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IP Theft, Data Security Breaches and RICO Claims, Oh My! Is E-Commerce Titan Shein the Fashion Industry’s TikTok?

July 18, 2023

Although you may have never heard of Shein, your children definitely have. Shein is one of the largest fashion companies in the world. After popping onto the e-commerce scene in 2008, it has sky-rocketed into a $100 billion company as it sells more clothing than any other brand worldwide. Its business model revolves around collecting vast amounts of customer data and leveraging artificial intelligence (“AI”) to reverse-engineer fashion trends, which are then marketed via social media influencers. Critics argue that Shein’s data collection poses serious privacy and data security risks, similar to concerns raised against TikTok.

On July 11, a handful of designers sued Shein, alleging that it engages in large-scale and systematic intellectual property theft from U.S. designers, effectively making them the fashion industry’s public enemy No. 1. The lawsuit alleges that Shein produced, distributed, and sold exact copies of their respective copyrighted designs through the use of Shein’s design algorithm, which relies on generating exact copies of copyrightable graphic designs, often resulting in significant harm to independent designers.

The lawsuit further alleges that Shein’s business model, driven by technology rather than design, contributes to its ongoing infringements. The secretive algorithm determines nascent fashion trends, while the production and fulfillment schemes flawlessly support the algorithm’s execution, including its illicit aspects. For instance, Shein’s AI technology is allegedly able to select the most popular designs and prioritize those as a target for infringement, and then subsequently, only produce a limited run, in an effort to decrease the liability for the infringement.

Typically, AI systems must gather huge data sets and develop algorithms that learn behavior patterns from that data set, in order to produce results. Lawsuits involving AI are already manifesting themselves in courts across the United States and are likely to grow in number. Many of these cases are class action lawsuits involving AI systems that misappropriate copyrighted works by including them in the vast amount of data used to train the AI system. For instance, in Andersen v. Stability AI Ltd., et al, 3:23-CV-00201(N.D. CA, 2022), three artists sued multiple generative AI platforms for allegedly using their copyrighted works without permission to train the AI platform. This fact pattern seems somewhat common as many others in 2023 have also been filed. Recently, comedian Sarah Silverman made headlines as she brought claims against Open AI for misappropriating her content for purposes of training the AI platforms.

With respect to Shein, the lawsuit goes beyond concerns regarding the company’s use of AI, as it also details how Shein’s operations are specifically set up to avoid such corporate accountability. Shein allegedly operates through a decentralized complex amalgamation of ever-changing companies, which facilitates such intellectual property misappropriation and has likely caused substantial societal harm in the form of environmental damage, use of sweatshop labor or worse, tax avoidance, and engaging risks to child safety. According to the lawsuit, if Shein were in fact one company, it would be among the top three most valuable companies in the world.

Given the complexity of Shein’s corporate structure and the challenges in identifying responsible parties, the lawsuit argues that the civil prong of the Racketeer Influenced and Corrupt Organizations Act (civil “RICO”) may provide the necessary remedies. It claims that Shein’s intellectual property theft and blame avoidance tactics align with racketeering activities, making individual components of the decentralized enterprise potentially liable under civil RICO. The lawsuit emphasizes the continuous pattern of copyright infringement and the need for action against Shein’s alleged misconduct.

This is not the first time issues related to Shein have been raised. In April 2023, Congress distributed an “Issue Brief” detailing some of the problems associated with the company, including: “…exploitation of trade loopholes; concerns about production processes, sourcing relationships, product safety, and use of forced labor; and violations of intellectual property rights.”

The Shein lawsuit raises an interesting spotlight on fast-fashion e-commerce, the growing concerns creators should have with respect to the protection of their intellectual property, and the likely impact AI is going to have on the fashion industry moving forward. Furthermore, amid the rapidly expanding uses of AI, there is growing concern that other emerging conglomerates like Shein will employ a similar business model and continue to damage legitimate intellectual property rights holders, not only in the world of fashion but also across other industries as well.

The views and opinions expressed in the article represent the views of the author and not necessarily the official view of Clark Hill PLC. Nothing in this article constitutes professional legal advice nor is it intended to be a substitute for professional legal advice.

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