updated 7/14/2004 8:53:21 PM ET 2004-07-15T00:53:21

Japan's anti-monopoly watchdog slapped a warning against Microsoft Corp. on Tuesday, demanding that the U.S. software giant remove what it said was a restrictive clause from contracts with electronics makers.

Microsoft issued a statement within hours of the warning, saying it would contest the decision. (MSNBC is a Microsoft-NBC joint venture.)

Fair Trade Commission official Toshihiro Hara said the warning was the first in the world against the clause, which he said in effect prevents Japanese computer makers from demanding damages or royalty fees even when rivals violate patents for important technology.

Such concerns have increased over the last several years as Japanese manufacturers add consumer-electronics features to Windows-installed computers, he told reporters at the trade ministry.

"There are concerns the clause may discourage motivation to develop audiovisual technology and may hinder fair competition in that technological field in our nation," Hara said.

Although the commission is not certain patents have been violated, it said several major Japanese makers suspect such violations and have objected to the provision since December 2000. Hara refused to give the makers' names.

Microsoft said it has omitted the conditions from new contracts. The Redmond, Wash.-based company also maintains that the disputed provisions are legal under Japanese, U.S. and European Union law. Company officials say such clauses are necessary to protect itself from costly lawsuits.

In a statement issued through its Japanese subsidiary, Microsoft said it would like to explain to the commission why it has the section called "the non-assertion of patents provision" in contracts.

"We object to the conclusions that the JFTC has announced," the statement said, referring to the commission by its acronym. The company has cooperated fully with the commission's investigation since it raided its Japan offices in February, it said.

Microsoft has until July 26 to respond. But the rejection by Microsoft means that the commission will start judgment sessions in which Microsoft will take part and the commission issues a ruling. If Microsoft decides to appeal the ruling, the case moves to a Tokyo court. It is not clear how long the commission's procedure will last, Hara said.

Analysts said Japanese authorities were trying to curb possibly monopolistic behavior in an effort to give more opportunities to alternatives such as the open-source Linux software system.

"It's part of the evolving trend toward alternatives such as Linux not only in Japan but around the world," said Tatsuya Iwamura, analyst at Marusan Securities. "There's long been a commonsense notion that something is wrong with the domination of one maker."

The Japanese authorities said that the provision violated Japan's fair trade law but did not set a fine or other penalties. In 1998, the Fair Trade Commission ordered Microsoft to stop bundling software pre-installed in personal computers in a way that put competitors at a disadvantage. But the company wasn't fined or charged with a crime.

Microsoft is facing similar challenges from other parts of the world recently.

On March 24, the European Commission found Microsoft has abused its "near monopoly" with Windows software, levied a record fine of about $613 million and demanded changes in how Microsoft operates in Europe to improve competition globally. Microsoft is appealing that decision.

In the United States, an appeals court last month approved a landmark antitrust settlement Microsoft negotiated with the Justice Department.

"The commission is sending a strong message against Microsoft," said Tadaaki Mataga, a Gartner analyst in Tokyo. "There's a need for balance to promote innovations and development in an industry."

Copyright 2004 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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