Aug. 9, 2023, 12:01 AM

Temu v. Shein Tests US Antitrust Principles in a Crowded Market

Darrell Prescott

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The legal battle between fast-fashion retail Chinese companies Temu and Shein is heating up. Attorney Darrell Prescott analyzes the case and unique questions it raises about US antitrust, monopolies, and cross-border discovery.

In an antitrust battle between two Asian clothing manufacturers, Temu alleges that Shein entered the ultra-fast fashion business in the US in 2017, and that Temu appeared with a similar business model in September 2022. The newcomer discovered how supplies of identical ultra-low cost products were impaired by exclusive supply agreements with garment manufacturers in China, claims of copyright infringement, and possibly fines or penalties built into Shein’s contracts with its suppliers.

The effect, Temu alleges, was to prevent it from offering identical goods to US consumers at prices that were lower than Shein’s. The complaint states that traditional high-end fashion brands would offer a t-shirt at $300, current fast fashion chains would offer a similar t-shirt at $30, while Shein and Temu would offer t-shirts at less than $10.

Temu’s prices were 10-40% less than those on Shein’s platform. This sounds too good to be true. One might wonder how the goods are produced, under what working conditions, and with what materials.

Allegedly, tens of thousands of clothing manufacturers are supplying under an ultra-fast fashion business model. According to the complaint, Shein and Temu offer hundreds of thousands of frequently updated products at low prices, offering 5,000-6,000 new SKUs per week.

Four issues stand out that the parties will have to grapple with.

Standard for Monopoly in US Antitrust Law

Did Shein invent a new business system and was it the first to enter? In US antitrust law, monopoly power is lawful if it’s achieved by “superior skill, foresight, and industry or historic accident.” If someone achieves monopoly as a result of innovation and is the first mover in the market, that’s not unlawful. We don’t penalize success.

On the other hand, if monopoly is achieved or maintained by long-term exclusive dealing contracts, coercing suppliers not to deal with competitors, tying, or a course of anti-competitive acquisitions, rather than by innovation, a monopoly position can be unlawful.

Are exclusive supply arrangements necessary for a new business system to work? Do they prevent theft of business secrets, ensure rapid supply response, enable business planning, and return on capital? Or do they lack a legitimate basis and have only an anti-competitive effect?

If a monopoly position is legitimately achieved, then with rare exception, even a monopolist doesn’t have a duty to deal with, or to assist, a competitor.

Market Definition

The complaint refers to an ultra-fast fashion market defined by the large number of styles offered, frequent turnover of styles, materially lower price points, quick design-to-retail time, and direct dispatch from factory to consumer. The question of entry isn’t addressed.

There’s likely a vast amount of garment production capacity in the world, much of it in low-cost places. If the business model proves profitable over time, could other supply networks be assembled?

Monopoly is the power to control prices and exclude competition. If that exists, how long can it last, and will others enter? Could some of the current fast fashion retail chains modify their systems to enter the ultra-fast fashion business? The complaint refers to a 50% market share if ultra-fast fashion and fast fashion are viewed as a single market. Usually, a share of 60% or higher is required to support finding a monopoly power.

Jurisdiction

Much of the conduct alleged occurred in China, not in the US. Likely, the supply contracts referred to were entered in China and performed there. If Shein caused a supplier to breach a contract with Temu, the interference and breach likely occurred in China.

The US takes effects-based jurisdiction, but the effect needs to be direct, substantial, and reasonably foreseeable. Showing a direct effect on prices to US consumers resulting from interference with contracts performable in China may be a challenge, especially because the prices to US consumers are already extremely low.

The Litigation Process

Much of the complaint is alleged upon information and belief, not on personal knowledge. To prove a case, Temu may need to adduce evidence from people in China and comply with US discovery and litigation process. It may need to authenticate thousands of contracts, prove that Shein caused breach or prevented people from entering into contracts with Temu. Chinese law may not permit US style discovery and it may be a challenge to get visas for witnesses to testify at depositions, much less trial.

The case presents interesting antitrust and litigation issues. It warrants careful watching to see how they play out.

The case is Whaleco Inc. v. Shein US Services LLC, D. Mass., No. 1:23-cv-11596, 7/14/23.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Darrell Prescott has practiced antitrust law in New York for 47 years. He currently works as a consultant and expert in the antitrust field.