Earlier this week, The Exchange argued that the PDD-Shein rivalry was worth keeping an eye on. PDD is a Chinese company that owns the well-known Pinduoduo e-commerce business as well as Temu, a discount online retailer that has seen quick growth in the U.S. market in recent years.
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Our post was well-timed. Two days after our short look into the rivalry, Temu filed suit against Shein. It was not the first time the company has done so. Earlier this year, the two companies had sued each other only to dismiss the lawsuits in October. Now Temu is back with a fresh lawsuit that alleges a battery of illegal acts by Shein.
How did we go from the two companies dropping their dueling lawsuits to yet another suit? Per the complaint, since the time when the first suits were dismissed, “Temu has discovered that Shein’s anticompetitive behavior has not only persisted but intensified,” the company claims. It’d be useful to recall at this point that Temu’s parent company PDD recently overtook Alibaba in market cap, and Shein wants to go public in the United States.
A Shein spokesperson told TechCrunch+ that the company “believe[s] this lawsuit is without merit and will vigorously defend” itself.
What does Temu say Shein is up to?
The suit’s claims are varied. Some deal with Temu’s view that Shein is filing a myriad of “dubious copyright infringement lawsuits” against it and alleges that the latter is issuing “voluminous, bad-faith DMCA takedown notices” against its rival.
But that’s just the start. Temu also alleges that Shein abuses its suppliers by leveraging what it considers a “monopoly power in the U.S. ultrafast fashion market” to enter into “Exclusive-Dealing Agreements with ultra-fast-fashion suppliers, and through those agreements Shein improperly seizes suppliers’ IP rights” so that it can prevent suppliers from listing and selling similar products on Temu or other retail platforms.
Abuse of legal systems and aggressive contracts are material allegations, but there are some truly wild statements elsewhere in the complaint:
Most notably, upon information and belief, Shein has now resorted to more aggressive methods of targeting suppliers believed to be selling products on Temu, including an ongoing program of summoning Temu’s suppliers on false pretenses to Shein’s offices, detaining those suppliers’ representatives in Shein’s office for up to ten hours, seizing these Temu sellers’ phones, searching their phones for Temu sales, commercial, and other financial information without permission, demanding the sellers’ chat histories and log-in credentials for their Temu account, compelling them to sign documents against their will, and threatening them with extensive penalties and termination of their Shein contracts for selling on Temu. Shein’s persistent and increasingly aggressive use of anticompetitive conduct, coercion, and threatening behavior necessitates this lawsuit.
That’s insane. Here’s how Temu alleges the practice is run:
Shein’s coercive conduct has become more severe in recent weeks and continues today. Upon information and belief, several suppliers who previously listed products on both Temu’s and Shein’s platforms have reported that their representatives were called into the “inspection room” in Shein’s offices in Guangzhou, China. In recent weeks supplier representatives were lured to the offices on false pretenses — to discuss “potential collaborations” between Shein and the supplier, to assist Shein in investigating corruption among Shein staff, or to discuss any difficulties the merchants were facing with their business and presumably any assistance that Shein could offer them. However, once there, the representatives were held at Shein’s offices in a small room for up to ten hours and threatened by Shein employees until they acquiesced to Shein’s demands. These representatives often arrived at Shein’s offices alone, and Shein employees physically overwhelmed the supplier representatives, stationing multiple Shein employees around the merchant in a small space during the ensuing interrogation.
Apart from Shein taking people’s phones away to steal information, Temu alleges that Shein also forced suppliers into entering contracts:
On information and belief, the Temu suppliers falsely imprisoned at Shein’s offices also were coerced to sign a number of documents before they were allowed by Shein to leave. The Shein documents were lengthy, constituting dozens of pages, and suppliers were not given an opportunity to review their terms closely. If the suppliers refused to sign, Shein threatened them with punitive measures, including refusing to allow the suppliers to leave Shein’s “inspection room,” closing the supplier’s storefronts on Shein, and threatening more generally that the supplier would face consequences for failing to cooperate.
If all that’s true, it’s really not okay. In fact, it’s incredibly abusive and speaks to a business climate in Guangzhou that sounds more like a scene from a mobster movie. We are discussing e-commerce companies here, not something outside the realm of normalcy. This is about cheap dresses and shoes and pants!
Why bring all this up?
Well, because Shein wants to go public in the United States. It may do so at a valuation in the tens of billions of dollars. And, per the Temu suit, a good part of its success may be attributable to practices that are certainly outside of business norms and may rise to criminal levels if the allegations hold up. The suit clearly presents only one perspective and Shein will have a competing view of the situation and pertinent matters.
Still, I cannot recall a company of Shein’s worth (especially one that’s raised billions of dollars from well-known venture and private equity brands) being hit with such a number of serious allegations while trying to go public. The company will have to discuss the matter in its F-1 filing, unless it can find a way to end the legal fight between itself and Temu.
I doubt that will happen. Shein could be racing toward another massive capital raise through its IPO, and Temu, of course, would prefer that its rival does not have more capital. It is not clear if Temu’s suit can slow or stop Shein’s IPO, but it certainly won’t help.
We’ll have more when Shein puts out its own statement, but for now, it’s slightly less certain that a major IPO candidate will go public at all.