Alibaba: The Scandal You Should Know About Before Investing

Francisco A. Laguna & Rolanzo White

For those unfamiliar, Alibaba is an e-commerce company based in China. Founded in 1999 by Jack Ma, this giant has grown into one of the most valuable technology companies in the world.  It raised US$ 25 billion from its United States IPO, and in 2014, transactions on their sites totaled US$ 248 billion.

"Alibaba Group Logo" by Source (WP:NFCC#4). Licensed under Fair use via Wikipedia

“Alibaba Group Logo” by Source (WP:NFCC#4). Licensed under Fair use via Wikipedia

Alibaba does not warehouse, ship or sell products, instead they offer sales portals and platforms whereby third-party merchants can sell their goods to third-party buyers. The company began as an online business-to-business wholesale company operating as Over the next decade, Alibaba launched a variety of businesses including Taobao, an online payment system called Alipay, an online marketing technology platform called Alimama, Tmall, and Alibaba Cloud Computing. The Company derives the vast majority of its revenue – 81.6% for FY2014 – from its China retail marketplaces, Taobao, Tmall, and Juhuasuan.

The sale of counterfeit and contraband goods over its platforms has long been an issue that could potentially impact Alibaba’s business significantly. Alibaba has always claimed to be against the counterfeiting on their sites.  On April 14, 2014, Alibaba’s proprietary news website, Alizila, published an article entitled “Fight against Online Sale of Fakes Goes on for Alibaba Group.” Alibaba claims to have removed an estimated 114 million listings for suspected fake goods from their giant Taobao marketplace during the first ten months of 2013. Their stated goal was to curb the infringement of intellectual property rights on its websites. The company has implemented measures to correct the problem which include searching their sites for merchants selling counterfeits and opening communication with government authorities and major brand owners. That being said, their current measures to stop counterfeiting have failed according to the recent complaints. The site rife with counterfeits is Taobao. Taobao is Alibaba’s largest shopping platform, hosting millions of merchants. Taobao offers buyers the ability to purchase unusual items and services like boyfriends for hire, live scorpions, and plenty of counterfeit merchandise.

"Jack Ma 2008" by World Economic Forum at en.wikipedia. Licensed under CC BY-SA 3.0 via Commons

“Jack Ma 2008” by World Economic Forum at en.wikipedia. Licensed under CC BY-SA 3.0 via Commons

Recently, Alibaba, Jack Ma and company executives have been hit with three class action law suits. The first was a derivative suit led by a common stock holder named Steve Surray (United States District Court for the Southern District of California). The second was a class action suit led by Gucci America Inc. who is joined by Balenciaga, Bottega Veneta, Yves Saint Laurent, Luxury Goods International (L.G.I.), and Kering (US District Court for the Southern District of New York). The last class action was filed by Myrtle Chao; the plaintiffs consist of people who bought the publicly traded ADSs of Alibaba on a U.S. stock exchange during the Class Period of 10/21/2014 – 01/28/2015 (United States District Court for the Central District of California).

Overall, these complaints accuse Alibaba of being untruthful about the counterfeiting problem on their sites and aiding and abetting the assailants. In other words, Alibaba is not only accused of allowing the sale of items like fake cigarettes, alcohol, restricted weapons and counterfeit luxury goods, it is also accused of providing an “ecosystem” for this type of behavior. In the Gucci complaint, the class claims that Alibaba knowingly encourages, assists and profits from the sale of counterfeits by providing online marketing, credit card processing, financing and shipping services. For example, Alibaba knowingly continued to allow the Hangzhou Yanbei Trading Company, a “Gold Supplier” and “Assessed Supplier” to sell counterfeit Gucci bags after inspecting them and concluding that they were, indeed, counterfeit. Alibaba is also accused of helping customers find counterfeit goods. For instance, they allow for keyword searches like “Gucci replica” and suggested terms like “cucci” and “guchi” when “Gucci” is typed into the search bars on their various platforms to intentionally drive customers to merchants of counterfeit products.

"Alibaba Binjiang Park" by Danielinblue, designed by HASSELL (architects)[1] - Own work. Licensed under CC BY-SA 4.0 via Commons

“Alibaba Binjiang Park” by Danielinblue, designed by HASSELL (architects)[1] – Own work. Licensed under CC BY-SA 4.0 via Commons

Alibaba is being sued for, among other things, trademark infringement, counterfeiting under the Lanham Act and violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”). The plaintiffs want Alibaba to stop aiding counterfeiters and take down any infringing product currently on their sites and have asked the court for statutory, punitive, and court-determined damages that could cost Alibaba millions.

Alibaba’s actions, if true, are illegal and could mean a severe drop in market value, which could further disrupt the Chinese economy and investor confidence.  The prudent investor may wish to consider waiting until the lawsuits are resolved, at least at the district court level.

TransLegal has offices throughout Asia, including China.  We assist our clients with enforcement of IP rights in the region.  Call us with your questions.


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