(FORTUNE Small Business) – As "eureka!" moments go, the precise instant of Jay Sorensen's Big Idea is closer to a Sad Sack comic than an Edison-style epiphany. One morning in the spring of 1991, Sorensen dropped his daughter off at school and then headed to a restaurant drive-through, where he promptly dumped 12 ounces of scalding coffee into his lap. The thin paper cup was way too hot to hold. He wasn't burned, but that kind of thing had happened to him before, and, after the usual stream of curses and a wad of sodden napkins, Sorensen set out to find a solution.

That quest led to a lot of experimenting and, ultimately, one very successful product: the Java Jacket, an insulating cardboard sleeve that wraps around a takeout coffee cup and allows people to drink their morning brew without risking a trip to the burn center. Admittedly, that invention may not put Sorensen in the same league as Louis Pasteur or Jonas Salk, but it should gain him some recognition among hard-core coffee hounds for finally separating pain from pleasure. It has also made him a successful business owner. Sorensen launched Java Jacket Inc. on less than $20,000 in 1993; this year his four-person operation (including wife Colleen) will take in revenue of nearly $8 million and crank out more than 250 million sleeves. Equally impressive, Sorensen has successfully fought off Starbucks. The coffee colossus claimed early interest in his product, strung him along for months, and then turned him away. Soon after, Starbucks tried to infringe on his patent with its own sleeve, but the Java Jacket remained the category leader.

It's the kind of thing that seems like it can't happen anymore--a moment of insight leads to an oddball product that becomes a runaway success. Given how much the business world is dominated by massive corporations and MBA-wielding market researchers, how did someone like Sorensen find such a specific niche to conquer? Not through the usual methods, like years of industry experience or professional connections or a bulletproof business plan. No, in Sorensen's case--and he'd be the first to admit this--it was more like dumb luck.

Like many success stories, this one begins with failure. In the 1980s Sorensen had been laboring quite happily in the family business, a service station in Portland, Ore., until Shell Oil abruptly terminated the lease. That bumped Sorensen out of a steady job and into selling real estate, a pursuit that sorely tested his drive, or lack thereof. "I was bad at it," he concedes. "I was pretty pathetic, really." Designing a new coffee cup seemed noble by comparison.

The Java Jacket began with the makings of a rainy-day crafts project--Sorensen at his kitchen table with corrugated paper and scissors, trying to make an insulated cup. He eventually put a prototype together, but realized that insulated cups wouldn't stack easily and thus couldn't be shipped efficiently. That led him to design a folding cardboard sleeve--like producing clothes for the doll rather than the doll itself. Sorensen made the sleeve but found that regular cardboard didn't insulate well. To that end, he sought inspiration from higher sources. "I started looking at toilet paper and paper towels," he recalls.

What made those products intriguing to Sorensen was their embossed look and feel. To give the Java Jacket those qualities, he paid a "converter"--a manufacturer that turns raw paper into customized products--$15,000 to make him 100,000 sleeves with a waffled, embossed texture. Now all Sorensen had to do was find somebody to buy them.

In the spring of 1993 he did the logical thing, knocking on the door at Starbucks. "They liked it. They wanted an exclusive," he says. Initially that was fine with him. "I was broke. I needed to make a buck." But the partnership never happened. For eight months, Sorensen says, the company repeatedly asked for changes and then tried to play hardball on price. He refused, and Starbucks dropped him with no deal.

Bedraggled and nearly impoverished, Sor-ensen then approached the opposition: Coffee People, a Portland chain founded in the anti-Starbucks mold. At Coffee People, Sorensen met the founder, who took one look at the Java Jacket and said, "I'll take 10,000." The next week Sorensen spent his last $1,000 on a booth at a trade show, Coffee Fest Seattle, where he received 100 orders. Six months later Java Jacket was in the black to stay.

all along, Sorensen had been interested in protecting his idea. He filed for a patent in 1994, and the following year he was granted patent No. 5425497. That proved timely, as soon after--big surprise--Starbucks began test-marketing its own version of a coffee sleeve. "It was a direct infringement of ours," says Sorensen, no longer speaking like a gas pump jockey but like a man suddenly able to engage legal counsel. "We filed a cease-and-desist order." Starbucks complied and then designed its way around Sorensen's patents, eventually coming up with a similarly alliterative product, the Coffee Clutch (which is also patented). A Starbucks spokeswoman acknowledges "some conversations" with Sorensen but says, "We were also researching other options. In the end we elected to develop our own sleeve."

The Java Jacket and the Coffee Clutch look similar but are made from different materials. The Coffee Clutch uses corrugated paper, while the Java Jacket uses chipboard (paper containing wood chips) that has been run through an embosser to give it better insulating value. In fact, nine of the 16 claims on Sor-ensen's patent relate to the waffling. What requires so much elaboration? "Spacing. Depth. All sorts of things," Sorensen offers, then fesses up. "Basically the attorneys write a bunch of b.s. and hope they bore the patent examiner to death and he'll approve it."

Meanwhile, the origins of the Coffee Clutch are also a bit vague. Starbucks developed it in concert with LBP Manufacturing, a subsidiary of Chicago-based Terrace Paper. Matt Cook, LBP's president, says he approached Starbucks after it started running afoul of the environmental police over using two cups ("double cupping" in industry lingo). Cook also claims that the Java Jacket and the Coffee Clutch evolved independently during the same time frame. Sorensen scoffs at that account. "It was a minimum of three years after we talked to Starbucks before the LBP product was used by them," he says. (For more on patent disputes, see "Small Business Rip-Off" on page 50.)

Cook and Sorensen profess to know little of each other, and it shows in their penchant for backhanded compliments. "He [Sorensen] has gone at this more entrepreneurially, while we've done it from a manufacturing standpoint," says Cook. Translation: We're the pros; he's the flake from Oregon. LBP will not disclose numbers other than to say that "billions" of Coffee Clutches have been sold, with billions more on the way.

Verbal sparring aside, the two say they do their best to stay out of each other's way, and to date they appear to have skillfully carved up a hot, recession-resistant market. Sorensen's customers include more specialty outlets, while LBP focuses on larger chains and convenience stores. (The Coffee Clutch gets licensed out to Starbucks and other companies.) Both men seem happy with what they have. Sorensen thinks every Coffee Clutch used actually reinforces his brand identity. Cook, just back from a week in Japan, talks enthusiastically about how gourmet coffee is now growing globally, and he's happy to serve as camp follower to Starbucks on its march toward world domination.

What is really brilliant about the idea of a coffee sleeve, though--and Sorensen does seem to deserve full credit for the idea--is not just its trivial utility but its microeconomic elegance. It's a near-perfect product. Consider: The main alternative to the Java Jacket is a second paper cup, which costs the retailer twice what a jacket costs--roughly 6 cents vs. 3 cents. Moreover, the second cup exudes a let-them-suck-ozone attitude when it comes to the environment. "Double cupping" promises as much PR upside as Joe Camel. On top of that, only about 35% of drinks at a typical coffee shop go out the door too hot to handle. The balance are either iced drinks or lattes, "which cool off much faster," says Sorensen. Thus, the jacket lets retailers insulate only those cups that truly threaten bodily harm.

Sorensen declines to disclose margins or profits, but allows that a probable downside to this article will be 20 unsolicited calls from brokers seeking to mismanage his money. All in all, it's a good life. He has two manufacturers producing jackets. He has major national food distributors like Sysco and Alliant Food Services trucking them around to 3,000 specialty coffee stores in the U.S. and Europe. And he now gets licensing revenue from an ad agency called Britevision Media, which puts corporate logos on his sleeves (see box). So what exactly does Jay Sorensen worry about? "Not much, really. I guess just taking care of my customers," he says.

In hindsight, that errant cup of coffee tumbling into Sorensen's lap seems like one part of a larger karmic puzzle. It was perfectly timed, after all, with the rise of Starbucks, which has turned gourmet coffee drinking into a near-religious rite. It also coincided with Sorensen's career quandary. If Shell hadn't yanked the lease on that service station, he says, he'd probably still be happily pumping gas. And if he weren't so lousy at selling houses, he'd probably still be doing that. Instead, he was bounced out of his rut because destiny intervened in the form of a hot cup of coffee and a cool little product. When Sorensen himself thinks about it, he can't figure out what happened. "I just got lucky," he says. "Everything broke right for me at the right time."