Vonage barred from new signups

ALEXANDRIA, Va. – 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 Friday.

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 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 existing 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 a jury in Alexandria, Va., 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.

Hilton said Friday 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 only would have been able to place calls to other Vonage customers, according to court papers.

Hilton said the compromise of applying the injunction only to new customers is a good way of maintaining the status quo during a potentially lengthy appeals process.

Vonage’s lawyer argued that because the company loses more than 50,000 subscribers per month, an injunction preventing new signups would lead to a slow bleed in business. Without new customers, Warin estimated Vonage would lose 650,000 subscribers within a year.

“In effect what you’re doing is slowly strangling our customer base,” Warin 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.

Vonage spokeswoman Brooke Schulz said Vonage will continue to sign up new customers through Thursday, and might not stop even then.

Schulz said it was possible the U.S. Court of Appeals for the Federal Circuit, which hears patent appeals, could provide instantaneous emergency relief.

She also said Vonage could deploy a workaround technology to keep its network operating without infringing on the three patents.