Vonage continues legal fight to sign up new customers

Internet phone provider is asking for permanent stay to an injunction while it fights an appeal in the patent case it lost against Verizon.
Written by Marguerite Reardon, Contributor
Vonage heads back to court on Tuesday hoping to ensure it can keep adding new customers to its IP telephony service while it fights for an appeal to a patent lawsuit it lost to Verizon Communications.

The Internet phone provider lost its patent infringement lawsuit to telecommunications giant Verizon in March. A Virginia jury ordered the Vonage to pay $58 million in damages, and a judge granted an injunction that would force the company to stop marketing its service to new customers.

A federal court of appeals then granted a temporary stay to the injunction on April 6. Now Vonage will try to convince the court to make the temporary stay permanent while it fights for an appeal.

Vonage and Verizon will each present oral arguments on Tuesday in front of the United States Court of Appeals for the Federal Circuit in Washington, D.C. Vonage will argue that without a stay to the injunction, the company's chances of survival while it appeals its case are limited. Meanwhile, Verizon will argue that if a stay is allowed to remain in place, Vonage will continue infringing its patents, perpetuating further damage.

The court could hand down its decision on whether or not to make the stay permanent as early as Tuesday, said a Vonage representative.

Vonage has repeatedly said it is confident that it will get the permanent stay and that eventually it will win its appeal in the patent case. The company has also said that it is working on an alternative technical solution to avoid infringing the Verizon patents.

Without a permanent stay, Vonage's future is uncertain. For one, there is no telling how long it could take the company to come up with a work-around solution that doesn't infringe on the Verizon patents.

"I think a temporary stay is a negative and the extent of how bad is largely determined by how long a temporary stay would be in place," said Albert Lin, an analyst with American Technology Research. "The courts can move unpredictably on timing, so one cannot count on enough time for a resolution in many circumstances."

The company has already argued in documents filed with the federal appeals court earlier this month that it might not be able to develop a technical work-around to avoid using technology that infringes Verizon's patents. This would mean that once the temporary stay ends, Vonage, which already suffers from higher-than-average customer turnover, would not be able to add new customers to its current base of more than 2.2 million consumers, a situation that could be devastating to any service provider.

If the company wins a permanent stay to the injunction, it would help assure customers and investors that Vonage will be able to weather the storm while it fights for an appeal. Several legal experts have said that Vonage's chances of winning its appeal are promising.

These experts believe that the court has interpreted Verizon's patents too broadly. Two of the patents Vonage is accused of infringing deal with translating IP addresses into phone numbers so that calls made from Vonage customers can be connected to people using phones on the regular telephone network. The third patent explains how users can make and receive voice over Internet Protocol phone calls over a short-range wireless network, such as one using standard Wi-Fi equipment.

Vonage's legal problems have already taken a toll on the company. On April 12, the company announced that Michael Snyder was stepping down as chief executive officer, and Jeffrey Citron, the company's founder and chairman of the board, would take over his duties.

The company also admitted in a recent filing with the Securities and Exchange Commission that the ongoing legal battles over patent disputes could eventually lead to liquidation of the company's assets under bankruptcy protection. With $420 million in cash, most analysts agree that bankruptcy is a distant concern. But if the company is not able to sign up new customers, it would likely heighten the threat.

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