Ruling bans Vonage from signing up new customers

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 yesterday.

The injunction was to take effect Thursday, but the company was granted a temporary stay from the 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.

Judge Hilton said yesterday 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.

Judge 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, Mr. Warin estimated that Vonage would lose 650,000 subscribers within a year.

"In effect what you're doing is slowly strangling our customer base," Mr. Warin said.