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Sparks from Microsoft-Google Friction

By Jay Greene To hear Kai-Fu Lee tell it, Microsoft's size has begun to slow the software giant overseas. The former Microsoft (MSFT) vice-president departed for Google (GOOG) in July, sparking a suit by Microsoft alleging that Lee violated the noncompete terms of his contract. Lee testified in court Sept. 6 that he grew increasingly frustrated by Microsoft's missteps in China and its unwillingness to address the problem.

Lee quit Microsoft to head Google's new research and development efforts in China. In seven years at Microsoft, he had launched the company's China research facility and eventually rose to become one of the closest technical confidants to Microsoft Chairman Bill Gates.

DISHEARTENING REBUKE. But Lee was frustrated by Redmond's progress in the world's most populous country, according to his testimony and internal e-mails. In a 2003 message to Gates and Microsoft CEO Steven Ballmer, Lee complained about the outfit's problems developing relationships in China. "I'm deeply disappointed at our incompetence in China -- that we have wasted so many years in China with little to show for it," Lee wrote.

The problems came to a head in a meeting with Gates, when Lee outlined his concerns. Gates blew his top, according to Lee. He yelled that the Chinese people and the Chinese government had "f--ked" Microsoft. Lee didn't disclose why Gates believed that, though. Presumably it was over piracy of Microsoft's software, a problem that is rampant in China. The rebuke was disheartening to Lee. "It was a sign that my work had been in vain," he testified.

For its part, Microsoft says Lee's testimony about the Gates meeting was inaccurate. "Bill Gates adamantly denies making such a comment," says Microsoft spokeswoman Stacy Drake McCredy. She adds that Microsoft recognized problems with its China operation and had made significant strides toward improving them, most notably with the 2003 appointment of Timothy Y.C. Chen as CEO of Microsoft China.

SENDING FEELERS OUT. However serious Redmond's stumbles in China, the legal proceeding has laid bare the growing enmity between Microsoft and Google. They are already at odds over the search engine's hiring of dozens of other former Microsoft employees.

Earlier this month, Google filed a declaration stating it hired another former Microsoft employee, Mark Lucovsky, who described Ballmer's distress over his departure. After Lucovsky disclosed his plans to leave, Ballmer threw a chair and said, "I'm going to f--king kill Google," court papers say. Ballmer called Lucovsky's account of the meeting "a gross exaggeration."

Microsoft argues that Lee knew all along that he was violating the noncompete terms of his contract with Microsoft and was selling himself to the search giant for top dollar. In a May 7 e-mail to Google CEO Eric Schmidt and co-founders Sergey Brin and Larry Page, Lee asks if the company might be interested in hiring him for its China operations. "I'm currently a Corporate VP at Microsoft, working on areas very related to Google," he wrote. He later told another Google exec that he expected to receive $10 million over four years, roughly the same amount he figured Microsoft would pay him.

EXTENDING RESTRAINING ORDER? To Microsoft attorney Jeff Johnson, Lee's e-mail and comments show that he knew he was violating the terms of his noncompete clause. "Did he intend to live up to this promise? The answer is clearly no," Johnson said.

King County Superior Court Judge Steven Gonzalez will eventually rule on whether to extend the temporary restraining order that bars Lee from doing any work at Google that might compete with Microsoft until the suit goes to trial in January. The hearing resumes Sept. 7, with Microsoft cross-examining Lee. If Day One is anything to go by, the sparks may have only begun to fly.

Greene is BusinessWeek's Seattle bureau chief

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