Vonage can keep signing up new customers

Federal court grants Internet phone company a second reprieve while patent lawsuit brought by Verizon proceeds.
Written by Anne Broache, Contributor
WASHINGTON--Vonage may continue to sign up new customers while appealing a patent infringement loss to Verizon, a federal appeals court ruled Tuesday.

In another reprieve for the struggling Internet phone company, the decision arrived just hours after a three-judge panel at the U.S. Court of Appeals for the Federal Circuit here spent nearly two hours listening to arguments from both parties. The stay, which arrived without comment from the judges, was part of a brief order that also dictated the schedule for the appeals process.

Vonage chairman and interim CEO Jeffrey Citron applauded the decision and said the company would continue working to add to its some 2.2 million subscribers. "We remain focused on growing and strengthening our business and driving toward profitability," he said in a statement. Citron added: "We continue to believe we have not infringed on any of Verizon's technology and remain optimistic that we will ultimately prevail in this litigation."

While the appeal is pending, the Internet phone company also plans to continue paying a 5.5 percent royalty rate on all future sales to an escrow account, and it has posted a $66 million bond required by the lower court.

Verizon deputy general counsel John Thorne said he expected the verdict would be upheld on appeal, which he said the court has decided to hear within two months.

"The expedited schedule will accomplish the same thing that a partial stay of the injunction pending a longer appeal would have accomplished--limiting Vonage's infringement during the appeal," Thorne said in a statement.

The appeals court has instructed the parties to file briefs and has scheduled oral arguments in the case for June 25. That's an unusually quick timetable for a patent appeal, which often can stretch on for at least a year.

The saga dates back to June, when Verizon filed suit, originally accusing its Internet phone rival of infringing on seven patents. A federal jury on March 8 decided that New Jersey-based Vonage had infringed on three of the five Verizon patents that ultimately went to court and ordered it to pay $58 million, plus royalties on future sales.

A few weeks later, U.S. District Judge Claude Hilton ordered that Vonage cease adding new customers while it continued to infringe on the patents. Vonage was able almost immediately to obtain a temporary reprieve from the Federal Circuit, which was scheduled to remain in effect until oral arguments took place.

The patents Vonage was found to have infringed deal with technologies involving connection of voice over Internet Protocol calls to the regular phone network, some features for implementing call-waiting and voice-mail services, and VoIP calls using Wi-Fi handsets. (The jury found Vonage had not infringed two other patents, which involve billing systems designed to detect fraud.)

By bundling the stay with an uncommonly speedy appeals schedule, the judges are likely attempting to balance some skepticism toward the lower court verdict with concerns about letting Vonage carry on business as usual while the decision is reviewed, some analysts and lawyers said.

"No doubt the Federal Circuit similarly concluded that Vonage's appeal raised a sufficient question concerning the correctness of the underlying verdict," said Thomas Duston, an intellectual property partner with the law firm Marshall, Gerstein & Borun in Chicago. "The fact that they appear to have expedited that appeal suggests the possibility that the Federal Circuit was not so convinced by Vonage that it was prepared to permit the injunction to remain suspended for the entire period usually required for a full appeal."

Some legal experts have said Vonage has a good chance of winning on appeal because it is believed the lower court interpreted the patents in an overly broad way that could be refined by an appeals court. Vonage has also said that even if the verdict is upheld, its subscribers will not encounter disruptions because it is developing a technological work-around.

But the viability of such a work-around remains a major question. Vonage has argued in documents filed with the federal appeals court earlier this month that it may not be able to develop a technical work-around to avoid using technology that infringes Verizon's patents.

The accelerated schedule for the appeal could hurt Vonage in that regard, said Clayton Moran, an analyst with the Stanford Group. "The longer the appeals process takes, the better for Vonage, because it gives them more time to develop a work-around if they were to lose," he said.

Earlier Tuesday, Vonage attorney Roger Warin told the appeals court that without a permanent stay to the injunction, "the continuing viability of the company is threatened." He argued that it was unfair to require the halt to accepting new customers on top of the 5.5 percent royalty rate that Vonage has already agreed to pay on future sales as part of the lower court ruling. He said Verizon itself has acknowledged it gets 74 percent of its new customers from companies other than Vonage.

Meanwhile, Verizon attorney Richard Taranto argued that his opponent failed to made a case that the lower court had wrongly interpreted two patents related to routing VoIP calls to the traditional telephone network. He also said Vonage would not face "irreparable harm" if barred from using a third patent related to Wi-Fi Internet phones because "there's no evidence of any significant number of customers that would be covered" by that patent.

Vonage feels the stress
The string of court decisions has already taken a toll on Vonage's operations. Earlier this month, the company announced that then-CEO Mike Snyder would be stepping down and revealed plans to cut spending by $140 million over the next several months.

Shares of Vonage surged nearly 50 percent after the company announced the stay had been granted. The stock closed at $3.72, up 83 cents, or nearly 29 percent.

The ruling may be good news for Vonage and its investors for now, but analysts warned that an uphill battle still lies ahead. The company has already admitted in a recent Securities and Exchange Commission filing that its legal woes could lead to bankruptcy, and it was losing customers even before the jury revealed its decision in the Verizon case.

"It's a good day for Vonage, but this legal battle with Verizon is not over," said Albert Lin, an analyst with American Technology Research. "Furthermore, natural business competition is intensifying as cable companies are coming on quickly."

Rebecca Arbogast, an analyst with Stifel Nicolaus who attended Tuesday morning's arguments, said she was left with the impression that the appeals court judges were leaning toward Vonage's side in some aspects of the dispute. But until a final decision emerges, Vonage may find it more difficult to attract new customers who may fret about the service's future.

"Even though legally they can sign up new customers," Arbogast said in a telephone interview, "I think they're still going to be kind of swimming upstream over the next couple of months in terms of marketing and commercial appeal."

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