Court affirms Vonage infringed 2 Verizon patents

WASHINGTON Wed Sep 26, 2007 2:04pm EDT

The sign for the Verizon Wireless store is seen in Lakewood, Colorado September 11, 2007. An appeals court on Wednesday upheld a verdict that Vonage Holdings Corp infringed two patents held by Verizon Communications Inc. REUTERS/Rick Wilking

The sign for the Verizon Wireless store is seen in Lakewood, Colorado September 11, 2007. An appeals court on Wednesday upheld a verdict that Vonage Holdings Corp infringed two patents held by Verizon Communications Inc.

Credit: Reuters/Rick Wilking

WASHINGTON (Reuters) - A U.S. appeals court on Wednesday upheld a verdict that Vonage Holdings Corp (VG.N) infringed two patents held by Verizon Communications Inc (VZ.N), the latest legal setback for the loss-making Internet phone company.

The U.S. Court of Appeals for the Federal Circuit reaffirmed an order barring Vonage from using Internet phone call technology related to two of the three patents which Verizon claimed had been infringed.

The court reversed a lower court's interpretation on the third patent, however, and ordered more proceedings to recalculate damages and royalties from a previous verdict of $58 million plus 5.5 percent in royalties.

Despite the mixed decision, analysts said the overall ruling was negative for Vonage.

"On balance, we view this as bad news," said Stifel Nicolaus analyst Rebecca Arbogast. The injunction on the two patents goes "to the core of Vonage's current business," she said in a report.

Trading in Vonage shares was halted early into Wednesday's session on the New York Stock Exchange after they fell 26 cents, or 20 percent, to $1.04. At that price, they have fallen 94 percent from the company's initial public offering at $17 per share in May 2006.

The appeals court decision came a day after a U.S. jury found Vonage had infringed patents owned by Sprint Nextel Corp (S.N), triggering a 34 percent Tuesday drop in the share price.

The Verizon-related ruling added to fears that Vonage would have a hard time staying in business.

But Vonage spokesman Charles Sahner said the company had "substantially completed" developing technology that would help it avoid infringing the two Verizon patents.

"In light of the workaround technology that Vonage has developed and deployed, today's decision is not expected to have an adverse impact on Vonage's business and customers will continue to enjoy the same great service they have come to expect from Vonage," Vonage said in a statement.

The federal circuit appeals court, which specializes in hearing patent cases, had stayed the injunction during the appeal.

Vonage has argued that the lower court judge who oversaw the trial misconstrued key claims in three of the patents at issue and gave the jury the wrong instructions on how to interpret technical terms such as data "translation" and "destination address."

The legal setbacks are only some of the problems facing Vonage. The company has posted heavy losses since it began offering its Internet-based phone services, due to high advertising spending.

While it is considered a pioneer in the business, with the biggest market share, it now faces competition from better-funded cable service providers and Internet firms.

(Additional reporting by Ritsuko Ando, editing by Gerald E. McCormick)

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