1. INTRODUCTION

In the second round of litigation between E-commerce platforms such as Amazon, Flipkart and Snapdeal ("E-commerce platforms") and Direct Selling Entities ("DSEs") such as Amway, Oriflame and Modicare earlier this year, a Division Bench of the Delhi High Court overruled1 the decision of the Single Judge whereby the E-commerce platforms were restrained from enabling sale of products of DSEs without their consent.2 While allowing the appeal, it was also held by the Division Bench that Direct Selling Guidelines, 2016 ("DSGs") are advisory in nature and the Single Judge had made a blunder in holding them to be a binding law.

The principles of 'exhaustion of rights'3 and the defence based on it4, which is available in cases of trademark infringements under the Trade Marks Act, 1999 ("TM Act") in India, have been frequently discussed in the context of parallel importation of goods in the country. However, in this interesting judgment that decided an appeal from a Single Judge's order of interim injunction passed in the civil suit initiated by the DSEs, the Division Bench gave its insights on the principle of exhaustion as a key defence for the E-commerce platforms in the case. This was besides the other strong defence of 'safe harbour immunity'5 that was available to the E-commerce platforms under the Information Technology Act, 2000 ("IT Act").

We discuss the matter and its outcome in detail as follows:

2. FACTS AND FINDINGS IN THE ORIGINAL SUIT BEFORE THE SINGLE JUDGE

2.1 Arguments by the parties

In the first round of litigation, the DSEs had initiated proceedings against the E-commerce platforms in the market for offering for sale their products without due authorization. It was claimed by DSEs (more particularly by Amway) that their business model is that of providing opportunity to customers to own and operate their own business by enrolling themselves as a 'direct seller' with DSEs and promote, distribute and sell their high-quality products on a principal-to-principal basis under a direct seller contract that also includes the provision of training by DSEs to such direct sellers.

Amway argued that some of their direct sellers without authorization are selling such products bearing their brands on E-commerce platforms, and these branded products had been illegally tampered with (by removal of unique product bar codes), thereby violating the trademark rights of the DSEs. The DSEs also argued that as the DSEs have a strict policy of quality control of their products and thus, such a sale of their products on the E-commerce platforms not only affects their goodwill and reputation, but also interferes with their ordinary course of business. Furthermore, it was argued that DSEs did not give permission to these E-commerce platforms to sell their products online, as was required by Clause 7(6) of the Direct Selling Guidelines (DSGs), 2016 and thus, such a sale is illegal in nature.

The DSEs also submitted before the Single Judge that they had written to the E-commerce platforms highlighting these concerns, but the E-commerce platforms did not discontinue the practice of facilitating the sale of the DSEs branded products. This, according to the DSEs, was in breach of their obligations as internet intermediaries under the provisions of the IT Act.

On the other hand, the E-commerce platforms primarily submitted that (i) their role was only to facilitate transactions between sellers who list their products for sale and buyers who purchase them and hence they were exempt from liability, i.e., has a safe harbour immunity, under Section 79 of the IT Act; and (ii) in view of the law laid down by the Supreme Court in Shreya Singhal vs. Union of India6, they were only required to take down content once they receive actual knowledge in the form of a court order that the content is infringing or in violation of law.

2.2 Findings of the Single Judge

On 08.07.2019, after hearing extensive arguments on the application for the grant of injunction till the pendency of the suit, the Single Judge had granted an interim injunction in favor of the DSEs, restraining the E-commerce platforms from selling products of the DSEs on their platform.

It was also held by the Single Judge that the E-commerce platforms had infringed the trademarks of the DSEs and they cannot take the defence of the principle of exhaustion of trademark rights under the TM Act. The Single Judge also had appointed local commissioners to inspect the warehouses of E-commerce platforms. Basis their reports, she arrived at the conclusion that there was indeed product tampering happening, which was sufficient for the defence of exhaustion of rights to become unavailable for the E-commerce platforms in this case under the TM Act7.

It was noted by the Single Judge that the IT Act makes a distinction between 'active' and 'passive' intermediaries and only passive intermediaries can claim safe harbour protection. As per the Single Judge, the safe harbour immunities are not available to the E-commerce platforms in the matter as they qualify as 'active intermediaries' by being involved in product warehousing, packaging and shipping, while providing value added services. The Single Judge also concluded that the E-commerce platforms also failed to follow the due diligence requirements mentions under the IT Act.

On the issue of enforceability of DSGs, it was held by the Single Judge that DSGs were binding as a law and the E-commerce platforms were in gross violation of the same. In order to arrive at the decision, the Single Judge also invited the feedback of the Additional Solicitor General (ASG) of India on the applicability and force of DSGs. The ASG opined that the DSGs indeed have a binding effect, though they are advisory in nature.

Thereafter, against the decision of the Single Judge, the E-commerce platforms had preferred an appeal in which the decision of the Single Judge was overruled.

3. ANALYSIS OF ISSUES BY THE DIVISION BENCH AND JUDGMENT

3.1 Issues for consideration before the Division Bench

The issues before the Division Bench in appeal were as follows:

  1. Whether the Direct Selling Guidelines, 2016 are valid and binding on the E-commerce platforms and if so, to what extent?
  2. Whether the sale of the DSEs' products on E-commerce platforms violates the DSEs' trademark rights?
  3. Whether the E-commerce platforms qualify as "intermediaries" and are entitled to protection under the safe harbour provided in Section 79 of the IT Act and the Intermediary Guidelines of 2011?
  4. Whether the E-commerce platforms are guilty of tortious interference with the contractual relationship of the DSEs with their distributors/direct sellers?

3.2 Analysis of issues by the Division Bench and Judgement

While dealing with the first issue, it was held by the Division Bench that the issue with regards to the binding nature of the DSGs has been erroneously decided by the Single Judge as the guidelines are merely model framework and they do not attain the status of law within the purview of Article 13 of the Constitution of India. It was noted by the Division Bench that the title of the DSGs itself explains its nature as it reads as "Advisory to State Governments/Union Territories: Model Framework for Guidelines on Direct Selling", thus making it clear that the DSGs were not meant to be treated as law themselves, much less binding law.

While deciding that the DSGs are advisory in nature, the Division Bench also went ahead to observe that the DSEs appear to have "jumped the gun" in not waiting for the DSGs to be formally changed into a law. As per the Division Bench, merely because the DSGs have been notified in the Gazette, they do not attain the status of law within the meaning of Article 13 of the Constitution.

Additionally, the Division Bench also noted that seeking the feedback of ASG in the suit, at the stage of grant of interim injunction, was beyond the rules set out in the Code of Civil Procedure, especially when the Government of India was not even named a party in the suit. As per the Division Bench, the Single Judge had committed a grave error in doing so.

While dealing with the second issue, the Division Bench at the outset pointed out that a fundamental error has been committed by the Single Judge in noting in the impugned order that the DSEs are the owners of their respective trademarks as none of the DSEs had asserted or even mentioned about trademark registrations in their pleadings. The Bench also observed that although the Single Judge has noted that the suits were not filed for trademark infringement, she has still proceeded to examine whether there has been an infringement of trademarks. Thus, as per the Division Bench, the findings of the Single Judge as regards the issue of trademark infringement were outside the purview of the pleadings and unsustainable in law.

Nonetheless, on merits, after these initial observations about lack of trademark ownerships of the DSEs (their foreign counterparts were the actual registered proprietors), the Division Bench proceeded to examine the applicability of the principle of exhaustion of trademark under the TM Act. The Division Bench by placing reliance on the decision in Kapil Wadhwa v. Samsung Industries8, reiterated that India follows the principle of "International Exhaustion" and if the buyer goes ahead and further sells the good in any market, the same shall not amount to infringement. Furthermore, especially in the case of Amway, it was observed that, even if there was a binding contract between Amway and its direct selling agents, at best, Amway can seek to proceed against a seller, and not the E-commerce platform. The Division Bench also pointed out that Amway itself also had a "Code of Ethics" which stated that once the product has been sold to the direct seller, no further condition can be imposed.

Upon re-examining the reports of the local commissioners on which the Single Judge had relied upon, the Division Bench held that the reports do not conclusively show if the tampering of products was done at the behest of or under the direction/control of the E-commerce platforms.

The Division Bench therefore rejected the views expressed by the Single Judge that E-commerce platforms in the case could not take the defence based on the principle of exhaustion in terms of Section 30 (3) of the TM Act, or that the sale of the DSEs' branded products on E-commerce platforms violates their trademark rights, constitutes misrepresentation or passing off, and results in the dilution and tarnishing of the goodwill and reputation of the DSEs' brands.

While dealing with the third issue, the Division Bench laid down that the IT Act does not distinguish between active and passive intermediaries as observed by the Single Judge and in fact, it grants safe harbour to all the intermediaries as long as they fall within the ambit of Section 79 of the IT Act. The Division Bench further observed that even though the E-commerce platforms provide value-added services, this does not dilute the safe harbour granted to them under Section 79 of the IT Act as the provisions of the IT Act also envisage that such intermediaries could provide value-added services to third party sellers.

The Division Bench noted that E-commerce platforms are not active facilitators of the sales process as they have no role in choosing the customers, initiating the sales, or choosing the information to be displayed. The Division Bench also referred to the Intermediary Guidelines Rules, 2011 which lists down the due diligence obligations of the intermediaries. According to Rule 3(1), an intermediary must publish its policies for the information of the users. In light of the same, the Division Bench examined Amazon's policy, Clause 17 of which states that Amazon shall prohibit sale on its platforms of 'unauthorised products'. The Division Bench noted that per se, the products of DSEs were not 1nauthorized because after the first sale, the DSEs had lost their right to regulate further sales.

Thus, in light of the above observations, the Division Bench held that the E-commerce platforms were in compliance with Section 79 of IT Act and thus entitled to protection of the safe harbour provision.

As regards the fourth and the last issue, the Division Bench firstly noted that direct sellers using the facilities offered by E-commerce platforms was entirely voluntary and not induced by these platforms. The services of warehousing, transportation, packing, and so on are provided by these online platforms, not just to the products of the DSEs, but to all products offered for sale on their platforms. The Division Bench further observed that the E-commerce platforms might have had knowledge about the existing contracts between the DSEs and direct sellers, however the same is not sufficient to claim tortious interference and the DSEs ought to have shown that there was an active effort on the part of the online platforms to induce the breach of contract.

Thus, the Division Bench held that in the absence of cogent evidence to show tortious interference, a conclusion to the end that there is an inducement to breach of contract is not the correct position in law.

The Division Bench, therefore, opined that the DSEs have failed to establish a prima facie case and overruled the order passed by the Single Judge.

4. CONCLUSION

The present dispute between the parties is admittedly complex in nature as it involves interplay between the IT Act, TM Act and the law of torts. While striving to strike a balance between ever-changing technology and law, the present decision delves deep to consider the applicability of the exhaustion principle under the TM Act and safe harbour immunities for intermediaries under the IT Act. This decision is likely to have far reaching implications as it strengthens the position of the E-commerce platforms which was earlier diminished by the interpretations adopted by the Single Judge.

The Division Bench has minutely analysed the findings of the Single Judge on each issue and it appears to make good sense especially when on technical grounds, it dismisses the findings of the Single Judge regarding the issues of binding nature of DSGs basis ASG's feedback, trademark infringement and also the findings of the local commissioners.

The Division Bench's effort to explain the 'first-sale doctrine' or the principle of exhaustion of trademark in the context of the services rendered by e-commerce portals is laudable as while doing so, the Division Bench goes on to observe that Amway itself has a "Code of Ethics" which states that once the product has been sold to the direct seller, no further condition can be imposed.

Especially, in the current era of E-commerce, it is crucial for almost all the E-commerce platforms to provide additional services in order to timely and effectively manage the delivery of orders. However, the same cannot be used to take away their status of an intermediary and safe harbour provided under the IT Act. The present decision is a positive step as amongst other things, it lays down that the mere fact of E-commerce platforms providing additional services like warehousing, packaging and shipping, or even value added services, does not disentitle them from taking the benefit of the exemption from liability under the IT Act.

Footnotes

1. Amazon Seller Services Pvt Ltd vs Amway India Enterprises Pvt. Ltd & Ors, FAO(OS) 133/2019, available at: https://indiankanoon.org/doc/43335747/

2. Amway India Enterprises Pvt. Ltd. vs 1Mg Technologies Pvt. Ltd. & Anr., order dated 08.07.2019

3. The 'principle of exhaustion' or the 'first-sale doctrine' simply mean that an owner of certain goods, after the goods are first sold by him or his authorization in a given market, exhausts his control over their future sale. This could be equally true for a branded or a patented product. While some countries follow national or regional exhaustion principles (i.e., an owner's right, after the first sale, gets exhausted in his country or defined region only), some others follow international exhaustion principles (i.e., an owner's right, after the first sale, gets exhausted for the purpose of the entire world).

4. India follows the principle of international exhaustion of rights under Section 30(3) of the TM Act, and the same is a possible defence available to defendants in cases of trademark infringements under the Act.

5. In India, the IT Act has established a legal framework that offered broad immunity or safe harbour to internet intermediaries from liability for third-party violations or third-party illegal content. Section 79 of the IT Act provides immunity to an internet intermediary from liability under all laws, provided the intermediary has not conspired, abetted, aided or induced in the commission of the unlawful act or upon receiving actual knowledge through any notification about a computer resource in the control of the intermediary being used for an unlawful act, fails to expeditiously remove or disable access to that material.

6. (2015) 5 SCC 1

7. Section 30(4) of the TM Act mentions that the defence under Section 30(3) shall not apply where there exists legitimate reasons for the proprietor to oppose further dealings in the goods in particular, where the condition of the goods, has been changed or impaired after they have been put on the market.

8. MIPR 2012 (3) 0191

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