(By Luo Yanjie) Abstract: Although online ads or pop-up ads may make you feel uncomfortable, that is a profit model utilized by free software like Tencent’s QQ, the popular online messaging software. But, when the 360 Guard software removed QQ’s ads, despite that being deemed reasonable in the eyes of some netizens, it would no doubt damage Tencent’s legal rights as QQ’s developer and operator. The author believes that it was proper for the court to determine that 360 had engaged in unfair competition practices. Today we’d like to introduce a bit about this case to our readers, beginning with today’s post and extending into tomorrow’s.
In 2010, Tencent (SEHK: 700) decided to enter into the computer security industry, and in the same year introduced its “QQ Computer Keeper” to the market, which focuses on defending against attacks on Tencent. Before that, the Qihu 360 Company (NYSE: QIHU) took advantage of the doubt many end users had regarding privacy and security while using QQ software, and publicized its product 360 Guard. 360’s software could remove QQ’s ads, remove supplemental and additional functions found within QQ’s software, and prevent Trojans and similar computer viruses from stealing QQ account information, which incidentally is an extremely common occurrence among QQ users. Within the first 72 hours after the introduction of 360 Guard, it was downloaded more than 20 million times, and the amount of individual downloads steadily increased as word of the new software spread throughout cyberspace. Tencent believed that 360’s Guard software was actually evidence of 360 engaging in unfair competition, and was possibly even stealing end user’s personal information. For this reason, Tencent announced that all computers with 360’s software installed would no longer be able to use QQ’s software, and would only be able to resume use of QQ software when the end user uninstalled all 360 software on the same computer. According to Mr. Zhou Hongyi, 360’s CEO, the forced uninstall deprived 360 of over 60 million users that would have otherwise used both 360 and Tencent’s software.
This battle between the two Chinese software giants was known as the 3Q battle when it occurred several years ago. Our website has previously posted an article introducing one aspect of the case, and can be found along with other posts on our website – just click here for more information.
Case summary: on October 29th 2010, Tencent discovered that 360 Company was providing its 360 Guard (the “Guard”)software for download on its website www.360.cn. 360 publicized the software in various ways. 360 Guard was primarily aimed at QQ software, and claimed to be able to carry out a “QQ physical test”, “speed up QQ,” “clean QQ trash,” “remove QQ ads,” “remove Trojans,” “keep QQ safe,” and “protect privacy.” 360’s description alone had the capability to discredit, damage or modify QQ software functions. At the same time, through the use of questionable marketing and commercial propaganda, 360 encouraged and lead users to delete any value-added plug-ins made for use with QQ software, and embedded 360 code into QQ software to publicize and promote itself.
To Tencent’s understanding, 360’s conduct had not only damaged the lawful business operation undertaken by TEncent, but had also damaged its business model, thus damaged and compromising the completeness and security of Tencent’s QQ products. In addition, Tencent believed that 360’s conduct had caused Tencent’s reputation to suffer severe damage, with palpable damage having been done to Tencent’s business credit and commercial reputation. Tencent believed that what 360 had done was contrary to basic commercial ethics and constituted unfair competition as defined in Chinese law.
360 had a different view on the issue. 360 believed that it’s Guard software had not damaged the completeness of QQ’s software ecosystem, but had adopted ways that conform to widely accepted commercial ethics in encouraging Tencent to modify its predatory commercial model. 360 held that ultimately the consumer would gain from this dispute. The 360 Guard software rates software based only on how the software operates on the computer, and did not provide overall evaluations regarding a particular software’s performance. Guard’s grading and rating function is essentially neutral technically, and only objectively assessed how the QQ software was working on a computer system. It never disparaged QQ. AS for document scanning, 360 Guard did not state definitively whether QQ scanned private files or documents, and did not use terms like “spy on,” “malicious” or any similarly negative phrases. Moreover, it did not force users to feel uneasy about installing QQ software on their computer. The objective description of QQ’s software provided by 360 Guard did not comprise a negative evaluation regarding QQ’s software.
After the hearing, the court determined that the focus of the dispute in the case included:
I. Whether 360 has reduced the transaction chances for Tencent and could that be unfair competition?
360 developed the Guard with its aim being QQ software. After running Guard on a computer installed with QQ, the computer would automatically check to see if QQ software was running on the computer, and subsequently warn the end-user that QQ presented a serious threat to the computer’s security. The consequence of 360’s conduct is that such messages would influence QQ’s income revenue from ads posted when using QQ software, and would also affect its in-game currency income and revenue generated from value-added service transactions, resulting in economic loss to Tencent. At the same time, it would influence the proper use of Tencent’s software, resulting in a modified user experience. The ultimate consequence is that Tencent’s reputation would suffer; all of the above were the kindling that helped feed the flames of the 3Q battle.
The court also held that Tencent’s ads, games, and value-added services did not constitute computer viruses, Trojans, or similar malware, and therefore 360 had no right to interfere with the end user’s use of other’s software under the guise of killing computer viruses or protecting the end-user’s privacy by making unlicensed changes to other’s software, resulting in purposeful damage to another’s reputation.
Based on the above description, the court found that 360 damaged the security and complete nature of QQ’s software, mainly due to its development and operation of the 360 Guard software, and this conduct resulted in TEncent losing transaction revenue as well as other forms of income from ads or games. This conduct deviated from the purpose of ensuring end-user’s run technically and operationally sound software on their computers, and could rightly be deemed malicious and ergo unfair competition.
II. Whether 360 fabricated and spread false rumors when running its Guard and related services, and whether this could be considered discrediting a business.
The main defense for 360 is what it has done could not constitute business discrediting, and the main reason is: to rate QQ does not equal an overall evaluation of the software, but simply is a way to reflect on and assess the running of the software. As for the court’s understanding: first, no matter whether it is an overall assessment or comment on a specific issue (as claimed by 360, it only assessed QQ’s software in terms of how it runs), once a false statement or misleading facts are made during the assessment of the product, business discrediting will be found. When determining whether business discrediting exists, a court shall comprehensively judge the so-called “grading” and the implications of any expressions provided by the software during the “grading,” which could influence the end-users or affect proper use of the software. That means it shall not solely or separately judge whether the “grading” itself has constituted the business discrediting. Basing on the 360 Guard software’s basic functions, the court found that 360 had deliberately fabricated and spread false rumors and that it had damaged Tencent’s reputation and business credit, and therefore the court found business discrediting to exist.
III. Whether 360’s Guard changed QQ’s user interface to replace part of QQ’s functions to promote its own product, and whether this constitutes Unfair Competition
360 changed QQ’s user interface through its “one click repair” function and “QQ security maintenance” to limit the security function of QQ’s Safe Center in the name of upgrading the QQ security center; also, 360 would through that method replace the original interface with its own 360 Guard. 360 was promoting its product, increasing its chances for transaction revenue at a cost of severe economic loss to Tencent, and this conduct violates good faith principles and principles of fair competition pursuant to the Unfair Competition Law.
Based on the above reasons, the court ruled against 360 and ruled that 360 shall compensate Tencent RMB 5 million. In addition, the court made an unprecedented move by forcing 360 to make a public, high-profile apology to Tencent; specifically the court required 360 to place the apology on its main page, to remain for a period of fifteen days, as well as on the main pages of popular legal websites the Legal Daily and China IPR Daily.
Considered part of the 3Q Battle, this case gained wide attention among Chinese netizens and the general population. Both parties in the case submitted evidence to support their claims. As shown in the court’s judgment, the case seemed to be complicated. Moreover, due to 360 adopting a free to use policy, 360’s loss in the case resulted in a lot of users sympathizing with 360 over Tencent. In reality, the case is not an easy one to adjudicate; that being said, ruling against 360 in this particular instance was proper for the following reasons:
1. The promotion of ads and fees are lawful items
It shall first be pointed out that despite some of QQ’s annoying functions, like pop-up ads or value-added services, these functions are part and parcel of Tencent’s legal profit model. As known to all, QQ is free to use (despite charging for various items, the basic function is online messaging and not providing services for a fee). For Tencent, in order to fulfill the designed function of its software, it has invested many resources in hardware and management costs, and naturally it shall be repaid through revenue from ads or value added services. Since such ads or value-added services are legal in China, these functions are legal and legitimate. Therefore, if other companies prevent Tencent’s exercise of this lawful business model, and interfere with TEncent’s lawful practice of such, this shall be deemed illegal.
2. The unfair competition judgment against 360 Guard was not due only to use of the 360 Guard software
360 is a noted safe software developer in the Chinese software industry, and once its 360 Guard could ensure software security as it claims, like killing Trojans or preventing the theft of private and confidential user information, most people believed the court would not find it guilty of unfair competition. Taking into consideration the purpose of 360’s Guard was to enhance the security and maintenance of a computer, changing or limiting certain functions found within QQ’s software seems entirely reasonable. And yet through the court’s written judgment, we find that 360 Guard’s functions are not solely limited to its raison d’être, and that it also had the ability to remove QQ ads, and did so by utilizing misleading text and modification of QQ’s user interface. This cannot seriously be considered necessary to ensure security of a personal computer, and objectively damage’s QQ’s commercial reputation, and as a corollary its ability to capitalize on its reputation by enticing customers to make use of its value-added services. Based on the aforementioned analysis, the court reasonably found unfair competition violations, and this determination is unquestionably a reasonable one given the circumstances and evidence provided.
In conclusion, 360 was found guilty of unfair competition for its 360 Guard, and the fact of the case show that the judgment was based on Guard’s ability to disrupt and prevent the normal functioning of QQ software, and such prevention and interruption could not reasonably be considered to be in the interest of the end-user’s computer security. With regard to the judgment in the case, 360 has appealed to the Supreme Court in Chin. Of course, we will keep a close eye on the case, and when the time comes share with our readers our thoughts as the case progresses.