Qihoo Takes Baidu To Court, Xiaomi Sued Again

Includes: BIDU, QIHU
by: Doug Young

I love a good case of irony, which is why I was amused to read that software security specialist Qihoo 360 (NYSE:QIHU) is suing leading search firm Baidu (NASDAQ:BIDU) for unfair competition. The irony lies in the fact that Qihoo is notorious for using underhanded tactics against its rivals and is now accusing Baidu of similar behavior. Perhaps Qihoo should instead be congratulating Baidu for winning over its rival to the Dark Side. Meantime in separate legal news, up-and-coming smartphone maker Xiaomi is being sued for the second time in a week in relation to its smart TV products, hinting that this new product area could face an uphill battle from a flood of litigation.

These two lawsuits are just the latest in a growing wave by some of China's best known tech firms, which are taking their business grievances to the courts for resolution. In many ways that's probably a good sign, as it reflects business leaders' growing confidence in the courts as a fair arbiter of justice. But the courts are still hobbled by the fact that punitive damages allowed in China are still pitifully small and as a result often have little or no deterrent effect against future illegal behavior.

All that said, let's turn our attention first to the latest lawsuit filed by Qihoo against Baidu in Beijing (English article). According to news reports, the suit accuses Baidu of using deceptive tactics to steer search traffic to its own industry-leading search engine away from Qihoo's competing So.com engine. The suit asks the courts to force Baidu to halt its behavior, and seeks 400 million yuan in damages.

Qihoo is certainly no stranger to lawsuits, though it's more accustomed to being sued by other Internet firms over the kinds of allegations it is now leveling against Baidu. One of the biggest cases saw Qihoo sued by leading Internet firm Tencent (HKEx: 700) back in 2010, with a court ultimately ruling in Tencent's favor earlier this year (previous post). But as in most such cases, the courts only awarded Tencent a meager 5 million yuan ($820,000) in damages. For the record, we should also note that Baidu previously sued Qihoo back in June, for intellectual property theft related to their competing search engines. (previous post)

From this building legal war between Baidu and Qihoo, let's turn our attention to Xiaomi, whose smart TV products have suddenly become a lighting rod for lawsuits. Media are reporting that Xiaomi has just been sued over allegations that its set-top TV boxes use technology illegally taken from a Coship Electronics (Shenzhen: 002052) (English article). News of this lawsuit comes just days after word that Xiaomi was being sued over allegations that its smart TV products illegally used some programs owned by leading video sharing site Youku Tudou (NYSE:YOKU) (previous post).

These latest two lawsuits mark the latest chapter in a bumpy road for Xiaomi as it tries to move beyond its core smartphone business. Its set-top boxes first ran into regulatory trouble shortly after their launch late last year, forcing Xiaomi to abruptly withdraw the product. These latest two lawsuits are directed at Xiaomi's related smart TV product, and come as such smart TVs experience a sudden boom in China.

Xiaomi, LeTV (Shenzhen: 300104) and PC giant Lenovo (HKEx: 992) were three of China's earliest companies to go into Internet television, which has big potential due to underdevelopment of China's media market. That trio has more recently been joined by Baidu and e-commerce leader Alibaba, which both recently launched their own competing products. I previously wrote that a new flood of lawsuits could ultimately undermine development of this promising sector, and this latest lawsuit against Xiaomi underscores that risk.

Bottom line: New lawsuits against Baidu and Xiaomi reflect growing confidence in the Chinese courts to arbitrate business disputes between private firms.