Microsoft's new legal dispute with Immersion Corp. raises an interesting question: What was the deal with the 2003 settlement between the companies? Specifically, why did it include a promise to refund a big chunk of Microsoft's payment in the event that Immersion settled a similar dispute with Sony?

That unusual provision came to light as a result of Microsoft's suit, filed Monday, in which it seeks to recover the money from Immersion, now that the Sony dispute has been resolved. In the comments on the previous post, one person concluded that the 2003 agreement was a pretty shrewd move by Microsoft at the time.

To assess the situation, it helps to consider the circumstances at the time of the Microsoft-Immersion settlement, and what happened in the following years:

The console business: Microsoft back then was still in the early stages of its move into the video-game console market, looking to give the original Xbox a foothold against Sony's dominant PlayStation 2. At the same time, Microsoft's balance of cash and short term investments as of mid-2003 was $49 billion. In the scheme of things, a $26 million settlement (for licensing and an equity stake) was a minor price for the company to pay -- particularly if that money helped Immersion remain a legal thorn in Sony's side.

The potential upside: Depending on the size of an Immersion-Sony settlement, Microsoft stood to receive as little as $15 million back, but the way the provision was structured, there was a chance for more. According to Immersion's recent SEC filings, Microsoft contends that it's owed "at least $27.5 million," based on the agreement Sony and Immersion announced in March. Considering that four years have passed since the Microsoft-Immersion settlement, that's not a great rate of return, but it would essentially let Microsoft recoup its payment.

A willing partner: Why would Immersion agree to such a deal with Microsoft? Whether or not this played into its decision, it's worth looking at Immersion's financial position at the time. The company posted $20.2 million in revenue in the year prior to the Microsoft settlement, and a net loss of $16.5 million. It had $8.7 million in cash. In that way, Microsoft's $26 million payment was a significant infusion at a time when Immersion was involved in a costly legal battle. The next year, it reported "increased legal and professional fees of $4.2 million," related in large part to the Sony litigation.

The bigger target: For Immersion, the PlayStation 2's market dominance translated into larger potential damages in the patent litigation, with licensing fees assessed on a per-unit basis. Refunding Microsoft's money would be a small price for Immersion to pay for a much bigger Sony settlement. Whether the March deal was technically a "settlement" is in dispute, but Immersion's latest quarterly SEC filing shows that the Sony case resulted in more than $100 million in judgments, licensing fees and other payments. From the filing:

Our net income was $122.4 million for the three months ended March 31, 2007 compared to a net loss of $2.9 million for the three months ended March 31, 2006 and was our first profitable quarter as a public company. The increase in net income was primarily due to the litigation conclusion and patent license from Sony Computer Entertainment of $119.9 million and the extinguishment of the liability to Microsoft of $15.0 million.

PS3 rumble technology: Whether or not Microsoft foresaw this, the situation appears to have resulted in a minor competitive benefit: With the Immersion litigation ongoing, Sony didn't include the disputed "rumble" vibration technology in the controllers for the PlayStation 3 console. Sony said it simply didn't consider rumble a "next-generation feature," but gamers were always skeptical of that assertion, and now that Sony's Immersion litigation is over, there are reports that rumble could be added to new PS3 controllers.

Given all that, it will be interesting to hear what people think. Of course, if this was all part of Microsoft's plan, it's not turning out exactly as the company hoped, considering Immersion's contention that the nature of its recent Sony agreement doesn't require it to pay the money Microsoft alleges it's owed. Maybe Immersion will end up being the shrewd one in all of this.

But as of now, it looks like that question will be left to the courts -- unless, of course, the two sides can reach some kind of creative settlement.

After all, they've done it before.