Friday, March 1, 2024

Shein battles counterfeiting lawsuits as online retailer pursues US IPO

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The online retailer Shein has been accused of breaching its own legal settlements and continuing to sell copycat items despite pledging to stop, with one of the world’s largest fashion groups accusing the company of being “repeat counterfeiters”.

Shein has long faced criticism that its blistering growth relied on cheap knock-offs of other people’s designs. The total number of copyright cases against the group has grown to nearly 100, according to legal filings.

The retailer has repeatedly denied the accusations, and said it invests heavily in systems to detect copyright infringements in its supply chain. But the persistence of the allegations and claims of repeat transgressions highlight a risk for potential investors as Shein attempts to pull off one of the largest — and most controversial — US initial public offerings in years.

“Many of [the cases] involve flagrant recidivism,” said Andrew Gerber, an intellectual property lawyer at Kushnirsky Gerber who has been involved in more than a dozen lawsuits against the company. “Shein knows what it’s doing. They use unscrupulous suppliers and continue working with them.”

Shein, which was founded in China and is now headquartered in Singapore, said it “takes all claims of infringement seriously” and was “continually investing in our review process”.

The pace of new legal complaints against the company had declined from its peak, Shein said, adding that third-party vendors selling goods on its platform “are required to comply with company policy and certify their products do not infringe third-party IP”.

A Shein pop-up store inside a California mall. At least 10 businesses have sued the company more than once © Allen J. Schaben/Los Angeles Times via Getty Images

Shein was valued at more than $60bn in its most recent private fundraising, which, if maintained in an IPO, would make it the most valuable company to go public in the US since Uber in 2019. It filed a confidential preliminary prospectus with regulators late last year.

However, the deal is facing intense scrutiny from lawmakers and regulators. Dozens of members of Congress and state attorneys-general have questioned whether Shein’s supply chain is free of forced labour. They have also criticised it for using a loophole to avoid import taxes by shipping low-value packages directly to consumers.

Shein this week said it had a “zero-tolerance policy” towards forced labour and was “committed to respecting human rights”. It also said it was “working closely with industry peers and policymakers” to help reform the contentious import tax rules.

Rick Scott, a Republican senator from Florida, told the Financial Times he would not stop fighting to keep Shein from listing on US exchanges.

Scott said: “Shein’s lack of transparency, seemingly illegal business practices and allegations of unethical conduct, like IP theft, may be OK in Communist China but won’t fly in the United States. Shein is bad news from any angle you look at it.”

Amid pressure, the company has been paying out more for lobbying in Washington. Disclosures released last week showed the company spent $3mn in 2023, more than 10 times the amount reported in 2022. 

At least 93 different designers and companies have filed lawsuits in US federal courts against Shein for alleged copyright or trademark infringement since 2018, according to a Financial Times analysis, including at least 30 new cases filed last year. Retail giants H&M and Fast Retailing, which owns Uniqlo, have also launched lawsuits against Shein in Hong Kong and Japan, respectively.

Senator Rick Scott
Senator Rick Scott said he was fighting to block Shein’s listing in the US © Drew Angerer/Getty Images

The majority of the cases against Shein ended with settlements whose terms were not disclosed, making it difficult to assess any financial costs to the company.

Philippa Loengard, director of the Kernochan Center for Law, Media and the Arts at Columbia Law School, said settlements in similar copyright cases “tend to be handsome to the artists. Possibly more lucrative than a licence agreement would have been”.

“This [issue] is not new, but the scale is larger than others in the past, even among other fast-fashion outlets,” she added.

At least 10 businesses have sued Shein more than once, including Deckers, a shoemaker with a $20bn market capitalisation, and Oakley, the sunglasses brand owned by €80bn eyewear giant EssilorLuxottica.

Oakley described the Singapore-based group in a recent legal filing as “repeat counterfeiters”. Shein agreed to stop selling glasses that copied Oakley’s designs in February 2022 but resumed selling the exact same items the following year, according to the company’s complaint.

Shein did not file a response to the complaint, but is now finalising its second legal settlement with Oakley in the space of two years, according to filings.

Fashion group Ralph Lauren has been locked in a dispute with Shein since 2021. Last year it expanded its complaint after claiming it found new infringing items, and warned it may expand the case further as it discovers more breaches.

Oakley, Ralph Lauren and Deckers did not respond to requests for comment.

Jeanne Fromer, a professor of intellectual property law at New York University, said a certain amount of copying was intrinsic to the apparel industry, particularly the fast-fashion sector.

“It may be that they say, ‘we’ll take a calculated risk on this’. You get sued on a certain percentage of products, or receive some cease-and-desist letters, and that’s part of your cost of doing business.”

But, she added, repeatedly infringing after agreeing earlier settlements would raise the risk of being forced to pay more severe penalties.

Shein said IP infringement was a problem across the fashion sector, and it was “committed to driving industry-wide advancement”. It has recently launched two of its own copyright complaints against businesses that sell items on the website of its close rival Temu.

Gerber, of Kushnirsky Gerber, has also represented artists in copyright claims against companies such as Amazon, Gap and Guess. He said: “In my experience no one else has ever come close [to Shein] in terms of the sheer number and scope of infringements . . . Our firm is constantly being contacted by aggrieved artists.”

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