Yahoo and former China head in brewing legal battle

A legal battle is brewing between Yahoo Inc. and the former head of its China operations, who filed a lawsuit against his ex-employer on Thursday as Yahoo prepared to answer with its own suit.

Zhou Hongyi took his legal action in Beijing alleging defamation against Yahoo -- whose main China business now consists of a 40 percent stake in that it bought last year for $1 billion -- said a spokeswoman for Qihoo, another China search company that Zhou currently heads.

"Because Yahoo China has used numerous methods in the media to openly express incorrect facts about and verbally abuse Zhou Hongyi, Zhou Hongyi has taken Yahoo China to court," Qihoo said in a statement.

As part of the landmark Yahoo-Alibaba deal, Yahoo folded its previous China business into Alibaba.

Zhou, who sold his Internet search business to Yahoo in 2003 for $120 million and had remained with the firm after that, left Yahoo China shortly after the Alibaba deal was announced.

He was free to pursue any business opportunities he wanted as of the end of last year, said the spokeswoman for Qihoo, where Zhou is now chairman and whose investors include venture capital heavyweights Sequoia Capital and IDG.

Chinese media have reported that Alibaba has accused Zhou of unspecified "unethical business practices".

Meantime, Alibaba said in a statement it would sue Zhou, though it declined to elaborate on the allegations.

"Alibaba has decided that its affiliated units and business departments starting from today will never make any investments with Zhou Hongyi and will have no involvement whatsoever with any of his companies," Alibaba said in a statement.

An Alibaba spokeswoman said the company would file its lawsuit in Hong Kong.

Both Zhou and Alibaba founder Jack Ma are known in China's Internet world as highly vocal and opinionated entrepreneurs, each building his company from scratch to become the business leader in its respective area.

Zhou's company, formerly known as 3721, was virtually synonymous with search in China when Yahoo bought it in 2003.

He was a highly visible figure before the purchase, and continued to freely express his views after the deal even as 3721 stumbled under competition from the likes of Google and Baidu, China's current Internet search leader.

Alibaba's Ma also relishes the spotlight, building his company into a Chinese Internet juggernaut whose scope includes business and consumer online marketplaces and online search.

Ma is also known for his outspokenness, frequently taking pot shots at eBay Inc.'s China unit.

Alibaba has waged an aggressive campaign that allowed it to overtake eBay's market-leading position in China over the last two years, although Ma's company offers its services for free while eBay is charging for some of its services.

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