After setback, Vonage wins temporary relief

Appeals court blocks a judge's order that would have stopped the Net phone company from taking on new customers.

ALEXANDRIA, Va.--A federal appeals court granted Vonage a temporary reprieve late Friday from an injunction granted earlier in the day that would have prevented the Internet phone provider from signing up new customers.

The U.S. Court of Appeals for the Federal Circuit, which hears patent disputes in Washington, D.C., blocked the injunction from taking effect until the judges were able to consider arguments in the patent case brought by Verizon Communications.

During a Friday morning hearing here that lasted about an hour, U.S. District Judge Claude Hilton ordered Vonage not to accept any new customers while it continues to infringe on Verizon's patents covering some aspects of Internet phone calls.

A copy of the one-page appeals court order(PDF) provided to CNET by Vonage's legal counsel gives Verizon until April 13 to respond to the voice over Internet Protocol company's request to lift the injunction during the appeal process. It was signed by Chief Judge Paul Michel.

Roger Warin, Vonage's attorney, protested Hilton's no-new-customers order during Friday's hearing. Arguing the decision was just as threatening to Vonage as a full injunction, he said "it would be the difference of cutting off oxygen as opposed to a bullet to the head."

He also told Hilton that "in effect, what you are doing is slowly strangling Vonage, because it cannot preserve that customer base" indefinitely. He noted that Vonage's customer turnover rate is 2.5 percent per month.

"It would be the difference of cutting off oxygen as opposed to a bullet to the head."
--Roger Warin, Vonage attorney

Verizon in court filings this week had opposed anything more than a so-called partial stay on the permanent injunction against Vonage. Attorneys for the nation's second-largest telephone company argued that without at least those restrictions, Vonage would continue to pour resources into adding new customers, potentially leaching additional subscribers from Verizon and causing it to lose business.

The judge's order follows a federal jury finding on March 8 that Vonage had infringed three Verizon patents. The New Jersey-based Internet phone provider was ordered to pay $58 million in damages.

Judge Hilton announced two weeks ago that he planned to sign off on an injunction barring Vonage from using the disputed Verizon technologies, but he gave the parties time to convince him otherwise.

Hilton on Friday also ordered Vonage to post an approximately $66 million bond, which includes interest accrued on the damages awarded and other legal costs, while it carries out its appeal.

Financial analysts said the partial injunction, if eventually upheld on appeal, would be a severe blow to Vonage.

"All carriers that have any degree of churn, which is pretty much everyone I know of, must be able to add new subscribers to remain viable as a business," said Albert Lin, an equities analyst with American Technology Research.

But for Vonage, being hamstrung in this way could be particularly devastating, as it faces stiff competition from cable operators, which are also targeting residential phone users with their own VoIP services. Then there are the Internet companies, such as Skype, Google, and Yahoo, that are also offering VoIP services that allow people to make calls to traditional phones as well as cell phones.

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