Vonage Hopes Court Stays The Course

The Vonage-Verizon high stakes legal battle moves to the U.S. Court of Appeals this morning with Vonage hoping to stave off what could be a disastrous scenario for the Internet telephone company. Without some court relief for Vonage, the company says it faces possible bankruptcy and a disruption of service for its more than two million customers.

Vonage  is seeking a stay of an injunction ordering the Holmdel, N.J.-based company to cease soliciting new business while it appeals a jury decision that it infringed on three patents held by Verizon . Vonage’s infringing technology allows it to connect Voice over IP  calls to the publicly switched public telephone network.

U.S. District Judge Claude Hilton issued the injunction on April 4 but temporarily stayed the decision until the Court of Appeals in Washington could hear the request. Hilton allowed Vonage to continue using the infringing technology to service Vonage customers.

“[The injunction] effects only new customers and allows Vonage to operate with its current customer base,” Hilton said. “It keeps [Vonage] from taking more clients from Verizon.” Vonage contends the injunction would amount to a “bullet to the head” for the struggling VoIP provider.

“We are, and may in the future be, subject to damaging and disruptive intellectual property litigation that could materially and adversely affect our business, results of operations and financial condition, as well as the continued viability of our company,” Vonage warned investors last week in a Securities and Exchange Commission (SEC) filing.

In March, a Virginia jury awarded Verizon $58 million in damages for patent infringement by Vonage, which Vonage steadfastly insists it will win on appeal. In order to protect Verizon’s interest during the appeals process, Hilton ordered Vonage to post a $66 million bond and pay Verizon a 5.5 percent royalty rate for using Verizon technology to service existing Vonage customers.

Another option for Vonage would be to develop a workaround of the infringed Verizon patents, but the company said in its SEC filing that could be problematic. Vonage admitted in the filing a workaround “may not be feasible.” Even if one is available, Vonage said it would take several months to implement.

“Our efforts to design around third-party intellectual property and implement such design arounds, including in connection with our Verizon patent litigation, may cause disruptions to our service,” Vonage stated.

After losing the infringement case, Vonage fired former CEO Mike Snyder over what chairman and new interim CEO Jeffrey Citron termed “disappointing” results, announced it would lay off approximately 10 percent of its workforce and slash its marketing budget by $110 million.

The SEC filing also outlined other pending patent infringement claims against Vonage, including lawsuits by Sprint, Klausner Technologies and Web Telephony. In all three cases, the companies are seeking compensatory damages, treble damages, attorneys’ fees and injunctive relief.

Any adverse decision in those cases, Vonage warned, could lead to default on its convertible notes and could accelerate the payment of approximately $253.6 million of principal and interest under the notes. Vonage added that adverse decisions would result in more “substantial” employee layoffs.

“We believe that we have meritorious defenses against the claims. However, we might not ultimately prevail in these actions. Whether or not we ultimately prevail, litigation could be time-consuming and costly and injure our reputation,” Vonage stated. “If any of the plaintiffs prevail in their respective actions, we may be required to negotiate royalty or license agreements with respect to the patents at issue, and may not be able to enter into such agreements on acceptable terms, if at all.”

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