Tegic, developer of the T9 input system and an AOL Time Warner subsidary, has prevailed in a patent infringement suit it brought against Zi Corporation.

Zi had been selling a rival input system for mobile devices – Ezitext – which was found to have infringed two of Tegic’s patents. Ezitext has since been withdrawn from the market and replaced with a new product. A court decided in February 2002 that the new version did not infringe Tegic’s patents, but the latest judgement, related to the old software, was unanimously in Tegic’s favour. The court has awarded damages of $9m to Tegic, which the company has asked be tripled to $27m under US punative damages rules for cases of wilfull infringement. Zi is to appeal the verdict and will continue selling the new software. Tegic is the market leader in text input systems for mobile telephones.

“We are pleased with the jury’s verdict and concur with the conclusions they reached,” Tegic said in a statement. “Tegic has been an innovator in the wireless messaging space for over seven years. The verdict validates our intellectual property rights and represents an important milestone in protecting and enforcing Tegic’s worldwide intellectual property rights.” Zi Corporation Chairman and Chief Executive Officer Michael E. Lobsinger, commented: “The arguments by both sides in this trial hinged on highly technical issues related to software. We are confident that our products do not in fact infringe on any valid patents, and believe that we will prevail on appeal.”

Insight

If Zi’s appeal fails to either overturn the verdict or reduce the amount of damages awarded, this could have serious implications for the company. Zi had about USD 14.5m in cash on its balance sheet at June 2002. It also lost USD 4.3m in the quarter. If it continues to burn cash at that rate, it will struggle to meet damages of USD 9m, let alone the USD 27m Tegic is pursuing.

The problems appears to be confined to Zi’s retired product line and it is diversifying away from the text input business, but that will make little difference if it can’t survive long enough to establish a new direction. It could seek out an acquisition partner to shore up its finances, but few companies would be willing to take on this sort of liability. Investors are rightly fleeing the stock.