I fought the same issue with JRuby 1.9.3 and MS JDBC Driver 4.0 and resolved it like this:
driver = Java::com.microsoft.sqlserver.jdbc.SQLServerDriver.new
props = java.util.Properties.new
props.setProperty("user", "username")
props.setProperty("password", "password")
url = 'jdbc:sqlserver://servername;instanceName=instance;databaseName=DbName;'
conn = driver.connect(url, props)
Found at bottom of page here: https://github.com/jruby/jruby/wiki/JDBC
It seems that my setup has issues with dynamically loading drivers and requires this more explicit approach.