January 13, 2003 4:10 PM PST

Phone maker details Microsoft divorce

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U.K.-based cell phone maker Sendo has filed a lawsuit accusing Microsoft of engaging in a "secret plan" to push the small maker of cell-phone software into bankruptcy.

The lawsuit, filed last month in federal court in Texarkana, Texas, accuses Microsoft of misappropriation of trade secrets, unfair competition and fraud, and provides the first glimpse behind the scenes of the recent dissolution of a relationship between Sendo and Microsoft. The 27-page lawsuit seeks unspecified damages.

Jon Murchinson, a Microsoft representative, denied the allegations.

"We look forward to refuting Sendo's baseless claims," Murchinson said Monday. Microsoft is scheduled to file a more formal denial in court later this week.

Beginning in 1999, Sendo was supposed to develop a Global System for Mobile Communications (GSM) phone based on a new cell phone operating system from Microsoft, then called "Stinger" and now known as Smartphone 2002. The OS is designed to combine the functions of a cell phone and a personal digital assistant. Microsoft was expected to provide financial support for Sendo's research.

In November 2002, however, Sendo announced it would be dropping the Microsoft software in favor of a rival OS called Symbian, developed and owned by some of the biggest phone makers in the world, including Ericsson, Nokia and Motorola.

Meanwhile, in late October, Sendo rival High Tech Computers, based in Taiwan, unveiled a phone designed around Smartphone 2002. U.K. wireless company Orange, a GSM carrier, is now selling the phone.

"The speed-to-market was not achieved by Microsoft's legitimate skill and expertise," Sendo attorneys allege in the lawsuit, "but rather by its secret plan to pillage Sendo of its technology, convert that technology to its own use, steal Sendo's customers and leave Sendo cash starved and on the brink of bankruptcy."

HTC and Orange, which are not defendants in the lawsuit, were not available for comment on Monday.

The Sendo-Microsoft partnership
As part of the original deal, Microsoft had also agreed to invest $12 million in Sendo, an investment that entitled Microsoft to a position on Sendo's board of directors, according to the lawsuit.

Sendo's work on the new phone began immediately, but so did the problems, Sendo said. The company said Microsoft was supposed to send software that was "code complete"--meaning it worked. Instead, Sendo alleges Microsoft gave it a program with "numerous critical problems" and "failed to take steps to remedy."

The Stinger phone was supposed to debut in August 2001, but the software problems forced Sendo to push the release date back to December 2001, Sendo said.

"Despite numerous previous representations by Microsoft that Stinger software was (ready), it was becoming clear that it was not," Sendo attorneys wrote in the lawsuit.

Sendo counted on revenue from the sale of the phone it was developing, so the launch delay created a "cash flow crisis" that was discussed at board meetings attended by Microsoft's appointee, according to the suit.

In December 2001, after yet another launch delay, Sendo tried to pressure Microsoft for the $12 million it promised to invest, Sendo alleges. But Microsoft refused, knowing "full well it would push Sendo towards insolvency," Sendo attorneys claim in the suit.

Although Microsoft refused to invest the $12 million, it did ultimately agree to loan Sendo $14 million. Terms of the loan were finalized in February 2002.

But Microsoft refused to release any of the loaned money and simultaneously demanded that Sendo build 300 test phones for Microsoft engineers to look at, Sendo alleges.

Microsoft also demanded that Sendo spend all its time and resources on the phone, Sendo claims. The phone maker said it obliged, turning its attention to making the 300 phones, which forced delays in other products it was developing and cost about $3.6 million, the company said.

On May 27, 2002, Microsoft also began a review of Sendo's work on the phone, ordering a "multiday, full review of Sendo and its progress," according to the suit.

Sendo honored Microsoft's request, the phone maker said, providing the software giant with the work and the materials to review. This, according to the lawsuit, amounted to "unbridled access to Sendo confidential and trade secret information."

But a few months later the partnership unraveled. On Sept. 23, 2002, Sendo learned that Microsoft would not invest the $12 million and the relationship formally ended, Sendo said.

 

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