ASSOCIATED PRESS
Internet phone company Vonage Holdings Corp. will be barred from signing up new customers as punishment for infringing on patents held by Verizon Communications Inc., under an injunction ordered yesterday.
The injunction is to take effect Thursday. Vonage said it will seek emergency relief from an appeals court as soon as the injunction is put in place.
The order issued by U.S. District Court Judge Claude Hilton in Alexandria 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 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 an Alexandria jury 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.
Judge Hilton said yesterday 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 would have been able to only place calls to other Vonage customers, according to court papers.
The judge said 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, Mr. Warin estimated that Vonage would lose 650,000 subscribers within a year.
“In effect what you’re doing is slowly strangling our customer base,” he 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 Ms. Arbogast, who attended yesterday’s hearing. “Vonage doesn’t have very many attractive options except to hope for an emergency stay.”
Vonage spokeswoman Brooke Schulz said Vonage will continue to sign up new customers through Thursday, and might not stop then.
She said it was possible the U.S. Court of Appeals for the Federal Circuit, which hears patent appeals, could provide 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, Ms. 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. Mr. Warin has said the federal circuit overturns district court judges 40 percent of the time on claim construction — a narrow, technical part of the law that is crucial in patent cases.
Please read our comment policy before commenting.