Vonage Message Mixed on Technology Patch

Vonage Holdings Corp. is delivering conflicting messages on its ability to deploy a substitute technology should the Internet phone provider lose its bid to overturn a jury's verdict that it infringed on Verizon Communications Inc.'s patents.

Depending on the audience, Vonage has been alternately reassuring and bleak: Customers and investors are told a technological workaround is feasible to prevent a disruption in phone service. But in court, Vonage declares doubt about that same possibility as it seeks permission to keep using the disputed technology during the appeal.

"While Vonage has studied methods for designing around the patents, the removal of the allegedly infringing technology, if even feasible, could take many months to fully study and implement," the company said in a filing submitted to the U.S. Court of Appeals on April 6 and released to the public on Friday.

On its Web site, Vonage offers customers a far different prognosis for working around the patents, which relate to the way that Internet-based calls are connected to the traditional telephone network.

"There are many options available to us and we are preparing to implement them if necessary," the company said in a news update for customers. "Vonage is also continuing to develop and design technical workarounds that would prevent Vonage's phone service from infringing upon Verizon's patents."

On Thursday, Vonage founder and interim Chief Executive Jeffrey A. Citron struck more of a middle ground between those stances in speaking with investment analysts after the company announced the resignation of CEO Michael Snyder. Citron said a workaround is in development, but declined to discuss details or timing.

"We are in the design phase of those workarounds, and we are not going to be able to provide much more than that at this current juncture," Citron said in a transcript of the conference call provided by the company.

But, unlike the long-term uncertainty depicted in Vonage's court filing, Citron indicated that hard details on a workaround were somewhat imminent: "We expect on our quarterly update call, which will be in May, to provide a better picture as to timelines with regards to those efforts."

The most consistent theme in all venues has been Vonage's confidence it will win its appeal, making the need for any emergency technological measures moot.

Last month, a federal jury in Virginia found Vonage guilty of infringing on Verizon's patents. The trial judge decided that while Vonage appeals the verdict, it should be allowed to serve existing customers but barred from signing up new customers using the disputed technology.

An appeals court is expected to decide soon whether the injunction relating to new customers should be put on hold during the appeal.

In arguing for a stay of the injunction, Vonage's filing said that Verizon's interests were amply protected without blocking new customer activations.

"A stay of the injunction will not cause substantial harm to Verizon," the filing said. "Vonage's required payment of 5.5 percent royalty revenues will compensate for any harm to Verizon during pendancy of the appeal."

Verizon, however, has expressed doubt about Vonage's financial resources for compensation should it lose the appeal. It has argued that Vonage should be forced to set aside its cash, which totaled $420 million at the end of March, rather than continuing with its plan to spend hundreds of millions on advertising this year.

Shares of Vonage fell 19 cents, or 5.6 percent, to $3.20 in Monday trading on the New York Stock Exchange.


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