Most, if not all, of our readers are familiar with e-commerce websites and related transactions. Notably, Amazon.com’s empire, as well as other forms of e-commerce such as iTunes subscription services or purchasing an e-Book are part of these transactions. In recent news, one of China’s largest e-commerce websites is being sued in the United States for selling counterfeit and knock-off products. Shares of the company, Pinduoduo, plummeted after news of the lawsuit was made public. Currently, six law firms are in the process of filing class actions on behalf of investors who purchased shares of Pinduoduo. The company went public in the United States earlier this year, raising over $1.6 billion from investors. Pinduoduo is traded on NASDAQ under PDD, and currently has a $25 billion market cap.
Pinduoduo is known for combining online shopping with entertainment. It was founded in September 2015 by Colin Guang, a former Google employee. As of now, however, the company has faced an influx of negative media in China, with claims that the platform sells knock-offs of major brand names. This selling of fake goods could give investors standing to sue. If the investors were misled, and invested because of the false information, they will have a cause of action under the federal securities laws. Executives of companies, and insiders who communicate information to investors about a company, have a duty not to make any misleading or materially false statements about the company. This includes information about the financial health of the business.
Started only three years ago, Pinduoduo had 295 million active users and 4.3 billion total orders in 2017. China is the largest online retail market, with other e-commerce names such as Alibaba and JD.com. Pinduoduo sells groceries, electronics, clothing, and household items, among other things. While Amazon may be the number one e-commerce website in the United States, Pinduoduo is the second larges e-commerce website in China behind Alibaba.
Alibaba, China’s largest online retailer, has faced similar lawsuits in the past for copyright infringement and counterfeit goods. The current lawsuit Pinduoduo faces alleges that the company failed to disclose that its controls were ineffective at preventing third parties from selling counterfeit goods on the platform, and the reported revenues were unsustainable because the they included money which came from counterfeit or knock-off goods. Investors claim they suffered damages in the marketplace due to these material misrepresentations.
An example of one such knock-off found on Pinduoduo is of Pampers, owned by Proctor & Gamble. Diapers with brand names such as “Pampois” and “Parmepas” were sold on Pinduoduo at below-market price compared to Pampers. Another brand, Skyworth, sells televisions and has asked Pinduoduo to take down all fake products with the name “Skyworth” on them. The State Administration for Market Regulation, China’s version of the Copyright or Trademark Office, has launched an investigation into Pinduoduo’s sale of copyright infringing products.
Overall, the lawsuit is not a first for the company since its founding. According to Forbes, Pinduoduo has faced 224 disputes with merchants and consumers in China, most of which were withdrawn. With over 300 million active users, 224 disputes may not be significant. What could be significant for the company, however, is if Pinduoduo was found liable for securities fraud in the United States. The company would likely face heavy fines and penalties, and the affected investors could get their money back.
Pinduoduo has stated that it will increase the verification process for the products sold on its platform. The company’s CEO, Huang Zheng, also said that he will “thoroughly rectify and reform” Pinduoduo and comply with any investigation conducted by China’s State Administration for Market Regulation.
At our law firm, we assist clients with legal issues related to e-commerce, business, technology, and internet laws. Please don’t hesitate to contact us to set up an initial consultation.