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Sega accused of contract breach

Stepping up tensions in a high-tech love triangle, 3Dfx Interactive files a multimillion-dollar lawsuit against Sega over a canceled contract.

Stepping up tensions in a high-tech love triangle, 3Dfx Interactive (TDFX) has filed a multimillion-dollar lawsuit against Sega Enterprises (SEGNY) and NEC over the cancellation of a contract with 3Dfx.

The suit, filed Friday in California's Santa Clara County Superior Court, charges Sega and NEC with unfair competition, breach of contract, and threatened misappropriation of trade secrets. It was filed a month after Sega told 3Dfx it was pulling the plug on a major contract that called for 3Dfx to make a new 3D graphics component for Sega's latest video game console.

The suit claims that Sega entered into the deal with 3Dfx knowing it ultimately would tap NEC to provide the graphics accelerator for Sega. Sega entered into the deal with 3Dfx, a San Jose, California-based maker of graphics accelerators for video games, in order to get the company to provide Sega with technical blueprints about its products. NEC, the suit charges, "deliberately set out to induce Sega?s breach of the contract and to usurp for itself the lucrative benefits of developing the 3D graphics accelerator chipset for the new Sega game console."

Greg Ballard, 3Dfx's chief executive and president, estimated the contract would have contributed $55 million to the company's revenues over the next few years. But more important than seeking damages for the revenue loss, Ballard said the suit attempts to protect 3Dfx's valuable intellectual property rights.

"Our most immediate [goal] is an assurance from Sega and NEC that our intellectual property will be respected and not included in any product made by" either company, Ballard told CNET's NEWS.COM. "Sega has our intellectual property in its office and is doing business with our biggest competitor," he said.

After Sega announced it was pulling out of the deal in July, the two companies entered into negotiations, according to the suit. They were unable to reach an agreement, Ballard said.

In a prepared statement, Sega denied any wrongdoing, noting that the company "is an investor in 3Dfx, and it would not be involved in any activities that would disclose 3Dfx's proprietary information." A representative for NEC said the company had not yet seen the complaint and could not comment.

3Dfx completed its initial public offering in June, raising some $35 million. According to the company's prospectus, the contract with Sega, which took effect in March, accounted for more than 14 percent of 3Dfx's revenues during the first months of 1997.

"The timely development of the Sega/3Dfx chipset by the company and the successful introduction and sale of the new Sega game console by Sega will be critical factors affecting the company's future business, financial condition, and results of operations," the prospectus warned.

Following an announcement in late July that the deal was off, 3Dfx's stock slipped from a high near 18 to almost 10. The stock has recovered most of its value, closing the market on Friday at 15-9/16.

Ballard added that as time went on, 3Dfx would rely less on Sega. He estimated the contract with Sega would have accounted for 10 percent of 3Dfx's revenues for all of 1998.