Vonage Awarded Two-Week Sigh of Relief

Judge orders permanent injunction giving the Internet phone company two weeks to stop using technology patented by Verizon.

By Roy Mark | Posted Mar 23, 2007
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A U.S. District judge slapped Internet telephone provider Vonage with a permanent injunction today against using Verizon technology in its VoIP service that connects users to standard phone lines. U.S. District Judge Claude Hilton delayed the actual enforcement of the injunction for two weeks.

Holmdel, N.J.-based Vonage moved quickly to assure its more than 2 million subscribers of continued service. "We are confident Vonage customers will not experience service interruptions or other changes as a result of this litigation," Vonage CEO Mike Snyder said in a statement.

The injunction comes on the heels of a March 8 Alexandria, Va., jury decision that Vonage infringed on three Verizon VoIP patents. The jury awarded Verizon $58 million in damages. Verizon had sought $197 million in damages, but the jury rejected the telecom giant's claim that the infringement was intentional.

"We're pleased the court has decided to issue a permanent injunction to protect Verizon's patented innovations for offering commercial-quality VoIP and Wi-Fi services," John Thorne, Verizon's senior vice president and deputy general counsel, said in a statement.

Verizon claims a permanent injunction is necessary since money alone doesn't cure the harm to the nation's second largest telecom carrier. The company contends Vonage's service has drained more than a million customers away from Verizon and that Vonage's precarious financial situation might put it in a position of being unable to pay the infringement judgment.

The next critical court date for Vonage is April 6, when Hilton is expected to rule on the company's motion to stay the decision. Vonage said if the court denies the stay, it would appeal to the Federal Court of Appeals.

"Our fight is far from over," Snyder said. "We remain confident that Vonage has not infringed on any of Verizon's patents -- a position we will continue vigorously contending in federal appeals court -- and that Vonage will ultimately prevail in this case."

Sharon O'Leary, Vonage's executive vice president, chief legal officer and secretary, said in the same statement that the company's appeal of the jury decision will be based on erroneous patent claim construction. "Vonage relied on open-standard, off-the-shelf technology when developing its service," she said.

Blair Levin, a telecom analyst at Stifel Nicolaus, said in a statement Vonage has three options: obtain a stay, devise a workaround to avoid infringing on Verizon's patents or settle.

Levin said a stay is possible but far from a certainty while hopes of a workaround would be a "challenge in light of the centrality of some of Verizon's patent functions and the breadth of Judge Hilton's claim construction."

As for settling, Levin said, "The price tag of such a settlement certainly went up today."

In June, Verizon filed suit against Vonage, claiming several instances of infringement, including inventions relating to, "gateway interfaces between packet-switched and circuit-switched network, which is critical to implementing commercially viable VoIP telephony."

Other patents named in the suit include solutions for fraud detection, services such as call forwarding and voicemail, and methods relating to the use of wireless handsets over a VoIP network. The jury ultimately decided Vonage infringed on three of the five patents cited by Verizon.

The pending permanent injunction is another blow to Vonage, which is also engaged in class action suits brought by customers who claim Vonage violated stock security rules in its May 2006 IPO. After hitting the market at $17 a share, Vonage stock has been in a continued slide. In late afternoon trading, Vonage shares were at $3.

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