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Introduction
In a swift rise to prominence that rattled the global e-commerce landscape, Chinese shopping platform Temu went from obscurity to ubiquity in just eighteen months. Yet behind its aggressive expansion and eye-catching Super Bowl ads lies a growing web of regulatory challenges. From Congressional investigations into its supply chain practices to mounting concerns over data privacy and product safety, Temu now faces intense scrutiny from U.S. regulators who question whether its meteoric success comes at too high a price for American consumers and national security.
Entry into the U.S. Market
In September 2022, Temu was launched in the United States. It is incorporated in Delaware with the official company name Whaleco. Inc., and is headquartered in Boston, Massachusetts. In its first month, Temu generated USD 3 million in sales, and by June 2023, Temu recorded USD 1 billion in monthly gross merchandise volume (“GMV”). Just within a period of two years, Temu becomes the dominant player in the e-commerce sector. In December 2023, Temu’s parent company PDD Holdings took over Alibaba to become the most valuable e-commerce group, and Temu earned a 17% market share in the discount stores category in the U.S. Temu also became the most downloaded shopping apps in the world with a significant U.S. consumer market base. Temu’s marketing success culminated in its 10-million-dollar giveaway during the 2024 Super Bowl, which led Temu to become one of the most downloaded apps in the U.S.
Along with Temu’s tremendous business success comes unprecedented legal controversies. Since 2022, Temu has been involved in a high-profile legal battle with Shein, another fashion company with a Chinese background thriving in the U.S. market. Shein accused Temu of defamation and spreading misinformation. The parties settled lawsuit in late 2023. Later, Temu became under the spotlight of U.S. regulatory inquiries, ranging from supply chain concerns, RICO litigations, and general inquiries about ties to China.
Opaque Organizational Structure
Temu is a public company in the sense that it was part of PDD Holding, which went public in 2018 on the Nasdaq stock exchange and raised USD 1.6 billion. When Temu was launched, PDD Holding already has huge amount of cash that could be utilized to back Temu’s operations. Temu’s revenue then becomes part of PDD Holding’s balance sheet, and Temu’s strong performance has been driving PDD Holding’s stock rise. In fact, incorporating Temu on PDD Holding’s own balance allows Temu to access U.S. investors more easily through PDD Holding’s foreign private issuer status, which entails a far less cumbersome listing procedure than U.S. domestic issuers. It also helps Temu avoid a more hostile listing review process amid the China-U.S. geopolitical tension, which essentially caused its chief competitor, Shein, to abandon a plan to go public in the U.S.
Figure 1: PDD Holding’s Org Chart and Temu Sits
Note: this org chart is prepared according to PDD Holding’s annual report dated April 25, 2024, which is available at https://investor.pddholdings.com/static-files/b5af664e-5fb4-40f5-96c3-6795596f8459.
Despite having a public parent company, Temu’s own internal company structure eludes public review. For example, there has been limited information about Temu’s board of directors and key executive officers. In fact, people familiar with Temu confirmed that Temu’s operations are primarily supported by employees based in China, so that Temu could utilize the relatively cheap human capital in China and escape the far more stringent U.S. regulatory requirements (e.g. employee overtime cost).
The Ugly Legal Battles with Shein
As perhaps the two most prominent players in the ultra fast-fashion e-commerce sector, Temu and Shein have been embroiled in a series of legal battles that highlight the intense competition and allegations of intellectual property theft and deceptive marketing practices between them. Shein entered the U.S. market in 2017 and quickly gained traction with its astonishingly low-pricing clothing.
In December 2022, just months after Temu was launched in the U.S., Shein failed a lawsuit against Temu in the U.S. District Court for the Northern District of Illinois, alleging that Temu had been hiring social media influencers to spread false statements about Shein brand (trademark claims) and engaging in deceptive marketing practices aimed at undermining Shein’s reputation. These alleged misconducts include counterfeiting, trade secret theft, and intellectual property infringement. In about late July / early August, Shein won a temporary restraining order on its trademark infringement claims.[1]
On July 14, 2023, Temu hired the litigation powerhouse Boies Schiller and sued Shein again in the District Court of Massachusetts, alleging that Shein “ha[d] engaged in a campaign of threats, intimidation, false assertions of infringement, and attempts to impose baseless punitive fines and has forced exclusive dealing arrangements on clothing manufacturers.” Temu’s claims are primarily based on U.S. anti-monopoly laws (i.e. Sherman Act, Clayton Act). Specifically, Temu alleged that Shein implemented at least four strategies geared toward stifling competition with Temu: (1) Shein forces manufacturers to enter into adhesion agreements that effectively create exclusive supplier relationships with Shein and threatens manufacturers with onerous fines and penalties if they supply product to Temu; (2) Shein forces manufacturers to sign loyalty oaths certifying that they will not do business with Temu (but silent as to other competitors); (3) Shein issues public penalty notices and imposes extrajudicial fines on disobedient manufacturers for supplying product to Temu; and (4) Shein sends numerous false notices of copyright infringement to Temu in order to disrupt sales of products that are offered for sale on Temu.[2]
In October 2023, Shein and Temu unexpectedly dropped their respective claims against each other without public explanation. It is likely that both companies may have sought to mitigate legal costs or pursue alternative resolutions outside the courtroom. However, in just two-month time, Temu filed another lawsuit, indicating that tensions between the two ultra-fashion giants remain high, and the mutual accusations of anti-competitive behaviors and intellectual property theft continued to shape their rivalry.
On December 13, 2023, Temu again sued Shein in the District Court of Columbia, this time with White & Case, alleging that Shein illegally interfered with Temu’s business, abused the U.S. legal process, and infringed Temu’s intellectual property (“IP”) rights. In comparison with the July 14, 2023 litigation, Temu’s litigation this time is more IP-focused. Specifically, Temu alleged that Shein (1) coerced suppliers to sign adhesion contracts allowing Shein to seize the suppliers’ worldwide IP rights through invalid assignments and often without the suppliers’ knowledge; (2) relied on the illegally seized IP rights or known false information to obtain improper copyright registrations in the U.S. Copyright Office; (3) issued voluminous, bad-faith takedown notices to Temu, often alleging that a product sold on Temu’s marketplace has infringed the very rights obtained as a result of Shein’s supplier IP seizures; (4) abusing the U.S. legal system by instigating and supporting dubious copyright infringement lawsuits against Temu; and (5) leveraging its dominance in ultra-fast fashion to foreclose Temu from access to suppliers through various anti-competitive conduct.[3]
In August 2024, Shein filed yet another lawsuit against Temu in the U.S. District Court for the District of Columbia, accusing Temu of stealing its designs, copying its product images, “ripping off its IP assets,” and engaging in other types of fraud to confuse consumers.[4] In many aspects, the allegations in this August 2024 lawsuit are a revamp of Shein’s December 2022 lawsuit.
Temu and Shein’s mutual accusations not only take place in the U.S. In 2023, Shein sued Temu in London, accusing the latter of copyright breach. Temu hit back with a counterclaim in February 2024, accusing Shein of breaking British competition law by tying suppliers of fast-fashion products to exclusive agreements, and flooding Temu with unwarranted notices of copyright infringement.[5] A trial is scheduled in 2026 at London’s High Court.
This ongoing legal saga between the two leading ultra-fashion companies eyeing the U.S. market with support of China’s cheap manufacturing costs and robust supply chain underscores not only the challenges both companies face as they expand internationally but also highlights broader issues related to Chinese companies going abroad. One may recall that just years ago, the fierce competition between Huawei and ZTE in overseas markets had essentially reduced the profits by both companies. Whether Temu and Shein can constructively resolve all these legal confrontations remains to be seen, and the outcome of these disputes will likely have significant implications for their operations and the fast-fashion industry as a whole.
Notable Other Lawsuits
In June 2024, Arkansas Attorney General Tim Griffin sued Temu for violating the Arkansas Deceptive Trade Practices Act (“ADTPA”) and the Arkansas Personal Information Protection Act (“PIPA”). The lawsuit alleges that Temu engages in deceptive trade practices, claiming it operates as a “data-theft business” rather than a legitimate online marketplace. The complaint accuses Temu of gaining unauthorized access to users’ devices, overriding privacy settings, and monetizing the unauthorized collection of personal data. The lawsuit seeks to enjoin Temu's practices, impose civil penalties, and provide monetary relief to affected consumers.[6] The lawsuit is ongoing as of the date of this article.
Meanwhile, Temu is facing other significant class action lawsuits regarding its data practices. On July 3, 2024, a class action was brought against Temu in the District Court for the District of Massachusetts, alleging that Temu sent marketing text messages to phone numbers listed on the U.S. national do-not-call registry. The plaintiffs claim that they received unsolicited messages despite being registered on the list. This constitutes a violation of the Telephone Consumer Protection Act (“TCPA”).[7] In two other class action lawsuits filed in September 2023, Temu was alleged to have failed to comply with “reasonable security standards” that would protect the personal data of its users.[8]
Regulatory Scrutiny
Supply Chain Compliance
Just as all companies operating in the apparel and fabric space are heeding supply chain compliance, Temu also found itself embroiled in a heightened scrutiny by U.S. congress about its sourcing mechanism. Following a March 2023 hearing by the Select Committee on the Chinese Communist Party (the “Committee”), Temu, together with Nike, Adidas and Shein, received requests from the Committee regarding steps it has taken to ensure that the products it provides to the U.S. consumers were not produced with forced labor as required under the Uyghur Forced Labor Prevention Act (“UFLPA”).
On June 22, 2023, the Committee issued an interim finding report, concluding that Temu’s business model, which “relies on the de minimis provision”, is to “avoid bearing responsibility for compliance with the UFLPA and other provisions on forced labor while relying on tens of thousands of Chinese suppliers to ship goods direct to U.S. consumers.” Further, the Committee found that Temu adopts no measures to ensure compliance with the UFLPA.[9] In response, Temu denied all relevant accusations about forced labor and claimed that it strictly prohibits the use of forced, penal, and child labor.[10] As of the date of the report, the Committee has not issued the final finding report regarding the four companies’ supply chain compliance. But its interim finding report has spurred considerable media scrutiny on both Temu and Shein. In Shein’s case, concerns about Shein’s supply chain compliance has even contributed to an unsuccessful IPO on the U.S. stock market, causing the company to find other options for public listing.[11]
Further, in August 2024, a coalition of 21 state attorneys general led by Montana’s Attorney General Austin Knudsen demanded answers from Temu regarding its business practices. They again raised concerns about potential violations of the UFLPA, among other concerns about labor laws, consumer data concerns, and potential ties with the Chinese Communist Party.[12] While the letter demanded Temu to respond within 30 days of receiving the letter, the back-and-forth between Temu and the legislators has been confidential with not much information available online.
Tariffs
In the same Committee investigation, the Committee also requested information from Temu and Shein about their use of the de minimis rule set out in Section 321 of the Tariff Act of 1930, which allows importers to avoid customs duties on incoming packages that are valued at less than USD 800. According to the interim report, Temu and Shein alone are likely responsible for more than 30% of all packages shipped to the U.S. daily under the de minimis rule, and likely nearly half of all de minimis shipments to the U.S. from China.[13] Clearly, the de minimis rule by and large exempts Temu and Shein from stringent duty obligations.
Worse still, in September 2024, the Biden administration announced that it would propose a new rule to close the $800 de minimis exception to import duties and institute additional information disclosure requirements.[14] The announcement also called for exclusion from the de minimis exemption of “import-sensitive products” such as textile and apparel products, and support for U.S. textile and apparel manufacturers and workers. As of the date of this article, the Biden administration has not formally announced draft rules for such purpose. However, the coming President Trump has already announced a plan to impose 60% tariffs on Chinese-sourced goods, which, if implemented, would likely to hurt Temu’s market dominance in the U.S.
The U.S. is not the sole authority to use tariff to counter Temu’s success. According to a July 3, 2024 news report, the European Union was also set to implement customs duties on inexpensive goods purchased from China’s online retailers such as Temu, Shein, and AliExpress.[15] There are also reported legislative actions in August 2024 indicating that the EU is actively considering to eliminate the current threshold of 150 euros under which items can be bought duty-free because of the large volume of parcels that arrived in the EU from non-EU countries.[16]
The U.S. Notorious Market List
While Temu itself is not listed on the U.S. Trade Representative’s 2023 Notorious Markets List, its parent company Pinduoduo has been identified on the list for five consecutive years since 2018.[17] The Notorious Markets List is maintained by the U.S. Trade Representative, and highlights online and physical marketplaces that reportedly engage in and facilitate substantial piracy and counterfeiting.
Temu’s association with Pinduoduo raises concerns regarding its practices and the potential for similar issues related to counterfeit goods. As Temu continues to grow in the U.S. market, it may face increased scrutiny due to its connection to a company already flagged for facilitating counterfeiting. Further, the inclusion of Pinduoduo on the Notorious Markets List has implications for Temu as it navigates regulatory environments, particularly in the U.S. and Europe. Regulatory bodies may closely monitor Temu’s operations to ensure compliance with intellectual property laws and consumer protection regulations.
The EU Digital Services Act
Perhaps the most significant regulatory enforcement action is the Europea Union’s investigation into Temu regarding its compliance with the EU’s Digital Services Act (“DSA”) and various consumer protection laws. As background, Temu entered the European market in April 2023 and experienced exponential growth. By September 2024, Temu reached 92 million users in the European Union.
In November 2024, the European Commission (the “Commission”) launched an investigation into Temu for potential violations of the DSA, which mandates that online platforms take responsibility for preventing the sale of illegal products and ensuring user safety. The investigation was prompted by concerns over Temu’s ability to manage rogue sellers and prevent hazardous products from reaching consumers. The Commission is primarily examining four issues: (1) the sale of illegal products; that is, whether Temu is able to prevent illegal and unsafe items from reaching consumers; (2) Temu’s user interface that allegedly utilized elements to encourage prolonged usage; (3) Temu’s content recommendation algorithm and whether it prevents the promotion of harmful content; and (4) whether Temu meets its obligations to provide access to publicly available data.[18]
The Commission is examining whether Temu has adequate measures in place to comply with these obligations, especially since it was designated a "Very Large Online Platform" (VLOP) in May 2024, which subjects it to stricter regulatory requirements.
Roughly at the same time alongside the DSA compliance probe, EU regulators are also scrutinizing Temu for issues related to product safety standards and transparency under EU’s consumer protection laws. Specifically, the Commission and national regulators (including Belgium, Germany, and Ireland) jointly demanded that Temu halt “problematic practices” that may mislead consumers and are in violation of the EU’s product safety rules. These practices include posting fake discounts and reviews, forcing customers to play fortune games while hiding its conditions, displaying misleading information, etc. The Commission gave Temu a month to propose solutions to the Commission’s consumer protection concerns. If found in violation of EU regulations, Temu could face substantial fines, potentially reaching up to 6% of its global annual revenue.[19]
In light of the scrutiny, Temu has expressed its commitment to compliance, stating that it is continuously investing in strengthening its compliance systems and safeguarding consumer interests. The company acknowledges its relative inexperience in the European market and is actively working to adapt to local regulatory requirements.[20] Overall, as Temu navigates these regulatory hurdles, its ability to effectively address compliance issues will be crucial for maintaining its growth trajectory in competitive markets like Europe while avoiding significant legal repercussions.
Other Countries
Temu’s success is rooted in its consumer-to manufacturer (“C2M”) business model, which removes all the intermediaries in the supply chain to allow ultra low-priced products to reach consumers. Understandably, this model enables Temu to significantly erode the profits by small businesses in less developed countries. For example, in October 2024, the Government of Indonesia asked Apple and Google to block Temu from their respective app stores to protect small businesses in the country.[21] Indonesian Minister of Cooperatives and Small and Medium Enterprises has proposed to the president the prohibition of Temu’s entry into its market. The Indonesian government reportedly has introduced e-commerce regulations specifically forbidding platforms from employing low-price strategies to entice consumers.[22] This is a continuation of the Indonesian government’s forcing TikTok to close its e-commerce service in the country last year to protect local merchants and users’ data.
No More Super Bowl?
Temu’s 2023 super bowl ad hit a home run, making Temu one of the most downloaded apps in the U.S. In February 2024, Temu again reportedly dropped USD 21 million on three Super Bowl ads, in which it offered USD 15 million give-away promotions to consumers.[23]
Temu’s commercial success soon attracted regulatory attention. Just before Temu’s 2024 Super Bowl ads were released, 11 Republican lawmakers sent a letter to the CEOs of CBS, which is airing the Super Bowl, and its parent company Paramount, using them not to run Temu’s advertisements. The lawmakers cited the interim finding report by the Committee, and stated that allowing Temu’s commercial to air “would be a touchdown for the Chinese Communist Party against the home team.”[24]
Conclusion
Worse still, legislators, including the coming State Secretary Marco Rubio, are still pushing fervently to cause Temu to be added to the UFLPA entity list.[25] Several other legislators are requesting information from Temu about its alleged ties with the Chinese government, UFLPA compliance, and data collection and sharing practices.[26] With the Trump administration arising on the horizon with a large number of China hawks, we can only expect further, tougher lobbying activities and political measures to come down.
[1] https://news.bloomberglaw.com/ip-law/shein-gets-temporary-restraining-order-against-rival-marketplace
[2] https://fingfx.thomsonreuters.com/gfx/legaldocs/egpbmnoomvq/Temu%20v%20Shein%20-%20DMass%20-%2020230714.pdf
[3] https://www.courthousenews.com/wp-content/uploads/2023/12/temu-shein-lawsuit.pdf
[4] https://www.usnews.com/news/business/articles/2024-08-21/shein-sues-temu-over-copyright-infringements-as-the-legal-feud-between-the-two-companies-heats-up
[5] https://www.claimsjournal.com/news/national/2024/11/05/327252.htm
[6] https://arkansasag.gov/wp-content/uploads/2024-06-25-Temu-12CV-24-149-Complaint.pdf
[7] https://tcpaworld.com/wp-content/uploads/2024/07/Whaleco-Complaint.pdf
[8] https://troypllc.com/en/temu-class-action-alleges-company-failed-to-protect-customer-data-resulting-in-breach/
[10] https://www.cnbc.com/2024/02/09/temu-returns-to-super-bowl-58-with-new-commercial.html
[11] https://www.cnbc.com/2023/12/20/shein-grilled-on-china-relationship-data-privacy-ahead-of-ipo.html
[14] https://www.whitehouse.gov/briefing-room/statements-releases/2024/09/13/fact-sheet-biden-harris-administration-announces-new-actions-to-protect-american-consumers-workers-and-businesses-by-cracking-down-on-de-minimis-shipments-with-unsafe-unfairly-traded-products/
[15] https://www.pymnts.com/cpi-posts/eu-to-impose-duties-on-cheap-chinese-goods-from-temu-shein-and-aliexpress/
[16] https://www.europarl.europa.eu/doceo/document/E-10-2024-001521_EN.html
[17] See e.g. https://ustr.gov/sites/default/files/2023_Review_of_Notorious_Markets_for_Counterfeiting_and_Piracy_Notorious_Markets_List_final.pdf; https://en.wikipedia.org/wiki/List_of_notorious_markets
[18] https://www.lawyer-monthly.com/2024/11/temu-under-scrutiny-eu-investigation-into-alleged-dsa-violations/
[19] https://fortune.com/europe/2024/11/08/temu-faces-second-eu-probe/
[20] https://www.thefashionlaw.com/shein-accuses-temu-of-running-fraud-marketplace/
[21] https://www.reuters.com/business/retail-consumer/indonesia-asks-apple-google-block-chinas-temu-protect-small-merchants-2024-10-11/
[22] https://equalocean.com/analysis/2024010620425
[23] https://nypost.com/2024/02/13/business/why-temu-dropped-21m-on-3-super-bowl-ads/
[24] https://www.cnbc.com/2024/02/09/temu-returns-to-super-bowl-58-with-new-commercial.html
[25] https://www.rubio.senate.gov/rubio-investigate-shein-and-temu-for-slave-labor/
[26] https://www.oag.state.va.us/media-center/news-releases/2774-august-19-2024-attorney-general-miyares-demands-answers-about-online-retailer-temus-business-practices-and-chinese-communist-party-connections
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