This article is written by Prashant Dhodapkar, pursuing a Diploma in US Intellectual Property Law and Pralegal Studies from LawSikho. The article has been edited by Prashant Bvaiskar (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).
Table of Contents
Introduction
In a recent judgment this year (June 2021), the Beijing Intellectual Property Court decided that the use of Red Packet grabbing software, developed by the defendant Shenzhen Palm Vision Technology Private Limited (‘Palm Vision’), amounted to an act of unfair competition as it allowed the users of the contested software to grab Red Packets in the WeChat app of the Plaintiff Tencent Holdings Limited (‘Tencent’) without actually logging in into the app. This interfered with the normal operation of the Plaintiff’s services provided over the internet.
This case is especially relevant in light of China’s competition policy, codified in the form of Anti Unfair Competition Law (‘AUCL’) of 1993 and the Anti Monopoly Law (‘AML’) of 2007, and the amendments to AUCL in 2017 and 2019.
There are several ancillary aspects of the case that are worth contemplating. The central issue of the Tencent v Palm Vision case is that torts committed over the internet can have very serious implications for the online operations of the victim and require more extensive intervention as compared to a mere notice to cease infringing acts or taking down offending content. In introducing the digital equivalent of Red envelopes (also known as Red Pockets or Red packets), Tencent monetized an ancient Chinese custom, and in a way, also let loose a Frankenstein monster.
The ‘Red Envelopes’ feature of WeChat has become very popular amongst young Chinese for the fun and entertainment (and even gambling) element involved in it but is rather deplorable in light of the cultural erosion it has caused. What is alarming is that the private data of users, including bank account details, gets compromised due to the torts such as committed by Palm Vision.The Chinese government has undertaken an overhaul of its legal system to create and support local enterprises of global repute. Its policy of oversight over social media and internet activities, accompanied by somewhat strict user registration requirements, prevents global adoption of innovative creations such as We Chat. The contention around the WeChat app (bans by India and USA) and the fierce competition and criticism associated with its use within and outside China indicates that for Tencent, success has spawned many hurdles.
AUCL of China : brief history
As a part of the transition to market economy in the 1970s and 1980s, China started to formulate its antitrust regulatory framework. This culminated in the Anti Unfair Competition Law in 1993. Its objectives included the maintenance of sound development of socialist market economy, encouraging fair and free competition, preventing acts of unfair competition, and safeguarding the lawful rights and interests of businesses and consumers. When the AUCL came into force, not many legal mechanisms were available to address a variety of commercial matters such as advertising, bidding, pricing, monopoly regulation, etc. and the AUCL was provisionally regulating all such matters.
With the passing of relevant laws such as Advertising Law (1994), Price Law (1997), Bidding Law (2000) and finally the Anti Monopoly Law (2007), it was realized that AUCL overlapped with a lot of other regulations. Moreover, the regulation of unfair practices in the online environment necessitated suitable modifications in the AUCL. Hence an amendment to AUCL was affected in 2017 and all the redundant provisions were deleted and the provisions related to the regulation of business conduct in the online environment were included. A second amendment was carried out shortly thereafter in 2019, mainly to include provisions related to trade secrets.
Tencent : profile of an innovator
With a valuation of USD 500 billion in 2018, Tencent is one of the most valuable technology companies in the world. It is a holding company, offering various products and services over the internet through its subsidiaries. Its services include social networks, music, web portals, mobile games, e-commerce, payment services, smartphones, etc. Its flagship products and services include the web portal QQ.com, instant messengers like Tencent QQ and WeChat and Tencent Music. It has four wholly foreign-owned enterprises and twenty subsidiaries.
Tencent’s business practices have been questioned in the media and several lawsuits brought against it. It has been allegedly involved in user censorship and surveillance through the WeChat app. An action for abuse of dominant position was brought against it, although Tencent came out of it unscathed. Tencent has been accused of blocking TikTok videos. It has also been accused of copying the software and services of its competitors. Alibaba Group happens to be a bitter rival, and its Executive Chairman Jack Ma is reported to have remarked that “The problem with Tencent is the lack of innovation; all of their products are copies.” People love Tencent and its offerings, its rivals hate it,; but no one can really ignore Tencent as it rolls out new products and services with high frequency.
WeChat app : a star is born
WeChat is a multi-purpose app with features like instant messenger, social media, mobile payment solution, etc. Launched in 2011 as Weixin, its user base has been increasing by leaps and bounds. In 2012 when the app was rebranded as WeChat, it was used by about 100 million people and with the introduction of WeChat payment in 2013, this number increased to 400 million, and 889 million in 2016. Today, it is the largest app in the world with 1 billion monthly active users. Although Facebook and Whatsapp have a comparable number of users, these apps do not offer all the features that WeChat does. Thus, the reasons for the immense popularity and adoption of WeChat are not hard to guess- it is a feature-rich, all-in-one app. For example, the messaging features of WeChat include text messaging, broadcast messaging, hold-to-talk voice messaging, video calls and conferencing, sharing of photos, videos, contacts and location, etc. WeChat Pay service is used for paying bills, purchasing goods and services, transferring money to contacts, and making in-stores payments wherever the stores allow WeChat payments. However, use of this service requires registration of bank or card details, which presents a barrier for non-Chinese users.
WeChat offers different types of accounts to its users, namely, individual or public accounts (which are useful as service, subscription or enterprise accounts). The enterprise WeChat can be used for tracking leave, working hours or expenses that need to be reimbursed, in addition to the regular features.
The Chinese government keeps a strict vigil on the online activities, with a view to curb criticism of government functioning. The size of WeChat groups is limited to facilitate this oversight. Any post which uses certain key undesirable words is flagged as inappropriate, and the accounts of repeat offenders are liable to be shut down permanently. The privacy laws regime in China is undergoing change with the passing of Personal Information Protection Law on 20 August 2021 which will be effective from 01.11.2021. Although based on European GDPR, there are stricter conditions requiring separate consents for data collection and every activity involving use of such data. Tencent complies with government regulations, and this has the effect of limiting the group size and also isolating the groups and ultimately the Chinese community from the rest of the world.
Red Packets transition from physical to the virtual environment
The exchange of red packets or red envelopes is an ancient Chinese custom known as hongbao. Monetary gifts are given on certain occasions (marriage, birth of a child, graduation, new year celebration, etc.) in red packets by elders to younger ones, married people to unmarried persons and employed persons or employers to unemployed or employees. The red packets are supposed to ward off evil and bring good luck.
Just before the new year of 2014, Tencent gave an example of its marketing genius by launching the digital equivalent of red packets on WeChat platform. During the live telecast of CCTV’s Spring Festival Gala in 2015, Chinese viewers were encouraged to shake their phones, and the lucky viewers had the chance to win red packets. This led to the soaring of WeChat popularity. Tencent went beyond the concept of red packet among acquaintances and introduced elements of fun, game and entertainment.
Thus, when somebody sent a red packet to its group members, there was an option to distribute the amount equally, or randomly. Whenever somebody received a red packet, they felt obliged to send a red packet to somebody else. This ensured regular traffic on the app. Tencent further introduced certain features that increased the social competition aspect of the red packet exchange, thereby getting people ‘hooked’ to WeChat. Besides increasing the social media addiction amongst the youth, the red packets also were used in illegitimate manner (e.g., bribery and gambling). Thus, the red packet exchange in physical and virtual environments is markedly different. While there is a touch of human sentiments when red packets are exchanged physically, in a virtual environment the recipient may be unknown.
The success of WeChat Pay as well as the virtual red packets led to imitation apps by Tencent’s competitors. Several companies introduced their own versions of digital payment solutions and red packets. Alibaba, a fierce competitor and often known to label Tencent as a ‘copycat’, ironically modified its Alipay app to include social media functions, and also included red packets functionality in its Laiwang messaging app (which is considered a copy of WeChat). Aggressive promotion of red packet functionality by Alibaba, and counter-promotion by Tencent (known as Red Packet wars), held the attention of the media for some time.
Palm Vision’s red packet grabbing software
Palm Vision was established in 2011. Its business activities include communication products, development and sales of computer software and hardware technology, information consulting and services. In 2018, Palm Vison introduced software which allowed users to grab red envelopes in WeChat automatically when the WeChat background is running, without actually logging in into WeChat. Ironically, the red packet plug-in utility of WeChat was used for accomplishing this. Palm Vision’s software provided functions such as ‘speed grabbing’ and ‘big envelope grabbing’ using specific keys, depriving bona-fide WeChat users who had to rely on manual red packet grabbing. This software was downloaded through various platforms such as OPPO software store, Pea Pod, Huawei App Market, Baidu Mobile Assistant, etc. The Software was awarded as the Top 100 Software of China.
Arguments by the opposing parties
The presence of unauthorized software such as the one introduced by Palm Vision did not go unnoticed by Tencent, and it initiated an action for unfair competition against Palm Vision in Beijing Intellectual Property Court in April 2019. Zhuoyixunchang, the developer of the Android app Pea Pod, was also listed as the second defendant by Tencent, since the software of the accused was launched on Pea Pod.
Tencent argued that by allowing automatic grabbing of red packets, the accused software deprived the WeChat users of the fun and entertainment, and also compromised the fairness and social interaction element in manual grabbing provided in WeChat app apart from affecting the normal traffic to WeChat. The behavior of Palm Vision amounted to free riding on the popularity of WeChat and was against principles of good faith and business ethics. Tencent had demanded a penalty of RMB 50 million as damages caused to its business activities.
In its arguments, Palm Vision stated that the two companies were not in competition, since the positioning of the two software in the market was quite different. Moreover, the red packet grabbing utility was developed on an application distribution platform provided by the plaintiff himself, and the plaintiff is obligated to provide clearance to all software developed using this platform. The accused software did not disrupt the normal operation of WeChat in any manner, and therefore, did not violate any provisions of the AUCL of China. The software was used with authorization and permission of the user; hence there was no unfair competition involved.
It may be noted that Tencent had clearly prohibited unauthorized use of third-party software in connection with WeChat functionality.
Court decision and rationale
In its first-instance judgment reported on 18 June 2021, the Beijing Intellectual Property Court declared that the defendant had used technical means to impede and disrupt the normal operation of the ‘grab red envelope’ function legally provided by the WeChat app, which violated the principles of good faith and business ethics. It ordered the defendant to stop the offending activities and pay a penalty of RMB 4.754 million for the economic loss caused.
In arriving at this decision, the Court relied on the Article 12 of Anti-Unfair Competition Law of People’s Republic of China, which states that :
A business entity engaged in production or distribution via the internet shall abide by the provisions of this Law.
A business entity shall not, by using technical means to interfere with users’ choice or otherwise, commit any of the following acts that affect or sabotage the normal operation of any online product or service lawfully provided by another business entity :
(1) Without consent of another entity, inserting a link or forcing a URL redirection in an internet product or service lawfully provided by the said other business entity;
(2) Misleading, tricking or forcing users to alter, shut down, or uninstall an internet product or service lawfully provided by another business entity;
(3) Causing, in bad faith, incompatibility with an internet product or service lawfully provided by another business entity; or
(4) Any other act that interferes with or sabotages the normal operation of internet products or services lawfully provided by another business entity.
The various aspects that the Court had taken into consideration to arrive at its decision included:
(i) whether the operator (defendant) uses internet to carry out its production and business activities and has a competitive relationship with other operators,
(ii) Whether the use of technical means, through influencing user choice or other means, has performed an act that hinders or undermines the normal operation or legal provision of network product or services, whether the defendant’s act disrupts normal order market competition in internet environment and harms the interests of other operators or the rights and interests of other persons, and
(iii) constitutes an act that violates principles of good faith and business ethics.
The Court observed that the software was specifically designed while keeping the operation of WeChat red packet in mind, and has no other value without the WeChat app. By allowing download of its software, it gathered a user base and through the software, diverted the users away from red packet functionality lawfully provided by WeChat. The operating resources and competitive advantage of WeChat was wrongfully utilized by the accused software. The use of accused software allowed technical means to grab red envelopes by simulating clicks on the screen, thereby functionally changing the normal operation of WeChat app. The accused software affected the users’ experience of WeChat app, and its batch and automated mode of operation increased the burden on We Chat servers.
Concluding remarks
This was the first decision involving an act of unfair competition. The amended AUCL has increased the scope of acts that can be considered as economic torts, especially in the era of business in the online environment. However, it should be noted that the Chinese case laws do not have precedent value; they may have some persuasive value only. Moreover, the Court’s intervention is limited to the consideration of the economic torts, if any, caused by the defendant’s act. However, Courts cannot comment on the adverse effect on society, traditions and cultures brought about by rapid technological changes. Through the analysis of the case, one learns a lot about the business and regulatory environment that the Chinese Government provides to its domestic business entities. Strong entities such as Tencent have emerged and established themselves on the global business landscape. However, Tencent also faces severe criticism, competition that often crosses the thresholds of legitimacy and illegitimate use of its apps and services. If the Chinese Government’s policies which favor localization over globalization continue, its domestic enterprises run the risk of undermining each other’s competitive position.
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