Unfair competition in internet advertising blocking in China: part two

The previous article in this series considered three perspectives on whether internet advertising blocking, or ad-blocking, in China should be regulated by the Anti-Unfair Competition Law. The question arises in light of an announcement on August 24 2023 by an official account on WeChat, Daxiaojie LiTiaotiao, that it would indefinitely suspend its updates. The move came in response to a legal demand letter from a major internet company, Tencent, claiming that the mobile application Daxiaojie LiTiaotiao developed and operated, LiTiaotiao, constitutes unfair competition and thus violates the Anti-Unfair Competition Law of the People's Republic of China.

This article considers the Chinese courts’ approach to unfair competition concerning internet advertising, with a particular eye on the ad-blocking service provided by LiTiaotiao.

In Tencent Computer System Co., Ltd. v Beijing ShijieXinghui Technology Co., Ltd. (2018), the first-instance court rejected all the plaintiff’s claims but was soon overruled by the second-instance court. The second-instance court explicitly stated: “The court should be very cautious in applying Article 2 of the Anti-Unfair Competition Law, to prevent the improper expansion of the scope of unfair competition that may hinder free and fair competition. Generally speaking, only when such conduct violates business ethics should it be considered unfair competition.

“At the same time, because the goal of the Anti-Unfair Competition Law is to maintain the social and economic order, a stable social-economic order is usually beneficial to the overall welfare of society. Accordingly, when determining whether a certain conduct violates Article 2 of the Anti-Unfair Competition Law, it can also be quantitatively analysed based on whether it is beneficial to the overall welfare of society.”

Similarly, in Hunan Happy Sunshine Interactive Entertainment Media Co. v Guangzhou Weisi Software Co., Ltd. (2018), the second-instance court pointed out: "The relevant judicial policies of the Supreme People's Court indicate that the legitimacy of competition conduct should be assessed from multiple perspectives, avoiding excessive restrictions on freedom of competition due to 'moralisation', paying attention to a comprehensive evaluation of the positive and negative effects of competitive conduct under an internet setting, and properly handling the relationship between technological innovation and the maintenance of competition order, as well as the protection of the interests of competitors and the improvement of consumer welfare."

The above suggests that courts are now deviating from the affirmative view they always took in the past, and are leaning towards the quantitative approach advocated by the compromise view. It also reflects that courts intentionally lower the ‘moral’ standard in judging the impropriety of competitive conduct and highlight the ‘economic’ standard.

Due to the rapid development of internet technology, the ‘internet clause’ of the Anti-Unfair Competition Law includes a fallback provision of Article 12-4. As ad-blocking does not completely conform to the situations listed in the other provisions of the internet clause, courts generally cite Article 12-4 for the determination of unfair competition by ad-blocking.

The legal circumstances of the LiTiaotiao case differ from the aforementioned precedents.

Firstly, regarding the application scenario of the app, the precedents primarily involved video ad-blocking, whereas LiTiaotiao is designed to automatically skip ads upon launching the app.

Secondly, the methods used in the precedents aimed at completely blocking ads, while the technique used by LiTiaotiao involves simulating clicks through programming. This bypasses the necessary click response time in the human brain, preventing accidental clicks on the ad interface, and eventually shortens the user's ad viewing time without actually ‘blocking’ it.

Thirdly, LiTiaotiao is distinct from paid apps such as AdBlock or AdGuard, as it does not involve any service charges for ad-blocking.

While browsers and websites complement each other in providing a service to consumers, they are in a competitive relationship concerning the distribution of value in the advertising market.

Browsers and websites use traffic as a basis for pricing advertising. However, there are differences in the statistical methods for traffic calculation, with browsers using the number of users, and websites adopting the ‘cost per click’ method. Users generally have a preference for fewer advertisements, so browsers with ad-blocking features attract more users, leading to an increase in user numbers and profits.

However, browsers’ advantage derived from users’ preference is not from their technological advancement, but from ‘free-riding’ on the value created by website content. In other words, a browser has no incentive to be against ad-blocking, as under its traffic calculation by the number of users, ad-blocking helps to attract customers at no cost, and all the negative externalities are borne by a third party; namely, website content creators. However, if website content creators cannot recover their costs from advertisements, the free high-quality information provided by each website may decrease.

Therefore, it seems necessary for the Anti-Unfair Competition Law to step in and regulate the aforementioned anti-competitive conduct. However, in the case of LiTiaotiao, its primary purpose is to skip splash ads, not to block specific webpage ads in browsers. As such, it does not affect content creators.

The LiTiaotiao app utilises the unique features of mobile devices to simulate clicks and automatically skip splash ads. In this regard, there is a significant difference between the technological methods used by LiTiaotiao and the traditional technique of blocking video ads. According to precedents, blocking video ads is considered unfair competition because it undermines the expected revenue of internet service providers. However, LiTiaotiao does not fall into this category. Moreover, its technical method differs from that of AdGuard, as it shortens the duration of ad displays instead of completely removing them. The impact on the browser’s interests is relatively minimal.

Secondly, regarding the function to achieve clicks and prevent accidental clicks, if the pricing strategy of browsers and advertisers is based on user numbers, the impact of accidental clicks on the browser's related interests is minimal. However, if the pricing is calculated based on the number of ad clicks, LiTiaotiao may undermine the economic interests of the browser and could be subject to regulation under relevant unfair competition laws.

In terms of whether LiTiaotiao qualifies as a "business operator" under the Anti-Unfair Competition Law, according to the definition in Article 2-3, a "business operator" refers to “a legal person or any other economic organisation or individual engaged in commodities marketing or profit-making services”. Therefore, no matter whether the provision of the service is paid or free, LiTiaotiao is a "business operator" according to the Anti-Unfair Competition Law.

With regard to whether LiTiaotiao's business activities fall under Article 12-4, which concerns any act that "interferes with or sabotages the normal operation of internet products or services lawfully provided by another business entity”, automatically skipping splash ads does not affect the normal operation of a browser service. Even considering potential decreases in internet ad revenue and difficulties in cost recovery, the impact of reduced profits due to LiTiaotiao is limited. Therefore, the likelihood of LiTiaotiao’s activities falling under unfair competition as defined in paragraph 4 is low.

Considering the above economic factors, the authors conclude that there is a relatively low likelihood that the ad-blocking service provided by LiTiaotiao should be deemed unfair competition.