The High Court of Delhi on July 8, 2019 answered the long and pending question revolving around the liability of an e-commerce platform by piercing through the protection granted by the ‘safe harbor’ provisions under the Information Technology Act, 2000.
A bunch of seven suits filed by the Plaintiffs (M/s Amway India Enterprises, M/s Modicare Ltd. & M/s Oriflame India Pvt. Ltd.) against the Defendants (1 Mg Technologies Pvt. Ltd., Amazon Seller Services Pvt. Ltd., Flipkart Internet Pvt. Ltd.), were combined and heard together. The Court ruled in favour of the claims raised by the Plaintiffs by restraining various e-commerce portals from supplying the products of the Plaintiffs on their platform by unauthorized sellers.
The Plaintiffs contended that their original products were being sourced through open markets via unauthorised dealers due to weak links in the supply chain system andthe products once sourced, are later tampered with and made available for sale on e-commerce platforms.
The Plaintiffs also alleged that their products are sold for cheaper/discounted prices on e-commerce portals bearing their names which ultimately results in tremendous financial losses as well as tarnishing of their hard earned name and reputation. Furthermore, the products offered for sale prove to be of substandard quality containing minimal information pertaining to the seller’s contact details that would otherwise prove to be useful in order to get grievances and feedbacks addressed.
The Court narrowed down the dispute into four issues, namely:
i) Whether the Direct Selling Guidelines, 2016 are valid and binding on the Defendants and if so, to what extent?
ii) Whether the sale of the Plaintiffs' products on e-commerce platforms violates the Plaintiffs' trademark rights or constitutes misrepresentation, passing off and results in dilution and tarnishes the goodwill and reputation of the Plaintiffs' brands?
iii) Whether e-commerce platforms are "Intermediaries" and are entitled to protection under the “safe harbor” provided in Section 79 of the Information Technology Act and the Intermediary Guidelines of 2011?
iv) Whether e-commerce platforms such as Amazon, Snapdeal, Flipkart, 1MG and Healthkart are guilty of tortious interference with the contractual relationship of the Plaintiffs with their distributors/ direct sellers?
What is a Direct Selling Entity?
Before diving into the Hon’ble High Court’s analysis, the concept of a Direct Selling Entity (DSE) needs to be understood. A DSE builds a network of independent sales representatives who use their personal network or contacts to sell the products as opposed to regular sales through retail outlets. An entity’s products are made available for sale either through their authorized representatives or their website. These representatives are not in the nature of an “employee” but will receive a commission on their sales.
The Direct Selling Guidelines (DSG), 2016 have been issued by the Ministry of Consumer Affairs, Food & Public Distribution as guiding principles for State Governments to regulate the business of DSE and Multi-Level Marketing (MLM) and to strengthen the existing regulating mechanism on DSEs and MLMs in order to protect the legitimate interests of the consumers. These guidelines contain basic definitions, obligations and conditions between the DSE and Direct Seller.
1. DSGs are more than “advisory” in nature
Reliance was placed on Clause 7(6) of the DSG of 2016 wherein the products belonging to a DSE cannot be sold on an e-commerce platform without the authorisation of the concerned DSE. These guidelines aim to fully regulate the conduct of the business of the Direct Sellers who are bound by them. The wordings of the said clause makes one thing clear, it applies to any person who sells or offers for sale. Therefore, all the sellers, including the sellers on e-commerce platforms, will be brought under the ambit of clause 7(6). The guidelines have been issued and duly authenticated through a notification in the Gazette. It was accordingly held that the DGS of 2016 were held to be binding on e-commerce platforms and the sellers on the said platforms.
2. Section 30(4) of the Trade Marks Act, 1999
A question arose as to whether the Plaintiffs can control or seek to regulate the sale of their respective products on e-commerce platforms and whether the Defendants have a right under Section 30 of the Trade Marks Act to continue selling the Plaintiff’s products. The Plaintiffs in each of the suits are the owners of their respective trade marks namely – Amway, Modicare and Oriflame. The usage and control over the products bearing the said marks would exclusively vest with the respective owners, in accordance with law.
Section 30(4) permits a claimant to bring an action for infringement against a re-seller even if such a re-sale is in respect of a genuine product sold directly from the claimant’s distributor provided the product has been tampered with or changed after being made available in the market.
Although a claimant may have been in receipt of a commercial gain after the first point of sale, the claimant’s interests continues to vest with the product in cases when it was being delivered to the ultimate consumer in a condition that would impair its goodwill. This applies in instances of removal of bar codes, re-packing, re-labelling and any other act that seeks to tamper with the integrity of the original product thus inviting the applicability of the provision enumerated under Section 30(4).
3. “Safe Harbor” provisions
The concept of an Intermediary, as the term itself denotes, refers to a person or an entity which is in between two other persons. An Intermediary ought to be acting as a bridge in between the said two persons as a passive platform in merely bringing the two people together. In order for an e-commerce platform to avail the “safe harbor” provisions enshrined under Section 79 of the Information Technology Act, 2000, it must merely be hosting/ listing third party information or serve as a communicating link alone. The said exemption will fail to apply if the e-commerce portal acts as an active participant between two persons. The question regarding the manner in which the platforms are engaging themselves as active participants while providing value-added services will be adjudicated during trial.
4. Breach of contractual obligations
The Hon’ble Court also held the e-commerce portals to be guilty of tortious negligence with regard to their contractual obligations since the e-commerce portals took shelter by referring to themselves as “Intermediaries” and refused to take down the infringing products in spite of being intimated of the DSG.
Platforms such as Amazon, Flipkart and Snapdeal carry out a substantial level of sales through huge investments in logistics and supply chain networks, third party service providers, delivery personnel, warehousing, logistical support, to name a few. It was opined that the platforms had a conscious duty in having knowledge of the sellers operating on their platforms. Therefore, they were not held to be merely passive, non-interfering platforms but portals that provide a large number of value-added services to their consumers and end users. It was further held that the manner in which e-commerce platforms operate, makes it extremely convenient and easy for distributors to merely procure the products from the Plaintiffs and defeat the purpose of the contractual obligations by selling in the grey market to unidentified persons, who may make the products available for sale on e-commerce portals without ensuring the necessary quality control standards.
Therefore, the Plaintiffs were entitled to interim reliefs of temporary injunction restraining the Defendants from displaying, advertising, offering for sale, selling, facilitating, and repackaging any of the Plaintiff’s products on their websites and mobile applications, except of those sellers who produce written permission/ consent of the Plaintiffs for listing of their products on the Defendants’ platform/ mobile application.