China: The QQ / 360 Disputes - Who, What, Where, When and Preliminary Antitrust Analysis

China Law Insight
Last Updated: 14 November 2010
Article by Susan Ning, Ding Liang and Angie Ng

Recently, the disputes between Tencent's QQ and Qihoo's 360 software have caused quite a stir in the press (see our article entitled " QQ vs 360 – an anti unfair competition case".

We set out the "whos", "whats", "where" and "when" or the background to these disputes. We also provide our preliminary views or analysis re these disputes vis-ŕ-vis the Anti Unfair Competition Law (AUCL) and the Anti-Monopoly Law (AML).

Background

Tencent Technology (Shenzhen) Limited is a internet service provider – its most well known product, however is an instant messaging system known as "QQ" (Tencent QQ).

Beijing Qihoo Technology Limited supplies security software – its most well known line of products, are its "360" line of security software (including software which protects user's privacy on the internet and anti-virus software) (Qihoo 360).

The following is a timeline and summary of the events which have led to the QQ / 360 disputes:

In September 2010, Qihoo 360 launched a software called "360 Privacy Protector". This product is used to keep tabs on other software on a user's computer and is able to detect a number of things, for instance the type of data that another software extracts from a user's computer. The objective of this product is to shield a user from software which illegally extracts or retains a user's personal data; in other words, to protect a user's privacy.

On 26 September 2010, Qihoo 360 published an article on their website entitled "360 Privacy Protector 1.1 Beta – new function – privacy clean up function" . In this article, Qihoo 360 alleged that its 360 Privacy Protector software had recently detected that a "certain instant messaging software" was found to be "peeping" at the private files and data of users, without first obtaining the approval of those users. The article itself did not name which instant messaging software Qihoo 360 was referring to. However a screenshot in the article bore the logo of the Tencent QQ instant messaging software.

On 14 October 2010, Tencent Technology (Shenzhen) Limited and Shenzhen Tencent Computer System Limited (for ease of reference, collective abbreviated as "Tencent QQ") filed an application with the Beijing Chaoyang District People's Court (the Court), alleging that:

  • Beijing Qihoo Technology Limited (manufacturer and copyright holder of 360 Privacy Protector; and owner of www.360.cn);
  • Qizhi Software (Beijing) Limited (company which supplies 360 Privacy Protector software); and
  • Beijing San Ji Wu Xian Internet Technology Limited (operator of www.360.cn) (for ease of reference these three entities have collectively been abbreviated as "Qihoo 360")

have fabricated or spread false facts about Tencent QQ's instant messaging software resulting in the Tencent QQ's business reputation or "commodity fame" being damaged. This conduct was allegedly in breach of Article 14 of the AUCL.

Further in Tencent QQ's court application, they claimed that they could properly be construed as a competitor to Qihoo 360 as the latter also manufactures and supplies their own anti-virus or security software (i.e. called "QQ Computer Housekeeper").

 In its complaint, Tencent QQ requested that the Court: injunct Qihoo 360 from fabricating or spreading false facts about Tencent QQ's instant messaging software;

  • that Qihoo 360 apologise to Tencent QQ for the conduct described above; and
  • that Qihoo 360 pay damages of RMB 4 million.

On 3 November 2010, the Court accepted this case (the AUCL allegation).

On the same day (i.e. 3 November 2010), Tencent QQ issued a newsletter to all its users entitled "A letter to all users of QQ". Through this newsletter, Tencent QQ informed all users that they have made the "difficult" decision of making the use of QQ instant messaging service incompatible with the use of 360 privacy or anti-virus software. In other words, QQ users who choose to use 360 privacy or anti-virus software will no longer be able to use QQ instant messaging in the same instance. Tencent QQ explained that this was mainly because they were not confident that they could continue to protect their user's privacy (including data such as chats and passwords), if they continued to use the 360 line of security software. In its newsletter, Tencent QQ also requested that users use its "QQ Computer Housekeeper" or other antivirus or security software in place of the 360 line of security software. [Note: From 3 November 2010, users of QQ reported that they weren't able to use the 360 line of security software and QQ at the same time. However, a few days later, reports suggest that government agencies intervened and users reported that their QQ and 360 softwares were able to be used concurrently.]

On 4 November 2010, Li Changqing (a Beijing based lawyer ) filed a complaint with the State Administration of Industry and Commerce (SAIC) requesting that the SAIC should commence an antitrust investigation against Tencent QQ. In his application, Li alleged that Tencent QQ had abused its dominance by restricting QQ users or "forcing" QQ users to uninstall 360 software, without a valid reason (in breach of Article 17(4) of the AML ). Li also submitted a study report issued by iResearch Consulting Group – this report showed that Tencent's market share in the instant messaging software market was approximately 76.2%. Li requested that the SAIC impose an appropriate penalty on Tencent QQ for its alleged breach of Article 17(4) of the AML (the AML allegation).

The following paragraphs discuss and analyse the AUCL allegation and the AML allegation outlined above in some detail.

The Anti Unfair Competition Law (AUCL) allegation As mentioned above, Tencent QQ's allegation is that Qihoo 360 is in breach of Article 14 of the AUCL.

Article 14 of the AUCL prohibits entities from fabricating or spreading false facts to damage the business reputation or commodity fame of a competing entity.

In order prove that a breach of Article 14 has occurred, Tencent QQ would need to prove the following elements:

  • that Tencent QQ and Qihoo 360 are "competing" entities (first element);
  • that Qihoo 360 has undertaken conduct amounting to "fabricating or spreading false facts" about Tencent QQ (second element); and
  • that the business reputation or "commodity fame" of Tencent QQ has been damaged (third element).

In respect of the first element, we note that a lot would depend on what the Court would construe as the "relevant market". If the Court construes the relevant market to be a broad "market for internet services" for instance, then it is likely that Tencent QQ and Qihoo 360 could be construed as "competitors". However, if the relevant market is more narrowly drawn, it might be more challenging for Tencent QQ to prove that they should rightly be considered "competitors" to Qihoo 360.

As mentioned above, Tencent QQ's primary business is in providing QQ instant messaging software to users; whereas Qihoo 360's primary business is in providing the 360 line of anti-virus or security software to users. In Tencent QQ's court application, they have argued that they are competitors to Qihoo 360's line of anti-virus or security software, because Tencent QQ also provides similar software in the form of "QQ Computer Housekeeper".

The second and the third elements would depend on whether the Court is satisfied that Tencent QQ has provided sufficient evidence to prove that Qihoo 360 has "fabricated false facts" and that this has resulted in "damage" to the former's business reputation.

The Anti Monopoly Law (AML) allegation

As mentioned above, Li's allegation is that Tencent QQ breached Article 17 of the AML.

Article 17 of the AML prohibits entities which hold a dominant position to abuse their dominance by engaging in several specified acts, including by restricting other entities to transact only with the original entity or only with specified entities, without a valid reason (Article 17(4), AML).

In order to prove that a breach of Article 17 has occurred, Li would need to prove or the SAIC would need to be satisfied that the following elements have been fulfilled:that Tencent QQ is "dominant" in the relevant market (the first element); that Tencent QQ has abused its dominance in the relevant market by restricting other entities to transact only with Tencent QQ or only with specified entities (thereby excluding others), without a valid reason (the second element).

With regards to the first element, Article 19 of the AML is instructive. Article 19 of the AML outlines three scenarios in which an entity would be considered a dominant entity, most relevant of which is an entity would be deemed dominant where the entity holds half of the market share (i.e. more than 50%) in the relevant market. However, this is a rebuttable presumption – in other words, an entity which has been "deemed" as dominant may provide evidence that it is not dominant in the relevant market.

As mentioned above, Li submitted a study report which alleged that Tencent QQ is dominant in the instant messaging software market (with a market share of 76.2%). It remains to be seen if a court or the SAIC would be of the view that the report provides sufficient evidence that Tencent QQ is dominant in the instant messaging software market.

Another issue is, that, if indeed the allegation is that Tencent QQ is dominant in the instant messaging software market but that the alleged "abuse" has resulted in effects in the security or antivirus software market; would a court or authority still consider this to be an abuse of dominance? In other words, if an entity is dominant in Market A but the alleged abuse has taken place in Market B – would such conduct still be construed as an abuse of dominance? If so, what are the factors which a court or authority would consider as relevant in proving such a case?

The allegation appears to be that Tencent QQ has somehow "made use" of or "leveraged" its dominance in the instant messaging market to influence another "market", arguably the "anti-virus" or "security" software market. Whether an entity has "leveraged" its dominance in Market A to influence conduct or outcomes in Market B is a complex issue – in overseas jurisprudence (such as the EU), there is conflicting jurisprudence on whether Market A and Market B have to be "related" markets, for an abuse of dominance breach to be made out.

In addition, even if a court or authority was willing to accept that an "abuse" may occur in a separate market, then the next step would be to prove the second element or nature of the abuse. In this case, it appears that the allegation is that Tencent QQ has restricted users from transacting or using the 360 line of anti-virus software, without a valid reason – in breach of Article 17(4) of the AML.

We also note that it may be possible to apply a "network effects" analysis – based on United States-based jurisprudence. Arguably, Tencent QQ possesses market power in the instant messaging service market (a "network" market) – and has used its power in this market to alter the behaviour of its users (i.e. not to use the 360 range of security software). It is unclear, though, the extent to which overseas theory and jurisprudence may be applied or be presented as persuasive evidence in a chinese court or before the SAIC.

Comments

It will be interesting to see how the AUCL and the AML allegations pan out – i.e. how the former court case is resolved; and whether the latter will result in an SAIC investigation or present a catalyst for an AML based private action in court. Complex AUCL and AML issues are raised in this case and we will keep a close watch on developments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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