India: E-Commerce Platforms Banned From Selling Or Advertising Products Of Direct Selling Entities Without Consent

Last Updated: 5 September 2019
Article by Ashima Obhan and Taarika Pillai

The Delhi High Court recently restrained multiple e-commerce platforms from selling, offering to sell, advertising, or displaying products in breach of third party agreements. The court's orders, from July 2019, arose out of a set of seven suits filed by direct selling companies against e-commerce platforms, and will have far-reaching consequences for not only e-Commerce companies but also any 'intermediary' that offers a platform, marketplace or forum to users online.

Specifically, the Court directed Amazon, 1MG, Flipkart, Healthkart and Snapdeal and independent sellers ("Defendants") to not offer for sale, advertise or display any product of Amway, Oriflame and Modicare ("Plaintiffs"), all entities that work on the direct selling business model. Justice Pratibha M Singh passed an order in multiple suits filed by the Plaintiffs against the Defendants and independent sellers selling unauthorized products through e-Commerce platforms.

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

Plaintiffs' claims

The Plaintiffs mainly sell nutrition and healthcare related products directly through their website or through direct sellers. These products are not available through any e-Commerce or online distribution channel.

The Plaintiffs argued that their products were being sold, using their trademarks and trade names, on e-Commerce platforms without their consent. According to the Plaintiffs, such sale and the alteration of the Warranties, Return and Refund Policies was in violation of the Direct Selling Guidelines, 2016. Additionally, the unauthorized use of the trademarks was violative and amounted to infringement of the Plaintiffs' intellectual property rights. Lastly, the products constituting cosmetics, health and nutrition products were being tampered with and were being offered at a much lesser rate, in a manner that could confuse customers into believing there was a connection or affiliation with the Plaintiffs.

ISSUES

The main issues raised before the Court were as follows:

1. The legal validity of Direct Selling Guidelines, 2016

The Defendants said that the Guidelines did not apply to e-Commerce platforms as they were merely advisory and not binding in nature. They were merely a model framework for State Governments and Union Territories to develop a formal legal mechanism to enforce the same.

The Court 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. Accordingly, they are not merely advisory in nature but have force of law.

Additionally, the Court also held that the sellers on such platforms cannot claim that they have a fundamental right under Article 19(1)(g) to sell the goods of Direct Selling Entities without their consent. It said that the direct selling business was regulated by the Government in consumer interest and public interest, and the sellers on these platforms were bound to abide by these guidelines.

2. Trademark violation, and abuse of goodwill and reputation

Relying on the principle of exhaustion of trademark rights, the Defendants claimed that the Plaintiffs'rights ended with the first sale of the product being made, and hence could not stop the sale of genuine products on e-Commerce platforms

The Court disagreed with the Defendants and said that the doctrine of exhaustion could not give legitimacy to the tampering, mutilation and unauthorized sale of products which are tampered, wrongly priced, and whose genuineness is questionable. To determine if the goods being sold were being tampered with, the Court considered reports prepared by Local Commissioners, which found large scale tampering, either the sellers' premises or the platforms' warehouses.

The Court held that the Plaintiffs cannot turn a blind eye to the sale of their products on platforms when there is a serious threat not only to their business but also to their products and the equity enjoyed in them. If the tarnished goods were permitted to be sold unchecked, there could be enormous dilution and tarnishment of the Plaintiffs' products and brand equity.

The Court applied Section 29 of the Trademarks Act to hold that while it is perfectly permissible for a seller of a product to use a trademark to signify the source of the products which are genuine, it cannot indulge in conduct, including advertising the mark, which would result in taking unfair advantage of the distinctive character of the mark.

The Defendants relied on Section 30 as a defence stating that sale of genuine products does not constitute infringement. However, the Court held that in order for the defence to succeed, the persons who have lawfully acquired the goods should be identifiable. Additionally, Section 30(3) could come to the aid of a person who wished to sell the goods in the market or otherwise deal in them, if the products are genuine. But this could not extend to an "unhindered and unbridled" use of the mark when there is a grave apprehension that the products are being impaired, and their condition is being changed.

On the basis of the findings, the Court concluded that the use of the mark and the manner of sale on the e-Commerce platforms constitutes passing off, misrepresentation and dilution/tarnishment of the Plaintiffs' marks, products and businesses.

3. Intermediaries must comply with Guidelines to obtain safe harbour protection

The Information Technology Act, 2000 ("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 be hosting/listing third party information/data or providing a communication link only.

It was argued that e-Commerce platforms such as Amazon, Flipkart and Snapdeal, have invested heavily in logistics and creation of a large network of suppliers, third party service providers, delivery personnel and warehousing facility, logistical support, etc. This made them 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 called a mere intermediary under the Act.

Additionally, the Court held that in order for the e-Commerce platforms to enjoy the status of intermediaries:

  • due diligence requirements would have to be met and complied with, as per the Platform's policies and as per the Intermediary Guidelines, 2011.
  • the conditions contained in Section 79(2), which specifies the due diligence requirements for intermediaries, should be adhered to and their services should not fall foul of Section 79(3) of the Act, which requires intermediaries to remove or disable access to certain content on the basis of user requests.

4. E-commerce platforms and contractual relationship between Plaintiffs and direct sellers

The Defendants argued that they were not directly involved in the sale of the products, and acted as an intermediary, and hence cannot be held guilty for tortious interference.

The Court held that the continuous sale of the Plaintiffs' products on the e-Commerce platforms, without the consent of the Plaintiffs, results in inducement of breach of contract, and tortious interference with contractual relationships of the Plaintiffs with their distributors.

The Court said that e-Commerce platforms are not merely passive non-interfering platforms, as they provide a large number of value-added services to the consumers and users. Upon being notified by the Plaintiffs of unauthorised sales on their platforms, they have a duty to ensure that the contractual relationships are not unnecessarily interfered with by their businesses.

CONCLUSION

In conclusion, the Court allowed the temporary injunction against the e-Commerce platforms and several sellers of the platforms. The Court also held that irreparable injury would be caused to the end consumers if the injunctions were not granted, as all the products were in the nature of nutrition and healthcare products, the quality of which was important.

E-Commerce platforms can now sell the products of Amway, Oriflame and Modicare only after acquiring their consent and in consonance with the Intermediary Guidelines and the Direct Selling Guidelines, 2016.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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