Tencent Prevails in Anti-Trust Suit
I’ve often wondered these last few months about what happened to an anti-trust lawsuit filed against Tencent (HKEx: 700) by security software firm Qihoo 360 (NYSE: QIHU) about a year ago. Now I finally have my answer, with word that the Chinese courts have rejected Qihoo’s complaint, meaning that life will now continue as usual for Tencent and other major Chinese Internet firms. (Chinese article)
Frankly speaking, this outcome doesn’t surprise me and does seem to reflect a growing sophistication in China’s legal system at handling major business disputes. I do agree to some extent that Tencent has come to dominate China’s Internet in some ways. That dominance is apparent in the company’s market capitalization, which is about the same or even bigger than all of China’s other Internet companies combined.
But at the same time, China’s Internet is a very big place that enjoys strong competition in most major segments. Tencent may enjoy the leading position in online games and social networking services — areas where it shows no signs of weakening anytime soon. But it’s still a secondary player in other big areas including online search and e-commerce, 2 of the most lucrative areas on the web.
Against that backdrop, I was a bit surprised when Qihoo filed its original lawsuit in southern Guangdong province in a trial that began last April. (previous post) Now media are reporting that the Guangdong court has rejected all of Qihoo’s complaints, and has even ordered Qihoo to pay the 790,000 yuan in legal and other fees related to the lawsuit. (Chinese article) Qihoo had accused Tencent of using its QQ instant messaging platform and other popular products to try and dominate other areas of the Internet.
This particular outcome wasn’t too difficult to predict, as the case seemed a bit strange to me from the outset. Qihoo is a famously litigious company that sues and has been sued by nearly every other major Internet firm, so it wasn’t that surprising to see it file this lawsuit. But in most western countries this kind of anti-trust lawsuit would typically be filed by government regulators rather than individual companies, so it was a bit strange that Qihoo decided to take this action itself.
Qihoo’s choice of choosing Tencent as its target was also a bit strange, since the 2 companies don’t really compete in any major product areas. What’s more, Qihoo doesn’t seem to have any major aspirations in online games or social networking, which are Tencent’s 2 strongest areas. As an outside observer, I would have expected Qihoo to target Baidu (Nasdaq: BIDU) with its anti-trust action, since many have accused Baidu of monopolizing China’s search market with its share of about 70 percent. A lawsuit against Baidu would have also made more sense, since Qihoo launched its own aggressive search initiative last summer.
Qihoo may have launched its lawsuit due to a lingering grudge it held against Tencent, after the pair became embroiled in a major conflict nearly 3 years ago. That clash saw Qihoo release a version of its free computer security product that hijacked Tencent’s QQ software on users’ computers, forcing Tencent to take emergency measures to counter the move.
Regardless of Qihoo’s motivations, I do quite like the fact that the Guangdong court has rejected the lawsuit. The decision reflects a growing sophistication among China’s courts in mediating business disputes. In this case the court seems to be saying it won’t allow itself to be used by companies like Qihoo for frivolous and time-wasting actions, which is why it ordered Qihoo to pay all the legal fees. In another high profile case, a different Guangdong court also showed growing sophistication last year when it successfully helped to mediate a sensitive trademark dispute between Apple (Nasdaq: AAPL) and a bankrupt electronics firm that claimed to own rights to the iPad name in China. (previous post)
I would like to think that perhaps Qihoo and other similarly litigious companies will learn a lesson from this case and perhaps stop filing so many lawsuits to try and solve their business disputes. But I suspect this verdict will do little to deter Qihoo from taking similar actions in the future. In the meantime, at least this latest action removes a distraction for Tencent, and also sends an important message that other China Internet firms won’t have to face similar risk in the future. At the same time, both Chinese and foreign firms should be encouraged by the fact that this case shows China’s courts are becoming an increasingly effective force in helping to resolve business disputes.
Bottom line: A court’s rejection of Qihoo’s anti-trust lawsuit against Tencent shows growing sophistication of Chinese courts in settling business disputes.
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