Vonage Seeks a Reprieve; Wants to Keep Expanding

By JEFF ST.ONGE, BLOOMBERG NEWS

ALEXANDRIA, Va. Vonage Holdings Corp., ordered to stop adding customers after it lost a patent ruling, may get a reprieve allowing the Internet phone company to conduct business as usual while it appeals the decision.

Vonage will ask a court in Washington today to extend a temporary freeze of a lower court order that bars it from winning new business during the appeal. A judge issued the ruling on March 23, after Vonage was found to have infringed on call-connection technology owned by Verizon Communications Inc.

The future of the company may be at stake. Vonage said on April 17 that it may be forced into bankruptcy or liquidation if it loses the appeal. If the company can’t try to grow during the appeal, its chance of surviving may be slim even if it does ultimately win in court.

"It would be very bad to ruin Vonage and then have a decision a year from now" that reverses the verdict, said John Dragseth, a patent lawyer with Fish & Richardson in Minneapolis.

The court may be "worried about shutting down such a high- profile company" because "you can’t unring the bell."

Winning a reprieve may help assure customers and investors that Vonage can endure its battle with New York-based Verizon, the second- biggest U.S. phone company. A favorable decision today also would give Holmdel-based Vonage time to find a way to connect calls without infringing Verizon’s patents.

Vonage founder Jeffrey Citron replaced Michael Snyder as chief executive officer April 12, partly to deal with the ruling.

"We are confident in our ability to get a permanent stay," said company spokeswoman Brooke Schulz.

Vonage stock has plummeted about 80 percent since May 2006, when the company first sold shares to the public for $17. The shares fell 10 cents Monday to $2.89 in New York Stock Exchange composite trading. That values the company at $447.7 million, down from $2.6 billion at its peak. Verizon fell 36 cents to $37.55.

A federal jury decided March 8 that Vonage infringed three Verizon patents, including technology that lets Vonage customers connect from its Internet-based system to standard phone lines. The panel decided Vonage should pay $58 million plus interest, Verizon’s legal costs and a 5.5 percent royalty. Verizon claimed Vonage lured away 600,000 customers by copying its inventions.

U.S. District Judge Claude M. Hilton in Alexandria, Va., ordered Vonage to stop using Verizon’s technology. He later decided he would limit the order during Vonage’s appeal, only barring the company from adding customers.

Proving harm

The appeals court froze Hilton’s April 6 decision that same day. To win a continued stay of his order, Vonage must convince the appeals court that it’s likely to win the case or that the harm to the company from lifting the freeze outweighs any hardship to Verizon, patent lawyers say.

Given that legal standard, Vonage’s strongest argument may be that it would be forced to shut down service to its 2.4 million customers if it can’t continue to add new ones to offset those it loses, the lawyers say.

That argument is contradicted by some evidence Vonage has introduced in court and in its public statements, said Rebecca Arbogast, a legal analyst with Stifel Nicolaus & Co., a St. Louis brokerage. Vonage has $500 million in cash and has told investors it can operate during its appeal, she said.

At the same time, Vonage said in an April 6 court filing that it may take months to develop technology to work around the Verizon patents if the freeze isn’t extended.

"Vonage has been sending one message to Wall Street and customers and another to the court," Arbogast said.

‘They’re toast’

Vonage faces an uphill fight, said Norm Bogen, an analyst at research firm In-Stat in Scottsdale, Arizona. "Verizon smacked them in the head with this lawsuit, and I think it will be difficult to beat it," he said.

"If you don’t have a workaround, then you’re at the mercy of the court," said Bogen, who doesn’t own shares in either company. "If it’s upheld, then they’re toast."

Verizon says a continued stay is unwarranted.

"Judge Hilton crafted a ‘middle path’ resolution that allows Vonage to continue serving existing customers while protecting Verizon’s patents from increased infringement during the appeal," said Verizon spokesman David Fish. "We expect Judge Hilton to be affirmed on appeal."

Vonage’s court filings are notable for their "vagueness about the details and mechanisms of the supposed dire losses if customer acquisition were frozen," Verizon said in papers filed with the appeals court April 13.

(c) 2007 Record, The; Bergen County, N.J.. Provided by ProQuest Information and Learning. All rights Reserved.