Qihoo 360 v. Tencent: A Landmark Decision under China's Anti-Monopoly Law

by Sheppard Mullin Richter & Hampton LLP

On March 29, 2013, the Guangdong High People’s Court ruled that Tencent, Inc. (“Tencent”) did not violate China’s Anti-Monopoly Law (“AML”). In the first lawsuit of its kind, Beijing Qihoo Technology Co. Ltd. (“Qihoo”) sued Tencent under the AML, claiming Tencent was engaging in anti-competitive behavior. They sought ¥150 million in damages and an injunction against Tencent.

Qihoo is the software developer of the anti-virus program 360 Safeguard, and has more than 445 million users in China. Tencent is the company behind popular social networking, micro-blogging, and instant messaging software platforms such as WeChat, Weibo, and QQ. Tencent has nearly 800 total million users overall.

In 2010, Tencent introduced an anti-virus program called QQ Doctor, competing directly with Qihoo. QQ Doctor came bundled with the QQ instant message service. Because of its aggressive business tactics, Tencent quickly captured a 40% share of that market. Faced with this new competition and declining market share, Qihoo initiated defensive tactics, such as blocking QQ pop-up ads on devices using Safeguard 360. Tencent countered with a software update that rendered 360 Safeguard virtually inoperable on QQ-equipped devices, effectively forcing consumers to choose between the new rivals.

The AML, which went into effect on August 1, 2008, prohibits a company from engaging in anti-competitive conduct. One of the provisions states that if a company has a “dominant market position,” it cannot abuse that position. “Dominant market position” occurs where one or several business operators(s) control(s) a specific market. Here, the plaintiff bears the burden of proof to demonstrate that the alleged harm is a result of the defendant’s: (a) dominant position in a “relevant” market, and (b) use of that position to abuse the market.

During the trial, Qihoo proffered a letter written by Tencent to QQ users, which instructed them to uninstall 360 Safeguard from their devices, or lose functionality of the instant message service. Tencent’s defense was that, ultimately, tech-savvy consumers are in the best position to make those choices. In addition, Tencent asserted that Qihoo’s closest competitors allow full integration of QQ, and Qihoo was the one acting anti-competitively. Finally, Tencent argued they lack a true “dominant position” in the relevant market.

The Court agreed with Tencent. In rendering this decision, the Court considered many factors, including market analytics and empirical data. In an 80-page decision, the presiding Judge opined, “The Anti-Monopoly Law aims to protect competitors and consumers, instead of the monopoly itself. Those who gain a dominant market position through technological innovation, better operation and management, and price advantages, are not the targets of the country’s Anti-Monopoly Law.” By dismissing all of Qihoo’s claims, the Court concluded Tencent lacks the “dominant” status required for an AML violation. Although Qihoo has appealed the decision to China's Supreme Court, it remains the most significant decision in China, and benchmark of antitrust analysis for the rest of the world.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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