The once mighty Palm Inc. has not had a wonderful year. From a position where it was the undisputed leader in the hand held computer sector the company has seen organisations employing Microsoft's PocketPC software gain considerable market share at the expense of Palm. To round off 2001, the company has now lost a patent infringement case in the US courts that could cost Palm millions of dollars.

Back in the mists of time, in 1997 to be exact, Xerox Corp earned a patent covering its handwriting recognition software, Unistroke. Unistroke allows users to write characters with just a single stroke of the stylus, essentially the same feature that the Graffiti software brings to Palm devices. Shortly after the granting of the patent Xerox filed suit against Palm arguing that Palm's handwriting recognition software, Graffiti, infringed the Unistroke patent. Ever since 1997 the case has been bouncing around the legal system until last week when the US District Court ruled that Xerox's patent was valid and enforceable.

Palm immediately responded by stating that it will appeal against the decision. Palm's Chief Executive, Eric Benhamou, has been quoted as saying Palm will defend itself vigorously and that the company does not intend to let the decision affect the way Palm does business. However, if the appeal should fail Palm could potentially be facing a payout of millions of dollars at a time when economic pressures are giving all IT suppliers a very bad time.

Indeed, were Palm to lose the company might be forced to remove Graffiti from its products or to pay Xerox a license fee. Equally, the courts could impose a large financial penalty on the company, as Graffiti software has been included on the millions of hand held devices sold over the past four years. If the court decides that Palm wilfully infringed the patent then Palm could be forced to pay an even larger sum of money to Xerox. 3Com, who owned Palm until last year, believes that it will not be faced with any damages as it maintains that when 3Com spun off Palm it would be insulated from any consequences of the ongoing court case.

In any event, Palm now finds itself in a very awkward position. It needs to carry on the fight against Xerox at a time when it is under severe pressure. Its financial results have not been particularly good over the last year and the company has already laid off hundreds of workers. If the appeal is lost Palm's costs will increase and it will have to fund a major payout. At the same time, PocketPC devices will continue to be aggressively marketed by the likes of Compaq, Hewlett Packard and Microsoft. Further pressure will come from the next generation of mobile phones that will begin to offer more and more of the functionality traditionally found in Palm's devices. It is clear that Palm is facing a very tough new year.