Outcome of Unfair Competition Dispute between Tencent QQ and Qihoo 360

3Q BATTLE(By Luo Yanjie) Recently, there has been a widely tracked case as to whether 360’s QQ Guard engaged in practices which constituted unfair-competition against Tencent (3Q battle for short). The Supreme People’s Court has made a judgment affirming the initial judgment, deciding that 360’s QQ Guard engaged in unfair competition against Tencent. We have already introduced the case and discussed the comment on the original judgment. Even though the Supreme Court upheld the original judgment, the statement in the judgment of second instance, backed by the Supreme Court, impressed us with its deepened understanding of unfair competition in the era of internet. We will combine the judgment with analysis for our readers in the following article to help you understand the implications.

Introduction to the Case:

On October 29, 2010, Tencent found that 360 Company was providing its 360 QQ Guard (the “Guard”) for download on its website www.360.cn. 360 Company described its Guard as software that could remove QQ’s ads, remove supplemental and additional functions found within Tencent’s QQ software and prevent computer viruses from stealing QQ account information, through various approaches. 360 Company also publicized and promoted its Guard through various different methods.

According to Tencent’s understanding, the Guard targeted the QQ software, and was self-declared to engage in such functions as ‘removing QQ’s ads’, ‘preventing QQ’s viruses’, ‘protecting QQ account information’, thus declaring itself as being engaged in acts which are likely to discredit, damage or modify QQ software functions. At the same time, through the use of questionable marketing, 360 Company encouraged and induced users to delete any value-added plug-ins made for use with QQ software, and embedded 360 codes and services into the QQ software to publicize and promote itself. From all the facts, 360 Company shall be deemed to have engaged in unfair competition.

360 Company argued that Guard had not damaged the QQ software’s integrity, but had adopted methods conforming to generally  commercial ethics, by encouraging Tencent to change its predatory commercial model which, it argued, is good for users as well as the market. As for the rating of the Guard, the company argued that it was a reflection and description of Tencent, and that it had not represented a negative evaluation of Tencent’s QQ software. 360 Company also believed that the rating of the QQ software was an objective description based on the principle of technical neutrality, without any deliberate intention to devalue Tencent’s QQ software.

The court of first instance favored Tencent’s arguments and the Guangdong Higher People’s Court, decided that the 360 Company had engaged in unfair competition. Subsequently, 360 Company appealed to the Supreme Court. After hearing the case, the Supreme Court held in the following.

1. 360 Company intended to develop and operate the Guard so as to destroy the security and integrity of QQ software and its services.

After running the Guard, it would carry an in-depth intervention of QQ software functions; relevant users followed instructions from the Guard, and then changed the original software model with the result of the destruction of the integrity of QQ software. At the same time, for its commercial purposes, 360 Company induced and provided tools for users to change the operating model of QQ software, and encouraged users to install its 360 Safe Guard instead of “QQ Computer Keeper”, thus damaging the service security of QQ software and threatening the integrity of QQ software.

2. The conduct of removing Tencent’s ads would result in Tencent losing transaction and ad income and thus would likely constitute unfair competition.

The appellant intended to develop and operate the Guard to adopt such approaches as assistance and inducement to damage the security and integrity of QQ software and its services. Its conduct also decreased the economic benefits and value-added services transactions, disturbed the rational businesses and damaged the legal interests of the respondent, thus breaching the principles of good faith and recognized commercial ethics.

3. 360 Company discredited Tencent.

Without any facts or basis, 360 Company declared that QQ software would forcedly scan secret documents on a user’s computer. At the same time, 360 Company utilized its standard to evaluate QQ software, publicized that QQ software had serious security problems, and misled users into panicked and negative evaluations. As such, 360 Company was deemed to engage in actions discrediting Tencent.

4. The Heavy losses of Tencent were far higher than the legal maximum compensation and thus the first instance’s payment is correct.

Considering that 360 Company’s conduct has caused far greater damage to Tencent than the maximum legal compensation, it shall not apply the calculation of legal compensation, but should instead make a reasonable payment beyond the legal maximum amount of compensation on the grounds of specific conditions in this case,

 For the above reasons, the Supreme Court affirmed the original judgment.

Lawyers’ Comment:

In accordance with the analysis of our previous post, there are no provisions to regulate competition in the internet industry. Generally, the courts will apply the principle provisions in the Anti-unfair Competition Law and make a comprehensive judgment based on the specific conditions. In this case, 360 Company was judged to have engaged in unfair competition on the grounds that Guard attempted to exclude QQ software’s functions in the name of protecting a users’ computer security. At the same time, it is the detailed statements and determinations on unfair competition in the internet industry which make this case much more valuable and informative.

1)  Users using free software have no obligation to watch ads, but the promotion of the ads is lawful.

Currently, most of internet enterprises provide free software for users and gain benefits through profit models such as advertising and value-added services to generate revenue streams. Despite some of advertising possibly being objectively annoying to users, in this case the court legalized such a commercial model. This is because the Supreme Court decided that it is not against the principle provisions and prohibitive provisions in the Anti-unfair Competition Law to use such a commercial model to obtain benefits for the respondent, and that the others should not utilize inappropriate methods to intervene in these legal interests.

With the above-mentioned determination, it is easy to conclude that the conduct of removing QQ software’s ads constituted unfair competition. As the court held that Guard’s deep intervention destroyed the integrity and security of QQ software, it is thus likely to that the 360 Company engaged in unfair competition in that, Guard utilized inappropriate methods of intervention in Tencent’s legal interests.

However, the Supreme Court corrected a point of the Guangdong Higher People’s Court and decided that consumers’ appreciation of free services has no corresponding relation to extra-time-costing or tolerance of other services. It seems such a decision is irrelevant with this case. Despite this, one still wonders whether it indicated that, if operators used appropriate methods to allow customers to use free software without ads, such conduct would not amount to unfair competition. As for how to define proper methods there is no more specific statement in the judgment. In our opinion, the judge had, acting as non-professional technical, no specific definition. It seems as if we could conclude that laws do not forbid consumers taking measures to block ads found within free software, whatever breach in a user’s agreement it may constitute.

2)  Operators have a higher duty of care to competitor’s products, without negative evaluations.

Additionally, 360 Company was also deemed as engaging in discrediting conduct against Tencent, because the Guard publicized a large amount of misleading speeches such as “QQ software will scan your personal documents and you should stop them scanning yours in order to avoid privacy disclosure”. The problem is one can’t literally determine if the Guard had fabricated these rumors. However, the judgment of Supreme Court already interpreted that similar one-sided and misleading speeches still constitute the discrediting conduct against Tencent without any factual basis.

At the same time, the Supreme Court decided that, it is not that operators cannot criticize or make comments about another’s goods, services or business, but that such criticism or comments shall be objective, sincere, fair and neutral with reasonable purpose, and not act to mislead the public or discredit that other party. Furthermore, it also pointed out that operators must fulfill a duty of care when making commercial comments or criticism for the purposes of competition. Accordingly, we know, when judging whether  a statement constitutes discrediting conduct, the court shall demand that such commercial commenters, especially operators in competition, far greater requests than demanded from ordinary civil liability. Unless the statement has a solid factual basis – in that case operators can criticize others by logical argument and reasoning.

3)  Adopting unfair means to carry out transactions on the market shall be considered as act of unfair competition.

In this case, when intervening with the operation of QQ software, the Guard also promoted that users install its products, such as 360 browser and 360 Safe. For such conduct, there is a textual determination in the judgment, i.e., that fair competition shall mean that competitors should pay in these circumstances to undertake honest competition; as a proverb states, no pay no gain. Non-payment or the unfair use of others’ markets to carry out transactions and obtain advantages shall be considered as acts of unfair competition.

Such a determination will set off alarm bells for most internet enterprises and some commercial models similar with the promotional advertising in this case, especially for some resource navigation software and websites. It is known in China that large software or websites attract users to visit its website or software by collecting others’ network resources as well as blocking others’ ads. As such, the current market has obviously conformed to using unfair means to grasp others’ markets. When challenged, this entrenched behavior is likely to constitute unfair competition, as stated in the determination of Supreme Court.

In turn, this indicates that using fair means does not constitute an act of unfair competition. For example, resource navigation software and websites do, if not blocking others’ ads and at the same time attracting users to visit their website so as to receive the goal of win-win, not constitute unfair competition.

4)  The legal amount of compensation is not the lifesaver for the infringers.

In the dispute of intellectual property rights, the reason why infringers are emboldened to engage in acts of infringement is that, in judicial practice, the courts always rule a low amount of compensation as punishment. In such proceedings, in the event that the profits earned by the infringer or losses suffered by the party infringed cannot be determined, the court shall apply the provision of the legal amount of compensation. However, in practice, due to the difficulties of proving the profits or losses in question, the court would award the damages of RMB 500,000 OR RMB 1,000,000.

In this case, Tencent provided adequate evidence proving the extent of losses suffered, but the evidence was not be fully dismissed by virtue of the cause-and-effect relationship afforded. The Supreme Court, however, decided that the Guard, publicized by the appellant, had already caused greater losses than the legal amount of compensation, and thus, upon the evidence, increased the payable damages up to the maximum compensation of RMB 5,000,000. Maybe it is not a large amount of money for these two companies, but such a decision is a revelation to intellectual property rights holders and courts. In the event that the plaintiff cannot prove the specific losses suffered, focusing on proving that the losses are far higher than legal amount of compensation will be a good strategy in the interests of obtaining higher compensation. It is good for intellectual property rights holders in protecting their legal interests.

In conclusion, even though the internet industry fiercely competitive, and thus, likely to bring benefits to consumers, we still want to quote a sentence from the judgment of second instance as encouragement: “free competition and free innovation shall be constructed as the border of protecting others’ lawful rights and interests, and a healthy development of the internet requires an orderly market environment and the explicit market competition rules as a guarantee.”

Lawyer Contacts

You Yunting86-21-52134918  youyunting@debund.com/yytbest@gmail.com

Disclaimer of Bridge IP Law Commentary

Leave a Reply

Your email address will not be published. Required fields are marked *