Chinese IP Law Updates
April 10, 2018

Is Video Ad Blocking Unfair Competition?

The first case on ad-blocking technology in Zhejiang goes on to second-instance trial

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On March 16, a dispute between video streaming services and an ad-blocking app was openly debated by the Zhejiang Hangzhou Intermediate People Court on the second instance. It is the first case of this kind on trial in the province. The proceedings have been initiated by the defendant at first instance – Hangzhou SEVEN Software Co., Ltd. (“SEVEN”). Which was not satisfied with the lower Hangzhou Railroad Transportation Court’s ruling affirming its acts of unfair competition against the video streamers Youku and Sohu by developing the application AdClear to block adverts aired by the plaintiffs. For its violations, SEVEN has been ordered to stop its illegal acts and pay Youku and Sohu a total RMB 620,000 (US$ 100,000) in compensation for the latter’s economic loss and reasonable expenses.

From the plaintiffs Youku and Sohu’s part, they jointly claim at first instance that they, as the leading video streaming services in China, feed on proceeds arising from paid memberships that exempt users from viewing ads to maintain their daily operations and provide licensed contents that come with loyalties packages. However, SEVEN’s app AdClear enables viewers to skip those ads they are made to watch if they prefer to enjoy videos for free, which is deemed to constitute unfair competition by the plaintiffs. Therefore, they respectively seek compensation, including RMB 1 million in damages and RMB 60,000 in reasonable costs of their legal actions.

SEVEN argues in defense that it is not a legitimate behavior for Youku and Soku to put their users to endure boresome and prolonged adverts that cannot be opted out ahead of videos, and thus there should not be legal rights and interests in relation thereto. Furthermore, AdClear has been developed on neutral technology to give its users a choice to block whatever they consider a threat to their cybersecurity. Indeed, such technology might hurt part of the plaintiffs’ vested interests. The result is part and parcel of free competition and technological advancement in the market economy, and thus should be accepted as a consequence of the risks inherent in the plaintiffs’ business model.

According to the first-instance court, SEVEN’s development and offering of the ad-blocking software AdClear, in addition to its advertising of the service as one that is capable of “blocking video adverts put on mainstream apps: Youku, Tencent, LeTV, Sohu etc.”, is been clear as to its intentions. Obviously, the defendant is aware or should be aware of the fact that users of AdClear will inevitably go on to block ads on the aforementioned video streaming sites, which eventually impairs the effects and returns that the plaintiffs expect from their business model, making the plaintiffs less attractive to advertisers as a result. That is to say, SEVEN has knowingly blocked adverts displayed by Youku and Sohu, thereby undermining the appeal and interests they are entitled to enjoy in the market based on their way of operations. This is disruptive to the plaintiffs’ business and not conforming to the principle of good faith and commercial ethics that are generally accepted. Therefore, SEVEN’s conduct is deemed in violation of Article 2 of the Anti-unfair Competition Law. Accordingly, the defendant has been ordered to provide the remedies above mentioned.

However, SEVEN did not accept the judgment and filed an appeal to the Hangzhou Intermediate People’s Court.

Now an appellant at second instance, SEVEN builds its case on three pillars: 1. The lower court erred in fact determination by finding it a competitor to Youku and Sohu, and improperly found ad-blocking illegitimate and the counterparty’s business model otherwise; it was inconsistent in its standards of evidence examination and failed to run an analysis of whether there has been an actual harm to the other companies business. 2. The lower court erroneously interpreted and applied laws, including Article 44.2 of the Advertising Law and Article 2 of the Anti-unfair Competition Law. 3. The lower court granted unreasonably high compensation without clear factual and legal grounds.

Together, the appellees Youku and Sohu replied against SEVEN that it has continued its bad-faith ad-blocking against the former’s legal and legitimate placement of adverts leading up to the trial; its behavior also violates Article 16 of the Interim Measures for the Administration of Internet Advertising besides Article 12 of the Anti-unfair Competition Law; its service pronouncedly targets Youku and Sohu by singling the two out in the description presented on its website and in the app in question.

The final judgment of this case is still undecided. However, it is reported that the parties are open to settlement as they have expressed their attitudes in court.

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