, so the company continues its "one step forward, two steps back" mode.

What may be more troubling to investors, however, is more potential lawsuits waiting in the wings. Lots of companies -- big and small -- have spent years developing voice over Internet protocol (VoIP) technology, including Microsoft (Nasdaq: MSFT) and Cisco (Nasdaq: CSCO), which has a huge list of patents related to VoIP. eBay (Nasdaq: EBAY) is also deeply invested in Internet telephony with its Skype service. Any one of these and several others have the legal muscle to put significant pressure on Vonage if they feel even a single patent is being violated.

With the disruptive service Vonage offers, it has earned plenty of enemies in the marketplace with interest in seeing the company disappear. With a current market cap of $320 million, however, some investors are betting that Vonage will actually succeed or be acquired before it goes under. No matter which way it goes, this Fool still doesn't find the company a compelling investment.

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