Vonage Injuction: "We're sorry, your call did not go through ..."

"We're sorry, your call did not go through...."


That may have a familiar ring to it for the more than 2.2 million subscribers using Vonage and the company's voice-over-internet-protocol, or VOIP service to make and receive calls over the internet.

A US District Court judge in Alexandria, Virginia stunned the company today by issuing a permanent injunction against Vonage , barring it from basing its service on three of five patents owned by Verizon . A federal court jury found that Vonage had in fact violated those patents, and slapped Vonage with $58 million in penalties and the specter of having to pay massive royalties. At the time, the company was doubtful the judge in the case would issue a permanent injunction.

He did just that today.

In a statement issued after the ruling, Vonage reassured its customers that service would continue, uninterrupted, while the company worked its way through the appeals process.

"We are confident Vonage customers will not experience service interruptions or other changes as a result of this litigation," says Vonage CEO Mike Snyder.

"With the permanent injunction which wasn't so clear that the judge would issue it two weeks ago, it now gives the fuel to a lot of other companies that are going to seek to attack Vonage, so it is a legal victory for Verizon," says intellectual property attorney Barry Cohen, who is not connected to this case.

Vonage also maintains that the appeals process will likely take some time and that no service shutdown is imminent. The company says the court has agreed to hear Vonage's arguments for a stay of this injunction in two weeks. At that time, the court will render a decision connected to the stay request. If Vonage loses that round, Vonage vows to go to the Federal Court of Appeals.

In other words, the notion that Vonage simply evaporates over night might be a little exaggerated. However, the notion that Vonage's days may be numbered might be a little more appropriate.

Vonage however is sticking to its original defense in this case, with some legal experts calling it "novel." Vonage maintains that even though it owns no patents of its own, it didn't violate any intellectual property in building its business. Instead, the company says it relied on open industry standards available for free to anyone out there who wants to innovate with them.

"Our appeal centers on erroneous patent claim construction, and we remain confident that Vonage has not infringed on any of Verizon's patents -- a position we will continue to vigorously assert in federal appeals court," says Sharon O'Leary, Vonage's executive vice president and chief legal officer, in a statement. " Vonage relied on open-standard, off-the-shelf technology when developing its service. In fact, evidence introduced in court failed to prove that Vonage relied on Verizon's VoIP technology, and instead showed that in 2003, Verizon began exploring ways to copy Vonage's technology."

"I think they absolutely have to appeal because the only other option would be to find some alternative technology to what they are using right now. I wouldn't count Vonage out but the odds against it are looking longer and longer," Joseph Laszlo at Jupiter Research told my producer Michelle Eprem. "I do think that at least thus far in the legal proceeding, the ruling has been pretty clear that Verizon does legitimately own this intellectual property and Vonage shouldn't be using it. It's good rhetoric to say, 'Yeah, this is just an industry standard.' But that just means that everyone else is violating Verizon's patent and that's not a good thing."

In Verizon's original complaint, the company claimed that Vonage had signed up 1.1 million new subscribers in the 15 months leading up to the patent infringement filing, "many of whom are Verizon's former customers." Verizon also asserted that Vonage had signed up 350,000 new customers in the first quarter of 2006, and had spent $400 million on advertising and marketing so far.

But there's a far bigger issue at stake here: If Verizon actually DOES own these patents, then the story is no longer just about Vonage. It's about Time Warner, eBay and Skype, and dozens of other companies trying to build businesses around so-called VoIP. If Verizon asserts itself as the de facto owner of VoIP, some analysts, including Laszlo at Jupiter Research wonder whether the case could chill innovation across the entire sector.

"There is an industry standard for VOIP that everybody uses. It's a protocol for how you send voice over the internet. What Verizon is claiming ownership over is a slightly different part of the value change. Verizon says it owns, among other things, the way that Vonage interconnects its network with the traditional phone network. Parts of what Vonage does can be industry-standard and nobody owns them. But again, I think Verizon is saying there are other parts of Vonage's total network that don't work quite that way," says Laszlo.

First things first: Vonage has a steep, uphill legal climb ahead of it. And if the company's stock price today (down better than 25% on the news), indeed over the past year (down better than 80% since its IPO last June), is any indication of what investors are thinking, Vonage may have trouble making the connection between online phone calls and a business plan with a future.

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