Boston Communications Group Inc. suffered another legal setback when a federal judge ordered the company to stop providing the prepaid wireless services that account for 70 percent of its revenue. BCGI provides a platform carriers like Cingular Wireless L.L.C. use to deploy prepaid offerings.
The U.S. Federal District Court for the District of Massachusetts granted the injunction at the request of Freedom Wireless, which in May was awarded $128 million when an eight-person jury found BCGI’s services infringed on Freedom’s patents. Last week the court added $20.1 million in interest to the judgment and said further damages may yet be awarded.
The injunction allows BCGI to serve existing customers for 90 days, although the company must pay Freedom a 2.5-cent per-minute royalty during that time. BCGI, which claims to charge carriers about a penny per minute for services, is forbidden from selling to new customers.
Shares of BCGI have tanked since May’s ruling. The stock, which was hovering around $1.10 per share late last week, was nearly $10 a share earlier this year.
The injunction would apply to more than 3 million prepaid users, including 400,000 Cingular customers. BCGI said it plans to appeal the original ruling and seek an emergency stay of the injunction in order to continue to provide wireless services to carriers. Cingular also said it plans to seek a stay of the injunction.
BCGI has acknowledged that it may be forced into bankruptcy if appeals are unsuccessful.
“Our fight is far from over,” E.Y. Snowden, president and chief executive officer of BCGI, said in a prepared statement. “We will bring our appeal to the U.S. Court of Appeals for the Federal Circuit, which has nationwide jurisdiction over patent issues and is especially skilled at reviewing complex patent cases, where we hope to prevail.”
It’s unclear which other carriers may be affected by the ruling, but other BCGI customers include Alltel Corp. and Nextel Communications Inc. Sprint Corp. merged with Nextel. AT&T Wireless Services Inc., which has since been acquired by Cingular, was a co-defendant in the lawsuit but reached a settlement with Freedom prior to the trial.
Since receiving the favorable verdict, Freedom has filed similar lawsuits against Nextel and Alltel, and more litigation may be on the horizon. Analysts say the judgment against BCGI could cripple the U.S. prepaid market, which already lags far behind most developed nations.
“The decision sets a precedent for possible action against other vendors and service providers, including (L.M.) Ericsson, Telcordia(Technologies Inc.), Lucent (Technologies Inc.), VeriSign (Inc.), Alcatel (Alsthom) and Intervoice (Inc.)-further affecting the prepaid market as we know it,” Yankee Group analyst Keith Mallinson wrote in a recent report. “Pro-rating this level of damages across the rest of U.S. cell-phone users supported by techniques provided by BCGI and these other vendors amounts to $1.1 billion, corresponding to more than $100 per prepaid user today.”
The prepaid space has grown quickly in recent years thanks largely to mobile virtual network operators such as Virgin Mobile USA L.L.C. that use prepaid as their primary billing mechanism. And while BCGI fights for its very survival, its customers may be forced to look elsewhere for prepaid services platforms. DCI Voice Solutions, Q Comm International Inc. and TeleCommunications Systems Inc. each stepped up their marketing efforts in the wake of last week’s injunction.
But regardless of the number of players on the playground-or the quality of their wares-an ultimate BCGI loss in court would mean a loss for the U.S. prepaid industry in general, according to Mallinson.
“If these patents continue to be upheld, it will make providing prepaid significantly more expensive,” Mallinson wrote. “Freedom Wireless is the sole beneficiary of this award. Wireless carriers, the companies that make the technologies and consumers will be the losers.”
