It might be hard to imagine that tiny Internet phone carrier Vonage could cause anything approaching “irreparable harm” to its massive competitor, Verizon Communications Inc.
But that’s just what a federal judge ruled Friday in handing down an injunction against Vonage as part of a patent infringement case that could eventually cause major disruptions in Vonage’s service to its 2.2 million customers nationwide.
Vonage received a temporary reprieve when the judge said he’d wait two weeks before formally entering the injunction while he considers Vonage’s request for an extended stay.
In the meantime, Vonage sought to assure its customers that their phone service would remain in place.
“We are confident Vonage customers will not experience service interruptions or other changes as a result of this litigation,” Vonage Chief Executive Mike Snyder said in a statement Friday afternoon.
Even if U.S. District Judge Claude Hilton refuses to stay the injunction, Vonage could then seek a stay from a federal appellate court. Legal experts said it’s likely that the appeals court will grant a stay if Hilton does not.
The injunction came after a jury verdict earlier this month that Vonage — a leader in the Internet phone marketplace known as Voice over Internet Protocol, or VoIP — infringed on three Verizon patents.
The jury awarded Verizon $58 million plus 5.5 percent of Vonage’s future revenue garnered from continued infringement of the patents, but Hilton ruled that the additional penalty measure of a permanent injunction was warranted.
Simply providing monetary damages “does not prevent continued erosion of the client base of the plaintiff,” Hilton said in explaining his ruling.
Verizon lawyer Dan Webb argued that Verizon has already lost hundreds of thousands of customers to Vonage in the growing VoIP sector.
Vonage officials have spent $425 million advertising their product “so they can lock up this emerging market and we can’t get a toehold in it,” Webb said.
Vonage lawyer Roger Warin said Verizon was exaggerating the harm caused by Vonage, and that internal Verizon briefings to top executives state that “Vonage is not expected to have a material impact on Verizon.”
Warin cited the relative size of the two companies in terms of weighing the relative harm. Vonage, with $607 million in annual revenue, is a blip on the radar compared to Verizon, with $88 billion in annual revenue.
Still, Hilton ruled that Vonage would inflict irreparable harm on Verizon if it continued to infringe on the patents. He cited not only the developing nature of the VoIP market, but also the difficulty in putting an exact dollar value on the losses Verizon was suffering to Vonage.
Verizon was required to prove irreparable harm, among other things, to win an injunction.
The exact effect of an injunction on Vonage’s service is difficult to determine. Vonage filed its arguments on the issue under seal, and the two sides differ on how extensively the infringed patents are integrated into Vonage’s system.
Verizon’s lawyer said the infringed patents are “embedded into their infrastructure.” He also said that Vonage warned of “enormous business difficulties” in its sealed pleadings if an injunction were enforced, including possible difficulties for customers to make 911 calls.
But Vonage, based in Holmdel, N.J., countered that Verizon overstates the importance of the disputed patents.
Warin also argued that Vonage stands a strong chance of reversing the infringement verdict on appeal. He said the federal circuit that hears such cases overturns verdicts more than 40 percent of the time. Furthermore, Warin said the case hinges on very technical decisions made by Judge Hilton in interpreting how the jury should apply patent law. Warin said such rulings are frequently overturned by the appellate court.
Charles Baker, a Houston-based expert in patent law with the Porter and Hedges law firm, agreed that the federal circuit responsible for patent appeals — which specializes in such matters — frequently overturns verdicts of patent infringement.
He questioned, though, whether Vonage could easily develop a workaround to avoid infringing the Verizon patents if an injunction takes effect.
“The injunctions generally are pretty broad,” he said. “If it were that easy to develop a workaround, why didn’t they do it while the case was going on? ... My sense is that they can’t just flip a switch on this” to avoid infringement.
Verizon sued Vonage last year for infringing on five patents it said makes the Internet telephone service network functional. On March 8, the eight-person jury found that Vonage had infringed on three of them. And it ruled that Vonage must pay $58 million, plus possible future royalties, to Verizon. That was far less than the $197 million that Verizon had requested, and was even slightly less than what Vonage had suggested would be fair if it were found liable.
Vonage Holdings Corp. shares on Friday fell $1.05, or 26 percent, to close at $3 on the New York Stock Exchange, a new 52-week low. Verizon shares rose 11 cents to $38.12 on the NYSE.