Vonage Injunction Stayed in Patent Case

Internet phone carrier Vonage Holdings Corp. won relief Tuesday from a potentially crippling court order that would have barred it from signing up new customers as punishment for infringing on patents held by Verizon Communications Inc.

The U.S. Court of Appeals for the Federal Circuit granted the stay of a trial judge's injunction on Tuesday afternoon, just hours after hearing arguments. A temporary stay had been issued earlier this month, but Tuesday's order will remain in effect throughout the appeal.

Vonage's battered stock price rallied nearly 30 percent after the decision, which allows it to keep signing up new customers while still using the disputed technology.

Verizon took solace in the fact that the appeals court set an expedited schedule for the appeal, with a hearing scheduled for June 25.

Vonage is seeking to overturn a jury's verdict in March that it infringed on three Verizon patents in constructing its Internet phone system. Following the verdict, the trial judge had ordered a compromise injunction, allowing Vonage to keep serving its 2.4 million existing customers during the appeal, but barring any new subscribers.

Vonage lawyer Roger Warin told the three-judge appellate panel that Vonage faced a "real risk of insolvency" if that injunction were allowed to take effect. Vonage has argued that such an injunction would have amounted to a slow death because the company loses more than 600,000 customers a year to subscriber "churn" even as its overall subscriber base continues to grow.

Verizon deputy general counsel John Thorne said Verizon expects the jury verdict will be upheld on appeal, at which point an injunction could again be implemented.

"An appeal could have taken a year or longer; now it will be argued in just two months," Thorne said in a statement.

Vonage's chairman and interim chief executive officer, Jeffrey Citron, issued a statement thanking the appeals court for its ruling.

"It's business as usual for us...We remain focused on growing and strengthening our business and driving toward profitability," he said.

Rebecca Arbogast, a Washington-based industry analyst with Stifel Nicolaus, said that while the stay is clearly a victory for Vonage, the expedited time frame causes problems for two reasons: It gives the company less time to develop a workaround technology should the appeal fail, while making it harder to market the service because consumers will know the issue could surface again this summer.

The jury awarded Verizon $58 million in compensation for Vonage's past use of the patents, plus future royalties for continued infringement.

While the case is on appeal, Vonage will pay 5.5 percent of its revenue into an escrow account to cover the royalties if the verdict is upheld.

Vonage argued Tuesday that it has a strong chance of overturning the verdict because U.S. District Judge Claude Hilton made numerous errors in "claim construction," the language given to juries to help it decide whether a patent is being infringed.

Much of Tuesday's arguments focused on arcane discussions on the proper definition of terms such as "localized wireless gateway system." There was even extended discussion, as there has been in past hearings, on what is meant by the phrase "a few feet" as it relates to distance.

Scott Doyle, one of Vonage's lawyers, asserted that the stay is particularly good news because the appellate court would not have issued it unless Vonage had demonstrated a likelihood that it would ultimately succeed on appeal.

Verizon lawyer Dan Webb disputed the argument that Vonage would be in dire straits if it could no longer sign up new customers. He said that such a ban would allow Vonage to drop its massive $400 million annual marketing budget and actually put the company, which lost $286 million last year, in the black.

Vonage announced plans earlier this month to cut its 2007 marketing budget from $420 million to $310 million as part of a general cost-cutting initiative.

If anybody is suffering irreparable harm, Webb said, it is Verizon, which continues to lose customers to Vonage. Court testimony indicated that Vonage gets about one-fourth of its new customers from Verizon.

Shares of Vonage rose 83 cents to $3.72, a gain of 29 percent, on the New York Stock Exchange. Earlier, the stock rose as high as $4.43 -- higher than where it stood after the guilty verdict in March.

Even with Tuesday's gain, the stock has lost more than 75 percent of its value since an initial public offering in May 2006.

Verizon shares were up a nickel to $37.60 on the NYSE.

Vonage helped popularize the technology known as VoIP, short for Voice over Internet Protocol. VoIP enables phone service over an Internet connection and is often available at savings of $10 or more per month compared with traditional dial-tone service.

Despite its aggressive marketing, Vonage's growth has slowed amid new competition from cable TV providers now using VoIP to sell phone service.


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