19 July 2023 • 7 min read
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The world's fastest-growing fast fashion retailer Shein seems to have made a serious legal faux pas.
Three US-based independent designers, Krista Perry, Larissa Martinez, and Jay Baron, are suing Shein. They have accused the company of "egregious" copyright infringement that amounts to racketeering.
The complaint was filed in California federal court on Tuesday, 11 July 2023. It says the designers were "surprised" and "outraged" to see that “Shein produced and sold exact copies of their creative work.”
This is a serious charge. But Shein is no stranger to controversy.
Fast fashion retailer Shein, based out of Nanjing, China, was founded by Chinese billionaire Chris Xu in 2008. It started as an e-commerce website selling wedding dresses made in China. It was initially named SheInside.
In 2015, when Xu pivoted the business to focus on fast-fashion apparel, the company rebranded as Shein. This pivot came at an opportune time. The COVID pandemic caused a prolonged lockdown when "quarantine shopping" boosted Shein's popularity.
In 2022, Shein generated an estimated $30 billion. That's a 91% increase from the previous year. It has more than 74.7 million active shoppers globally.
It was also valued at $100 billion in 2022, making it more valuable than its competitors, H&M and Zara combined.
But the company's growth at this breakneck speed has been sharply criticized.
Shein is a fast fashion retailer. This means that it sells clothes in large quantities at very low prices. This concept, known as "fast fashion," made popular by retailers like Zara and H&M, has drawn a lot of flak.
Environmental groups point out that this excessive production and supply leads to massive amounts of waste. These clothes are also made from environmentally unsafe materials. This is how Shein keeps their prices very low.
Meanwhile, human rights advocates have raised serious concerns over Shein's dubious labor practices. Employees at Shein's factories churn out dozens of clothes and accessories in a day. They have to because the online store adds a staggering 6,000 new items to its offerings every day.
The U.S. government has also acknowledged these dangers "including exploitation of trade loopholes; concerns about production processes, sourcing relationships, product safety, and use of forced labor; and violations of intellectual property rights" in an Issue Brief by the U.S.-China Economic and Security Review Commission.
But the issue runs deeper than the fast-fashion business. It also crosses over into concerns over the misuse of social media platforms. Shein is a hot favorite with users, especially on TikTok. Fashion influencers regularly show off their massive “Shein hauls.”
The lawsuit by Perry, Martinez, and Baron also mentions TikTok's dangers. But it labels Shein as the more significant threat.
The complaint starts on a searing note by saying:
“For all the scrutiny given to TikTok, it's surprising that Congress has not considered more dramatic action against the Chinese fast-fashion giant Shein.”
It also alleges that “Shein is a fast fashion behemoth that thrives through irredeemable intellectual property theft.”
It goes on to state that Shein's "large-scale and systematic intellectual property theft from U.S. designers large and small" is the tip of the iceberg as “Shein high-tech business model… will spread and lead other industries on a race to the bottom.”
Such allegations arise because the plaintiffs claim that Shein relies on an A.I. algorithm. The suit claims Shein utilizes "a shocking amount of data" gathered from its customers. It then "reverse-engineers" this into fashion trends.
The founder Chris Xu is an expert in SEO and brand marketing. The complaint says he "made Shein the world's top clothing company through high technology, not high design." It further states that:
"The brand has made billions by creating a secretive algorithm that astonishingly determines nascent fashion trends—and by coupling it with a corporate structure...that are perfectly executed to grease the wheels of the algorithm, including its unsavory and illegal aspects."
This brings us to the racketeering allegations.
While Shein is one of the most well-known businesses in the world, it isn't technically a business at all. Instead, Shein is owned by what the complaint describes as a "byzantine shell game of a corporate structure." In fact, “there is no single company that can be identified as Shein.”
The complaint aims to tie together the various allegations against Shein, including criminal copyright infringement lawsuits. This can establish a pattern of criminal activity by a larger, global organization that owns Shein.
This is why the designers and their legal teams want Shein to be charged with racketeering under the Racketeer Influenced and Corrupt Organizations Act (RICO).
The RICO Act of 1970 addresses the exploitation of legal businesses by organized crime. It's usually applied as a law to combat organized crime. But the RICO Act also has occasionally been used to prosecute civil cases in high-profile, white-collar crimes like the Enron scandal and Bernie Madoff's Ponzi scheme.
The suit alleges that Shein's misconduct is committed not by a single entity but by a collection of shell companies and subsidiaries. It claims that this "decentralization" further facilitates Shein's "criminal infringement and other racketeering activity," which makes it liable under the civil provisions of RICO.
While Shein has drawn a lot of flak in the past, these allegations are some of the most serious it has ever faced.
The suit alleges, “Shein has grown rich by committing individual infringements over and over again, as part of a long and continuous pattern of racketeering, which shows no sign of abating.”
As this legal battle unfolds, it could have far-reaching implications on the intersecting spheres of social media, e-commerce, and fast fashion. And Shein, unlike its customers, may have to pay a high price.
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Amrusha is a versatile professional with over 12 years of experience in journalism, broadcast news production, and media consulting. Her impressive career includes collaborating extensively with prominent global enterprises. She garnered recognition for her exceptional work in producing acclaimed shows for Bloomberg, a renowned business news network. Notably, these shows have been incorporated into the esteemed curriculum of Harvard Business School. Amrusha's expertise also encompassed a 4-year tenure as a consultant at Omidyar Network, a leading global impact investing firm. In addition, she played a pivotal role in the launch and content strategy management of the startup Live History India.
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