Introduction

On November 4 2017 the National People's Congress Standing Committee passed the long-awaited amendments to the Anti-unfair Competition Law, which will take effect on January 1 2018. This is the first time that the law has been amended since it came into effect in 1993, and it will have a significant impact on business practice in China.

The revision of the law covers various legal issues, including:

  • acts of confusion (Article 6);
  • commercial bribery (Article 7);
  • false or misleading business promotion (Article 8);
  • infringement on trade secrets (Article 9);
  • illegal prize-giving sales (Article 10);
  • spread of rumours or misleading information (Article 11); and
  • internet-related unfair competition by technical means (Article 12).

In particular, the revised law includes a new section addressing internet-related unfair competition. Some behaviours (eg, false or misleading online business promotion) appear to be online versions of the traditional acts of unfair competition. However, other behaviours are unique to the digital age and driven by information technology.

This update focuses on the latter (ie, unfair competition that is unique to the digital world) and illustrates the precedents and interpretations of Article 12 of the law, and how this will be applied and enforced in practice.

Codification of existing case law

Article 12 is one of the most debated topics regarding the overhaul of the Anti-unfair Competition Law. Although this specialised internet clause has arguably provided sufficient protection for fair competition online, it is difficult to cover all types of unfair competition in the changing digital age.

Article 12 clarifies the standards for determining internet-related unfair competition and codifies existing case practice by the courts. Although the existing law provides no specific internet-related unfair competition regulations, the courts have developed a series of well-formulated legal principles based on Article 2 of the Anti-unfair Competition Law, which provides a general definition of 'unfair competition' as that which prohibits the activities of competitors, disrupting market competition order and undermining the legitimate rights and interests of other business operators or consumers.

Article 12 of the amended law prohibits certain types of conduct by online players which are deemed to constitute unfair competition. The key idea is that online companies are prohibited from obstructing the legitimate activities of competitors or confining consumers' right to choose.

It states that business operators must comply with the law when engaging in production and business activities via the Internet. Further, it also states that business operators must not use technical means to carry out four kinds of activity that obstruct or disrupt the normal operations of the online products or services lawfully provided by other business operators by way of affecting users' choices or otherwise.

The first prohibited behaviour is inserting links into or forcing the redirection of targets from online products or services offered by another operator without its consent. For example, in Beijing Baidu Netcom Science Technology Co Ltd v Qingdao Aoshang Network Technology Co Ltd the court found that Aoshang, without permission, forcefully inserted pop-up advertising content that was closely related to Baidu's general search results via technical means and induced users that were searching for Baidu to click on the advertising page, thereby undermining Baidu's legitimate commercial interests. The court held that Aoshang had violated the principle of good faith and recognised commercial ethics, and had prevented other operators from operating properly and undermined their legitimate interests.

The second prohibited behaviour is misleading, compelling or deceiving users to modify, close or uninstall online products or services that are lawfully provided by other business operators. In Tencent Technology (Shenzhen) Co Ltd v Beijing Sogou Technology Development Co Ltd Sogou's pinyin installation method included the "input method repairment" window pop up, which would guide users to delete the shortcut of QQ pinyin input software (operated by Tencent) from the language bar. This meant that users were unable to use QQ pinyin input software. The court condemned such behaviour as unfair competition.

The third behaviour, which might be the most controversial, is maliciously implementing technology that undermines the compatibility of legal network products or services offered by other business operators. However, the new law provides no explanation of 'malicious incompatibility'. This issue of such incompatibility can be observed in Beijing Qihoo Technology Co Ltd v Tencent Technology (Shenzhen) Co Ltd, in which Tencent compelled its users to choose only one of two platforms (ie, its instant messaging software QQ or Qihoo's 360 anti-virus software). Those that chose to use QQ could not use the 360 anti-virus software. The Supreme Court ruled that this forcefully incompatible behaviour did not constitute abuse of a dominant position. Some experts claim that while the provision aims to promote resource sharing, it may – despite the legislative intent – have the unintended consequence of restricting competition and innovation. Generally speaking, business operators are free to adopt intentionally incompatible strategies to compete with other competitors. Apple is a prime example of adopting a unique, closed ecosystem of such an incompatible nature. Clarification on the boundary between malicious and justified incompatibility is needed by either enforcement agents or the courts in future.

Taking into account the challenges arising from the fast-growing and changing online sector, the revised law provides a miscellaneous provision on unfair competitive conduct in Article 12, paragraph 4. Under this catch-all provision, operators are prohibited from impeding or destroying the normal operation of online products or services legitimately provided by other business operators.

The revision of law reflects technological advancement and absorbs the courts' contribution on past judicial practice.

Inherent limitation of Article 12

However, given the rapid advancement of technology and the fierce competition in the digital world, three explicitly prohibited behaviours outlined in Article 12 are arguably becoming outdated, and new types of infringement are not clearly defined in the law.

This is partly because Article 12 over-emphasises technological interference. Whether links are inserted or redirected, or unlawfully modified or uninstalled, the end result is a direct loss of one business operator. In other words, a business operator will directly profit from infringing other business operators' products or services. Nevertheless, in practice certain behaviour (eg, data grabbing) may not have a directly negative effect on other business operators' products or services.

Another reason why outdated internet-related unfair competition disputes could be reduced is the deterrence of court decisions and the innovation of business models in the sector. After significant judicial decisions have been made, the market promptly responds and adjusts its corresponding behaviour and business models. This also explains why after a series of unfair competition cases (eg, Cheetah Browser (Beike Internet (Beijing) Security Technology Co Ltd) v Youku Video (Heyi Information Technology (Beijing) Co Ltd and Beijing Iqiyi Technology Co Ltd v Shenzhen Juwangshi Technology Co Ltd), in which the courts ruled that online video advert filtering constituted unfair competition, such software has become rare.

Future developments

This is not to say that software interference which aims at gaining online traffic will soon disappear. The most important thing to online businesses is still to compete for online traffic – regardless of legitimate or unfair competition. Such traffic and the volume of visits to a website is and will remain a key competitive resource in the internet industry. In addition, online competition is beginning to shift from pure traffic competition to data capture and content free-riding, due to the rapidly decreasing rate of traffic volume and the increase in the importance of data resources.

Recent cases have exemplified this trend. In Beijing Taou Technology Co Ltd v Beijing Micro Dream Network Technology Co Ltd the court claimed that without the consent of users and authorisation of Sina Weibo, Maimai was not allowed to crawl public information on the Weibo platform and conduct technical matching to promote its own service, as this constituted unfair competition. The court went on to establish a controversial 'triple authorisation' principle, which meant that – excluding the initial users' authorisation on Weibo's data collection and Weibo's authorisation on Maimai's data collection – users must knowingly and directly allow Maimai to collect their personal information on Weibo's platform. However, this seems questionable because a data-holding platform has no incentive to share its data resources. Such a principle may restrict the space for data sharing and subsequent development, which is unconducive to encouraging the market to form a healthy ecosystem of data interconnection.

The characteristics of the internet industry should be considered in order to determine whether particular conduct might lead to unfair competition. Data competition will likely play a major role in future internet-related unfair competition.

'Rule of reason' approach

Another feature of online competition is the increasingly obscure boundary between fair and unfair competition and the increasing importance of protecting innovation. Defining unfair conduct in the internet industry involves a careful balance of promoting new technology and protecting legitimate rights, which is challenging during law enforcement.

However, the revised Anti-unfair Competition Law provides no applicable or detailed standards to identify whether particular conduct constitutes unfair competition. Therefore, the definition of 'unfair conduct' still needs judicial elaboration. Although the courts have developed several theories based on the loss of trading opportunities, more comprehensive and detailed assessment is required in relation to the diversified and quickly changing internet-related competition status.

The 'rule of reason' approach could be adopted, whereby the key factor is assessing whether any actual or potential harm on competition would outweigh any actual or potential pro-competitive effects, as applied in antitrust cases. When finding that a specific behaviour constitutes unfair competition, the following three factors will be considered:

  • whether the legitimate rights and interests of other business operators have been infringed;
  • whether consumer welfare has been deprived; and
  • whether the competition order has been negatively affected.

The rule of reason further requires that the court consider whether any positive welfare benefit is attributable to the alleged behaviour.

For example, it might be difficult to assess the legality of data grabbing. On the one hand, data grabbers may infringe upon other business operators' competitive resources, but also bring about innovation. On the other hand, refusing to share data may constitute malicious incompatibility if such data is deemed essential to effective competition. Therefore, use of the rule of reason approach may be critical to anti-unfair competition cases.

Shanghai Hantao Information Consulting Co Ltd v Beijing Baidu Netcom Science Technology Co Ltd is a recent precedent that applies the rule of reason. In this case, Baidu's map used technical means to grab review information from 'dianping.com' and its search results displayed these reviews with a link to the original comments. The court held that although Baidu's map, to a certain extent, enriched consumer choice, it was disproportionate as it did not take the measure that could be least harmful to 'dianping.com'. Moreover, Baidu's vertical search service replaced reviews generated from 'dianping.com', which not only undermined the interests of 'dianping.com', but also curbed the incentive to invest further in its content providing services, thus hindering the order of market competition.

Comment

Article 12 gives practical and clear guidance for business operators on how to compete legally and fairly online. It also enables enterprises to better safeguard their legitimate rights and interests when faced with unfair competition online. Although some internet-related behaviours are not clearly stated, the competition enforcement authorities – particularly the courts – may still use Article 2 to determine the legality of such conduct.

However, enforcement of internet-related competition cases should be prudent in order to maintain the market incentive to promote innovation. It has been widely recognised that over-enforcement in the internet industry may lead to high error costs. Thus, more effect-based analysis will likely be seen in future internet-related unfair competition cases.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.

For further information on this topic please contact Michael Gu or Charles Xiang at AnJie Law Firm by telephone (+86 10 8567 5988) or email (michaelgu@anjielaw.com or xiangwenlei@anjielaw.com). The AnJie Law Firm website can be accessed at www.anjielaw.com.