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Two legal defeats in two days have dealt Vonage Holdings Corp. a blow that analysts said may force the Internet telephone company into bankruptcy. The U.S. Court of Appeals for the Federal Circuit in Washington on Wednesday upheld a verdict that Holmdel, N.J.-based Vonage infringed patents held by Verizon Communications Inc. The ruling comes less than a day after a federal jury late Tuesday decided that Vonage violated six patents owned by Sprint Nextel Corp. and that it must pay $69.5 million in damages, plus 5.5% in future royalties. The legal defeats punished Vonage shares, which closed at 96 cents, down more than 26% on the day after falling 13% on Tuesday, compounding questions about its prospects. "I think [Vonage's] debt holders are very concerned, and Vonage faces a potential liquidity crisis," said Clayton Moran, an analyst with the Stanford Group Co., an investment bank in Boca Raton, Fla. "From the big picture we see a company with a business model that was unattractive to begin with, continued to disappoint with its operating metrics and has lost several major legal battles. We think it's unlikely this negative momentum will turn." Verizon's lawsuit, which the New York telecommunications giant filed in 2006, accused Vonage of infringing five patents. In March, a district court found that Vonage violated three of those patents and ordered the company, which provides so-called voice-over-Internet protocol services, to pay a 5.5% royalty and $58 million in damages. It also enjoined Vonage from adding new customers. Vonage appealed that decision to the federal appellate court, which ruled Wednesday that Vonage infringed two of Verizon's patents, remanding the third for reconsideration. Although the damages award was also sent back to the lower court for recalculation, analysts estimated that the penalty will amount to roughly $40 million. Vonage has placed $66 million in escrow to pay for those damages and royalty payments. The appeals court decision also bars Vonage from adding new customers. To overturn that decision, the company would require an emergency stay from the U.S. Supreme Court. Alternatively, Vonage could seek an alternative way to connect calls over its network without infringing Verizon's patents. Vonage said in August that it has developed alternative technologies, known as workarounds, to the disputed patents. In a statement on Wednesday the company said it does not expect the latest court ruling to affect its service. "In light of the workaround technology that Vonage has developed and deployed, today's decision is not expected to have an adverse impact on Vonage's business ... . " Rebecca Arbogast, an analyst with investment bank Stifel Nicolaus & Co., said Verizon will likely scrutinize Vonage's workarounds to see if the company is continuing to infringe its patents. If so, Verizon would likely bring Vonage back to court, where it could face contempt charges, she said. Sprint Nextel's infringement suit against Vonage is following a similar track as the Verizon case. Sprint Nextel filed the suit in 2005 in the U.S. District Court in Kansas City, Kan. On Tuesday a federal jury found Vonage guilty of infringement and ordered Vonage to pay damages and a 5% royalty for use of the patents. Matt Sullivan, a spokesman for Sprint Nextel, said the Reston, Va., company plans to seek an injunction against Vonage to stop it from using its patents. In addition to legal woes, Vonage continues to struggle financially. The company spends far more thank it makes, relying on its ability to continuously add new customers to replace the ones it loses each month. Vonage's monthly customer churn rate is 2.5%, which means it loses more than a quarter of its subscribers each year. That would make an injunction against enlisting new customers a fatal blow for the company. As of the end of June, Vonage had $344 million in cash. After paying for damages in the Sprint case, it would have about $274 million. The company also has $253 million in convertible debt that can come due in December 2008. "We believe Tuesday's ruling increases Vonage's risk of bankruptcy," Mike McCormack, a research analyst with Bear Stearns & Co., said in a research note issued on Tuesday. "Following patent defeats to Verizon and Sprint the company, pending appeal or successful workarounds, must pay over 10% of revenue as royalties for using infringed patents."  Deal Video
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The only winners here are the lawyers because VoIP is a great offer that delivers real value. Pity since it is likely that Vonage will hemorrhage due to the FUD factor (fear, uncertainty and doubt). And worse, it will give a black eye to all of the other good providers like Net2Phone and Lingo.
I have Net2Phone and I like them because they seem to have focused primarily on developing technology with a great set of features - rather than throw money at campaigns. After more than 10 years, they are not the Johnny come lately so at least I feel safe with them.