Court Refuses to Dismiss RICO Claim in Artists’ Lawsuit Against Shein

Image: Shein

Law

Court Refuses to Dismiss RICO Claim in Artists’ Lawsuit Against Shein

A California federal court has refused to dismiss a Racketeer Influenced and Corrupt Organizations Act (“RICO”) claim waged against Shein in a lawsuit accusing the fast-fashion giant of engaging in racketeering through a combination of copyright ...

November 9, 2024 - By TFL

Court Refuses to Dismiss RICO Claim in Artists’ Lawsuit Against Shein

Image : Shein

Case Documentation

Court Refuses to Dismiss RICO Claim in Artists’ Lawsuit Against Shein

A California federal court has refused to dismiss a Racketeer Influenced and Corrupt Organizations Act (“RICO”) claim waged against Shein in a lawsuit accusing the fast-fashion giant of engaging in racketeering through a combination of copyright infringement and wire fraud, as well as the use of a complex corporate structure aimed at shielding the company from accountability. In a November 8 order, as first reported by TFL, Judge Mark Scarsi of the United States District Court for the Central District of California largely preserved claims brought against Shein by a group of designers, who allege that Shein copied and sold their original designs without authorization. 

A Bit of Background: In the headline-making lawsuit that they filed in July 2023, independent designers Krista Perry, Larissa Martinez, and Jay Baron alleged that Shein and various related entities (collectively, “Shein”) are on the hook for copyright and trademark infringement in connection with their practice of “produc[ing], distribut[ing], and selling exact copies of their creative works,” which they allege is “part and parcel of Shein’s ‘design’ process and organizational DNA.” 

At the same time, they asserted that Shein has “made billions [of dollars] by creating a secretive algorithm that astonishingly determines nascent fashion trends – and by coupling it with a corporate structure, including production and fulfillment schemes, that are perfectly executed to grease the wheels of the algorithm, including its unsavory and illegal aspects.”

In a bid to sidestep the claims lodged against it, Shein argued, in part, in a motion to dismiss in June, that the plaintiffs fell short in alleging a civil RICO claim, under which a plaintiff must allege: “(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity (known as predicate acts) (5) causing injury to plaintiff’s business or property.” 

Here, Shein argued that the plaintiffs fell short on multiple prongs, including by: failing to adequately plead willfulness to sustain criminal copyright infringement as a predicate act; failing to adequately plead mail and wire fraud as a predicate act; and failing to cure defects in their allegations of a RICO enterprise. 

Motion to Dismiss

In his order on Friday, Judge Scarsi sided with the plaintiffs in large part, denying Shein’s motion to dismiss the RICO claims, in what could set a potentially notable precedent in a rare legal scenario where copyright infringement is being used as a predicate act to establish a RICO violation. Among some of the critical aspects of the court’s order are … 

Copyright Infringement as a RICO Predicate Act: The court held that the plaintiffs sufficiently alleged that Shein’s copyright infringement could serve as a predicate act under the RICO statute, finding that the plaintiffs “easily exceed” the requisite threshold by “generally pleading that the defendants willfully committed copyright infringement and purposefully created and employed an algorithm that generates exact or close copies of works it does not own.” 

In particular, the court held that the plaintiffs’ detailed claims of Shein’s alleged “algorithmic” copying of designs satisfied the pleading standard. (Shein’s attempt to challenge this based on a more stringent pleading standard was unsuccessful.)

Mail & Wire Fraud as a RICO Predicate ActIn terms of their fraud claim, the plaintiffs have alleged in the lawsuit that Shein “used the mail and interstate wires to deliver infringing designs to users on the Shein mobile application or website and to ‘obfuscate or misrepresent SHEIN’s corporate structure for the purpose of making it impossible for victims to identify the entity or entities responsible for the theft of intellectual property.’” The court noted that the plaintiffs “also identify dozens of communications that ‘furthered and facilitated [Shein’s] scheme to defraud.’”

With the foregoing in mind, Judge Scarsi held that the plaintiffs met the heightened standard (under Rule 9(b), which requires fraud to be pled with particularity) by providing specific examples of deceptive conduct, and thus, rejected Shein’s challenges to wire fraud as a predicate act. 

RICO Enterprise Structure: The plaintiffs successfully argued that the multiple entities in Shein’s orbit function as an “association-in-fact,” thereby, meeting the RICO requirement for an “enterprise.” Siding with the plaitniffs (and shutting down Shein’s argument that the plaintiffs failed to support an inference that each of the Shein defendants participated in the conduct of a RICO enterprise), the court held that the plaintiffs adequately alleged that Shein’s entities functioned with a shared purpose of “misappropriating” intellectual property. Moreover, the court stated that the plaintiffs provided sufficient details to suggest that the individual companies worked as part of a cohesive unit aimed at avoiding infringement liability.

Claims Against George Chiao: Turning its attention to claims waged against Shein executive George Chiao, the court determined that the plaintiffs failed to allege sufficient direct involvement by Chiao in individual acts of copyright infringement. However, the court granted plaintiffs leave to amend, allowing them an opportunity to replead their claims by connecting specific acts of infringement to Chiao’s oversight roles. Beyond that, the court upheld the RICO charge against Chiao, noting that Chiao’s involvement in the operation and management of Shein’s business entities and his participation in the alleged fraudulent scheme were sufficient to keep the RICO claim alive.

The Bigger Picture

The court granted the plaintiffs leave to amend their complaint in what is proving to be an increasingly complex legal battle that marks a novel example of how the RICO Act’s broad language can be used to apply to intellectual property-centric disputes. The plaintiffs have broken new ground in the lawsuit at hand by advancing RICO claims against Shein based on alleged copyright infringement, which, when combined with wire fraud claims, makes for an interesting use of the statute, which has traditionally been used to crack down on organized crime. 

If the plaintiffs ultimately prevail, the case could open the door for similar actions by other creators against companies that allegedly exploit complex corporate structures to avoid intellectual property obligations. It could have far-reaching consequences for Shein and its operations. With the RICO claims still in play, Shein could face both financial damages and a possible overhaul of its business practices, particularly its handling of intellectual property and its corporate structure.

The case is Perry, et al., v. Shein Distribution Corp., et al., 2:23-cv-05551 (C.D. Cal.).

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