Zhou Hongyi, controversial Internet entrepreneur and former president of YahooChina, has filed a 3.6-million yuan ($450,000) defamation suit against his former employer in Beijing’s Second Intermediary People’s Court.

The suit, filed Thursday, came after Yahoo China general manager Tian Jian accused Mr. Zhou in a Monday press conference of unethical business practices.

Alibaba, the Hangzhou-based B2B e-commerce company that took control of Yahoo China in August 2005, announced that the company and its subsidiaries would “henceforth and for all time cease to make use of the services provided by companies invested in or related to Zhou Hongyi.”

Alibaba’s subsidiaries include Yahoo China, payment solution provider Alipay, and leading Chinese auction site Taobao.com.

Alibaba also called on other Internet companies and investors to follow its lead, in the name of creating “a better understanding of the importance of morality in this industry, and restoring the industry’s environment to excellence.”

“The Yahoo [China] employees wanted this,” said Jack Ma, chief executive of Alibaba. “They were fed up and really angry, and wanted justice. I felt I owed it to them.”

Alibaba also announced that it will, “at an appropriate time, bring legal action against Zhou Hongyi,” according to an official Alibaba statement. “We’ve prepared very serious legal action, but we can’t reveal any details about it at this point,” said Mr. Ma.

Mr. Zhou joined Yahoo China and became president in 2003 when the company he founded, 3721, was acquired for $120 million. 3721 Assistant, a browser plug-in now called Yahoo Assistant, allows Internet users to enter Chinese text in browser bars in lieu of alphanumeric URLs.

Although it enabled millions of Chinese Internet users who lacked basic English skills to access the web, the plug-in is classified by many as “hooligan-ware”—the Chinese term for malware—because it installed itself without explicit user consent and was difficult to remove.

Origins of the Rift

A rift between Mr. Zhou and Yahoo China has been developing since before his departure from Yahoo last year, just prior to Alibaba’s takeover of Yahoo’s China operations. Mr. Zhou doled out generous bonuses to Yahoo employees in a ploy his detractors derided as a naked purchase of loyalties.

Mr. Zhou defended the disbursements. “Many of these people were longtime Yahoo employees, and they were under no obligation to follow me,” he said. “It was my money to do with as I wanted.”

The rift widened when Mr. Zhou, who nominally joined the venture capital firm IDG as a venture partner when he left Yahoo China, launched Qihoo.com, a blog and bulletin board aggregator and search engine early this year in Beijing.

He hired more than 100 former Yahoo workers as part of Qihoo’s 380 employees. Mr. Zhou said he didn’t poach any of them and that he abided strictly by the terms of his non-competition agreement.

Mr. Ma countered that many of those who wound up at Qihoo actually stopped working for Yahoo as early as April and May of 2005—three or four months before Alibaba took the reins of Yahoo China—and were still on Yahoo payrolls during those months.

Mr. Ma also alleged that Mr. Zhou took valuable intellectual property with him when he left Yahoo, in breach of his contract. Mr. Zhou dismissed suggestions of IP theft as “laughable.”

“If anything, Yahoo China has followed what Qihoo has done,” said Mr. Zhou. “They only began blog and BBS search after we already launched.”

Qihoo raised a $20-million venture round led by Menlo Park, California-based Sequoia Capital’s China fund. Sequoia, somewhat ironically, was an early investor in Yahoo.

Pandora’s Box

What evidently prompted Alibaba’s open attack on Mr. Zhou was Qihoo’s launch in late July of free antivirus software called 360safe, developed in cooperation with the Moscow-based antivirus company Kaspersky Labs.

360safe includes Yahoo Assistant, which remains one of the key drivers of traffic to Yahoo China, on the list of malware that it disables.

The restitution sought by Mr. Zhou in his suit is actually a reference to 360safe. The Chinese use the unit 10,000—one wan—for numbers below 100 million, and so 3.6 million yuan is 360 wan yuan.

Alibaba’s Mr. Ma downplayed the importance of 360safe in the current kerfuffle. “360safe was nothing, a small matter, just the straw that broke the camel’s back,” he said. “This is about his values, about his ethics and morals.”

Mr. Zhou denied that 360safe singles out Yahoo Assistant, noting that Qihoo’s 360safe is a broad-spectrum antiviral. He has been reborn, he said, and is now doing penance for the sins of his past, when he was a leading purveyor of what, even before leaving Yahoo China, he conceded was malware.

“I opened Pandora’s box,” said Mr. Zhou. Not undeservedly, he acknowledged, he has been saddled with the epithet “godfather of hooligan-ware.”

While he regrets his role in the escalating malware wars, at the time he had little choice. “If you weren’t a hooligan, you were a victim,” he said.

Recent Skirmishes

His legal battle with Yahoo China is just the latest in a series of recent skirmishes in the industry.

“This fight is another chapter in the no-hold-barred battle for domination of the Chinese search market,” said Mark Natkin, managing director of Beijing-based consultancy Marbridge. “We’ve seen several iterations of this.”

Mr. Natkin cited accusations by Beijing-based search provider Zhongsou against Yahoo in November, claiming that Yahoo’s 3721 disabled Zhongsou’s Internet Gateway integrated search interface.

Baidu successfully sued Yahoo China in 2004 on similar grounds. A countersuit by Yahoo against Baidu is still pending in Beijing’s Haidian People’s Court, alleging that Baidu’s search bar impeded the use of Yahoo’s 3721 toolbar.

Malware, Malware Everywhere

The Chinese Internet is awash with toolbars and other browser plug-ins that install themselves, resist easy removal, constantly redirect page requests, and generate pop-up ads. While they’re huge annoyances for users, they’re also big business.

“The malware market is huge in China,” said a Qihoo manager who spoke on condition of anonymity. “Companies make tens of millions of renminbi [yuan] in ad revenue. There’s a whole ecosystem of malware in China, and many PC users aren’t aware of its harm.”

Mr. Zhou acknowledged he was part of that market.

“There’s only one browser address bar, and we were all competing for that space,” he said. “We all tried to uninstall one another. And we all just went further and further down that road. If you can protect your software from being uninstalled by a competitor’s, then imagine how hard it is for a regular user to uninstall.

“We’re all businessmen—me, Jack Ma, and Robin Li [chief executive of leading Chinese search provider Baidu],” added Mr. Zhou. “We were competing against each other, but ultimately we were ignoring what the customer wanted.”

Customer Is King

Mr. Ma sees it differently. “The customers want 3721,” he said. “If it weren’t for the customers, I wouldn’t even care about keeping 3721. I’d just get rid of it.”

360safe, said Mr. Zhou, is intended to “get everyone back to the same starting line” and to protect the consumers he had ignored for too long.

Others aren’t convinced of his altruistic intent. “Mr. Zhou isn’t happy to see Yahoo China taking advantage of the 3721 malware plug-in, and he’d be happy to make it disappear,” said the Qihoo manager.

No doubt Mr. Zhou wouldn’t mind if Mr. Ma disappeared too. The outspoken Mr. Ma is known for his aggressive and pugnacious fighting style, most famously on display as he taunted eBay’s China operation, eBay Eachnet, as it lost market share to his own C2C site, Taobao.

‘Industry Pariah’

Mr. Ma’s campaign to cast out Zhou Hongyi as an Internet industry pariah is working, he said.

“I’m warning all the multinationals, and all the people in the industry, about how important it is to work with moral people in China,” said Mr. Ma. “People are heeding the call. I’ve gotten a lot of messages and calls of support from people in the industry.”

Mr. Zhou disagrees.

“This whole thing is classic Jack Ma style,” said Mr. Zhou. “I can see why [eBay CEO] Meg Whitman couldn’t stand him. I have a lot of sympathy for eBay.”

But that’s China, said Mr. Zhou. “Luckily, I’m a land tortoise,” he said, referring to a recent Chinese coinage meant to differentiate those educated in the mainland from returnee “sea turtles” who run many of China’s Internet companies. “I’m used to this sort of behavior.”

Contact the writer:KKuo@RedHerring.com