A clash between two Chinese ultra-fast fashion companies is ramping up in U.S. courts. On the heels of Shein filing a lawsuit against Temu in December (in which it accused its rival of “willfully and flagrantly” infringing its “exclusive and valuable trademark and copyright rights” in order to get ahead in the U.S. market), Temu has responded with a lawsuit of its own. In the complaint that it filed with a federal court in Massachusetts on July 14, Temu claims that in the wake of its expansion into the U.S., Shein “chose not to compete on the merits by offering better prices, terms, service, or quality,” and instead, has opted to carry out an “scheme of coerced exclusivity, threats, intimidation, and direct financial punishments,” which amounts to conduct that is “the opposite of competing fairly and within the bounds of applicable law.”
Setting the stage in the newly-filed complaint, Temu asserts that it and Shein are “at the vanguard of ultra-fast fashion, where technology and highly efficient supply chains meet to satisfy consumer demand for cutting-edge fashions at ultra-low prices.” The increasing “speed of communications and rapidly changing consumer preferences and fashion have created strong consumer demand for the ultra-fast fashion business model,” one that critically relies on “relationships with tens of thousands of clothing manufacturers capable of meeting the rigors of the ultra-fast fashion business model.”
After achieving success in the Asian markets, Temu alleges in its lawsuit that Shein entered the U.S. market in 2017 and “obtained a monopoly position.” According to the complaint, Shein is “by far the largest competitor” in the ultra-fast fashion market with “more than 75 percent of U.S. market share in 2022.” It also has a 50 percent share among the combined markets of fast-fashion and ultra-fast fashion, per Temu.
Fast forward to September 2022, and Temu says that it launched in the U.S. market and “quickly became U.S. consumers’ favorite ultra-fast fashion retailer, topping the app store charts and consistently offering lower prices than Shein.” Faced with “direct competition from another platform capable of taking on its business model,” Temu contends that Shein has “retaliated with … threats, intimidation, false assertions of infringement, and attempts to impose baseless punitive fines” on suppliers with the aim of “lock[ing] up the supply chain” and undermining Temu’s “ability to offer similar products at prices that are consistently lower than Shein’s.”
In particular, Temu points to “at least four strategies” that Shein is allegedly utilizing in order to stifle competition. Specifically, Temu says that Shein: (1) forces manufacturers to enter into adhesion agreements that effectively create exclusive supplier relationships with it and threatens manufacturers with onerous fines and penalties if they supply product to Temu; (2) forces manufacturers to sign loyalty oaths certifying that they will not do business with Temu, but which are silent as to any other competitor or potential competitor; (3) issues public penalty notices and imposes extrajudicial fines on disobedient manufacturers for supplying product to Temu; and (4) sends numerous false notices of copyright infringement to Temu in order to disrupt sales of products that are offered for sale on Temu.
“By October 2022, Shein had begun engaging in all [of the aforementioned] anticompetitive conduct,” and since that time, Temu states that “more than 10,000 product listings have been pulled from [its site] because of Shein’s scheme.” All the while, Temu alleges that “as of May 2023, Shein has required all of the approximately 8,338 manufacturers supplying or selling on the Shein platform” – which represent 70-80 percent of the total number of merchants capable of supplying ultra-fast fashion – “to execute Exclusive-Dealing Agreements, which prevent [them] from offering products on the Temu platform or supplying products to sellers on the Temu platform.”
As the dominant ultra-fast fashion retailer, Shein “knows that manufacturers need [its] volume and its access to the U.S. market and it is, therefore, able to coerce manufacturers into arrangements that force manufacturers not to do business with Temu,” the plaintiff maintains, arguing that the “intent and effect of Shein’s anticompetitive conduct is to exclude Temu so that Shein can charge higher prices to consumers while offering a smaller selection and lower quality than Shein would if it faced competition from Temu.”
Such conduct violates “harms consumers and competition by raising prices to consumers, restricting choice and innovation, and impairing the expansion of the ultra- fast fashion market in the U.S.,” Temu contends, setting out causes of action under Sections 1 and 2 of the Sherman Act, the Clayton Act, as well as the Massachusetts Consumer Protection Law, according to Temu, and further constitutes common-law tortious interference.
Fast Fashion Fights
Not the first case of its kind, Fashion Nova was previously accused of engaging in a conspiracy to stifle the growth of its fast fashion competitors. In the lawsuit waged against it in 2020, budding online retailer Honey Bum alleged that Fashion Nova was engaging in a “conspiracy to restrain trade” by getting more than a dozen of their shared vendors to “unexpectedly” cancel and/or refuse to fill existing purchase orders, and reject new orders on the basis that it is “a threat to Fashion Nova’s low-cost fast fashion image, and, more importantly, its profit margins.” Honey Bum argued that Fashion Nova and its founder were violating sections 1 and 2 of the Sherman Antitrust Act and of engaging in tortious interference with business and contract.
After getting Judge Gary Klausner of the U.S. District Court for the Central District of California to toss out Honey Bum’s monopolization claim under Section 2 of the Sherman Act in March 2021 in light of the company’s failure to establish that Fashion Nova maintains “market power within a ‘relevant market,’” which is a necessary element in a monopolization claim, the court granted Fashion Nova’s motion for summary judgment in January 2022 and dismissed the remainder of the case.
In its own motion, Honey Bum alleged that Fashion Nova ran afoul of the law by “pressur[ing] various vendors to refuse to sell to Honey Bum,” prompting the vendors to then “agree with each other to stop doing business with Honey Bum,” creating a three-part “hub-and-spoke” conspiracy consisting of a dominant purchaser, competing distributors, and a horizontal agreement among those competing distributors. Honey Bum argued that this arrangement was unreasonable per se, thereby, relieving it of having to establish an anti-competitive effect.
Unfortunately for Honey Bum, Judge Klausner found that its evidence of such alleged horizontal agreements – namely, emails showing that certain vendors told Fashion Nova that they would no longer do business with Honey Bum, warranties that they allegedly made good on – does not “create a genuine dispute that the vendors entered into any horizontal agreement.” Moreover, the court found that a reasonable jury could not infer that there was an agreement in place between the individual vendors to boycott Honey Bum, and that Honey Bum failed to exclude the possibility that the vendors acted independently. In fact, Judge Klausner stated that the evidence actually “supports an opposite finding – that each vendor independently agreed to the threats that Fashion Nova levied against them individually.”
THE BIGGER PICTURE: A clash with high stakes, Temu claims that Shein’s “customer base and sales have exploded since early 2020,” with its global annual revenue growing from an estimated $3 billion in 2019 to around $30 billion in 2022, and approximately $9.6 billion of that came from sales in the U.S. Such growth has not come without legal ramifications, however. In addition to the budding legal battle between, themselves, Shein, in particular, is being targeted with separate litigation. Just this month, the Chinese retail titan was named in a headline-making lawsuit that alleges that it is not only carrying out “large-scale and systematic intellectual property theft from U.S. designers large and small,” but of also engaging in infringement-related racketeering activities in the process.
A spokesperson for Shein said that Temu’s lawsuit is “without merit” and the company “will vigorously defend ourselves.”
The case is Whaleco Inc. v. Shein US Services LLC et al, 1:23-cv-11596 (D. Mass.)
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