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Court Affirms Injunctions Vs Vonage In Verizon Case

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NEW YORK (Dow Jones) An appeals court upheld an injunction barring Vonage Holdings from using two Verizon Communications patents related to connecting Internet phone calls.

The U.S. Court of Appeals in Washington on Wednesday upheld the U.S. District Court finding that Vonage had illegally used Verizon's technology. But it sent a decision on a third patent, which relates to Wi-Fi phones, back for further review. Because the punishment was based on all three patents, the court also sent back the award of $58 million and 5.5% royalty fee for further review.

A third judge issued a dissenting opinion that the entire ruling and award should have been affirmed.

Vonage said the ruling wouldn't affect its business. "We completed the workaround some time ago," said spokesman Charles Sahner. "We don't expect an adverse impact on business because of the Verizon decision. Customers are enjoying the same service."

Sahner expects the damages to be reduced because the third patent was remanded. Vonage is exploring its option if the case goes before the district court again.

It represents another legal defeat for the Holmdel, N.J., Internet phone company, which on Tuesday suffered a similar loss to Sprint Nextel over Sprint's Internet phone patents. The U.S. District Court in Kansas City, Kansas, ruled that Vonage would have to pay $69.5 million in damages.

Vonage denied using the patents and vowed to seek an appeal. A spokesman declined to comment on the latest ruling.

"They've lost on every front," said Clayton Moran, an analyst at Stanford Group Co., who recommended investors dump the stock. "We don't see any end in sight to the bad news."

It isn't clear how this latest decision will affect Vonage. During its last conference call in August to discuss earnings, founder and Chairman Jeffrey Citron said the company had developed technology that would work around the two Verizon patents.

Moran noted the technology "workarounds" may not be clean, and could be challenged by Verizon.

But Sahner said Vonage is confident the workarounds don't infringe on Verizon's patents, and is ready to present its case if needed.

Given the opinion on the first two patents, he estimates Vonage will have to pay at least $40 million in damages to Verizon.

Verizon spokesman Peter Thonis said, "The decision speaks for itself."

Vonage shares fell 28% to 94 cents in recent trading. Verizon shares traded up 36 cents to $44.43. Vonage shares reached an all-time low of 89 cents on Wednesday. Vonage's stock has been plagued with problems since its initial public offering, which debuted at an all-time high of $17. The stock steadily declined from there.

A pioneer in offering Internet phone service, Vonage has suffered through a flood of negative press and litigation, which has curtailed customer growth. But even before the problems, the company lost money as it spent heavily on subscriber growth.

In April, Citron took over as interim chief executive in an effort to streamline costs and run the business more efficiently in the face of rising legal costs.

"In the big picture, we think Vonage continues to hit major obstacles," Moran said. "The business model is challenged and the metrics have been disappointing."

Vonage isn't the only Internet phone company to get squeezed. Privately held SunRocket abruptly shut down in July. The start-ups faced intense competition from the cable companies, which offered their own Internet phone service bundled with Web access and cable TV.

-By Roger Cheng, Dow Jones Newswires; 201-938-2020; roger.cheng@dowjones.com

(END) Dow Jones Newswires

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