Explained | What is the lawsuit against Chinese fast-fashion company Shein?

The story so far: Three U.S.-based designers and artists on July 11 filed a lawsuit against Chinese fast-fashion retailer Shein, alleging that the company indulges in copyright infringement that “constitutes racketeering”.

The case against Shein was filed in a California district court,with the plaintiffs invoking sections of the Racketeer Influenced and Corrupt Organisations Act (RICO). The lawsuit also expressed surprise that for all the scrutiny that TikTok – yet another Chinese app – has been subjected to, the U.S. Congress has not considered “more dramatic action” against Shein.

In April 2022, Shein was valued at $100 billion for a capital-raising round, Bloomberg reported. This would have made it as valuable as Elon Musk’s SpaceX, and more valuable than fast-fashion giants H&M and Zara combined, the report added.

It eventually raised $2 billion in May 2023, when valued at $66 billion, one-third down from the 2022 valuation, the Wall Street Journal reported.

What are the allegations in the lawsuit?

Independent designers allege that Shein “produced, tributed, and sold exact copies of their creative work.”

“These are not the familiar close-call legal claims where a corporate apparel manufacturer takes inspiration a bit too liberally. At issue here, inexplicably, are truly exact copies of copyrightable graphic design appearing on Shein products,” the filing reads.

The subject of this lawsuit is primarily intellectual property theft, although it also mentions environmental damage, sweatshop labour conditions, tax avoidance, and child safety as some other malicious practices that Shein allegedly indulges in.

The lawsuit holds Shein liable under the civil prong of the Racketeer Influenced and Corrupt Organisations Act (RICO), which is mostly used against organised crime.

The plaintiffs allege that Shein uses a design algorithm, possibly introduced around 2016-17, that offers a “rapidly changing assortment of trendy and remarkably affordable clothing, shoes, accessories, and beauty products”.

In Shein’s own words, it uses “alternative processes and technologies to bring fashion into the future”.

According to the plaintiffs, Shein is more of a big tech company than a traditional fashion company. The lawsuit claims that the exact copies of works by designers like the plaintiffs in the case constitute counterfeiting and piracy.

The lawsuit also alleges that Shein operates on the large-scale automated test and reorder (LATR) model, which, according to the plaintiffs, is a method of “facilitating intellectual property theft.” This view was also echoed by John Deighton, emeritus professor of business administration at Harvard Business School, in an op-ed published earlier this year.

On the other hand, Shein claims on its website that it uses a “data-driven test and learn approach to improve efficiency and minimise production waste.”

The lawsuit points out that the Chinese fast-fashion giant carefully presents itself as an integrated company, and uses its complicated structure to avoid plaintiffs from figuring out who to sue for intellectual property theft.

What is RICO?

The Racketeer Influenced and Corrupt Organisations Act (RICO) is a federal law that was enacted in 1970 to target organised crime and crime syndicates such as the mafia. Under RICO, use of income or proceeds from racketeering activity, acquisition or operation of any enterprise engaged in interstate commerce through a pattern of racketeering activity, and the conspiracy to commit any of these prohibitions are deemed unlawful.

Although the main purpose of RICO Act is to target organised crime, its provisions also include civil aspects like consumer protection, commercial fraud, bribery, official corruption, and security violations. According to the U.S. Justice Department, there are seven basic elements of a civil RICO action:

• Only ‘persons’ can sue or be sued;
• the plaintiff must show that the defendant participated in a ‘pattern of racketeering activity’;
• the ‘pattern’ must consist of at least two acts of racketeering committed within 10 years of each other with at least one act occurring after the effective date of the statute;
• the existence of an ‘enterprise’ which is the instrument or the target of racketeering activity is required;
• the enterprise must engage in or affect interstate commerce;
• the plaintiff must allege and prove injury to his business or property; and
• the plaintiff must demonstrate that his injuries resulted from a pattern of racketeering activity.

Other violations

Apart from civil RICO violations, the lawsuit also alleges that Shein has not taken steps to prove that the cotton used in its clothes is not a product of forced labour. A 2022 Bloomberg report traced climate and weather signatures on cotton fabrics used in Shein’s clothes to determine that they originated in Xinjiang. The 2021 Uyghur Forced Labour Prevention Act is a federal law that prohibits the import of goods sourced from Xinjiang unless the supplier can prove that it is not a product of forced labour.

The lawsuit also raises health concerns. An investigation by Health Canada in 2021 found that a children’s jacket sold by the brand contained nearly 20 times the allowable lead limit in children’s products in the country.

Shein in India

The Shein app was banned in India in the aftermath of border tensions between India and China in 2020. A total of 59 apps were banned at the time, including popular ones like TikTok, WeChat, Shareit, Mi Video Call, Club Factory and Cam Scanner, citing threats to national security and sovereignty.

Shein products began to be sold again in India around a year later, via Amazon. A plea seeking to prohibit the re-entry of Shein in India through the sale of its products on Amazon was filed in Delhi High Court, but the Centre informed the Court that the sale on other websites has not been covered under Section 69A of the IT Act, which deals with the power to issue directions for blocking for public access of any information through any computer resource. Therefore, a blanket order for blocking their sale cannot be passed by a committee constituted under this provision.

In May 2023, industry sources said that Shein will re-enter India in partnership with Reliance Retail, although the development was not confirmed by the retail arm of Mukesh Ambani’s Reliance Industries.