The IP battle between Qihoo and Tencent steps into a new stage

2012/7/26By Doris Li, China IP,[Copyright]

Once upon a time, Zhou Hongyi, CEO of Qihoo 360 Technology Co., Ltd. (Qihoo) and Pony Ma, CEO of Tencent, Inc. (Tencent) were good friends and appreciated each other. Of course, the “Penguin” (Logo of Tencent) had not turned against the “Shield” (Logo of Qihoo) at that time, nor did the “Shield” showed its fist on the “Penguin.” The war broke out between these two Internet giants having hundreds of millions of users when it attracted the attention from both the media and authorities in China. Different from other commercial wars, the public showed particular concern on this case, worrying about whether this war would spill out of control.

 

Deeply rooted hatred

Bad blood developed between Qihoo and Tencent which dates back to September 2010, when Qihoo accused Tencent of peeping into users’ computer files via QQ, and then it provided free downloading of “360 Privacy Protector” software. In November of the same year, Tencent sent its QQ users an open letter with the title of “A Difficult Choice,” asking them to choose between QQ and 360. The war began to affect common users. In the next few months, the “Shield” and the “Penguin” kept the fierce confrontation. On April 26th, 2011, Chaoyang District People’s Court

made a ruling on the case filed by Tencent on the unfair competition count of 360 Privacy Protector. Qihoo and other two defendants were enjoined from offering the 360 Privacy Protector, and ordered to run a 30 day consecutive elimination of the adverse effects on Tencent due to the infringement, compensate 400,000 yuan, and delete related remarks on its websites.

The truce lasted for a moment. However, the “Penguin” and the “Shield” had planted the seeds of hatred and the outbreak of another war was just a matter of time.

In September 2011, Tencent declared the second war against Qihoo and raised the amount of compensation up to 125 million yuan. Tencent announced that it would stop the development and dissemination of the “360 Koukou Guard” (which was designed to protect the privacy of QQ users and blocking ads) and related softwares, claim compensation for economic losses of 125 million yuan and force Qihoo to publish apology letters for its acts of unfair competition on its portal 360.cn and 360.com, Sina, Legal Daily newspaper and other media for three consecutive months so as to eliminate the bad influence.

Tencent said in the indictment: “the acts of unfair competition by the defendant (Qihoo) reduce the trading opportunities for value-added services and advertising revenue of the plaintiff (Tencent). It not only causes incalculable damages to the plaintiff, but also prevents users from enjoying high-quality, safe and effective instant messaging services, which ultimately damages the interests of users. Therefore, the plaintiff claims 125 million yuan of compensation without any exaggeration.” Tencent was angry while Qihoo is not a cowardly lion either. In April 2012, Qihoo sued Tencent for abuse of dominant market position, claiming 150 million yuan. On April 18th, the Guangdong Higher People’s Court opened the first instance hearing. Should Qihoo win, it will not only regain respect, but also recover the previous losses.

 

How to define the market

On the eve of “April 26th World Intellectual Property Day,” Qihoo opened fire to Tencent. Qihoo announced that it would bring Tencent to court for “the abuse of its dominant market position in using the instant messaging tool QQ to muscle users to uninstall the 360 software,” with the claim of 150 million yuan. Almost simultaneously, the Guangdong Higher People’s Court formally accepted the unfair competition lawsuit raised by Tencent against Qihoo and its “360 Koukou Guard” with the claim for 125 million yuan and official apology. So far, the lawsuit between Qihoo and Tencent has become one with the highest compensation claim in China’s Internet industry.

At trial, the definition of instant messaging software (IM) became the most controversial issue. According to the provisions of Article 12 of China’s Anti-Monopoly Law, “relevant market” refers to the commodity scope or territorial scope within which the business operators compete against each other during a certain period of time for specific commodities or services. Attorneys of both sides argued on this matter.

Attorney of Tencent said that dozens of new IM products, including “Kouxin” of Qihoo, “Youni” of SNDA, “iMessage” of Apple, “Woyou” of China Unicom, etc. entered the market in 2011. Together with the existing IM products with millions of users, such as Fetion, Ali Wangwang, Baidu Hi, YY and Sina’s microblog, the IM market should be defined as a fully competitive market.

Qihoo also spent a great deal in introducing British scholar David Stallbass as expert witness, who once served as Secretary for London Office of Fair Trading.

According to him, mailbox and microblog are different from IM, none of which is instant messaging tool. When the judge asked him whether it could affect the definition of relevant market if the chat function of microblog solved the instant communication problems and reduced the use of instant messaging, David said that the chat function of microblog is in the same market as QQ, but microblog itself and QQ do not belong to the same market. Qihoo commissioned the professional research organ RBB to work out a special economic analysis report (the RBB Report ), which stated that e-mail and instant messaging products are not interchangeable and therefore cannot be classified into the same market.

Jiang Qiping, Secretary-General of the Center for Informatization Study (CIS) under the Chinese Academy of Social Sciences, acted as the expert witness for Tencent. He said, there are significant flaws in the RBB Report when defining the relevant market in this case.

The report could not reflect the competitive situation of China’s Internet products and industry development pattern. It ignored the IM applications offered by e-mail service providers, and made mistakes when excluding microblogs and social networking sites that integrated instant messaging services.

 

According to the Articles 4, 5 and 6 of the Guide of the Anti-monopoly Committee of the State Council for the Definition of the Relevant Market, the fundamental basis for defining the relevant market includes substitution analysis, demand substitutability and supply substitutability. In the law enforcement practices, the range of the relevant market depends heavily on the substitutability of commodity (region). With regard to this issue, China IP interviewed Mr. Zhao Junjie, lawyer of the Trust Law Firm. He commented that from demanders’ perspective, different commodities that have higher degrees of substitutability and stronger competitive relationships are more likely to be in the same relevant market. With lower input in production facilities and smaller additional risks, more operators would join in the market rapidly and provide substitutive commodities, so that the supply substitutability will rise to a higher degree. There is more than one way to define a relevant market. Demand substitutability analysis can be based on commodity characteristics, applications, prices and other factors. Supply substitutability analysis should also be conducted if necessary. If the range of the competitive market is not clear enough or is not easy to determine, the analysis of “hypothetical monopolist test” (analyzing data with economic tools) can also be adopted to define relevant market.

Considering the market definition of instant messaging software (IM), You Yunting, Partner of Debund Law Offices told China IP , “Since its implementation, the Anti-Monopoly Law has not yet made specific provisions on how to define the market (in fact it’s also difficult to have a unified provision), so that the criterion could only be concluded from specific cases. The market in this case can exclude the industries with similar communication function, such as cell phone, text messages, e-mail, etc., but should include the mobile Internet. With regard to the antitrust case between Tencent and Qihoo, reports on the trial said that Tencent took the instant messaging function of Sina’s microblog into consideration and calculated its market share. In my opinion, Sina has not yet launched the instant messaging function in its Web version in the previous dispute period and has not accumulated large amount of end users. Therefore, Tencent’s defense has no solid grounds.” The 2010-2011 Annual Monitoring Report on China’s Instant Messaging issued by iResearch also showed that, 77.2% of Internet users used IM in 2010, totaling 350 million and having increased by 29.8%; users of mobile instant messaging services amount to 202 million, with an increase of 12.6%. The veteran operator Tencent has taken 76.2% of the market share, keeping its peak concurrent users above 100 million. “This may serve as a proof that the defendant occupies the dominant market position. If Tencent can find an anti-proof, the report can be deemed as flawed and would no longer have probative force.” You Yunting said.

 

“Monopoly” is in focus

Qihoo sued Tencent for the “abuse of dominant market position.” On April 18th, Guangdong Higher People’s Court opened the first instance hearing on this case. Qihoo requested the court to order Tencent to immediately stop the abuse of its market position and stop asking QQ software users not to trade with Qihoo or use bundled security products.

Qihoo claimed that judging from the market structure, Tencent took a dominant market share, which was far ahead of any other operators. The 2010-2011 Annual Monitoring Report on China’s Instant Messaging issued by the third-party iResearch shows that the defendant’s market share reached 76.2% while any of the other operators’ shares did not exceed 7%. According to the report of China Internet Network Information Center, the penetration rate of Tencent’s QQ software was as high as 97%. The defendant’s annual financial report showed that as of June 30th, 2011, the number of active users of QQ instant messaging reached 701,900,000 and the number of peak concurrent users reached 136.7 million.

According to China’s Anti-Monopoly Law, the definition of market dominance is “dominant market position,” which refers to a market position held by a business operator having the capacity to control the price, quantity or other trading conditions of commodities in relevant market, or to hinder or affect any other business operator to enter the relevant market. The definition constitutes two conditions as selective conditions: the first is the enterprise’s position in the market, which makes it possible for it to control the price, quantity or other transaction terms; the second is its impact on competition, which makes it possible to hinder or affect other operators’ access to the relevant market.

As far as abuse is concerned, You Yunting said, “It is still difficult to make a judgment. Although Tencent’s act of forcing its users to choose between the two software has fallen in line with the definition of ‘abuse,’ it has indeed given many ‘reasons’ to justify it, such as Qihoo’s acts of hijacking and destruction of QQ.” According to China’s Anti-Monopoly Law, if the operator that has a dominant market position allows their trading counterparts to make transactions exclusively with themselves or with the undertakings designated by them, conducts tie-in sale of commodities or adds other unreasonable trading conditions without justifiable reasons, it will be identified as abusing its market position.

Zhao Junjie said that the Articles 18 and 19 of the Anti- Monopoly Law provide that, the dominant market status shall be determined according to the following factors: the market share of a business operator in relevant market, and the competition situation of the relevant market; the capacity of a business operator to control the sales markets or the raw material procurement market; the financial and technical conditions of the business operator; the degree of dependence of other business operators upon of the business operator in transactions; the degree of difficulty for other business operators to enter the relevant market; and other factors related to determine a dominant market position of the said business operator.

When the operator’s market share in the relevant market reaches a certain proportion, it can be presumed as having the dominant position in the market.

The abuse of dominant market position means that the operator that enjoys a dominant market position abuses its position to prevent or restrict market competition.

According to Article 17, the abuse of dominant market position includes: 1) monopoly pricing; (2) predatory pricing; (3) refusal to deal; (4), (5) restraint/tying; (6) discriminatory treatment. The case centers on (4) and (5), i.e., unreasonably restraining a trader from dealing with no other except itself or its designated operators, or tying with the deal other unreasonable conditions. The plaintiff ’s statement and proof were all related to the issues mentioned above. Therefore, the defendant gave rebuttal and the court has not made the first instance verdict.

It is learnt that, according to the provisions of the Anti- Monopoly Law, Tort Law of the People’s Republic of China (Tort Law) as well as the Regulations on Several Issues Related to the Application of Laws in Civil Disputes Caused by Monopolistic Behaviors enacted by the Supreme People’s Court on June 1st, if the court rejects the accusation of abusing dominant market position while holds to the act of restricting competition, the defendant will bear related responsibility and be ordered to stop infringement and compensate for the losses.

 

A pathfinder dispute

The war between Qihoo and Tencent has been continued for a long time and each battle has caused wide concern. It is generally believed that it is of positive significance to China’s anti-monopoly practices and fair market competition if their dispute on “abuse of dominant market position” came to a verdict.

At present, China’s legislation in the anti-monopoly field is not very clear. Most of the regulations are principles rather than specific standards. For example, there are no detailed standards in definition of the market, the identification methods of compensation and the specific forms of monopolistic behaviors.

You Yunting thinks that this dispute is inevitable in market competition and can be resolved through civil procedures. But he still suggests that public relief should play its role in preventing such competition restriction acts by large enterprises, and the administrative departments shall make investigations.

Zhao Junjie argues that anti-monopoly laws of other countries generally do not prohibit operators from achieving dominant market position through competition, but prohibit the abuse of dominant market position to exclude or restrict competition. It is an international practice. With the continuous development of society, the number of monopoly disputes will increase gradually.

The legal basis for monopoly disputes include: the Anti- Monopoly Law and its judicial interpretation, Tort Law, Contract Law and its judicial interpretation, the Anti- Unfair Competition Law and its judicial interpretation.

The dispute between Tencent and Qihoo has a positive meaning in enriching China’s anti-trust practices and promoting fair competition in the market.

(Translated by Li Guanqun)

 

 

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