RealTime IT News

Vonage Service Cutoff Faces Critical Court Date

Talk about woo-hoo, woo-hoo-hoo. Vonage, the nation's largest Voice over IP (VoIP) provider, finds out today if it must shut down service to its 2.2 million customers.

In an Alexandria, VA. courtroom showdown, U.S. District Judge Claude Hilton will decide if he will sign a permanent injunction prohibiting Vonage from connecting its Internet-based calls to the traditional telephone system. Last month, in the same courtroom, a jury awarded Verizon $58 million in damages after deciding Vonage's technology infringed on patents owned by Verizon.

Hilton issued a permanent injunction sought by Verizon two weeks ago to bar Vonage from using the technology, but delayed signing it pending a stay request. The Holmdel, N.J.-based Vonage is also appealing the jury decision.

If Hilton signs the permanent injunction, Vonage is expected to immediately file for a temporary stay of the order with the federal appeals court.

Hilton, though, has other options beyond signing or not signing the permanent injunction, including granting a partial stay suggested by Verizon this week in a court filing.

"Such a stay would allow Vonage to continue serving its present subscribers during an appeal, even if such service would infringe the patents," Verizon's motion states, "but would prohibit Vonage from serving any new subscribers or subscriber lines through infringing patents."

Verizon claims a permanent injunction is necessary since money alone doesn't cure the harm to the nation's second largest telecom carrier. The company contends Vonage's service has drained more than a million customers away from Verizon.

In its motion opposing the stay, Verizon noted Vonage announced just before the infringement trial began in February that it planned to add almost a million new subscribers during the same period the 120-day stay would be in effect.

"Staying the [full] injunction would permit…permit Vonage to radically alter the landscape of the telephony marketplace at Verizon's expense," the motion states.

Stifel Nicolas' Rebecca Arbogast, writing in an analyst note issued Thursday, said the appeals court would be less likely to grant a stay, "If the district court issued a targeted stay as proposed by Verizon."

Even with a partial stay, Arbogast added, "Vonage would have a tough time if it is barred from adding new customers at the same time existing customers are leaving."

Another option for Vonage would be to create a technological "workaround" the Verizon patents during or after the appeal. In the event of a workaround, Arbogast contends Verizon could argue the fix violates it patents.

"Verizon would not need to initiate a new trial, but instead could bring a contempt action to Judge Hilton, who would be expected to rule promptly," she wrote. "Vonage could still seek to settle with Verizon, but with each adverse decision, the price tag of a settlement increases from the 5.5 percent royalty figure the jury awarded."

Vonage officials have remained upbeat throughout the process, maintaining it will win the infringement case on appeal and promising customers there will be no interruption in service. The company also stated it would continue to aggressively court new business.

Vonage CEO Mike Synder said in a statement last week, "To paraphrase Mark Twain, the rumors of Vonage's death have been greatly exaggerated."

Snyder said Vonage, which lost $65 million last quarter, had been preparing for the verdict and the possibility of an injunction for months, although he did not mention any workaround of the three Verizon patents in question.