Appeal judge moots 'middle ground' in Vonage patent flap

The black clouds that for the last three months have been hanging over VOIP service provider Vonage parted ever so slightly today, allowing through the tiniest sliver of sunshine as a federal appeals judge raised the possibility of a compromise in its patent war with Verizon.

Those following the dust-up will remember that a lower court jury in March ruled that Vonage's voice over internet protocol (VOIP) services violated three Verizon patents covering technologies for internet-routed phone communications. Vonage was subsequently barred from signing up new customers, a prohibition that raises the very real possibility the VOIP upstart could go out of business.

"Isn't there kind of a middle ground in these cases when the injunction would put someone out of business?" Judge Timothy B. Dyk of the US Court of Appeals for the Federal Circuit, asked a Verizon attorney at a hearing Monday, according to the Associated Press. "Shouldn't there be a consideration? Shouldn't the district court consider allowing time for a workaround as part of the injunction."

Vonage shares ended the day at $3.09, a 1.3 per cent rise, while Verizon's stock fell a fraction of a per cent.

That Vonage and its shareholders are pinning hope on comments as noncommittal as Judge Dyk's demonstrates just how bleak life has grown for the company. In a market with high subscriber churn, customer acquisition is a matter of survival. The lower-court injunction forbidding Vonage from signing up new customers, while on hold pending appeal, would most likely prove fatal if put into effect.

What's more, Vonage, which last year racked up a net loss of $286m on sales of $607m, has been ordered to pay Verizon $58m in damages and an annual royalty of 5.5 per cent of future revenue. Faced with these prospects, its only natural for Vonage to take solace where the company can get it.

Of course, it's always risky to predict judicial outcomes based on the questions of judges. And besides, focusing solely on Dyk's comments fails to take into account the long-shot strategy Vonage's legal generals have devised for victory. Indeed, Vonage never even asked for the sort of compromise Dyk was hypothesizing.

Instead, they argue that the entire jury verdict finding infringement should be invalidated because the trial judge provided flawed instructions to the jury. Specifically, Vonage attorneys say US District Judge Claude Hilton failed to provide the jury with adequate definitions for some of the technical terms contained in the patents.

That could provide Vonage another shot at convincing a jury that the patents - which cover methods for translating between IP addresses and phone numbers and connecting a wireless device to a VOIP network - concern obvious innovations that by definition are not eligible for patent protection.

One reason Vonage appears to be putting most of its appeals eggs in the invalidation basket has to do with a US Supreme Court ruling delivered in April. It simplified the basis under which trial courts can determine what is obvious in a patent. Vonage attorneys were granted permission to incorporate the decision into their appeal even though the Supreme Court ruling was issued after the jury rendered its decision in spat with Verizon.

In light of today's quizzing from Judge Dyk, it would appear Vonage may have been presented with another way out of the impasse. ®