Microsoft wins first round with Google

Microsoft proposed on Tuesday settling its lawsuit with Google over the hiring of a former executive in China by asking Google to agree to limit the exec's duties until July 2006 when the non-compete agreement he signed with Microsoft expires.

Earlier on Tuesday, a Washington state judge ruled that Kai-Fu Lee could immediately begin recruiting staff for a Google development centre in China rather than wait until after a January trial, but severely limited the scope of his duties until then.

"We can settle this lawsuit tomorrow if Google will agree to take today's preliminary injunction, keep every word without a single change and enter it as a permanent injunction that will last until July 18, 2006," Brad Smith, general counsel for Microsoft, said in a phone call. "We can avoid a trial, forgo paying outside lawyers and get back to work competing in the marketplace."

"What this obviously means is we are very pleased with today's ruling and we are prepared to back up these words with concrete deeds that will bring the entire case to a close if Google will agree to do the same," he said.

Smith said Microsoft was trying to reach Google representatives with the proposal.

Google did not return an e-mail seeking comment. (Google representatives have instituted a policy of not talking with CNET News.com reporters until July 2006 in response to privacy issues raised by a previous story.)

Microsoft had asked the King County Superior Court to extend a temporary order banning Kai-Fu Lee from starting the work he was hired to do at Google, arguing that it would violate a one-year non-compete agreement he signed when he became a Microsoft vice president in 2000. Google argued that the contract does not prevent him from doing recruiting work in China.

In his 13-page ruling, Judge Steven Gonzalez restricted Lee to recruiting for Google in China and to talking to government officials about getting a licence to do business there but said Lee cannot work on technologies such as search or speech. Lee also cannot set budgets or salaries, or decide what research Google will do in China, according to the order.

The ruling also prohibits Lee from recruiting Microsoft employees or using any confidential information he gleaned from his work at the software giant.

In its findings of fact, the court said Lee misled Microsoft about his intention to return to the software company from a sabbatical and that he was instead contacted and hired by Google. The court also said Lee assisted Google while he was still employed at Microsoft.

"Dr. Lee confused the difference between the discretion given him to disclose Microsoft's confidential information for the benefit of Microsoft and disclosing Microsoft's confidential information for his own benefit or the benefit of another," the order said.

While employed by Microsoft, Lee received confidential Microsoft information about the company's government relations strategies and activities in China, the court found. However, Google's use of Lee to recruit, to meet with university administrators and professors regarding recruitment, and to offer "general, nontechnical advice to Google about doing business in China, does not violate the agreement," as long as Lee does not use any confidential information from Microsoft, the ruling said.

"We are really pleased with the judge's order," said Tom Burt, deputy general counsel for Microsoft. "For $10m, [Lee] can interview students and be a leasing agent," he said, referring to Lee's purported salary at Google. The order "reduces him to being, at least until the outcome of trial, the most highly compensated HR manager ever."

But neither Microsoft nor Google can claim complete victory with Tuesday's order, said Robin Meadow, an employment attorney with Greines Martin Stein & Richland.

"The judge kind of threaded a needle here," Meadows said. "He gave Microsoft what its non-compete gives it in very explicit terms and seems to have refused to go beyond it. Microsoft seems to have wanted to take Kai-Fu Lee completely out of commission, and they didn't get that."

The ruling comes after hearings last week in which depositions and documents revealed the intense rivalry between the companies over Lee's defection. Microsoft chief executive Steve Ballmer vowed to "kill" Google in a cursing, chair-throwing tirade when he learned Lee was leaving to work for Google, Lee claimed in court documents. In addition, Lee criticised Microsoft's strategy, saying the company was more focused on making money than on forging relationships in China.

Microsoft sued Google in July, when the search company announced plans to hire Lee to help lead the launch of a China research and development centre. Microsoft claimed that Lee should be prohibited from doing any work at Google similar to what he did at the software giant and that he was privy to Microsoft company secrets that could give Google an unfair advantage.

Google contended that the work Lee will do for it is not the same as what he did for Microsoft in China and that the non-compete agreement he signed is not valid in California or in China. The case goes to trial on 9 January, 2006.

The order, particularly the finding that Lee misled Microsoft, gives some strong indications of how Gonzalez might rule in the January trial, Meadows said.

"It's almost like he's said, 'Dr Lee has behaved suspiciously. I'm going to enforce the non-compete [clause] pretty rigorously,'" Meadows said. "When you find someone has not played straight, you're not inclined to be charitable. It's hard to see how the result [of the trial] would be much different."

A lawsuit Google has filed against Microsoft in California challenging the legality of Lee's contract with Microsoft is pending.

CNET News.com's Alorie Gilbert contributed to this report.