April 24, 2007 11:43 AM PDT

Vonage can keep signing up new customers

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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Vonage Holdings Corp., Internet phone company, reprieve, appeal, patent

9 comments

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What did Vonage offer?
They paved the way for IP-based phone pricing but they've never had anything else that would justify their continued existence.

Their IPO was a joke on Wall St.
Their original equipment was a crappy CISCO devise that Cisco dropped because they could get it to utilize two phone lines even though the ports were there.
In the end, they helped the multi-handset phone manufacturers get a little exposure on the US market; the helped usher in Cable-based phone awareness; and they pushed Number Portability into areas most consumers hadn't thought about. These were all admirable but hardly justification for using their service.

Why anyone would still try and sign-up is just ridiculous.

Vonage is a marketing company utilizing other people's equipment; transported on someone else's network; and perpetually vulnerable to a price war or a government tax. They even chose their stupid orange color because it looked like Cingular - like that was such a great brand.

I don't think they infringed on Verizon patents - that was just the bullet that killed the terminally ill cancer patient. Vonage is an example of marketing over value - it works for a while until your competition kills you in the teeth.
Posted by phillynets (73 comments )
Reply Link Flag
Vonage offers freedome and low cost
I have been a customer for two years. I dumped Bellsouth and got Comcast cable for internet access and Vonage for telephone.

With Vonage, I pay only $15 plus a $3 in taxes/fees for what Bellsouth charged me $50 for each month + whatever long distance charges I accrued. So, say $60 per month for BellSouth vs. $18 for Vonage. (I have the $15 per month Vonage plan, not the $25 unlimited plan. I don't need the unlimited plan.)

Now, Comcast cable offers their "digital voice" VoIP for about $43 per month + taxes/fees which includes long distance. Say about $46. It's a savings over Bellsouth, I guess -- but Vonage is a home run!

Also, of the "cheap" VoIP providers, Vonage is one of the few that lets you use REAL telephone and not geeky headset. When I use Vonage I am not even aware it's VoIP. Dial tone, voice mail, voice mail indicator stutter beep -- just like regular telephone. Sure my cable company now offers the same, but for almost 3 times the price.

Also, I got a free Linksys router when I signed up. I don't know what equipment you were talking about in your post, but what they give people now is a regular blue Linksys router that has ethernet ports and telephone jacks on the back.

That's what Vonage offers.
Posted by chazzsubscribe (55 comments )
Link Flag
websites ride on the Internet...
Everyone uses everyone's service. since when does Verizon own the Internet. No way.
Posted by Blito (436 comments )
Link Flag
What did Vonage Offer.
I too am a very satisfied customer. I am not sure what the writer of this article has got against Vonage or how he/she can be so sure of themselves about patent infringemant. But I am concerened about such a commentary when it serves no purpose.

To answer the question, they offered and delivered an excellent low cost phone service, with superb back-up customer and techincal service. Which none of the big carriers, like Verizon and AT&T could not. My local phone company has prohibited Time Wrner Cable from offering a VOiP service on its infrastructure. In addition it limits the long distance charges from ATT to 10 cents/per minute. Vonage to the rescue, despite attempts by the local phone company to sabocharge line quality to anyone receiving Vonage calls.

Good luck Vonage!
Posted by mainejazz (2 comments )
Link Flag
Happy Vontage Customer
We have been using Vonage for over a year now and are very happy with the service. When we moved into a new house AT&T wanted to charge us over $100 to reconnect our house and then proceeded to miss two appointments in a row to do so. I ordered Vonage on the net and was connected two days later and have never looked back. I am glad I never bought the stock but I am happy they are hanging tough. I hope they prevail.
Posted by katznaperr (23 comments )
Reply Link Flag
exactly
I am glad I am not one of their shareholders. Vonage has a very dodgy business plan to make any profits. But I am a very satisfied customer.

If they go away my telephone costs will almost triple to get the same level of features and service with my cable company's VoIP.

I love my Vonage.
Posted by chazzsubscribe (55 comments )
Link Flag
Happy Vonage Customer
We have been using Vonage for over a year now and are very happy with the service. When we moved into a new house AT&T wanted to charge us over $100 to reconnect our house and then proceeded to miss two appointments in a row to do so. I ordered Vonage on the net and was connected two days later and have never looked back. I am glad I never bought the stock but I am happy they are hanging tough. I hope they prevail.
Posted by katznaperr (23 comments )
Reply Link Flag
Vonage is great
I guess it's always the innovators that eventually get shutdown by the big boys, but Vonage has done an excellent job for me. I've used them for nearly three years. Never had a service interruption except when I lost my Comcast connection, never had to call customer service, my voicemails get emailed to me, I can take the phone with me and use it anywhere I have a broadband connection, call europe for free all for $25/mo. I hope they win this battle.
Posted by DeeepBlue (2 comments )
Reply Link Flag
vonage has price advantage over AT&T/Verizon, but not iTalkBB/sunrocket
vonage has price advantage over AT&T and Verizon, but not iTalkBB or sunrocket.

See <a class="jive-link-external" href="http://italkbbdeal.blogspot.com/2007/05/friend-picked-sunrocket-over-italkbb.html" target="_newWindow">http://italkbbdeal.blogspot.com/2007/05/friend-picked-sunrocket-over-italkbb.html</a>

Voip goes cheaper and cheaper now.
Posted by weiwenchang (2 comments )
Reply Link Flag
 

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