China's Baidu, Inc. Hits the Great Wall of Litigation

Baidu is getting sued, and it can't afford to lose.

Aug 19, 2014 at 10:30AM

Source: Baidu.

Operating a search engine in China isn't easy, and now market leader Baidu (NASDAQ:BIDU) is getting sued for not checking on the quality of one of its advertisers. In news that was originally reported by China's Beijing Times before being noted stateside by MarketWatch, a 30-year-old who used Baidu in searching for "gay treatment" got more than he bargained for, and now he's going after China's leading search engine.

The plaintiff went with a clinic listed as the top result on Baidu, only to find that it had a bogus psychiatry license after he was subjected to electroshock treatment as part of the clinic's "conversion" therapy.

The compensation that he's demanding from Baidu and the Xinyupiaoxiang Clinic for violating his health and personal rights translates into roughly just $1,626. Baidu could easily pay to settle and make the case go away. It's not smarting for money with more than $7.8 billion in cash and equivalents on its balance sheet. However, it certainly doesn't want to set a precedent. In that sense, it can't afford to lose this case. The last thing that Baidu -- and any of the smaller search players in China -- want is to be forced to vet the actual quality of the sites that either show up as organic search results or the companies that they take on as paid search clients.

Baidu has been been stung by the quality of its growing Rolodex of marketers before. The biggest hit came in 2008 when Chinese TV broadcaster CCTV ran a scathing expose, accusing the company of accepting unlicensed pharmaceutical companies as top bidders for medical keywords. Baidu owned up to it and tightened its advertising requirements, and the stock eventually bounced back.

Beyond Baidu
It's not just Baidu that has come under fire for its search. Global leader Google (NASDAQ:GOOG) has faced several lawsuits stemming from some of the unsavory associations made with its Autocomplete feature that begins to list popular search options when a term starts to get typed. There have been a lot of those, according to SearchEngineLand.

  • Germany's former First Lady Bettina Wulff sued after searches initiated with her name offered up unsavory terms such as "escort" as a result of earlier rumor mill chatter suggesting that to be the case.
  • A French company sued after the word "scam" showed up after its name in an Autocomplete.
  • Another lawsuit in France was successful against Google when the person's name was followed by "satanist."
  • Google settled with an Irish hotel after "receivership" appeared after its name, suggesting that it could be in financial hardship.

These are just Autocomplete incidents. Search engines have faced legal fisticuffs for everything from links to pirated media files to the placement of ads on third-party websites. Running a search engine has its legal tangles, though the high-margin nature of paid search makes it more than worthwhile.

Bouncing back
Shares of Baidu didn't take a hit on last week's litigation news. It's clearly different this time. Baidu isn't hitting new lows on the news the way it did nearly six years ago. In fact, Baidu stock is trading near the all-time high it hit three weeks ago. The news isn't making waves, though naturally that could all change if the plaintiff wins out or if others follow suit.

China's a difficult market for many investors, but despite fears of government censorship many of the country's dot-com darlings have come through with stellar results. Baidu stock has been a 20-bagger since bottoming out during the original 2008 scandal. Investors put up with the risks to share in the growth and high margins that put U.S. engines to shame. This is still a case that investors will want to watch closely. Folks sue companies often, but it's not every day that a plaintiff decides to take aim at the search engine that made the ill-fated connection happen.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Apple, Baidu, and Google (C shares). The Motley Fool owns shares of Apple, Baidu, and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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