Explainer: What’s at stake for China-founded e-commerce giant Shein amid looming EU regulations

By Arriana McLymore

NEW YORK (Reuters) – Sheina’s wide range of $5 T-shirts, $20 dresses and $15 shoes could face greater trademark scrutiny under new EU rules that tighten oversight of intellectual property rights.

Shein, the Chinese-founded e-commerce giant, is pushing for a London IPO. EU digital rules, which come into force at the end of August, will require Shein to prevent products from being listed as infringing intellectual property rights and from listing and selling counterfeits to the region’s 108 million monthly active users.

According to American documents accessed by Reuters, Shein faced over 90 lawsuits accusing him of plagiarizing other companies’ designs or products. Sixteen U.S. attorneys general also asked Shein in an August letter to declare that he “often blurs the lines of intellectual property and copyright” by asking the Securities and Exchange Commission to require independent audits before Shein can go public.

HOW DO SHEIN DESIGN PRODUCTS?

According to analysts and investors, Shein’s business relies on a network of suppliers based primarily in China that buck traditional manufacturing trends by taking small initial orders and scaling up based on demand. Most of the clothing sold by Shein is manufactured in Guangzhou, China by 5,400 suppliers.

Peter Pernot-Day, Shein’s head of strategic and corporate affairs for North America and Europe, said Thursday at an e-commerce conference that the company’s speed of design and agile approach to manufacturing gave it a competitive advantage over other global retailers.

According to a company spokesperson, internal employees, external artists and third-party vendors from around the world create their own merchandise designs for Shein.

Pernot-Day said Shein’s design process is “often misunderstood as an AI-driven system,” referring to artificial intelligence, and there are between 200 and 250 in-house designers for each product category.

The internal team submits designs to the sales management system, which assigns suppliers “materials, inputs and different types of fabrics” for production, Pernot-Day said.

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WHY WAS SHEIN ACCUSED OF COPYING OTHER DESIGNS?

Shein’s design practices have been criticized for years by plaintiff lawyers who say Shein tends to copy other people’s designs.

“What really sets Shein apart is the scope and number of infringing styles the company has promoted and sold over the years,” said Scott Burrough, a lawyer who has repeatedly sued Shein for infringement on behalf of graphic designers and digital artists.

Shein denies plagiarizing anyone else’s designs or products. Its suppliers and third-party sellers must certify to Shein that their goods do not infringe the rights of other brands, it says. Third-party seller products are offered on the Shein marketplace and include products outside of Shein-owned brands.

The Shein system provides suppliers with real-time updates on sales and product trends, allowing them to predict future orders and demand.

HOW DOES SHEIN CURRENTLY DETECT FAKES?

Shein stated that it makes every effort to comply with the EU Digital Services Act. The company did not provide any updates it has made to its operations since April, when the EU announced guidelines for Shein as a “very large online platform.”

On June 4, Shein said it has been using artificial intelligence to detect potential violations in product publications since 2020. A Shein spokesperson added that from 2021 to 2023, Shein saw a double-digit percentage decline in infringement claims.

“The technology scans images of new products based on our proprietary and privileged IP library, which contains prohibited products and items,” a Shein spokesman said. “We have also incorporated artificial intelligence into other databases to improve detection of potential breaches.” Shein declined to provide details about the databases.

Shein uses a two-part screening process to prevent infringements, Shein’s lawyer said during a 2021 court hearing in which the company was accused of copying designs from swimsuit maker HVN.

Shein’s screening process includes manual and digital components, in which moderators check designs and prints for logos, registered trademark symbols and brand names, Shein’s lawyer said.

Although Shein did not say how the company came up with the design for a similar fruit-covered swimsuit, her lawyer said the infringement screening process “failed to detect products bearing the word mark HVN” because the maker’s swimsuits “did not use the circle R trademark , to notify a registered trademark.”

(Reporting by Arriana McLymore in New York; Editing by Josie Kao)