How to sue Microsoft - and win

TORONTO (CNNMoney.com) -- For a tiny Toronto software manufacturer nestled in the city's grimy garment district, winning a $290 million court judgment against Microsoft is more than simply a long-awaited victory.

"It's a battle cry for the entrepreneur and every small company," trumpets Loudon Owen, i4i's chairman, just hours after learning of the U.S. federal appeals court's decision.

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i4i Chairman Loudon Owen and founder Michael Vulpe

That cry was closer to a whimper two years ago when i4i, a 30-person document collaboration firm, sued Microsoft (MSFT, Fortune 500), claiming it violated a patent with features found in Word 2003 and Word 2007. The offending technology lets users edit XML, a computer programming language that customizes the way a document's contents are interpreted and displayed.

In August 2009, a Texas jury agreed with i4i, ordering Microsoft to pay $290 million in damages and stop selling Word in the U.S. Although Microsoft appealed that decision, a federal appeals court upheld the judgment on Tuesday, issuing an injunction that bars Microsoft from selling versions of Word that contain the offending patent technology. The court's ruling takes effect on Jan. 11, 2010.

i4i's legal victory is being touted as a modern-day tale of David and Goliath. So how does a tiny software outfit in Canada defeat one of the world's best-known corporate behemoths?

Underdogs, take note. Here's a road map for waging war against a giant -- and winning.

Protect your property. Despite applying for a U.S. patent in 1994, i4i wasn't issued the patent -- No. 5,787,449 -- until 1998. Owen says that the time-consuming process is a necessary evil in today's ultra-competitive climate.

"It doesn't come easy, it doesn't come cheap and it's not simple," he says. "But there are very valid remedies [for infringement] if you file your patents and protect your intellectual property upfront."

Prepare your case. When it comes to taking on a company the size and stature of Microsoft, don't expect legal eagles to bang down your door.

Instead, Owen says, "we assembled the [patent infringement] claim, the background and the history in an extraordinarily detailed, analytical way. We prepared the case as best we could independently before meeting with leading counsel and luminaries in the industry."

Don't lose track of your day job. A much-ballyhooed, two-year legal battle against Microsoft can significantly distract employees and completely consume a company's top brass.

To keep operations up and running, Michel Vulpe, i4i's chief technology officer and founder, kept employees informed of the case's progress, "but not mired in details." The company laid plans at the start to guard against letting its legal proceedings encroach on operational activities. That meant frequently reassuring clients about i4i's future and quelling employee concerns.

Pick your battleground. i4i's decision to have its case heard in a U.S. District Court for the Eastern District of Texas -- where neither i4i nor Microsoft has its headquarters -- prompted many legal and tech pundits to cry foul.

"Typically, the court in Tyler, Texas, is one that a lot of companies seek out for high-tech cases," says Tim Hickernell, an analyst with Info-Tech Research Group in London, Canada. "The perception is that folks in Tyler aren't very technically oriented."

In fact, 358 of the 2,866 cases related to copyrights, patents and trademarks were filed in the district in 2008, according to the Administrative Office of the U.S. Courts.

However, the Washington federal appeals court's upholding of the ruling this week "removes any perception that the Tyler jury didn't know what it was doing," says Hickernell.

"It's absolutely a complete and utter vindication of the judgment," says Owen.

Be prepared to pay the price. Two years spent in and out of courts across the U.S. cost i4i $10 million in legal fees. That doesn't account for the legal battle's considerable toll on the company's ability to focus on product development, marketing, and innovation -- activities that are primary drivers for a small business.

"[A lawsuit] is a complete and utter commitment," says Owen. "It's not something to be taken lightly. The deposition process, the cross-examination, the whole series of allegations -- it's a very tough process to go through."

In response to the ruling in favor of i4i, Microsoft said in a statement that it's "considering our legal options, which could include a request for a rehearing by the Federal Circuit Court of Appeals."

In the meantime, Vulpe says, "We're still sitting. We'll be jumping when the Maple Leafs win a game."

Or maybe when a check for $290 million arrives in the mail.