Dec. 23 (Bloomberg) -- Google Inc. and Microsoft Corp. settled a dispute over Google's decision to hire former Microsoft Vice President Kai-Fu Lee to run a research facility in China.

The confidential settlement, announced yesterday, comes less than three weeks before a trial was scheduled to start in Seattle. Redmond, Washington-based Microsoft in July won a temporary ruling enforcing an employment contract signed by Lee that barred him from working on some technical projects at competitors.

``I suspect Microsoft believed it had a pretty good chance of getting the entire year of the non-compete enforced by the judge in Seattle,'' said Anthony Oncidi, an employment lawyer at Proskauer Rose in Los Angeles who isn't involved in the dispute. ``I'm speculating that Microsoft started the negotiation by saying they wanted Lee not to work for the remaining seven months of his agreement.''

The settlement might result in Google buying its way out of the non-compete by paying Microsoft to use Lee before his employment agreement expired in July, Oncidi said.

``What Microsoft is selling, and Google is buying, is the right to use Lee earlier than the 12 month term of the non- compete,'' he said. ``The earlier that Google will be able to use him fully, the more it will cost them to do that.''

The dispute between Google, owner of the world's most used Internet search engine, and Microsoft had ratcheted up tensions between the companies as they compete for a bigger share of the Internet search market. Google this week signed an advertising agreement with Time Warner Inc.'s AOL, edging out Microsoft, which tried for almost a year to sell its own search technology to AOL.

Microsoft spokesman Jack Evans said the company is pleased with the settlement. Google vice president David Drummond said Google was also pleased with the settlement's terms.

The case produced documents in which Google claimed Microsoft Chief Executive Officer Steve Ballmer used profane language to criticize Google and Lee, underscoring the personal nature of the companies' battle for a global audience using their Internet search engines.

China Revenue

Microsoft needs more revenue from China to revive global sales growth, which the company has said dipped to a record low 8 percent in the year ending June 30. China, the No. 2 market for personal computers, generates about 1 percent of Microsoft's $36.8 billion in annual revenue.

Lee was born in Taiwan and reared in Tennessee. He is a former assistant professor of computer science at Carnegie Mellon University in Pittsburgh and a five-year employee of Microsoft. Microsoft Chairman Bill Gates testified in September that Lee was ``one of the top two'' people influencing the company's strategy in China.

Google hired Lee in July to open a research center in Beijing, as president of the company's Chinese operations. Microsoft, the world's largest software maker, sued, arguing that Lee was a Washington resident when he signed the non-compete agreement and is governed by the law of that state.

Lawsuits

Microsoft won a restraining order from state court Judge Steven Gonzalez barring Lee from working on technical research at Google before a Jan. 9 trial.

Google had filed a counter-suit in federal court in San Jose, California, arguing that the employment agreement was invalid under California law. U.S. District Judge Ronald Whyte in October refused to consider the suit until Microsoft's case in Seattle was resolved.

The settlement ``does demonstrate that non-competes are enforceable in some states,'' said Rob Enderle, president of the Enderle Group research firm in San Jose, California. ``Transfers of critical employees between competitors come with a certain amount of risk.''

The shares of Microsoft rose 5 cents to $26.64 at in Nasdaq Stock Market composite trading. Google shares fell $1.11 to $430.93.

The Washington case is Microsoft v. Lee, 05-2-23561-6, King County Superior Court (Seattle). The California case is Google v. Microsoft, CV 05-03095, U.S. District Court, Northern District of California (San Jose).

To contact the reporter on this story: Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net

Last Updated: December 23, 2005 16:58 EST