Microsoft Pays $200 Million to Settle Patent Tiff

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Microsoft and VirnetX announced Monday that they have reached an out-of-court settlement regarding the software giant’s use of two of the smaller firm’s patents.

Under the settlement, VirnetX Holding Corporation (AMEX: VHC) has agreed to drop a pair of lawsuits for patent infringement after Microsoft (NASDAQ: MSFT) agreed to pay a one-time fee of $200 million, and take out licenses for continued use of VirnetX’s patents for virtual private network (VPN) technology, the companies said in a joint statement.

Microsoft in March lost a lawsuit in federal court regarding the two patentsand their use in Windows XP, Windows Vista, Live Communication Server, Office Communication Server, Windows Messenger, Live Meeting Console and Microsoft Office Communicator.

The jury found Microsoft guilty of “willfully” infringing Scotts Valley, Calif.-based VirnetX’s patents and recommended a damage award of $105.75 million. So why settle for $200 million — almost double the original recommendation?

Within a day or two after the verdict in the original lawsuit, VirnetX sued Microsoft for a second case of infringement regarding the same two patents— but directed against Microsoft’s Windows 7 and Windows Server 2008 operating systems, which hadn’t been officially released by the time the first suit was filed in 2007.

“We are pleased to work with VirnetX to bring these cases to a successful resolution through this settlement … [and] we look forward to VirnetX’s continued progress as it develops its technologies,” Tom Burt, Microsoft corporate vice president and deputy general counsel, said in the joint statement.

Neither company disclosed any details of the deal beyond those contained in their brief statement. “We’re kind of in a quiet mode,” a VirnetX spokesperson told InternetNews.com.

The settlement in the VirnetX case comes less than a week after the U.S. Patent and Trademark Office (USPTO) declined to invalidate a patent held by another small development firm — tiny Toronto-based i4i.

Microsoft had already lost its request to have its appeal in the i4i caseheard by the entire appeals court, leaving it with few options, such as launching an appeal to the U.S. Supreme Court, which the company has said it may do, or, as with Monday’s deal, settling out of court.

The lower court jury in the i4i case recommended a total of approximately $290 million in damages and penalties.

Both the VirnetX and i4i cases were filed in U.S. District Court for the Eastern District of Texas, Tyler Division, a court with a history of siding with plaintiffs in patent disputes.

The law firm McKool Smith of Dallas represented both companies in their disputes with Microsoft.

Stuart J. Johnston is a contributing writer at InternetNews.com, the news service of Internet.com, the network for technology professionals.