Complex Rules of Anti-unfair Competition Cases in the Chinese Legal Environment
A common method for network service providers to expand its market is to make their software installed on as many users 'computers as possible. Therefore, users' computers have become a fiercely competitive place. This competition is accompanied by greater controversy over whether installing of software of a certain manufacturer in the user's computer causing competitor's similar software cannot be installed constitutes unfair competition and whether this method infringes the rights and interests of consumers, or whether it constitutes a monopoly.
In a typical case that a prestigious Chinese internet company represented by Beijing Wis & Weals Law Firm against its competitor in the unfair competition case concerning web navigation, the dispute between the two parties mainly stems from whether the above situation constitutes unfair competition. The Haidian District People's Court of Beijing made a groundbreaking judgment in the above case. Based on this typical case, the author discusses the unfair competition attributes of software exclusion, whether it constitutes an infringement of consumer rights, and whether it constitutes a monopoly.
During 2002-2004, a series of lawsuits occurred between the prestigious Chinese internet company and its competitor for commercial competition of occupying users’ clients using Chinese-language Internet plug-ins. The typical case, together with other related cases, can be regarded as the earliest battlefield for Internet software operators to seize clients.
The typical case tells us that over the past decade or so, both the legislation and justice sectors have made profound efforts to introduce new thoughts and regulations for addressing these issues. Similar cases of recent years also show that market players have kept creating new competitive approaches and methods to constantly adapt to the legislative and judicial changes.
I. The evolution of rules under the Law Against Unfair Competition to regulate Internet-related unfair competition
The Law Against Unfair Competition is a basic law governing the competition behaviors of operators. However, recent years have witnessed the prominence of the following trend in the judicial application of this Law: unfair competition cases in the field of Internet have been on the growth and triggered great influence, making the regulating of unfair competition behaviors, which was originally intended to underpin the intellectual property laws, to become a hot spot in law practice and research.
1. Key points in the application of the general provisions of the Law Against Unfair Competition in ascertaining unfair competition
Software exclusion is the earliest and most influential Internet-related unfair competition behavior by which software operators deliberately set up obstacles in the design, installation and running of their software to hinder the installation and operation of competitors' software and induce users to unload competitors' software.
As far as the typical case is concerned, the defendant constituted typical software exclusion as its software, once installed, would undermine or delete the plaintiff’s software or hinder the installation of the plaintiff’s software.
Before amending the Law Against Unfair Competition in 2017, the basis for identifying behaviors such as software exclusion as unfair competition was usually the general provisions of the Law Against Unfair Competition, i.e., Article 2 of the Law Against Unfair Competition before amendment: “An operator shall, in transactions in the market, follow the principle of voluntariness, equality, fairness, honesty and credibility, and observe generally recognized business ethics. ‘Unfair competition’ in this Law refers to acts of operator which contravene the provisions of this Law, damage the lawful rights and interests of other operator, and disturb the socio-economic order.” The judgment on the typical case has been issued on the basis of this article.
The application of the Law Against Unfair Competition to civil actions should conform to the general legal principles of the tort law. Therefore, the key to the application of this article lies in the definition of the faults required for ascertaining the act of infringement, which asks for the interpretation of “business ethics” and the identification of subjective faults in infringement.
As far as the typical case is concerned, the defendant has based its defense on the ground that its behavior is a protection against the unfair competition committed by the plaintiff, which is similar to “justifiable defense” and does not constitute intentional unfair competition.
We are of the opinion that this ground of defense is untenable. In a society ruled by law, a civil act, whether intended to hold back competitors or not, shall apparently indicate the actor's intention and malice of infringement if it involves illicit means of maliciously destroying the competitors' software products. The so-called "justifiable defense" should neither be used as an excuse to evade the liability for infringement, nor be permitted by law.
Article 20 of the Criminal Law stipulates the justifiable defense as follows: "If a person is compelled to commit an act in an emergency to avert an immediate danger to the interests of the state or the public, or his own or another person's rights of the person, property or other rights, thus causing damage to the perpetrator of the unlawful act, it constitutes justifiable defense and he shall not bear criminal responsibility." Article 30 of the Tort Liability Law also stipulates the exceptions and limits of the infringement liability in the case of justifiable defense: "A person who causes damage in exercising justifiable defense shall not bear any liability. If justifiable defense exceeds the limits of necessity and causes undue damage, the person exercising justifiable defense shall bear appropriate liability."
As far as the typical case is concerned, the court did not support the defendant’s ground of defense for the so-called “justifiable defense”. As a matter of fact, justifiable defense can seldom serve as a ground of defense in cases related to intellectual property and competition laws.
Another key point in the application of this article lies in the definition of “business ethics”. We hold that “business ethics” as mentioned in this article refers to the generally accepted business ethics that should be observed in the industry of the two parties. For example, in the case of Beijing Baidu Netcom Science & Technology Co., Ltd. and Baidu Online Network Technology (Beijing) Co., Ltd. v. Qihoo 360 Technology Co. Ltd. for disputes over unfair competition relating to the Robots protocol, the defendant was accused of not complying with the plaintiff’s Robots protocol and constituting unfair competition. The court held that the Robots protocol has become a common technical specification to be followed in the Internet industry at home and abroad. The Self-discipline Convention jointly initiated by the two parties, though not constituting applicable laws, regulations or rules which can be referenced directly by the court, reflects and embodies the generally accepted business ethics and standards of conduct in the industry. Therefore, the court took into full consideration the spirit embodied in the Self-discipline Convention.
2. Analysis of special provisions on Internet in the Law Against Unfair Competition of 2017 and their vulnerabilities
Special provisions on Internet were added to the Law Against Unfair Competition as amended in 2017 through the legislative model of "summarization + enumeration + miscellaneous". This article stipulates that: "Operators engaging in production and operation activities via the Internet shall abide by the various provisions of this Law. No operator may use any technical means to influence users’ choices or to otherwise commit any of the following acts that will hinder or undermine the normal operation of Internet products or services lawfully provided by other operators: (1) putting links or compulsory target skips in Internet products or services lawfully provided by other operators without the consent of such other operators; (2) misleading, deceiving or forcing users into modifying, closing or unloading Internet products or services lawfully provided by other operators; (3) maliciously making network products or services lawfully provided by other operators incompatible; or (4) other acts that hinder or destroy the normal operation of Internet products or services lawfully provided by other operators."
This article firstly summarizes the general characteristics of unfair competition in the field of Internet and stipulates 3 types of typical unfair interference in the field of Internet and the miscellaneous provisions in this regard. The specific content includes: (1) inserting links or compulsory target skips in Internet products or services lawfully provided by other operators without the consent of such other operators; (2) misleading, deceiving or forcing users into modifying, closing or unloading Internet products or services lawfully provided by other operators; (3) maliciously making network products or services lawfully provided by other operators incompatible; or (4) other acts that hinder or destroy the normal operation of Internet products or services lawfully provided by other operators.
To sum up, the Law Against Unfair Competition is getting more and more sophisticated in regulating software exclusion and other Internet-related unfair competition behaviors. For example, it lays down explicit stipulations on several typical behaviors such as “label inserting and flow hijacking”, “advertisement shielding” and “altering other's software or services” and adds miscellaneous provisions to prohibit other improper interferences.
We believe that although the amended Law Against Unfair Competition contains explicit stipulations on the typical Internet-related unfair competition behaviors, its general and miscellaneous provisions are still vague and can by no means adapt to the ever-changing Internet technology, nor can they provide exact guidelines for the operation of enterprises. Therefore, the principle of “non-interference unless for public interest” and the views established in subsequent judicial precedents can continue to serve as a reference for this issue.
Given the evolution of rules regulating Internet-related unfair competition behaviors under the Law Against Unfair Competition, the principle of "non-interference unless for public interest" and the general and miscellaneous provisions in the special Internet clause of the Law Against Unfair Competition of 2017, we find that "disrupting the competition order" and "damaging the legitimate rights and interests of other operators or consumers" are the key elements of unfair competition. In other words, the legislation governing these unfair competition behaviors aims to regulate the operators' behaviors that will hinder or undermine the normal Internet-based production and operation activities of other operators, infringe upon the normal production and operation rights and interests of Internet operators, and thus disturb the normal competition order. The value orientation of legislation is to protect the normal competitive interests of Internet operators and the normal competition order among them.
Therefore, in view of the stability of law and the rapid development of the Internet technology and related industries, and based on the above legislative purpose and value, we can actively refer to the generally accepted industry order and standards (such as self-regulatory industry standards like Self-discipline Convention) in addition to legislative documents. Such self-regulatory industry standards shall be formulated and jointly signed by companies in the industry. The jointly signed industry standards shall be binding upon the companies signing them. For disputes over unfair competition between companies who have jointly signed the industry standards, if there are no specific rules governing such disputes, the court may introduce the rules contained in such industry standards as the basis for judging the constitution of the unfair competition.
In addition, we believe that even for disputes over unfair competition between companies who have not jointly signed such convention, if such disputes are caused due to obvious violation of relevant unwritten standards that have become an industry practice, the court may, in accordance with Article 10 of the General Provisions of the Civil Law which stipulates that the relevant practices may serve as the basis for judgment, introduce such unwritten standards as the basis for judgment; provided, however, that a prudent affirmation shall be made as to whether such standards have become conventional industry practices among companies, and the party claiming being infringed upon shall be responsible for submitting the relevant evidence.
II. Insufficient Protection of Consumers' Rights and Interests in Internet-related Unfair Competition
Contents on protection of consumers' legitimate rights and interests are added to the general provisions in Article 2 of 2017 Law Against Unfair Competition. However, in accordance with the provisions of Article 17, this law only grants operators the right to claim for compensation of damages. Consumers have no independent right of action to safeguard their legitimate rights and interests, and may only report the unfair competition behaviors of market players to the regulatory authorities, which places consumers in a very passive position. Under the Law Against Unfair Competition, consumers are unable to claim for compensation of damages and other rights in relation to the damage caused to them due to unfair competition. Does the Law on the Protection of Consumer Rights and Interests provide effective remedies in this regard?
Internet-related unfair competition behaviors such as software exclusion infringe upon consumers’ right of independent choice and right to be informed. We are of the opinion that the Law on the Protection of Consumer Rights and Interests does not provide consumers with effective protection against damages caused to them due to the unfair competition behaviors of companies.
Ⅲ. Software Exclusion and Restricted Transactions Governed by the Anti-monopoly Law
Article 17 of the Anti-monopoly Law prohibits operators holding dominant market positions from abusing their dominant market positions to restrict transactions. This article stipulates that: "Undertakings holding dominant market positions are prohibited from engaging in any of the following activities by abusing their dominant market positions: (1) selling commodities at unfairly high prices or buying commodities at unfairly low prices; (2) selling commodities at prices below cost for no justifiable reasons; (3) refusing to enter into transactions with their trading counterparts for no justifiable reasons; (4) making their trading counterparts to make transactions exclusively with themselves or with the undertakings designated by them without justifiable reasons; (5) conducting tie-in sale of commodities or adding other unreasonable trading conditions to transactions without justifiable reasons; (6) applying differential prices and other transaction terms among their trading counterparts who are on an equal footing without justifiable reasons; or (7) other acts of abuse of dominant market positions confirmed as such by the authority for enforcement of the Anti-monopoly Law under the State Council. For the purposes of this law, dominant market position means a market position held by undertakings that are capable of controlling the prices or quantities of commodities or other transaction terms in a relevant market or preventing or exerting an influence on the access of other undertakings to the market."
As defined in this law, the act of restricting transactions means that without justifiable reasons, undertakings holding dominant market positions allow their trading counterparts to make transactions exclusively with themselves or with the undertakings designated by them. For cases of disputes over unfair competition caused by software exclusion, will the software exclusion among companies realized by technical means constitute any of the abovementioned circumstances as stipulated in the Anti-monopoly Law?
If the Anti-monopoly Law is chosen as the applicable law, we should first confirm that the actor holds the dominant market position as defined in this article. However, from the perspective of legal provisions and judicial practices, it is usually difficult to make such a confirmation. Article 19 of the Anti-monopoly Law provides that: "The conclusion that an undertaking holds a dominant market position may be deduced from any one of the following circumstances: (1) the market share of one undertaking accounts for half of the total in a relevant market; (2) the joint market share of two undertakings accounts for two-thirds of the total in a relevant market; or (3) the joint market share of three undertakings accounts for three-fourths of the total in a relevant market. Under any of the circumstances specified in item (2) or (3), if the market share of one of the undertakings is less than one-tenths of the total, the undertakings shall not be considered to have a dominant market position. Where an undertaking that is considered as holding a dominant market position has evidence to the contrary, he shall not be considered as holding a dominant market position."
The above provisions show that to prove whether an undertaking holds a dominant market position in civil procedures, a high burden of proof shall be shouldered as to the market share in a relevant market. In the case of 360 v. Tencent for disputes over monopoly, 360 filed an anti-monopoly lawsuit against Tencent for its abuse of dominant market position to restrict transactions. 360 alleged that Tencent’s abuse of its dominant market position to force users to choose one or neither is a typical act of restricting transactions under the Anti-monopoly Law. Upon trial by the Higher People’s Court of Guangdong Province as the court of first instance and the Supreme People’s Court as the court of second instance, the plaintiff’s claims were rejected on the ground that Tencent did not hold a dominant market position in a relevant market. As far as the typical case is concerned, Tencent which occupies an absolute market share in the field of instant messaging in China, was not considered to have a dominant market position, which shows that the judicial organs were prudent in making a judgment that undertaking holds a dominant market position. Therefore, it is difficult to judge whether a market player holds a dominant market position if Article 17 of the Anti-monopoly Law is applied in anti-monopoly civil actions against software exclusion and other acts of unfair competition.
It is worth further discussing that if an operator who commits software exclusion is considered to hold a dominant market position, does such software exclusion violate the provisions of the Anti-monopoly Law about refusal to deal.
We are of the opinion that such software exclusion constitutes refusal to deal governed by the Anti-monopoly Law. The ascertaining of refusal to deal is based on 4 constituent requirements: entity (holding a dominant market position), subjectivity (with the intention to refuse to deal), behavior (specific behavior of refusing to deal), and result (resulting in the effect of competitive exclusion). If an operator who commits software exclusion is considered to hold a dominant market position, the act of software exclusion committed by such operator shall also constitute an act of refusal to deal as stipulated in the Anti-monopoly Law and such operator shall bear the legal liability arising therefrom.