The agreement represents a coup for Immersion, a San Jose-based company with just $20 million in revenue after a decade in business.
Microsoft's $26 million payment includes $6 million earmarked for a roughly 10 percent stake in Immersion. Immersion also has a 48-month option to require Redmond, Wash.-based Microsoft to buy $9 million of convertible debt.
Monday's investment gives Microsoft stock valued at $2.745 per share, a 48 percent premium to Immersion's Monday closing price of $1.85 on the Nasdaq Stock Market.Immersion disclosed the Microsoft settlement after the stock market close. The company's shares more than doubled in extended trading, surging by $2.90.
Microsoft had been sparring with Immersion since February 2002 when the tiny company filed a federal lawsuit alleging the Xbox maker had been infringing on a patent for interactive technology that simulates the sensation of touch.
Immersion continues to pursue a similar suit against Sony, the maker of the PlayStation 2 video game console, alleging violations on its patents covering so-called "haptic" technology. Haptics enables video game players to feel like they are shooting a laser gun or picking the lock on a safe in certain sequences.
Under the settlement, Microsoft may start using Immersion's touch technology on a broader range of products, including handheld computers and computer mice used to navigate the Windows operating system.
Microsoft didn't acknowledge any wrongdoing in resolving Immersion's lawsuit, Microsoft spokesman Jim Desler said.
Microsoft still faces more than 30 other patent-infringement suits over everything from online video game software to digital rights management software.
Immersion is hoping the broad reach of Microsoft's products will help bring its haptic technology to the mass market. The settlement is structured to require Microsoft to pay Immersion for additional help as it introduces touch technology into more products, said Immersion chairman Victor Viegas. "We gave Microsoft a permit to fish on Immersion's river, but we still know where the fish tend to hang out and how to catch them," Viegas said in an interview Monday.
Immersion's haptic technology also is being sold to automakers and doctors.
Even if the Microsoft alliance doesn't spur more sales, the settlement gives Immersion more leverage in its expensive fight with Sony. The stakes in the Sony case, scheduled for an April 2004 trial, are potentially much higher because the PlayStation 2 system is used far more widely than the Xbox.
Financing the Sony case threatened to become a serious strain on Immersion, which had just $3 million in cash as of June 30. The company's legal fees in June totaled roughly $500,000, Viegas said.
The 196 patents that Immersion holds rank among the most valuable assets in a company that has consistently lost money, The company has accumulated losses of $84 million, including a $4.4 million setback in its most recent quarter ended in June.