Vonage's penalty for patent violation: No new customers

ALEXANDRIA, Va. - A judge yesterday barred Internet phone carrier Vonage Holdings Corp. from signing up new customers as punishment for infringing on patents held by Verizon Communications Inc.

The injunction will take effect Thursday. Vonage, based in Holmdel, N.J., said it would seek emergency relief from an appeals court as soon as the injunction is put in place.

The order by U.S. District Judge Claude Hilton is not quite as broad as the blanket injunction sought by Verizon.

Vonage's existing 2.2 million customer base should be able to continue without disruption to their service.

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 found that Vonage infringed three patents held by Verizon. A jury awarded $58 million, and Hilton 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.

Hilton said yesterday that he did not want to issue a blanket injunction because of the chance that it would irreparably harm Vonage's business. Had the injunction been applied to existing customers, they would have been able to place calls to other Vonage customers only, according to court papers.

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

But Vonage's lawyer said that, because of the massive churn in Vonage's subscriber base, cutting off new customers will result in a slow bleed in business. Vonage said it loses 2.5 percent of its existing customers every month, but gains an even larger number of new subscribers.

Without new customers, Warin estimated that Vonage would lose 650,000 subscribers within a year.

Rebecca Arbogast, a telecom analyst with Stifel Nicolaus, said Verizon was smart to offer the compromise because it was nearly as effective as a total injunction and was more likely to hold up on appeal.

Warin, indeed, argued to Hilton that it may be more difficult to obtain relief from the compromise injunction than from a blanket injunction.

Another potential problem for Vonage is a hearing Thursday to set a bond amount that the company must post while it pursues its appeal. Vonage has already been ordered to post a $66 million bond to cover the jury award and related expenses. Verizon is seeking an additional bond of $189 million to cover the monetary damages for continued infringement of the patents.

Vonage shares fell an additional 7 percent Thursday, or 25 cents, to $3.37. Its high for the year was $17.25.