Legal brilliancy, Microsoft sues Immersion

Redmond (WA) – The lawyers at Microsoft must be patting themselves on the back for their recently filed breach of contract lawsuit against Immersion. Microsoft wants millions of dollars that Immersion won from its lawsuit against Sony. Back in 2003, Immersion sued both Sony and Microsoft and settled with Microsoft first. Now it looks like that early settlement is coming back to haunt Immersion in a big way.

You may remember Immersion for its force-feedback patent lawsuit that was clearly aimed at the game console controllers made by both Microsoft and Sony. Back on February 2002, Immersion sued both companies for patent infringement. Microsoft settled on July 25th 2003 and paid $26 million for rights to use the technology.

But it doesn’t end there, Microsoft also loaned Immersion $9 million dollars through the purchase of convertible bonds and also bought a 10% stake in the company. Back in 2003, Immersion shares were trading in the $2/share range, which put the value of teh 10% stake at just under $1.3 million. Today, the stock is trading at just under $13/share.

Immersion also entered into a sublicense agreement and promised to pay Microsoft $15 million dollars if Immersion won up to $100 million dollars from the Sony lawsuit. Microsoft would get 25% for amounts from $100 to $150 million and 17.5% for everything above $150 million.

On September 2004, Sony settled with Immersion for $22.5 million which is in addition to the $90.8 million ordered by the court. This puts the total won by Immersion against Sony at approximately $113 million. Immersion contends that it doesn’t have to pay Microsoft because it entered into a “business agreement” with Sony rather than a settlement.

According to Immersion’s Form 10Q filing, the company acknowledged that Microsoft lawyers sent an initial demand on May 1st 2007 for at least $27.5 million. So by settling early with Microsoft, Immersion made a deal with the devil. Sure Microsoft paid $26 million up front, but it now wants to win it all back. Plus don’t forget that 10% equity stake that is now at approximately $13/share and worth about $33 million.

If you put it all together, Microsoft will effectively double its money and still have rights to the technology if it wins this lawsuit.

Immersion says it will “vigorously” defend the lawsuit.

Update :

We’ve been given some extra information about the Microsoft’s equity stake in the company. According to Immersion, Microsoft owned 2,185,792 shares of Immersion common stock on April 2, 2004. Immersion believes Microsoft has since sold most or all of those shares because Microsoft has not filed a Form 13G/A with the SEC, which is required when someone owns more than 5% of a company’s common stock.