Chinese e-commerce giant Alibaba suffered a setback this week in its efforts to dismiss a lawsuit alleging the sale of counterfeit versions of popular children’s plush toys called “Squishmallows” on its platforms.
On Wednesday, U.S. District Judge Jesse Furman denied Alibaba’s motion to dismiss the lawsuit brought by toy maker Kelly Toys. Furman ruled that Kelly Toys, now a subsidiary of billionaire Warren Buffett’s Berkshire Hathaway, had plausibly claimed that Alibaba was aware of and facilitated merchants’ infringement of its intellectual property related to Squishmallows, despite Kelly Toys providing notice of violations across six prior lawsuits.
Alibaba claimed that Kelly Toys failed to show its direct involvement in the alleged counterfeit sales. But Furman found the allegations that Alibaba ignored its own “three-strike” policies against repeat offenders and instead provided some merchants selling knock-offs “Gold Supplier” and “Verified” status to be persuasive.
The lawsuit alleges Alibaba has allowed the persistent sale of fake Squishmallows even after numerous attempts to curb the activity. Kelly Toys contends this demonstrates Alibaba improperly shifts the responsibility for policing violations to brands, rather than taking “draconian” internal measures itself.
While Furman’s ruling does not decide the ultimate merits of the case, it does clear the way for it to move forward. Alibaba and its legal team have not yet commented on the decision or indicated whether they will appeal.
The stakes are high for Alibaba, which faces growing legal scrutiny in the U.S. over its handling of counterfeit goods amidst sinking stock value and slowing growth. Just last April, Alibaba was added to the U.S. government’s “Notable Markets” list for inadequate intellectual property enforcement.
With Furman allowing the lawsuit to proceed, Alibaba must now mount a vigorous defense to avoid further damage to its reputation and perhaps stricter regulation by American authorities. For children’s toy juggernaut Kelly Toys and parent Berkshire Hathaway, the ruling maintains pressure on Alibaba in their high-profile fight against fake Squishmallows.
