Nov. 15 (Bloomberg) -- Vonage Holdings Corp., the unprofitable Internet phone service provider, must pay $120 million to end a patent lawsuit won by Verizon Communications Inc. after a U.S. appeals court refused to reconsider the case.

Vonage settled the infringement suit on Oct. 25 after Verizon won both a jury verdict and an appeal in the case. The accord left open the amount to be paid until the appeals court decided whether to grant Vonage's request for reconsideration.

Legal costs have eaten into Vonage's cash flow and may increase its risk of bankruptcy. The Holmdel, New Jersey-based company said yesterday that it may not have enough money to pay $253.5 million in debt due as early as December 2008. Vonage, which generated cash of $22.5 million in the third quarter, will try to restructure the debt.

``This ruling against Vonage and substantial payments to Verizon doesn't help the situation,'' said Clay Moran, an analyst at Stanford Group Co. in Boca Raton, Florida. He recommends investors sell their shares. ``They have a stock that's overvalued, given that there's a funding gap and there are longer-term concerns about its competitive position.''

The company is worth $1.50 a share, Moran said. Vonage fell 9 cents, or 4.1 percent, to $2.13 at 4:02 p.m. in New York Stock Exchange composite trading. The shares have dropped 69 percent this year.

Cutting Expenses

Vonage fired 10 percent of its workforce this year and trimmed its advertising budget. The company's previous chief executive officer, Mike Snyder, left the company, along with three other top managers. Jeffrey Citron took over as interim CEO in April.

Vonage had asked the U.S. Court of Appeals for the Federal Circuit to review its ruling, or have the full 12-judge court reconsider the Sept. 26 decision in favor of Verizon. That request was denied today in an order posted on the court's Web site.

``We were not surprised, but disappointed that the court denied our request for a rehearing of the case,'' Vonage spokesman Charlie Sahner said in an e-mailed statement. ``We are pleased to continue putting litigation behind us.''

Royalty Fees

Vonage wanted the court to review a decision that upheld most of a March verdict, which found that the company had violated two Verizon patents. The jury from that trial awarded Verizon a 5.5 percent royalty on future income. The amount owed to Verizon had grown to about $88 million when Vonage announced the settlement.

Under the terms of the settlement, the $120 million payment would have been cut to $80 million had the appeals court in Washington agreed to review the decision. Holmdel, New Jersey- based Vonage must pay $117.5 million to Verizon and give $2.5 million to charity.

Vonage, which first sold shares to the public for $17 each in May 2006, also faces suits from investors. They say the company's prospectus misrepresented or omitted information about its products and the experience of some managers.

The plaintiffs agreed to file a joint complaint with the District of New Jersey against the company by Nov. 19. Vonage will have to respond to the complaint by Jan. 18, the company said in a regulatory filing yesterday.

Vonage's shares have fallen 87 percent since the IPO.

The patent case is Verizon Services Corp. v. Vonage Holdings Corp., 07-1240, 07-1251 and 07-1274, U.S. Court of Appeals for the Federal Circuit (Washington). The lower court case is Verizon Services Corp. v. Vonage Holdings, 06-00682, U.S. District Court, Eastern District of Virginia (Alexandria).

To contact the reporters on this story: Jeff St.Onge in Washington at jstonge@bloomberg.net; Amy Thomson in New York at athomson6@bloomberg.net

Last Updated: November 15, 2007 16:08 EST