India: Delhi High Court Reverses Decision: E-Commerce Platforms Now Allowed To Sell And Advertise Products Of Direct Selling Entities Without Consent

In a landmark judgement in Amazon Seller Services Pvt. Ltd. v. Amway India Enterprises Pvt. Ltd. & Others, FAO(OS) 133/2019, a Division Bench of the Delhi High Court has permitted e-commerce platforms to sell and advertise products of Direct Selling Entities ("DSEs") without their consent. In doing so, it has set aside the Single Judge's order in Amway India Enterprises Pvt. Ltd. v. 1Mg Technologies Pvt. Ltd. & Anr., CS(OS) 410/2018 passed in July 2019 by a Single Judge bench of the same Court, which had restrained various e-Commerce platforms including Amazon, 1MG, Flipkart, Healthkart, Snapdeal and independent sellers from selling, offering to sell, advertising, or displaying products in breach of third party agreements. An article summarising the main arguments and issues laid down in the Single judge's order is available on our blog ( See).

Under the concept of direct selling, sellers' market, distribute and sell manufacturers' products and provide services, directly to consumers. Such sale is regulated by agreements between the manufacturers and sellers, and a code of ethics/code of conduct regulated by the manufacturers. The Direct Selling Guidelines, 2016 ("the Guidelines") (See) also safeguard the interests of direct sellers. Clause 7(6) of the Guidelines recommends that any e-Commerce platform or marketplace should obtain prior written consent before selling products of direct sellers.

Direct Selling Entities argued that e-Commerce platforms were offering their products for sale and advertising them on their platforms without their (DSEs) consent, and in contravention of the Guidelines.

In response to appeals filed against the July 2019 order, the Division Bench held that the previous judgment was passed without considering whether the grant of injunction would have an adverse impact on online marketing, and whether it would deprive unwary consumers of exercising their choice to buy such products on online platforms, while ensuring free flow of trade.

The Division Bench also rejected the DSE's argument (specifically, Amway) that e-commerce platforms (specifically, Amazon) had sold tampered, damaged and counterfeit products and held that there was no material or conclusive proof at present, and this could only be determined after trial.

Four major issues were discussed in this judgement, as follows:

Legal validity of Direct Selling Guidelines, 2016

In the original July 2019 order, the Single Judge had held that even though the Guidelines were issued as advisory instructions, once Gazette notifications were issued and implemented by various State Governments, they became binding executive instructions, and thus had force of law. That order had also stated that sellers on e-commerce platforms cannot claim to have a fundamental right under Article 19(1)(g) of the Constitution (the right to practice any profession or to carry on any occupation, trade or business to all citizens) to sell the goods of DSEs without their consent and were bound by these guidelines.

Reversing this decision, the Division Bench clarified that mere notification in the Gazette does not confer the status of "law" on the Guidelines, and that they remained only advisory in nature.

Trademark violation, and abuse of goodwill and reputation

The doctrine of exhaustion of trademark rights came up here again: the principle states that a trademark owner's rights end with the first sale of the product being made, and thus, cannot stop the sale of genuine products on e-Commerce platforms.

The Single Judge had said that the exhaustion of trademark rights could not legitimise the tampering, mutilation, wrongful pricing, or unauthorized sale of products. Accordingly, the Single Judge had held that the use of the marks and the manner of sale on the e-Commerce platforms constituted passing off, misrepresentation and dilution/tarnishment of the marks, products and businesses of the DSEs.

In contrast, the Division Bench pointed out that the e-Commerce platforms had not asserted or even mentioned anything about trademark registration in its plaint. In fact, the suits were not filed for passing off or infringement under the Trade Marks Act and would accordingly not fall under commercial suits. Further the Division Bench relied on Kapil Wadhwa v. Samsung Electronics Company Limited, MIPR 2012 (3) 0191, where it was held that the use of a registered trademark in relation to the goods to be sold in any place, or exported to any market, would not constitute an infringement. It was held that once the goods have been lawfully acquired, if they are put into the market and further sold, there would be no infringement, regardless of whether it was an international market or a domestic market.

The Division Bench also held that once the title to a product passes through sale, no further condition can be imposed on the buyer to restrict "post-sale alienation". Clause 7 (6) of the Guidelines imposes one such condition that the buyer cannot resell the product online. Such a condition was held to be not an enforceable law in the present case, as there was no contractual obligation to that effect between the DSEs and the e-commerce platforms.

Safe harbour protection not contingent on intermediaries' compliance with Guidelines

The third issue was whether e-Commerce platforms could be termed as intermediaries and if they could obtain Safe Harbour protection under the Information Technology Act and the Intermediary Guidelines of 2011.

The Information Technology Act, 2000 ("IT Act") exempts intermediaries from liability for hosting third party content in certain instances (Section 79). "Safe harbour protection" is available where intermediaries merely facilitate and host/list third party information/data or provide a communication link.

The Single Judge had concluded that e-Commerce platforms were not merely passive non-interfering platforms but providers of a large number of value-added services, thus taking them out of the ambit of being termed mere intermediaries.

The Division Bench contrarily held that the Single Judge had misinterpreted Section 79 of the IT Act in concluding that it is restricted to passive intermediaries. The Division Bench concluded that under Section 79, an intermediary would not be liable for any third-party information, data or communication link posted by it, as long as it complies with Sections 79 (2) or (3) of the IT Act.

For this, the court relied on Shreya Singhal v. Union of India, (2015) 5 SCC 1, where it was held that the obligation of an online platform to remove content arises only if there is a court order or a notification from a government agency on the grounds mentioned in Article 19(2) of the Constitution. Thus, allegations from DSEs without a supporting court order or government notification was not sufficient to trigger a takedown obligation.

The Division Bench added that providing value-added services would not dilute safe harbour protections. The definition of an intermediary under the IT Act along with the policy laid down under Press Note No. 2 of 2018 (See) permits entities following the marketplace-based model to provide such value-added services and claim to be a mere intermediary. Infact, Section 2 (1) (w) of the IT envisages that such intermediaries could provide value-added services to third party sellers. This interpretation is reinforced by Press Note No. 2.

Contractual relationships between DSEs and e-commerce platforms

The original order had held that the continuous sale of DSEs' products on e-Commerce platforms, without the consent of the DSEs, results in inducement of breach of contract, and tortious interference with the contractual relationships of the DSEs with their distributors. As e-Commerce platforms were not merely passive non-interfering platforms, upon being notified by the DSEs of unauthorised sales, the Judge had said that they had a duty to ensure that the contractual relationships were not unnecessarily interfered with by their businesses.

The Division Bench, on the contrary, held that the tort of inducement to breach of contract necessitates that there be a contract in the first place between the platforms and the DSEs. The mere fact that online platforms may have knowledge of the Code of Ethics of the DSEs, and the contractual stipulation imposed by such DSEs on their distributors, is insufficient to lay a claim of tortious interference.

In the present case, the Division Bench stated that whether the platforms induced a breach of contract between the DSEs and its sellers/distributors had to be proved and could not be inferred. In fact, the Division Bench held, "by permitting private entities like Amway to restrict downstream distribution of genuine goods, by enforcing contractual stipulations against third parties, the judgment of the learned Single Judge recognizes a monopoly that can be exercised in perpetuity. There is also force in the contention that this runs contrary to the legal position explained in Kapil Wadhwa v. Samsung Electronics."

CONCLUSION

Effectively, the Division Bench has overwritten the Single Judge's ruling in favour of e-Commerce platforms. This has come at a time when courts and the Government have been strictly enforcing due diligence obligations on intermediaries. It remains to be seen as to whether the enactment of the Consumer Protection (Direct Selling) Rules (See) (which have stayed long-pending) will add to the uncertainty on the e-Commerce selling module or fortify the Direct Selling Guidelines by offering more clarity on e-commerce businesses. Arguably, the e-Commerce marketplace wars are not over yet.

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