ALEXANDRIA, Va. (AP)-- Internet phone company Vonage Holdings (VG)
will be barred from signing up new customers as punishment for
infringing on patents held by Verizon Communications (VZ), under an
injunction ordered Friday.
The injunction was to take effect Thursday, but the company was granted
a temporary stay from U.S. Court of Appeals for the Federal Circuit in
Washington, D.C., which will allow Vonage to sign up new customers until
the court rules on its appeal.
BACKGROUND: Is Vonage's time running out?
The order issued by U.S. District Court Judge Claude Hilton is less
severe than the punishment he initially proposed -- a blanket
injunction that might have disrupted phone service for all 2.2 million
of Vonage's existing customers.
But Vonage's lawyers said the compromise crafted by the judge -- at
Verizon's suggestion -- is almost as devastating.
"It's the difference of cutting off oxygen as opposed to the bullet in
the head," Vonage lawyer Roger Warin said.
The injunction comes a month after a jury in Alexandria, Va., found
that Vonage infringed on three patents held by Verizon.
The jury awarded Verizon $58 million in compensation for Vonage's past
use of the patents, plus future royalties for their continued use.
But the judge later ruled that an injunction of some form was
appropriate to prevent Vonage from using the infringed patents to
continue to steal customers away from Verizon.
Vonage and other providers of phone service over an Internet
connection -- also known as VoIP or Voice over Internet Protocol --
typically offer savings of $10 or more per month compared with the
traditional dial-tone service sold by Verizon and other local
carriers. By the end of 2006, about 10 million subscribers had signed
up for VoIP service, the vast majority switching to Vonage and the
nation's big cable TV companies.
Hilton said Friday he did not want to issue a blanket injunction
because of the chance it would irreparably harm Vonage's business. Had
the injunction been applied to existing customers, they only would
have been able to place calls to other Vonage customers, according to
court papers.
Hilton said the compromise of applying the injunction only to new
customers is a good way of maintaining the status quo during a
potentially lengthy appeals process.
But Vonage's lawyer argued that because the company loses more than
50,000 subscribers per month, an injunction preventing new signups
would result in a slow bleed in business. Without new customers, Warin
estimated that Vonage would lose 650,000 subscribers within a year.
"In effect what you're doing is slowly strangling our customer base,"
Warin said.
Rebecca Arbogast, an industry analyst with Stifel Nicolaus, said
Verizon was smart to suggest a compromise that was nearly as stinging,
yet more likely to withstand appeal.
"I think Verizon's legal strategy has been very aggressive and very
effective," said Arbogast, who attended Friday's hearing. "Vonage
doesn't have very many attractive options except to hope for an
emergency stay."
Indeed, Warin also argued to Hilton that it may be more difficult to
obtain relief from the compromise injunction as opposed to a blanket
injunction.
Vonage spokeswoman Brooke Schulz said Vonage will continue to sign up
new customers through Thursday, and might not stop even then.
Schulz said it was possible the U.S. Court of Appeals for the Federal
Circuit, which hears patent appeals, could provide instantaneous
emergency relief.
She also said Vonage could deploy a workaround technology to keep its
network operating without infringing on the three patents. The company
has continued development of a workaround, Schulz said, but she
declined to discuss the issue in detail.
Vonage, based in Holmdel, N.J., has been optimistic about its chances
of overturning the verdict on appeal. Warin has said the federal
circuit overturns district court judges 40% of the time on claim
construction -- a narrow, technical part of the law that is crucial
in patent cases.
Another potential problem for Vonage is a hearing Thursday to set a
bond amount that the company must post while it pursues its
appeal. Vonage has already been ordered to post a $66 million bond to
cover the jury award and related expenses. Verizon is seeking another
bond of $189 million to cover the monetary damages for continued
infringement of the patents by Vonage's existing customers.
Warin said a requirement to post more than $250 million in cash to
cover bonds could cripple the business.
"Vonage needs to have money to continue to operate," Warin said.
Verizon lawyer Dan Webb countered that Vonage should have plenty of
cash on hand, given the fact that it had planned to spend $400 million
a year on advertising to draw new customers.
"Now they don't have to get any more new business because they can't"
under the court's order, Webb said.
Copyright 2007 The Associated Press.
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[TELECOM Digest Editor's Note: Indeed, most days I see a dozen or more
commercials for Vonage on television. I have seen _none_ over the
weekend. Anyone else? PAT]
Associated Press News Wire (ap@telecom-digest.org)