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i4i founder Michael Vulpe (left) and chairman Loudon Owen hold the original patent cited in its lawsuit against Microsoft at the company's headquarters in Toronto on June 9, 2011. (Frank Gunn)
i4i founder Michael Vulpe (left) and chairman Loudon Owen hold the original patent cited in its lawsuit against Microsoft at the company's headquarters in Toronto on June 9, 2011. (Frank Gunn)

The new standard for justice in patent law is i4i Add to ...

A small technology company that began life in a second-floor office next to a shiatsu massage parlour in downtown Toronto is basking in the glory of a high-profile victory in a four-year patent dispute with software giant Microsoft Corp.

The case, which ended Thursday with a final verdict from the top court in the United States, isn’t notable only for its David-versus-Goliath nature, and the nearly $300-million in damages that comes with it, but also because of how it reinforces the ability of small patent-holders to battle industry giants.

The U.S. Supreme Court ruled in favour of i4i in a patent infringement case filed against Microsoft in 2007 by the company run by founder Michel Vulpe and chairman Loudon Owen. The case, related to technology that deals with ways of representing and storing meta-data, or information about documents and files, had worked its way up the appeals ladder, followed widely because of the potential ramifications for patents.

The court ruling affirms previous court decisions, and paves the way for i4i to collect the almost $300-millionin damages. It also keeps in place the current patent system in the U.S., where those looking to have a patent declared invalid must present “clear and convincing” proof as to why it should be tossed out.

The case has significant ramifications for the technology sector, said patent lawyer Barry Sookman of McCarthy Tetrault in Toronto. The decision affirms the rights of patent holders, both big and small, and will affect everyone from small companies to giants such as Apple Inc., as well as companies known as “patent trolls,” which buy up various patents to assert them against large corporations, Mr. Sookman said.

“This is going to make it more difficult to second guess the patent office’s decision to grant a patent,” said Mr. Sookman, one of Canada’s top technology lawyers. “The court refused to overturn a standard that’s been enforced in law for decades, and that was a standard that basically presumes the validity of patents issued by the patent office and requires a very high standard of proof, clear and convincing proof … It’s a very pro-patentee decision.”

Indeed, Mr. Sookman said the case backs up the power of small patent holders such as i4i. “It shows that even a small Canadian company can win against an international behemoth,” he added, noting that the decision may also act as a further incentive for companies to patent their technologies.

The chairman of i4i, Loudon Owen, said it was “extremely gratifying” that the court’s decision was unanimous, adding that “it has also become one of the most important business-law cases decided by the Supreme Court in decades.”

The men behind i4i were an interesting tag team to begin with – a computer programmer and an executive with an affinity for boxing. Together, they built i4i and battled Microsoft all the way to the top.

The company got its start in 1993 when Mr. Vulpe moved into an office in Toronto next to a Shiatsu massage clinic where his girlfriend worked. Mr. Vulpe, who toiled on software solutions for corporate clients with vast databases and worked with his dog Jack by his side, eventually tired of the task at hand. He decided to make one piece of software that would do the database managing work for him.

In 1994, he applied to patent what he came up with, and partnered with Loudon Owen, the venture capitalist co-founder of McLean Watson Capital, to develop the software and take it to market. At that point, Mr. Owen had just returned from the United Kingdom, where he worked for a software company that he and a partner had seeded in the late 1980s and then sold – to Microsoft.

Mr. Owen has an intriguing past: He comes from a family that founded a commodities business in Indonesia in 1820, trading in tea and spices, among other things. He also loves to box, once punching his way to become Ontario’s intercollegiate boxing champion.

The company grew in the years before the tech bubble, once reaching around 100 employees, but shrunk back down once the bubble popped. Sales were lagging and by 2004 clients were telling Mr. Vulpe and Mr. Owen that Microsoft was offering a similar software solution. Since Microsoft’s programming code wasn’t public – and still wasn’t during the trial – the pair took Microsoft to court.

In an affidavit in a U.S. court in 2009, Mr. Owen said that at the time Michael Vulpe owned over 9 per cent of i4i LP, McLean Watson owned over 51 per cent, Northwater Capital Management owned just over 33 per cent and Ontario Teachers’ Pension Plan owned just over 2 per cent.

Mr. Owen sought to play down the impact of the victory on i4i’s staff, saying they were focused on moving the company forward.

“They’ve got a lot of work to do,” he said. “They said, great, congratulations, and went back to work.”

Mr. Vulpe added that it’s “very satisfying” to have the legal battle virtually finished and no longer looming over i4i’s dealings with potential customers. “We have a company to run, and this has been very distracting,” he said.

Microsoft had essentially argued that the “clear and convincing” standard that must be met in order to declare a patent invalid was too high, and only worked to stifle innovation by making it difficult to toss out undeserving patents. Had the Supreme Court sided with Microsoft, it is very likely the U.S. patent system would have undergone a major shift, making it much easier to invalidate patents. However, the Court disagreed with the company, saying the courts are able to keep the current patent law in check.

“By preventing the ‘clear and convincing’ standard from roaming outside its fact-related reservation, courts can increase the likelihood that discoveries or inventions will not receive legal protection where none is due,” the Justices wrote.

The case began in March, 2007, when i4i sued Microsoft for patent infringement related to a technology used in Microsoft’s Word software. Two years later, a U.S. federal court awarded i4i about $290-million (U.S.) in damages. In addition, the court prohibited Microsoft from shipping versions of its Word software containing the code in question as of January, 2010.

Microsoft appealed the ruling twice, but lost both times. The U.S. patent office also refused to re-examine the patent. The Supreme Court, which agreed in November to hear the case, was Microsoft’s last hope of a court victory. A number of major third parties filed briefs in support of the companies – Google, Apple and other tech firms sided with Microsoft, while a number of venture capital firms, as well as the U.S. government itself, sided with i4i.

In a statement, Microsoft spokesman Kevin Kutz said the company would not stop advocating for change in U.S. patent law, despite losing the case.

“This case raised an important issue of law which the Supreme Court itself had questioned in an earlier decision and which we believed needed resolution,” he said. “While the outcome is not what we had hoped for, we will continue to advocate for changes to the law that will prevent abuse of the patent system and protect inventors who hold patents representing true innovation.”

But i4i intends to advocate for change as well, albeit in a different direction. Mr. Vulpe said the law needs to punch patent infringers with penalties greater than what they would have had to pay had they simply licensed the technology in the first place.

“That’s the next hurdle in protecting patent-holders’ rights,” he said. “And I’ll be turning some of my time to addressing that issue.”

Microsoft (MSFT)

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