Does the Vonage court decision harm the future of consumer VoIP?

* Analysis of Vonage’s injunction

Last Friday, a federal judge issued an injunction against Vonage that would essentially prevent it from connecting its customers to the PSTN; however, the judge also gave Vonage until April 6, 2007 before making the injunction effective. The judge found that Vonage had violated Verizon patents in an earlier ruling. This injunction was issued to prevent Vonage from further harming Verizon, which claimed it had lost a million customers to Vonage.

Following the ruling, Vonage stock lost about a quarter of its value and share trades were halted for the remainder of the business day. By Monday of this week, Vonage shares had recovered about half of their losses. In a statement prepared by the company, Mike Snyder, Vonage CEO said, “the rumors of Vonage's death have been greatly exaggerated.” Friday's events represented one small step in what is sure to be a long legal battle.

"The fact is we've been preparing for this verdict and the possibility of an injunction for months," Snyder added. "For the market to react the way it did to the recent rulings shows an unfortunate lack of understanding of the judicial/appellate system, a lack of appreciation of Vonage's resourcefulness, or, perhaps, both. Anyone who's counting Vonage out is making a huge mistake."

The statement continued to say that “if, as expected, the judge enters a permanent injunction against Vonage on April 6, 2007, but fails to grant the company's request to stay the injunction pending its appeal, Vonage will immediately file for a stay with the Court of Appeals for the Federal Circuit. In addition, the company reconfirmed its plan to file a notice of appeal to the Circuit Court of Appeals to set aside the jury verdict which was handed down on March 8, 2007.” Vonage said it expected the litigation to take years before a final resolution is reached.

Our analysis: Although we aren’t legal experts, we were surprised that the judge seems ready to cut off 2.2 million Vonage customers who rely on the VoIP provider for phone service. We think that the customers deserve some consideration in this legal battle and that even if Vonage needs to find a work-around to resolve the disputed patent rights, it should be given time to find an technical alternative. While we aren’t convinced that any consumer-VoIP-only service provider can survive in the long term against the triple play provider, we do think that the judge’s ruling harms the opportunity for VoIP to advance as a consumer alternative to legacy phone systems.

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