updated 10/25/2007 6:50:24 PM ET 2007-10-25T22:50:24

Vonage Holdings Corp., the beleaguered provider of Internet-based telephone service, said Thursday it has settled a patent lawsuit brought by Verizon Communications Inc. for a maximum of $120 million.

The lawsuit, along with two filed by other phone companies, had cast a heavy shadow over Vonage’s future. The company’s service enables subscribers to connect their phones to their broadband connections for about $25 a month using a Vonage adapter.

After setbacks in the litigation with Verizon, which began in June 2006, Vonage put $88 million in escrow. The settlement caps any payouts Vonage will make on top of that amount at $32 million. If Vonage wins a rehearing on either of the two patents at issue, its total payout will be $80 million.

The settlement was announced just after the 4 p.m. stock market close, which saw Vonage shares fall 7 cents to $1.53. In after-hours trading, the shares jumped 70 percent to $2.60.

“We believe that the settlement terms may allow Vonage to avoid bankruptcy — at least for now,” the telecom analyst team at brokerage Stifel Nicolaus wrote in a research note Thursday.

In March, a jury held that Vonage had infringed on three patents and awarded Verizon $58 million in damages, plus a royalty on future revenues. In September, an appeals court sent the remaining two patents in dispute back to the lower court for retrial.

“This settlement removes the uncertainty of legal reviews and long-term court action and allows us to continue focusing on our core business and customers,” said Sharon O’Leary, Vonage’s chief legal officer.

The settlement is a major step forward for Holmdel, N.J.-based Vonage, which earlier this month settled another patent dispute with Sprint Nextel Corp. for $80 million.

The settlement does not put Vonage’s legal troubles in the past, however. AT&T Inc. sued Vonage last week, also for patent infringement.

“There’s always something coming out of the woodwork in terms of lawsuits,” said analyst Stephan Beckert at TeleGeography Research. “That probably says more about the patent system than it does about Vonage.”

He said Sprint’s and Verizon’s success in their suits may have encouraged AT&T to get into the game.

“I guess it’s good to settle a lawsuit and get it behind you, but (Vonage) settled for really big numbers,” Beckert added.

Vonage had a substantial war chest, thanks to an initial public offering last year at $17 per share that drew in more than $500 million but quickly turned into an embarrassment when the stock plummeted.

The legal challenges have scared off customers and stalled Vonage’s growth. It now has about 2.45 million subscribers. The attractiveness of Voice over Internet Protocol, or VoIP, provided by independent companies shrank further this summer, when Vonage rival Sunrocket suddenly shut down, stranding subscribers. But cable companies have had great success signing up their video customers to VoIP.

Vonage subscriber Randy Borow in Lisle, Ill., said he hasn’t really worried that the company would founder because of the lawsuits, but he’s heard of subscribers who have fled.

Borow said he’s pleased to have cut his phone bill by more than half by switching to Vonage from AT&T a year and a half ago.

“The biggest threat these landline companies is obviously VoIP service,” Borow said. “They look upon Vonage as a huge threat ... so they try to sue them out of existence.”

In court, Verizon argued that Vonage, while using Verizon’s patented technology, had stolen away hundreds of thousands of customers.

Of the $120 million maximum payment from Vonage under the settlement terms, $117.5 million would go to Verizon and $2.5 million to charities.

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