Vonage: Away from the Edge, for Now

The Web-calling service provider can seek subscribers until its appeal hearing on the patent infringement case brought against it by Verizon

By Olga Kharif

That Vonage man dressed in a lobster costume will remain stuck in a revolving door a bit longer: On Apr. 24, the U.S. Court of Appeals for the Federal Circuit granted Vonage a permanent stay to a prior injunction. The troubled Web-calling service provider is once again allowed to recruit customers, effectively giving it a new lease on life. Last week, Vonage warned in a regulatory filing that if it were unable to sign up new subscribers, the company could face bankruptcy.

On Apr. 24, the court said that Vonage (VG) should get an expedited hearing of its appeal of an Apr. 6 lower-court decision on a patent infringement case brought by telecommunications giant Verizon (VZ). Both Vonage and Verizon have to file briefs by May 30 (Vonage's first brief is due May 9), with an oral argument set for June 25.

Tricky Nitty-Gritty

Vonage's shares, beaten down over the past several months, rallied 30.8%, to $3.78, on the news that the company will be able to sign up new subscribers, at least for now. That's critical considering nearly 29% of Vonage's customer base turns over every year. "The decision allows them to step back from the edge of the cliff," says Will Stofega, an analyst with IDC.

But Vonage isn't all that far from the edge. While the stay means Vonage has a chance to overturn the Apr. 6 ruling, the decision does not signal an inclination on the judges' part to side with Vonage on appeal. The same judges who ruled on Apr. 24 will be hearing the appeal on June 25 (see BusinessWeek.com, 4/6/07, "Vonage: Gasping for Air"). "It's a mistake to take too much away from this decision," says Nolan Goldberg, a lawyer at law firm Proskauer Rose in New York in assessing the court's Apr. 24 action. "I don't think the court wanted to sign a death warrant on Vonage."

The judges spent much of the two-hour proceeding—unusually long, according to lawyers—trying to understand the potential impact of an order to stop recruiting new customers. They also seemed to struggle to understand the claims and the arguments made in the case, delving into the nitty-gritty of voice-compression technology, servers' role in providing service, and figuring out which types of phones a decision may cover.

"It's very hard to tell from the briefs what's going on here," Chief Judge Paul Michel told a Vonage lawyer during the hearing. "Your motion papers don't explain the context and significance of the injunction and claims."

Uncertain Outcome

The unusual length of the hearing "is an indication that the judges didn't have their hands around this case as much as they would like," says James Shalek, partner at Proskauer Rose. "They were trying to understand the merits and didn't lean one way or another."

Vonage's lawyers offer a different interpretation: "This particular court has a lot of patent expertise and experience, and they wanted to grill into the issues," says Scott Doyle, partner at law firm Steptoe & Johnson, which is representing Vonage in the case. "You can never tell [which way judges are leaning] based on questioning. Sometimes, the most aggressive judge can, at the end, be on your side."

The fact that the appeal has been expedited may or may not be good news for Vonage, which had expected the legal wrangling with Verizon to go on for up to two years. That might have given Vonage time to develop a work-around technology that would come in handy if the patent infringement verdict isn't overturned.