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When cell phones first popped up, a lot of people were left out of the new craze because they couldn’t pass a credit check by the wireless carriers. A pair of Arizona entrepreneurs claim they came up with a solution — a system that allowed customers to prepay their calls and be cut off when their account ran out. But Douglas Fougnies and Dan Harned charge that another company, Boston Communications Group Inc., began infringing their patents, shutting them out of the market. BCG, which sells a prepaid service to Verizon Wireless and other cell phone carriers, counters that Fougnies and Harned filed suit simply because their company couldn’t compete against other vendors. The dispute could be costly for the cell phone industry. Fougnies and Harned’s company, Freedom Wireless Inc., sued BCG and several carriers using its service for as much as $1 billion. Last month, Verizon settled out of the case — set for a Feb. 28 trial in Boston federal court — for an undisclosed sum. Five other carriers remain as defendants, including Cingular Wireless LLC and AT&T Wireless Services Inc. William Price, a Los Angeles partner at Quinn Emanuel Urquhart Oliver & Hedges who represents Freedom Wireless, said his clients initially worked with a few cell phone companies in the 1990s. “At the time, [the carriers] were turning away 20 percent of people who wanted to be customers” because they couldn’t pass a credit check, Price said. Fougnies offered to buy minutes from the carriers and sell them to prepaid subscribers. Price said Freedom Wireless couldn’t provide the service without a direct connection to the cellular switch of the carriers. Some carriers, he said, initially provided the connection but then declined to do so, instead giving Boston Communications Group access. “We found out they [BCG] were using the same process as Freedom Wireless,” Price said. When Freedom Wireless’ patent was issued, the firm sought to license its technology to BCG and the carriers. When they rejected the offer, Freedom Wireless filed suit in March 2000. Gibson, Dunn & Crutcher Palo Alto, Calif., partner Denis Salmon, representing Cingular and AT&T, said he could not comment on the litigation. BCG attorney Michael Keating, a partner in the Boston office of Foley Hoag, said Freedom Wireless didn’t come up with any novel system and that its patents do not cover what BCG or the cellular companies do. Under BCG’s service, he said, wireless carriers transfer prepaid calls to BCG for billing. Keating said many vendors offer prepaid call service, and carriers have chosen from among them. He said Freedom Wireless sued because carriers didn’t pick it up very often. The case “falls into a pattern of a lot of patent litigation, where a company gets a patent they perhaps shouldn’t have gotten,” Keating said. “They don’t get anywhere operationally and look for people with the same general technology” whom they can sue for infringement. For Quinn Emanuel, the dispute is an example of its recent move into contingency fee work. The firm started taking such cases both as a way to make money and to compete for associate talent during the Internet boom. Partner A. William Urquhart said contingency work helped boost the firm’s profit margin last year, generating $8 million in fees. Urquhart could not say how much money the Verizon settlement will bring in, but noted that the sum is “significant.” Verizon’s standing in the case was different from that of the other carriers. Verizon had argued that it was immune from being sued by Freedom Wireless under an agreement that its successor company — Cellexis International Inc. — had reached with GTE Wireless in 1996. Cellexis had sued GTE for trade secret theft over the same prepaid technology, for which patents had not yet been issued. A jury found in GTE’s favor, and Cellexis agreed not to sue GTE or its affiliates. In a subsequent victory for Verizon, a second jury concluded in February 2004 that Verizon — created by the merger of GTE and Bell Atlantic — was covered under the ’96 agreement and thus immune from damages in Freedom Wireless’ suit. But Freedom Wireless appealed. Verizon attorney Scott Lindvall, a partner at New York’s Darby & Darby, said Freedom Wireless seeks more than $400 million from Verizon and $1 billion from all the defendants together in the patent litigation. Lindvall said that despite the 2004 jury verdict, which he believes would withstand the appeal, Verizon decided to settle for reasons he did not specify. The case has already generated hefty legal fees. In a filing with the Securities and Exchange Commission in October, BCG said it had incurred $15.7 million in legal costs to defend against the suit and expects to spend about $1 million per quarter until the matter is resolved.

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