California Judge Denies Shein’s Motion to Dismiss RICO Suit Alleging Ripped-Off Designs and Racketeering
A Central California District Court has denied Shein’s motions to dismiss allegations brought by creatives who accused the fast global fast-fashion conglomerate of ripping off their designs last year.
In a groundbreaking Racketeer Influenced and Corrupt Organizations Act (RICO) suit filed in July 2023, Worcester, Mass.-based artist and designer Krista Perry, alongside Los Angeles, Calif. brand-owner Larissa Martinez and co-plaintiff Jay Barron alleged that entities including Shein Distribution Corporation (SDC), Roadget Business Pte., Ltd., and Zoetop Business Co., Ltd. infringed upon their trademarks and copyrights.
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RICO statutes are often used by prosecutors to freeze the assets of organized crime syndicates in cases of racketeering—making money off of illegal activities, often through the perpetuation of unlawful schemes.
It’s unusual to see RICO invoked in a civil case. But according to the plaintiffs’ attorneys, Jeffrey Gluck and David Erikson, “Shein has grown rich by committing individual infringements over and over again, as part of a long and continuous pattern of racketeering, which shows no sign of abating.”
“It is well established that egregious copyright infringement (of the type alleged here, and of the type referenced in other similar cases against Shein) constitutes racketeering,” they said upon filing the suit.
More specifically, the plaintiffs claimed that the Shein defendants collectively produced, distributed and sold copies of their creative work, violating RICO statutes through the predicate acts of criminal copyright infringement and wire fraud. Predicate acts are defined as criminal offenses that are used to carry out more serious crimes, like racketeering.
The American designers, artists and retail businesses argued that the Shein defendants used mail and interstate wires to deliver the infringing designs to users of Shein’s mobile app and its website. They also alleged that the company used those channels to “obfuscate or misrepresent” Shein’s corporate structure, making it impossible for complainants to identify the entity or entities responsible for boosting their designs.
Since the complaint was first filed, it was amended several times to include new plaintiffs Rachel Pfeffer, Dirt Bike Kidz Inc., EstelleJoyLynn, LLC, Jessica Louise Thompson Smith and Liv Lee. An amendment to the case also listed Shein business development and partnership lead and SDC president George Chiao as a defendant.
The Shein defendants pushed the California court to have the complaints dismissed, saying that the suit failed to sufficiently support the accusations that they worked together as a criminal enterprise, or that they willfully used copyright infringement and wire fraud as predicate acts.
Chiao asserted that the RICO claim against him fails because it doesn’t provide plausible proof that he committed any predicate acts of racketeering or that he participated in a RICO enterprise.
Presiding U.S. District Judge Mark C. Scarsi ultimately rejected the Shein defendants’ challenges to wire fraud as a predicate act, and said that the plaintiffs’ pleading “gives rise to a reasonable inference that the Shein Defendants participated in a RICO enterprise.”
The judge also denied Chiao’s motion to have RICO charges against him dismissed, saying that the plaintiffs “plausibly and particularly plead Chiao personally used the mail and wires to advance the fraudulent scheme at least twice.”
However, Scarsi validated Chiao’s claim that the lawsuit failed to connect him personally with the acts of trademark and copyright infringement based on his status as a corporate officer affiliated with Shein.
“Whereas Chiao’s conduct might support a fraudulent scheme to conceal or avoid liability for infringement across the Shein corporate ecosystem, Plaintiffs do not connect that conduct to the acts of infringement…,” he said, nor does the complaint raise “a plausible inference that Chiao ‘was the guiding spirit behind the wrongful conduct or the central figure in the challenged corporate activity,’” as it stated.
But this was just the complainants’ initial crack at the Shein exec. “Since this was Plaintiffs’ first attempt to plead the claims against Chiao, Chiao offers no reason why the Court should find amendment futile,” Scarsi stated.
They are free to file an amended complaint within the next 14 days.
Jeff Gluck, an attorney for the plaintiffs said Saturday, “Our landmark ruling against Shein firmly establishes clear precedent towards bringing an end to their alleged unlawful conduct and should provide some relief to the countless creators, who have allegedly had their work relentlessly infringed. What seems like every day, we receive inquiries from more artists and designers who have found their work allegedly copied and stolen by this platform. But this ruling will finally lead to enforcing major changes within this enterprise and its entire model.”
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