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 was to take effect Thursday, but the company was granted a temporary stay from U.S. Court of Appeals for the Federal Circuit in Washington, D.C., which will allow Vonage to sign up new customers until the court rules on its appeal.
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.
But Vonage's lawyer argued that because the company loses more than 50,000 subscribers per month, an injunction preventing new signups would result in a slow bleed in business.
Without new customers, Warin estimated that 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.
"I think Verizon's legal strategy has been very aggressive and very effective," said Arbogast, who attended Friday's hearing.
"Vonage doesn't have very many attractive options except to hope for an emergency stay."
Indeed, Warin also argued to Hilton that it may be more difficult to obtain relief from the compromise injunction as opposed to a blanket injunction.
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. The company has continued development of a workaround, Schulz said, but she declined to discuss the issue in detail.
Vonage, based in Holmdel, N.J., has been optimistic about its chances of overturning the verdict on appeal. Warin has said the federal circuit overturns district court judges 40 percent of the time on claim construction — a narrow, technical part of the law that is crucial in patent cases.
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 another bond of $189 million to cover the monetary damages for continued infringement of the patents by Vonage's existing customers.
Warin said a requirement to post more than $250 million in cash to cover bonds could cripple the business.
"Vonage needs to have money to continue to operate," Warin said.
Verizon lawyer Dan Webb countered that Vonage should have plenty of cash on hand, given the fact that it had planned to spend $400 million a year on advertising to draw new customers.
"Now they don't have to get any more new business because they can't" under the court's order, Webb said.