Delhi HC Division Bench Sets Aside Order Restraining E-Commerce Platforms from Selling Goods of Direct Selling Companies

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Last week, a Division Bench (DB) of the Delhi High Court set aside a common judgment passed by a Single Judge thereof in July last year in Amway India Enterprises Pvt. Ltd. v. 1Mg Technologies Pvt. Ltd. & Anr. The common judgment addressed the interlocutory applications filed in seven suits by Direct Selling Entities (the DSEs), Amway, Modicare and Oriflame against e-commerce platforms including Amazon, Snapdeal and Flipkart (the defendants).

The DSEs engage direct sellers of their products to sell, distribute and market their products under a contract.  In short, the DSEs claimed in the suit that the Direct Selling Guidelines, 2016 (DSG) issued by the Government of India was to regulate the direct selling business in the interest of consumers. It was the case of the DSEs that the defendants violated the DSG by offering the products of the DSEs for sale on their respective platforms without the consent of the DSEs. The common judgment, in short, injuncted the defendants from selling the goods of the DSEs on their online platforms without their consent.

The Single Judge’s findings in summary were as follows:

  • The DSGs, issued and notified in terms of the Article 77 of the Constitution of India, regulate the business of Direct Selling. These are binding in law;
  • The defendants were aware that they were bound to enforce the DSGs and yet they chose to defend their actions based on the alleged illegality and non-binding nature of the DSGs;
  • The defendants were guilty of infringement of the DSEs’ trademarks, dilution, passing off, and misrepresentation;
  • The defendants were not merely passive players but massive facilitators inasmuch as they were providing warehousing, logistical support, packaging and delivery services. To be eligible for the exemption under Section 79(2)(c) of the Information Technology Act, 2000 (IT Act), the defendants must observe due diligence required under Section 79(2)(c);
  • The continued sale of the DSEs’ products on the defendants’ e-commerce platforms without the consent of the DSEs, results in inducement of breach of contract, and tortious interference with DSEs’ contractual relationships with their distributors; and
  • The balance of convenience lies in the favour of the DSEs as the defendants could not establish that the products of DSEs sold thereon were genuine and not tampered with.

The defendants in six out of the seven suits appealed the common judgment.  In an incisive order issued on January 31, 2020, the DB set aside the above findings in the common judgment. The DB prefaced its findings with the following observations, which would come as a revelation to those who have read the very convincing order of the Single Judge:

  • The suits were not filed for passing-off or infringement under the Trade Marks Act, 1999 and as such were not commercial suits;
  • There was no prayer in any of the suits seeking a declaration that the DSGs are binding and enforceable in law;
  • There was no prayer for a declaration that Amazon and Snapdeal were not intermediaries under Section 79 of the IT Act; and
  • Yet, the Single Judge returned specific findings on these points, which run contrary to the structure and frame of the suits themselves.

The DB then went on to hold that:

  • The DSGs are not law. These are only advisory in nature and are yet to be enacted into law, pending adoption of a new Consumer Protection Act, 2019 (CPA) and the draft Rules thereunder. The Single Judge lost sight of the distinction between ‘rules’ made under a statute and mere ‘guidelines’;
  • The DSEs jumped the gun in not waiting for the law to be formally made and enforced. Once enacted as law, the Direct Selling Rules under the CPA would be open for challenge by the e-commerce platforms under various statutes including the Trade Marks Act (Section 30);
  • The suits filed by the DSEs were not framed as traditional trade mark infringement and passing-off actions. The plaintiffs neither asserted nor mentioned anything about trade mark registrations. The marks “AMWAY” or “ORIFLAME” were owned by entities which were not even parties to the suits. Besides being violative of the exhaustion principles (in aid of traders’ freedom to trade lawfully and acquire goods), Clause 7(6) of the DSGs (which prohibits a buyer from reselling the product online) cannot be enforceable vis-à-vis third parties as there is no privity of contract between the DSEs and the defendants;
  • Section 79 of the IT Act is a safe-harbour for online marketplaces, limiting their liability for third party information posted on their platforms. The safe-harbour provisions do not make any distinction between passive and active intermediaries. The value added services provided by the defendants (such as warehousing, packaging, delivery, etc.) do not dilute the safe-harbour granted to them under Sec. 79 of the IT Act coupled with the definition of “intermediary” under the said Act and the clarification provided by the Government of India with regard to such online marketplaces;
  • There was no basis for a finding of inducement to breach of contract and tortious interference. To invoke the tort of inducement to breach of contract presupposes a contract between the online platforms and the DSEs, which does not exist. The mere fact that the online platforms may have knowledge of the Code of Ethics of the DSEs and the contractual stipulations imposed by such DSEs, is insufficient to lay a claim of tortious interference;
  • Regarding the finding on the tampering of the products, the DB found many holes in the reports of the Local Commissioners and held that this issue is a matter of evidence and can be concluded only after trial. It found that the facts revealed in these reports were insufficient to make any specific conclusions regarding the impairment of the products vis-à-vis the appellant defendants.

Each of the appellants (defendants) was awarded costs of INR 50,000 which the DSEs are required pay within four weeks of the judgment.

Please click here to view Eashan’s follow on guest post on the judgment.

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