TORONTO, CANNADA: When Microsoft called to discuss a potential sales partnership, small Canadian software company i4i was all ears. Ten years later the startup wishes it had never answered the phone.

The ensuing meeting was the catalyst for a costly patent war over text-manipulation software between i4i (www.i4i.com) and the world's No. 1 software seller that has entangled i4i in endless legal proceedings for the past three years.

"Microsoft sat in meetings with us where we explained how it works and we believed if you've got a patent, a patent is full disclosure and in return you guys have to respect that and that is the law," said i4i co-founder Michel Vulpe, whose software patent was approved by the U.S. Patent and Trademark Office (USPTO) in 1998.

In 2004 Vulpe became suspicious that the software giant was using their technology, without permission, in its popular Word software. In 2007, when Microsoft began touting its XML capabilities, i4i got serious and launched their patent infringement lawsuit.

At the time, Vulpe said the reaction from friends was a mixture of laughter and horror.

"Some friends took up a collection for large white coats with really long sleeves," he joked about the legal battle that has cost i4i more than $15 million and has contributed to a downsizing of the business over the last decade from a peak of about 140 employees to its current staff of around 30. “As part of the process of essentially having phones disappear, we had to try to figure out how we were going to regroup and keep the company going."

Legal Fight Continues

The lengthy, and at times nasty, process culminated with last year's decision by a Texas federal court that Microsoft had willfully infringed the i4i patent and awarded the Toronto-based company $290 million in damages. Microsoft was also ordered to stop selling versions of Word containing the disputed technology.

Microsoft has unsuccessfully tried to appeal the verdict several times; the last one coming a month ago when the USPTO confirmed the validity of the i4i patent. The software giant's only remaining avenue is to appeal to the Supreme Court, but it faced an August 27 end-of-the-day filing deadline.

Microsoft refused to comment on whether it intends to continue the fight, but company spokesman Kevin Kutz previously stated "there still remain important matters of patent law at stake."

Patent lawyer Mark Walters, who works for Seattle-based law firm Frommer Lawrence & Haug LLP, said the chances of the Supreme Court accepting the case were slim.

"It's traditionally very hard to get the Supreme Court interested in patent issues," said Walters, who felt the case held significance for other small companies that want to enforce their patents. "It keeps bigger companies that have the balance of power in their camp from abusing patent rights, because now they may be forced to stop."

Stanford law professor Mark Lemley, a patent lawyer for San Francisco firm Durie Tangri, was not willing to count Microsoft out just yet.

"It's late innings, but it's not quite done,' insisted Lemley, pointing to Microsoft's successful appeals of Lucent's $1.5-billion award and another against AT&T. If Microsoft is able to get this in before the Supreme Court, it may force a settlement. "If i4i offered them a significant discount because they were afraid the court would take this case, maybe it would make sense to settle."

In It For The Long Haul

I4i chairman and CEO Loudon Owen bristled when asked why they don't just settle and move on.

"Why should we settle? Why don't they simply stop selling the technology?" Owen exclaimed during an interview at the Toronto headquarters of his venture firm McLean Watson Capital.

Owen, who first invested in i4i more than 14 years ago, said before larger corporations such as Microsoft, Intel and Cisco began buying up smaller players, entrepreneurs such as Vulpe had a more level playing field.

"In the good old days everybody used to get out and fight and build their companies and they would go to war," he said, adding i4i's technology addresses a market 10 times the size of Microsoft's.

Ironically Vulpe developed a technology that enables applications such as Word and thought one day he might be sitting next to Bill Gates reminiscing about how their innovations changed the world.

"Unfortunately 10 years later we're not talking to each other and it's a very different circumstance for a whole bunch of obvious reasons."