There’s a rule at Research In Motion Ltd., maker of the habit-forming BlackBerry hand-held e-mail device. Anyone who gets caught checking the stock price at work has to buy doughnuts for every employee in the company.

Research In Motion’s two 44-year-old chief executive officers issued the decree in 1997, just after the company sold shares to the public. Mike Lazaridis, who founded RIM in his senior year at the University of Waterloo, and Jim Balsillie, a triathlete who looks to Roman emperor Marcus Aurelius for inspiration, wanted to keep their 180 employees focused on long-term prosperity, marketing chief Mark Guibert says.

In 2002, one worker got nailed and had to buy 1,000 doughnuts. Today, the penalty would be more than 3,000—one for each employee in Research In Motion’s 12 buildings in Waterloo, a Canadian university town settled by Mennonites in the 1800s on the plains west of Toronto.

Workers have become either disciplined or stealthy. No one had to make a doughnut run on March 16, when shares of Research In Motion, popularly known as RIM, rocketed $11.87, or 18 percent, to $78.96 in Nasdaq Stock Market composite trading. RIM ended a three-year battle that day by agreeing to pay $450 million to NTP Inc., an Arlington, Virginia–based company that owns five key patents on a method for sending e-mail over the airwaves.

Coughing up $450 million doesn’t sound good until you consider the alternatives: paying NTP a royalty on every BlackBerry sold in the U.S. or having a judge halt sales in RIM’s biggest market, causing withdrawal among hundreds of thousands of American “CrackBerry” addicts.

Amit Ramani, 31, a real estate consultant in Charlotte, North Carolina, used his BlackBerry so much in the first six months that he got tendinitis in his wrist. Joe Estes, 45, an investment banker at Raymond James & Associates Inc. in Atlanta, says he sends as many as 200 BlackBerry e-mails a day. His wife won’t let him bring it in the bedroom. “I used to use it all night long,” Estes says.

Money managers, Wall Street traders and corporate lawyers are especially afflicted. Trains to New York City from Connecticut are filled with devotees in the “BlackBerry prayer” position: head down, hands clasped, humbs working away on the tiny keys, eyes fixed on the miniature screen.

Politicians are big fans. Karl Rove, deputy chief of staff to President George W. Bush, is often “chipmunking” as he steps off of Air Force One. Fed up with chronic messaging in Parliament, Michael Martin, speaker of the U.K. House of Commons, declared in February that any member using a BlackBerry or other e-mail device may be removed.

Even with the patent settlement and legions of enthusiasts, RIM shares remain below the record $93.96 set on Nov. 2. On April 12, they traded at $75.40. The reason is competition. Microsoft Corp., the world’s biggest software maker, is improving its system for delivering e-mail to hand-held computers such as Hewlett-Packard Co.’s iPaq.

Startups see an opportunity, too. Good Technology Inc., a Santa Clara, California–based company backed by venture capital firm Kleiner Perkins Caufield & Byers, has sold its wireless e-mail program to more than 5,000 companies. Among them are Bentonville, Arkansas–based Wal-Mart Stores Inc., the world’s biggest retailer, and Seattle-based Starbucks Corp., the largest U.S. coffee shop chain.

Seven Networks Inc., based in Redwood City, California, makes software that powers e-mail services for customers of Atlanta-based Cingular Wireless LLC, the biggest U.S. cell phone carrier, and Tokyo-based NTT DoCoMo Inc., No. 1 in Japan. Visto Inc., another Redwood City startup, sells similar software.

RIM can’t escape rivals in computer hardware either. PalmOne Inc., in Milpitas, California; Hewlett-Packard, in Palo Alto, California; and Nokia Oyj, in Espoo, Finland, sell hand-helds or so-called smart phones that can send and receive e-mail. Hewlett-Packard’s iPaq runs Good software. So does PalmOne’s Treo, a phone and e-mail device with a color screen and a keyboard like the BlackBerry’s. Phones from Motorola Inc.; Nokia; South Korea’s Samsung Electronics Co.; and Sony Ericsson Mobile Communications Ltd., a joint venture of Tokyo-based Sony Corp. and Stockholm-based Ericsson AB, all run e-mail software from Seven Networks. “RIM has a number of competitors who are going to be pushing them around,” says analyst Pablo Perez-Fernandez at Stanford Group Co., a Houston-based investment bank.

RIM’s sales have risen at a slower pace in three straight quarters. In the fiscal first quarter of 2005, they surged 158 percent to $269.6 million from a year earlier. By the fourth quarter, which ended on Feb. 26, growth had slowed to 92 percent. The company had a fourth-quarter net loss of $2.57 million, or 1 cent a share, after costs to settle the patent dispute. That compares with net income of $41.5 million, or 23 cents a share, a year earlier. Analyst James Faucette at Pacific Crest Securities in Portland, Oregon, cut RIM shares to “sector perform” from “outperform” after the report.

Seven Networks is betting it can provide the mobile e-mail system for the masses, leaving RIM with the bankers and lawyers who are willing to pay more. It bought competitor Smartner Information Systems Ltd. of Helsinki in April for an undisclosed price.

Seven and Good are hoping to pigeonhole RIM the same way Microsoft marginalized Apple Computer Inc. in the 1990s. Apple refused to license the operating system that ran its machines while Microsoft blanketed the market with Windows, fostering the rise of Dell Inc. into the world’s biggest personal computer maker. Apple kept building the whole computer and lost market share. Last year, it had just 3.3 percent of U.S. demand, according to Framingham, Massachusetts–based research firm IDC. A third of Apple’s $3.49 billion in sales came from the iPod music player in the quarter that ended on Dec. 25, up from 13 percent a year earlier.

In many ways, RIM is like Apple in its heyday, Perez-Fernandez says. It has a cult following, and it makes all of the parts of its product. RIM even handles the e-mail service in-house: Every message sent on a BlackBerry shuttles through a global network of RIM computers controlled in Waterloo. “When you build everything yourself, it gets very expensive,” Seven Networks founder Bill Nguyen says.

RIM, which reports its financial data in U.S. dollars, gets sales in three ways. About two-thirds, or $267.2 million, of RIM’s $404.8 million total in the fiscal fourth quarter came from selling its dozen BlackBerry models. Most are made in a 122,000-square-foot (11,334-square-meter) plant in Waterloo. The average price is about $380.

The rest of RIM’s revenue comes from software and service. E-mail pops up automatically on a BlackBerry. Users don’t have to check for it. To provide that feature, RIM requires companies with lots of workers using the BlackBerry to install software called the BlackBerry Enterprise Server on their corporate computers. The software connects to the company’s in-house e-mail system, such as Microsoft Exchange, a program that dishes up e-mail to PC users.

When a message arrives for someone who is out of the office, RIM’s server software sends a copy on the Internet to a RIM computer. It locates the BlackBerry user and ships the message to a wireless carrier, such as Cingular in the U.S. or Vodafone Group Plc in Europe. The carrier zips the message to the BlackBerry, which beeps, vibrates or flashes a light.

Perez-Fernandez and other analysts estimate that RIM charges BlackBerry owners about $10 a month to shuttle e-mail around, a fee the wireless carriers collect in their monthly bills. Those payments accounted for about 17 percent of RIM’s revenue, or $68.8 million, in the February quarter. Sales of BlackBerry Enterprise Server software to companies brought in about 14 percent, or $56.7 million.

Unlike Apple before it, RIM isn’t as rigid about controlling its products. In March 2003, the company began letting phone and hand-held computer companies make devices that can send and receive e-mail over RIM’s network. Last year, RIM began licensing the calendar, Internet browser and e-mail display system that’s on every BlackBerry.

Trouble is, the licensing program hasn’t been popular, Perez-Fernandez says. He estimates that licensed manufacturers have shipped about 22,000 devices, a fraction of the more than 2.44 million BlackBerries RIM shipped in the year ended on Feb. 26. One reason may be that companies didn’t want NTP to sue them for using technology allegedly covered by its patents, Perez-Fernandez says. Nokia, for one, licensed RIM technology in November 2002. Wary of the patent issues, Nokia didn’t put the technology in phones for the U.S. market, spokeswoman Megan Matthews says. Nokia signed an agreement with NTP in June 2004 and is working to ship a phone with BlackBerry e-mail in the U.S. this year.

The settlement with NTP may prompt others to sell BlackBerry-capable devices too, Perez-Fernandez says.

Resolving the patent fight with NTP clears up only a part of RIM’s predicament, says Ken Dulaney, an analyst at Gartner Inc., a Stamford, Connecticut–based research firm. Phone-makers will be reluctant to license BlackBerry software and service as long as RIM is competing with them in hardware.

Software maker Good Technology, by contrast, isn’t a threat to phonemakers because it doesn’t make handsets or hand-held computers, Dulaney says. Good has two products: One delivers messages from Microsoft’s e-mail system to hand-held computers; the other sends information from computers running business software from Oracle Corp., Salesforce.com Inc. and others. Both products compete directly with RIM.

Good CEO Danny Shader, 44, says sticking to software gives him an easier pitch to phonemakers. “Everyone who makes devices wants to work with us,” Shader says. Nokia says it plans to ship devices with Good software this year. Hewlett-Packard said in February that it would install Good’s messaging software on all new iPaqs.

Shader has worked at six companies backed by Menlo Park, California–based Kleiner Perkins, including Netscape Communications Corp., once the dominant maker of Internet browsers, and online merchant Amazon.com Inc. Shader’s chief technology officer, John Friend, 46, built Netscape’s e-mail software and managed many of America Online Inc.’s communications products. AOL is now part of Time Warner Inc.

John Doerr, general partner at Kleiner Perkins and a member of Good’s board, says he’s confident Good will succeed, partly because of the experience Shader and Friend bring to the company. “These aren’t kids sleeping on futons at their first startup,” he says.

Microsoft may be RIM’s biggest threat. The Redmond, Washington–based company’s newest version of the Exchange e-mail server can send e-mail to wireless devices. Compared with RIM’s system, which passes the message along as soon as it arrives at the office, Microsoft uses an inelegant method: When an e-mail comes in, the Exchange server sends a short notice to a customer’s hand-held device. The device then uses a Microsoft program called ActiveSync to retrieve the e-mail. “That’s how we do it today,” says Scott Horn, senior director of the mobile and embedded devices division at Microsoft. “There is an update to Exchange Server coming. It will feature a lot of improvements.”

Microsoft is committed to the project, Horn says. Requiring customers to buy software such as RIM’s to tap e-mail when they’re out of the office isn’t fair, Horn says. “People don’t want a special tax to get their e-mail out on the road,” he says.

Balsillie, a 1989 graduate of Harvard Business School, and Lazaridis, who moonlights as chancellor of the University of Waterloo, his alma mater, reject the notion that they can be relegated to a small niche the way Apple was. “That comparison just doesn’t hold water,” Balsillie says. If RIM were like Apple, it wouldn’t be licensing its software to other manufacturers, he says. RIM is primarily a service company, he says, adding that the service is like Coca-Cola and the BlackBerry is like a vending machine. “At first, you sell a lot more vending machines,” he says.

Beyond licensing, Balsillie says, RIM has a plan for preserving the prosperity that has sent its shares rocketing more than 10-fold since the start of 2003. Balsillie and Lazaridis are pushing BlackBerry into Europe, India and China by signing up more wireless carriers there.

To gain customers in North America, RIM last year started selling a gadget that looks more like a mobile phone than the typical BlackBerry, which resembles a plastic waffle. RIM added voice service to the BlackBerry in 2002. The new model, called the 7100, is slimmer, has fewer keys and is aimed at customers who might otherwise buy a high-end cell phone. The 7100 condenses the QWERTY keyboard found on standard BlackBerries onto a mobile phone keypad and uses new software to anticipate what the user is typing.

Balsillie joined RIM in 1992 and handles finance and business development, leaving research and development to Lazaridis. He says he shuns business books, even those by his University of Toronto friend and backgammon opponent Malcolm Gladwell, author of The Tipping Point: How Little Things Can Make a Big Difference (Little, Brown & Co., 2000) and Blink: The Power of Thinking Without Thinking (Little, Brown & Co., 2005), a current best-seller about decision making.

Instead, Balsillie just finished Meditations, in which Marcus Aurelius dispenses advice on remaining poised in a chaotic world. Among Balsillie’s favorite maxims: “Ambition means tying your well-being to what other people say or do. Self-indulgence means tying it to the things that happen to you. Sanity means tying it to your own actions.

“Balsillie says he and Lazaridis leave little to chance at RIM. Take the name BlackBerry. Whimsical as it may seem, RIM settled on it only after weeks of work by Lexicon Branding Inc., the Sausalito, California–based firm that named Intel Corp.’s Pentium microprocessor and Apple’s PowerBook.

One of the naming experts at Lexicon thought the miniature buttons on RIM’s product looked like the tiny seeds in a strawberry, Lexicon founder David Placek says. A linguist at the firm thought straw was too slow sounding. Someone else suggested blackberry. RIM went for it.

Before Balsillie’s time, RIM wasn’t so rigorous, at least about naming. Lazaridis, born in Istanbul and raised in Windsor, Ontario, was always a technology nut. He built a personal computer from scratch in high school in 1979, using a cassette tape for memory and a Teletype for a printer. An electrical engineering and computer science student in college, he started RIM with his friend Douglas Fregin, who’s still a vice president. Their first product was a small computer that sent words scrolling across a video monitor. Sellers at flea markets bought them to advertise their wares.

Business took off when a bigger client came calling. General Motors Corp., the world’s biggest automaker, wanted to install signs made of light-emitting diodes in plants so it could broadcast messages amid the din of a car assembly line. The trick was hooking up the signs to a single computer so managers didn’t have to program each sign to scroll a new message. Lazaridis, who’d worked on supercomputers during work-study programs at college, got the 600,000 Canadian dollar (US$481,000) contract to deliver the first two dozen signs and dropped out in his last term to fulfill it.

Finding a name for the new company proved difficult. Lazaridis wanted something with research in it. Paradigm Research was taken by another company, as he discovered after paying C$75 to a search service. He tried more ideas with research in them, paying C$75 each time.

Watching a U.S. football game on TV, Lazaridis heard commentators talking about players who’d taken ballet to improve their footwork. The caption below the dodging and weaving athletes was “Poetry in Motion.” The idea “Research in Motion” came to mind, Lazaridis recalls in his uncluttered office at RIM, where conference rooms are named for scientists such as Nikola Tesla, inventor of the induction motor.

RIM incorporated on March 7, 1984. Lazaridis began pursuing wireless products in 1987. Engineering work for other companies still paid the bills. By 1989, RIM’s largest customer was Sutherland-Schultz Inc., a local firm that builds mechanical and electrical systems for aircraft hangars and factories. Balsillie was in charge of engineering services and got to know Lazaridis. Balsillie says he was drawn to RIM because Lazaridis’s team was talented and eager to grow. Balsillie invested in the company and became co-CEO in 1992, when there were eight employees.

In 1996, Lazaridis’s work yielded the Inter@ctive Pager. Shaped like a bloated rectangular clam, it received messages and had a tiny QWERTY keyboard for sending them. The thing was a hit. In the six months ended on Aug. 31, 1997, the Inter@ctive Pager accounted for 62 percent of RIM’s $8.7 million in revenue compared with just 6 percent in the same period a year earlier, according to documents RIM filed to sell shares on the Toronto Stock Exchange. RIM went public in October 1997, raising C$100 million.

RIM unveiled the BlackBerry in January 1999. It was a bigger hit. Sales almost doubled to $85 million in the year ended on Feb. 29, 2000, from $47 million a year earlier as Citigroup Inc., Credit Suisse First Boston and other Wall Street firms bought BlackBerries for their executives. RIM began trading on the Nasdaq Stock Market in February 1999.Just before the end of that blockbuster fiscal year, RIM got a letter dated Jan. 27 from a small company called NTP that claimed to have patents on a system like RIM’s. The letter said that RIM was infringing the patents and suggested RIM sign a license to use them, according to court documents.

Among the owners of NTP was Thomas Campana, an electrical engineer who had started a firm in Chicago in 1971 after leaving the U.S. Air Force, where he’d specialized in communications. In the mid-1980s, Campana started working with a company called Telefind Corp. to develop a pager that worked on more than one radio frequency, letting users roam from one city to the next, something that was impossible with older pagers.

Campana started experimenting on a system for sending e-mail from computers to pagers. In August 1990, an executive from AT&T Corp. phoned Campana and asked about using the system to send e-mail to a new laptop computer called the Safari that AT&T was building, Campana testified in court.

Campana agreed. At the Comdex computer show in Las Vegas that year, Campana and AT&T demonstrated technology that let attendees type a message into a computer and see the words pop up on the Safari, which was connected wirelessly via a pager.

Campana applied for patents in May 1991. He and Don Stout, a lawyer and former examiner in the U.S. Patent and Trademark Office, set up NTP in 1992 to license the patents. They sent letters to RIM and about 40 other companies seeking licensing fees, according to testimony.

NTP sued RIM in U.S. District Court in Richmond, Virginia, in November 2001. NTP alleged that RIM had infringed patents Campana held describing inventions that “provided for a wireless mobile e-mail unit and the infrastructure necessary in the e-mail system to update the user’s e-mail messages.

“The trial started on Nov. 4, 2002. RIM couldn’t prove it had taken proper steps after receiving NTP’s letter about the patents. Under U.S. law, companies are supposed to examine competitors’ patents thoroughly to check for infringement as soon as they know the patents exist. After a three-week trial, the jury deliberated over two days and ruled that RIM knew the Campana patents existed and had infringed them willfully. The jury ordered RIM to pay NTP $23.1 million.

Because the infringement was willful, NTP sought more damages and reimbursement of attorney’s fees. In May 2003, Judge James Spencer boosted the jury award by 50 percent and ordered RIM to pay 80 percent of NTP’s attorneys’ fees. RIM said in a statement at the time that the jury award was subject to appeal and that the company had increased the money set aside for legal costs by a third to about $59 million.

“RIM consistently engaged in a variety of questionable litigation tactics,” Spencer wrote in his opinion. The company was slow to deliver documents during the case and canceled one deposition at the last minute, making the discovery phase of the trial “unnecessarily arduous,” Spencer wrote.

In August 2003, Spencer ordered RIM to halt U.S. BlackBerry sales unless the company could persuade an appeals court to overturn the jury’s ruling. Spencer postponed the effect of his ruling so RIM could appeal.

RIM took the case to the U.S. Court of Appeals for the Federal Circuit in Washington, D.C. In December, the court upheld the earlier ruling that RIM had infringed NTP’s patents, pressuring RIM to settle.

RIM did so, announcing the $450 million agreement on March 16. The settlement covers all RIM products and includes a license to use the patents in the future without further payment, RIM said in a statement. “We’re very pleased we were able to resolve this, and we have always admired Research In Motion for its good products,” NTP attorney James Wallace of Wiley Rein & Fielding LLP in Washington, who argued the case, said in an interview that day.

RIM reported costs of $294.2 million in the fiscal fourth quarter to pay for the settlement. It had earlier set aside the remainder for the litigation. That leaves RIM with $1.34 billion in cash, according to the report.

Campana, the patent holder, will never see the settlement money. A smoker, he died of cancer of the esophagus on June 8, 2004, a year after being diagnosed, Wallace says.

With NTP out of the way, Gartner’s Dulaney says, the wireless e-mail game is RIM’s to lose. There are few devices out there with features, especially keyboards, as alluring as RIM’s. “Users are addicted to the hardware,” he says. “I don’t see anything but success for them for the next couple years.” After that, things will get trickier, he says, because electronics makers will improve their products, giving Good Technology, Seven Networks and others better platforms for their software.

Like Balsillie, Lazaridis says concern about competition is overblown. The market for wireless e-mail is so new that it’s absurd to talk about anyone losing share, he says. RIM has a market value of $14.3 billion. His own stake is valued at more than $900 million. All of that is built on just 2.5 million BlackBerry subscribers. “It’s all virgin territory,” Lazaridis says.

Nor is it easy to do what RIM has done, Lazaridis says. On a tour of RIM’s laboratories, he shows off the electromagnetic equivalent of a soundproof room. Little radiation of any kind gets in or out. Two stories high and at least a hundred feet long, RIM’s anechoic chamber is encased in copper and lined with 35,000 electromagnetic tiles. The walls on the inside bristle with 2-foot-long spikes made of what looks like stiff foam rubber.

RIM uses the room to see how new BlackBerries perform with different radio signals. Lazaridis points to the room as one of the investments required to produce reliable hardware. A lot of people have tried to build devices, he says. Good, for one, sold a BlackBerry-like machine in 2002 and abandoned the effort a year later. “If it’s such a bad idea, why did others try?” Lazaridis asks.

In 2000, Lazaridis donated C$100 million to build the Perimeter Institute for Theoretical Physics just down the road from RIM. There, scholars puzzle over string theory and quantum gravity. Blackboards fill with long equations that are more symbols than numbers.

The center operates independently of RIM and the University of Waterloo and has attracted more young scientists to the outskirts of Toronto. Perhaps one of those will come up with a way to keep RIM ahead of the pack for another decade. The doughnut penalty may be pretty stiff by then.„

Anthony Effinger is a senior writer at Bloomberg News in Portland. aeffinger@bloomberg.net