Reel Good: Slot Machine Maker Wins $29 Million Patent Settlement

The lawsuit, first filed in 1994, alleged that WMS had infringed IGT's "Telnaes" patent, used to increase the number of stops on a physical reel. This is the technology that made it possible for slot manufacturers to offer huge jackpots on reel slots, such as the $29 million jackpot currently offered on IGT's "Megabucks."

Under terms of the settlement, WMS will refrain from selling the games that IGT said infringed the Telnaes patent. The patent expires in February 2002.

A slot machine reel can only hold about 20 symbols. Formerly, this allowed slot machines to only offer jackpots of limited size, since the odds of hitting a top jackpot on a three-reel machine were only about one in 8,000.

With Telnaes, IGT could create a "virtual" reel, increasing the number of potential "stops" to thousands, or even millions. IGT currently licenses the technology to other slot manufacturers, and uses it in virtually all of its reel slot machines, which account for about two-thirds of IGT's installed slot machine base.

"Any slot machine with physical spinning reels, if you're going to have exceptionally high jackpot awards, you have to have something to create those very long odds," said IGT spokesman Bob McIvie. "The virtual reel can be as big as you want it to be."

WMS officials couldn't be reached for comment.

The settlement isn't as large a financial blow as WMS expected to absorb initially. In 1996, a federal judge awarded $33 million to IGT in the case -- $10.75 million in actual damages, tripled because WMS was found to have willfully violated the patent. But in July 1999, a federal appeals court threw out that award, saying WMS had violated the patent, but hadn't done so "literally." The Chicago judge was ordered to reconsider the damages award.

"You've got a roll of the dice whether you'll get the $11 million and change, or the $33 million, which would have been treble damages," McIvie said. "Both sides asked, 'Do we really want to play all or nothing, or do we want to split the difference?' Why risk everything, even if we are in the gaming business?"

WMS had previously established a reserve account of $38.5 million after it lost the case in Chicago. Those funds have already been written off by the company.

But since the settlement is far below the amount already written off, WMS will recognize pre-tax income of $13.2 million for this quarter, the difference between the settlement and the amount of the reserve.

Stuart Linde, analyst with Lehman Bros., called the settlement a win for WMS, since investors had expected a much larger financial hit. Besides, he pointed out, WMS is now primarily in the business of producing video slots -- such as "Monopoly" -- that don't need the Telnaes technology.

"(Telnaes) is old technology," Linde said. "The question now is, who will be successful in the video market?"

A far more significant threat to WMS, Linde said, is new litigation brought against WMS and three other manufacturers in November by IGT. In that case, IGT claims the companies are violating a patent for use of a "touch screen" in video slots.

"The thing that's been overhanging the stock isn't the (Telnaes) lawsuit, but the video lawsuit," Linde said. "That's the more significant one. But, in my opinion, WMS will be successful on that case."

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