April 24, 2007 9:14 AM PDT

No quick decision in Vonage patent appeal

Editor's note: Since this story was published, a federal appeals court ruled that Vonage can continue to sign up new customers.
WASHINGTON--A federal appeals court spent nearly two hours Tuesday listening to arguments over an injunction that threatens to pull the plug on Vonage's ability to sign up new customers, but did not reach a decision.

A three-judge panel at the U.S. Court of Appeals for the Federal Circuit here devoted much of that time to grilling attorneys for Verizon and Vonage about technical aspects of a district court's interpretation of three disputed Verizon patents relating to Internet phone service. They appeared to direct their irritation more frequently, however, at Vonage attorney Roger Warin.

"It's very hard to tell from the briefs what's going on here," Judge Timothy Dyk told Warin shortly after the attorney began his arguments. Chief Judge Paul Michel later scolded Warin for beginning to answer a question posed by Judge Arthur Gajarsa before the judge had finished asking it.

An avalanche of questions about the patents at issue left little time for the company attorneys to lay out specific arguments about whether the appeals court should extend a freeze on the injunction against Vonage while the struggling VoIP company challenges its lower court loss.

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

Verizon attorney Richard Taranto argued that his opponent failed to make a case that the lower court had wrongly interpreted two patents related to routing voice over Internet Protocol 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 has already lost at the lower court level to Verizon, which filed suit in June, originally alleging infringement of seven patents. Verizon later scaled back the scope to only five patents. A federal jury decided on March 8 that the New Jersey-based company had infringed on three Verizon patents and ordered it to pay $58 million, plus royalties on future sales.

Now at issue is whether Vonage will continue to be able to add new customers while the court proceedings continue. U.S. District Judge Claude Hilton recently ordered a halt to additional customers, but the U.S. Court of Appeals for the Federal Circuit granted the VoIP provider a temporary reprieve until oral arguments could take place.

A decision from the Federal Circuit, which more than doubled the normal allotment of time for oral arguments, is expected at any time.

The patents Vonage was found to have infringed deal with technologies involving connection of VoIP 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.)

The bulk of Vonage's argument time involved discussion of the patent related to Wi-Fi calling. Two of the judges seemed skeptical of Vonage's assertion that an injunction on that patent would harm the company.

Warin acknowledged that only 1 percent of Vonage's customers have signed up for a brand of phone that's considered an exclusively Wi-Fi-dependent Internet phone--that is, it is designed to substitute for a traditional cell phone. But he argued that broader language in Hilton's injunction also threatened the company's ability to sign up new customers who opt for other cordless phones offered by the company. He estimated that 50 percent of Vonage customers prefer such phones.

Michel sharply questioned whether the lower court's reading would actually produce that broad effect. "That can't be right," he told Warin. "A judge can't possibly order that people stop using things that don't infringe."

Dyk later suggested the patent may not affect either company's bottom line. When he asked Verizon's Taranto whether he agreed, the attorney conceded, "That's probably right."

Trying to reconcile interpretations
The judges focused considerably less time on the two patents that could prove more difficult for Vonage to sidestep if the infringement verdict is upheld. Dyk and Gajarsa repeatedly asked Taranto to reconcile Verizon's interpretation of the patents with Vonage's assertion that the lower court had improperly interpreted them.

At one point, after Taranto described an aspect of the patents that deals with mapping names and Internet Protocol addresses to telephone numbers to connect VoIP calls to the traditional phone network, Dyk said of Vonage's system, "It's not doing those things, is it?"

Vonage has maintained that it did not infringe on any of the Verizon patents and that its service rests on commercial, off-the-shelf technology. The company 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.

Once the temporary stay ends, and without a work-around in place, Vonage would not be able to add new customers to its current base of more than 2.2 million customers. That situation could be devastating to any service provider, and Vonage already suffers from higher-than-average customer turnover.

If the Federal Circuit issues 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 Vonage has a good chance of winning on appeal because it is believed that the lower court interpreted the patents in an overly broad way that could be refined by an appeals court.

 

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