“A Sherlockian Venture”: The Delhi High Court Shuts Down (Genuine?) E-Commerce Sales Unauthorized by Trade Mark Claimants

We’re pleased to bring to you a guest post by Eashan Ghosh on the recent Delhi High Court decision restraining various e-commerce platforms (including Amazon, Flipkart and Snapdeal) from enabling sale of products of ‘direct selling’ companies without their consent.

Eashan has been in practice as an intellectual property advocate and consultant in New Delhi since 2011, and teaches a seminar on intellectual property law at National Law University, Delhi. Eashan writes about Indian intellectual property law, including a monthly review of Delhi High Court judgments, on his Medium page. He has written guest posts for us in the past as well (see here, hereherehereherehere and here).

“A Sherlockian Venture”: The Delhi High Court Shuts Down (Genuine?) E-Commerce Sales Unauthorized by Trade Mark Claimants

Eashan Ghosh

A Delhi High Court ruling last week returned an interim injunction ruling in favour a group of seven claims (instituted by Amway, Oriflame and Modicare) restraining various e-commerce platforms (Amazon, Flipkart and Snapdeal among them) from permitting sellers from supplying products on those platforms unauthorized by the Claimants.

This follows on from some heavy traffic before the same Court late last year on the question of whether these e-commerce platforms can be treated as pure intermediaries in such cases.

The Court returns four findings of note. First, it finds that the Defendants are in violation of the 2016 Direct Selling Guidelines. Second, it holds that the Defendants are liable for trade mark infringement. Third, the Defendants, as e-commerce platforms, are directed to comply with due diligence requirements to sustain access to safe harbour protections under the IT Act. Finally, the Defendants’ actions are ruled to constitute tortious interference with the Claimants’ contractual relationships with their direct sellers.

This essay addresses some issues flowing from the trade mark infringement portion of the Court’s findings.

The Claim

The core of the Claimants’ case is this: it apprehends that the products sold by various sellers (one set of Defendants) are original articles manufactured by the Claimants that have been secured from the open market by unauthorized means or via leakages in the Claimants’ supply chains. These are being impaired or tampered with ahead of re-sale to consumers via various e-commerce platforms (the second set of Defendants).

They allege, further, that the products are sold on e-commerce portals under the Claimants’ original names / brands for cheaper prices, which cause financial losses to them and their direct sellers. The Claimants allege, finally, that the sales on e-commerce portals are concluded with little information on the real sellers, which make it difficult for consumers to identify them in case of grievances, leaving the reputational damage caused to be borne by the Claimants.

The former claim, in particular, opens up the question of whether a defence under Section 30 of the Trade Marks Act is tenable. The latter claim, specifically, sets up a consequence-based case for recognizing trade mark infringement by way of dilution.

I now take up both in turn.

“Direct Selling”

The Court variously refers to “direct selling” as a “unique system”, as having a “unique character and impact”, having a “unique nature”, being “unique in nature”, “unique business”, and a “unique method of distributing and selling

”. However, by condition, it offers no point of difference from a network of contracted authorized distributors. Direct sellers are also bound by a Code of Ethics, but this is little else but a stack of contractual conditions tacked on to the contract between the manufacturer and the distributor.

The only sticking points identified in the entire ruling are that the products sold must:

(i) be genuine,

(ii) not be tampered with at the point of sale, and

(iii) abide by some specific post-sale conditions that the seller is obligated to meet, such as a money back guarantee or refund.

In every other way, “direct sale” is understood on parallel with common sale through distributors, and to essentially exclude retail sales and e-commerce sales, but nothing else. (The Court, likely deliberately, uses the term “distributors” synonymously with direct sellers at several places.)

The Defendants’ Actions: Performative and Negative

This presents a rather blunt question about the claim: how are the Defendants getting a hold of the Claimants’ products for sale at all?

The Court’s response to this is to believe the only version that emerges from the Defendants. Their case, says the Court, is that the products “have passed through various distribution channels”, that their sellers “have represented [that the products] are genuine”, and that they have “executed contracts with [the sellers] with necessary warranties” about the genuineness of the products and the legitimacy of the proposed sales. Some other sellers, it appears to the Court, “have clearly procured the products through unauthorized channels”, since they “cannot be legitimately traced back” to the Claimants.

On the substance of the activities themselves, the Defendants’ actions appear, at the interim stage, to be both performative and negative.

On the former front, the Defendants’ e-commerce platforms offer any manner of facilitation to these second-sales. They run their own advertisements, offer their own genuineness guarantees, present endorsement via name association with the Claimants, and even have their own refund and return policies. (That they do not offer the latter for some products is, in itself, a crucial point of difference with the direct selling model).

Naturally, these may qualify as infringement if the original sale does not bear the Claimant’s consent.

On the latter front, however, sellers through the Defendants’ platforms are charged with tampering with the products (specifically, erasing identification barcodes, re-packaging and re-labelling products at warehouses owned by the platforms, and fiddling with MRP listings), and not supplying full and verifiable details of the sellers themselves.

This is supported by Commissioner reports, customer reviews, and the violation of the Defendants’ own terms of use agreements with their sellers. These infractions are decidedly blacker against the Defendants since they are prima facie actionable to some degree, even if there is doubt about trade mark law being the correct mechanism to access corrective action.

The Section 30(4) Defence

In the present instance, the Court merely commits to taking down the primary defence offered for re-sale of genuine products relied on by the Defendants here. This is embodied by the October 2012 Delhi appeals decision in Samsung v Kapil Wadhwa, which hewed a restrained exception for re-sale of genuine products outside authorized distribution channels.

This Court correctly identifies that the case before it must be tested against Section 30(4) of the Trade Marks Act, rather than Section 30(3), which had principally captured the Samsung Court’s attention.

Section 30(4) permits a Claimant to bring an action for infringement against a re-seller even if such re-sale is of a genuine product sold directly on from the Claimant’s distribution network, if the product has been changed or impaired after the first sale.

The provision recognizes that, while the Claimant may have extracted its commercial reward from the product at the point of first sale, it retains a legally protectable interest in the product if it is ultimately delivered in such a condition that would harm its value or goodwill in the market. In effect, it protects the right of an infringement Claimant to file suit purely on dilution grounds.

It may also be surmised – though authority for it in the Indian context is sketchy – that the stricture intends to benefit of consumers as well, by enabling the Claimant to weed out deficient but genuine products prior to re-sale.

Set against Section 30(4), the claim, as framed, really has no option but to succeed. Re-packaging, re-labelling, removal of barcodes, and several other instances of tampering with the integrity of the product are all acts which fit comfortably within the scope of the sole Samsung passage which interprets the words “changed or impaired” under Section 30(4).

There may have been room for a considerably more complex outcome if the focus of the Court had instead been contrasting the present case with the Samsung Court’s decision to permit the Defendants before it to carry on business simply by clarifying and prominently displaying their own post-sale conditions of service.

Nevertheless, the scale of the alleged tampering involved appears to be considerable. Combined with the conceivable difficulty of ordinary consumers being faced with what the Court calls “a Sherlockian venture” in getting to the bottom of who actually sold them a potentially compromised product, this consequence, on balance at least, points to a case in Claimants’ favour.

A pithy phrase summarizing the Court’s finding – “the purchaser re-sells the goods of the producer, and stocks and displays the goods, but does no more” – is a good rule of thumb to judge such second-sale infringement claims by.

The Nature of E-Commerce

A smaller finding, but perhaps one that may gain momentum with time, is also returned here: that the Defendants’ depiction of the Claimants’ trade marks in advertising, promotions and meta-tags is impermissible.

To allow this, says the Court, “the products have to be genuine, untampered and [the Claimant’s] consent would be required”. This very framing, though unacknowledged, is slightly at odds with the Samsung ruling (which had summarily shut down the possibility of recognizing meta-tagging as nominative fair use for Defendants selling genuine products), but it is also a necessary corollary to the finding of infringement.

Far more curious is the Court’s suggestion that the nature of e-commerce platforms itself is so unstructured such that all sales via this route may have to be treated as an exception to the exhaustion principle, simply for their capacity to impair products and dilute trade marks.

The Court does not commit to a position on this – perhaps influenced by the fact that the case for trade mark violations made out by the Claimants was rather thin on the ground – but it promises to be an issue of considerable interest going forward, perhaps as early as an appeal.

What Next?

The stakes involved in these suits should precipitate what I call “matter of course” appeals: an escalation up the judicial chain justified not solely on the merits of the impugned ruling but also dictated by the common sense of exhausting appeal on the chance that an appeals court may kill the injunction.

The wide sweep of the injunctions heightens this likelihood as well. The Defendants, by this interim decision, are required to not only take down all listings of and forsake commercial activity on Claimant products to which the Claimants have not consented, but must also supply detailed seller data on all Claimant-approved products.

Even otherwise, the construction of the injunction may be worth modifying, whether on technicalities (because compliance presents second-degree difficulties, or conflicts with other legal obligations), on sampling objections (the material presented to the Court may not be fully representative of the Defendants’ business), or for other reasons best known to the litigants.

For the moment, however, it offers a clear yardstick on which to judge such claims from a factual standpoint, even as their trade mark underpinnings appear harder to locate than they did before.

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