March 23, 2007 / 4:42 PM / 13 years ago

UPDATE 4-Judge hits Vonage with injunction, shares tumble

(Adds Vonage CEO, patent expert, edits, updates stock move)

By Peter Kaplan

ALEXANDRIA, Va, March 23 (Reuters) - A federal judge dealt a blow to Vonage Holdings Corp. (VG.N) that sent its stock reeling on Friday, when he agreed to bar the company from using Internet phone call technology patented by Verizon Communications Inc. (VZ.N).

Vonage said it was confident its customers would not experience service interruptions, but investors sent its shares down nearly 26 percent.

U.S. District Judge Claude Hilton said he would delay signing the order for two weeks to give Vonage time to try to convince him to stay the injunction while it appeals the entire patent infringement case. “I will sign the injunction at the time I rule on the stay,” Hilton said at a hearing.

Hilton agreed with Verizon that it would suffer irreparable harm if he allowed continued infringement of the Voice-over-Internet Protocol (VoIP) technologies that allow consumers to make calls over the Internet.

He rejected arguments by Vonage that the harm to Verizon, the No. 2 U.S. telephone company, was outweighed by other factors, including the public interest.

“I don’t think it’s going to kill Vonage,” said Albert Lin, an analyst at American Technology Research. But he said the legal costs and management distractions were disruptive.

Vonage has been public for less than a year, and its stock has lost value consistently since its initial public offering at $17 a share in May. It reached a new low Friday, closing down $1.05 at $3 per share on the New York Stock Exchange.

Vonage said the patent battle was far from over and the company would vigorously defend itself.

“Despite this obvious attempt by Verizon to cripple Vonage, the litigation will not stop Vonage from continuing to provide quality VoIP service to our millions of customers,” Vonage chief executive Mike Snyder said in a statement.

OPERATING CHALLENGES

Vonage has previously said it is working on redesigned technologies to avoid infringing Verizon’s patents.

“It should likely continue as an independent company, but their operating challenges will have increased,” said Stanford Group analyst Clayton Moran, who also warned that Vonage’s subscriber growth could slow.

A jury on March 8 found Vonage had infringed three patents owned by Verizon. The jury said Vonage must pay $58 million plus 5.5 percent royalties on future sales.

“They could not have been commercially successful if they had not taken these patents we have and put them into their technologies,” Dan Webb, an attorney for Verizon, said at Friday’s hearing on the injunction request.

Webb also cited documents Vonage filed with the court under seal, saying an injunction would cause “enormous business difficulties” for Vonage. Webb said the Vonage filings suggested that Vonage “can’t live with an injunction because of the way their technology is designed.”

Vonage’s chief lawyer, Sharon O’Leary, declined to comment on the sealed documents.

“We will get the stay, either through the district court or the Federal Circuit Court of Appeals,” O’Leary told Reuters outside the court.

One patent lawyer told Reuters Vonage has a chance of winning an appeal, but it was crucial to get a stay of the injunction.

“A one-and-a-half to two-year injunction, even if they win on appeal, could be very significant to Vonage,” said John Rabena, a partner with the firm Sughrue Mion. (Additional reporting by Ritsuko Ando in New York)

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