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Texas Microsoft suit thrown out

A Texas judge dismisses a state suit brought to challenge nondisclosure agreements Microsoft imposes on its partners.

A Texas judge dismissed a suit today in which the state's attorney general accused Microsoft of illegally interfering with an ongoing investigation into the software giant's business practices, according to the company.

The suit, filed in November by Texas attorney general Dan Morales, alleged that nondisclosure agreements (NDAs) Microsoft imposed on customers and business partners were impeding the state's probe into possible antitrust violations. The suit sought an order striking down the nondisclosure agreements, which require customers and partners to contact the company before cooperating with officials' requests for documents.

Microsoft has argued that the confidentiality agreements are intended merely to protect its trade secrets and other intellectual property against misappropriation. It said such agreements are common in the industry and pointed to other companies--including Sun Microsystems and Novell--that imposed the same requirements on their partners.

At a hearing today in the case, Texas District Court Judge Joseph Hart of Austin dismissed the suit on the grounds that the state failed to show that the confidentiality agreement had in any way interfered with its probe.

The ruling comes the same day that a European Union official told Bloomberg that Microsoft had not yet proven it has amended contracts with European Internet service providers. A Microsoft legal representative said that the company's plans to amend the contract--and thus close a European Commission's inquiry into the matter--was nonetheless "definitely on track."

Today's ruling in the Texas case is similar to one the Justice Department received in its separate action against Microsoft. While the thrust of the federal action, filed last October, takes aim at the software giant's bundling of the Internet Explorer browser with its dominant Windows operating system, it also challenged nondisclosure agreements.

In December, U.S. District Judge Thomas Penfield Jackson dismissed the government's challenge of the confidentiality agreements, ruling that "there is no evidence of record that the NDAs are meant for any purpose other than to require that Microsoft be given notice and an opportunity to object before any confidential information is disclosed that might be of value to a commercial adversary."

Unlike the Justice Department's action, however, the sole matter at issue in the Texas suit was the inclusion of NDAs, leading at least one outside observer to doubt the significance of today's dismissal.

"This is not a particularly significant event," said Lloyd Constantine, former chief of the antitrust division of the New York attorney general's office, now in private practice in New York City. "It was curious to me that Texas would file an action on this discrete issue."

Constantine added that today's ruling, along with Jackson's similar decision last December, by no means settles the legal issues regarding NDAs because neither judge ruled on whether the provisions are allowed, only on the fact that the government had not submitted evidence proving the agreements were being illegally used. "If the Justice Department feels aggrieved by the pervasive use of NDAs and is able to make an argument that they are part of an overall pattern of conduct, [the issue] may not go away," he noted.

A spokeswoman from the state attorney general's office said the agency was disappointed by the ruling but had not yet decided if it would pursue an appeal. "It's unfortunate that these companies are going to have this cloud of intimidation over them," said Texas's Sonya Sanchez. "[But] we will continue our investigation."

Texas is not alone in looking into potential anticompetitive activities carried out by Microsoft. As reported earlier this month, 11 states have subpoenaed the software giant for documents relating to the inclusion of Internet Explorer in Windows 98, the successor version of Windows 95.

Today's ruling doesn't bar those states from taking action against Microsoft, but it does mean that they likely will have to carry out their investigations with Microsoft's NDAs firmly in place.

Rich Gray, an antitrust attorney at Bergeson, Eliopoulos, Grady, & Gray, said that given the high-tech industry's dependence on NDAs, today's ruling was a "significant victory" for any company that relies on them to protect their intellectual property.

"No high-tech company wants the various battles with Microsoft resulting in the weakening of NDAs," Gray said, "because they're too important to the industry."

In related developments, a Bloomberg report stated that a European Union official in Brussels, Belgium, said Microsoft has yet to provide written confirmation that it has amended its contracts with European ISPs. The contracts have not been made public but are believed to have limited the providers' ability to offer customers competing browsers in some cases.

Microsoft said the European officials had been looking into its contracts but agreed to drop their inquiry if the company amended certain portions of them. Citing an unnamed European official, Bloomberg said a deadline for Microsoft to provide written confirmation of the changes had been extended by two weeks.

Microsoft's associate general counsel, Brad Smith, said the official's comment in no way indicates a change in plans. "We're definitely on track to amend our contracts in Europe," he added, noting that it takes time to file an accompanying 25-page form required by European officials. "We have told the commission that we are preparing this form and we certainly expect to get this form completed and into the commission within the next couple of weeks."