A federal lawsuit against online retailing giant Alibaba filed by its shareholders was given new life last week in the Second Circuit Court of Appeals. The complaint had previously been dismissed in 2016 by Judge Colleen McMahon, but the suit has now been remanded by the appeals court and will proceed.
According to documents in the case, Alibaba shareholders argued that the Chinese e-commerce powerhouse had been aware of the many counterfeit luxury goods being sold on its site. It was further alleged that the company had also engaged in fraud against shareholders by failing to disclose a meeting between its officials and China’s State Administration for Industry & Commerce. During that meeting, the agency had reportedly warned Alibaba of fines that would be imposed if the retailer continued to permit counterfeiters to engage in transactions on the website.
In the 2016 dismissal, Judge McMahon held that the lawsuit should not move forward because Alibaba did disclose the potential regulatory hazards in its IPO information. The Court of Appeals, however, supported the shareholders’ right to argue that Alibaba had in fact defrauded them.
The opinion reviving the lawsuit highlighted the relevance of shareholder allegations that the facts concealed by Alibaba were material to investors in that the retailer had been presented with a choice between abandoning lucrative business from counterfeiters and facing massive regulatory fines. Either choice, the court stated, would have impacted company revenues substantially. As such, the lower court had improperly disregarded shareholder arguments, did not construe the complaint in a light most favorable to the plaintiff and erroneously dismissed the suit.
Accusations related to Alibaba’s tolerance of counterfeit goods being sold through its website have long plagued the Chinese retail juggernaut. Company founder Jack Ma has argued that the problem lies with Chinese governmental leniency in dealing with known counterfeiters, urging more stringent legal penalties for those engaging in such activity.