Update: Vonage gets stay on new customer ban

The ruling is part of an ongoing patent infringement case

A U.S. District Court judge on Friday barred voice-over-IP (VoIP) provider Vonage Holdings Corp. from signing up new customers after the company lost a patent infringement lawsuit to Verizon Communications Inc.

But Vonage later in the day secured a temporary stay from the U.S. Court of Appeals for the Federal Circuit, in Washington, D.C., according to a Vonage statement. The stay enables Vonage to continue to sign up new customers until the appellate court can hear Vonage's request for a permanent stay.

The temporary stay was granted just a few hours after U.S. District Judge Claude Hilton, in Alexandria, Virginia, issued an order barring Vonage from signing up new customers, though it could continue to serve its existing 2.2 million customers.

Earlier in the day, Hilton, of the U.S. District Court for the Eastern District of Virginia, had denied Vonage's request to stay an injunction pending its appeal of a patent infringement ruling. On March 8, a federal jury found that Vonage infringed three Verizon patents and must pay $58 million in damages plus royalties.

Verizon sued Vonage last June, alleging it had violated seven of its patents involving packet-based calling technology.

Hilton issued a permanent injunction against Vonage in late March, but delayed its implementation while considering Vonage's request for a stay. Vonage had said it would appeal the injunction to a higher court if it failed with Hilton.

Current customers won't be affected by the injunction, Vonage has said.

John Thorne, a Verizon senior vice president and deputy general counsel, said in an e-mail statement that the judge's ruling "exercised the court's equitable discretion to craft a middle path that allows Vonage to continue serving its existing customers while protecting Verizon's patents from increased infringement during the appeal process. We expect [today's ruling from] Judge Hilton to be affirmed on appeal."

Jeff Kagan, an independent telecommunications analyst in Atlanta, said the ruling, even if it had stood on appeal, didnt mean that Vonage is finished. But it would have changed the landscape dramatically for the company.

When Vonage first began providing VoIP services to consumers, Kagan said, it had few major competitors for the same slice of its business. That changed when traditional telephone companies, cable TV companies and others began offering VoIP services -- particularly when bundled with their other offerings.

"I don't see a big future for Vonage because everybody, including the big companies, [is] going to offer that service and customers are going to buy a bundle" that includes phone service, cable TV access, long-distance phone service and more, he said. The benefit for consumers is that they can buy services from fewer companies and get lower prices when they're bundled, Kagan said.

"They were a great idea [originally], but the idea of Vonage as a stand-alone company is limited," he said.

Dan O'Connell, an analyst at Stamford, Conn.-based Gartner Inc., said before Vonage won its stay of Hilton's decision that the ban on new customers "definitely hurts them and if it lasts, it will effectively destroy them. Even without this judge's ruling, their options were pretty gloomy," because they only have one product offering and no other wares to sell instead. "It's not enough of a niche to sustain a business model on. The way it is now, you really need a bundled service [offering] and right now they are a one-trick pony."

Attorneys for Vonage could not be reached immediately for comment.

Computerworld's Todd R. Weiss and Robert Mullins, of the IDG News Service, contributed to this report.

Copyright © 2007 IDG Communications, Inc.

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