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Amazon, Snapeal, Flipkart and other e-commerce platforms stopped from selling Amway products

A batch of seven suits with overlapping issues was heard together by the Delhi High Court. The suits were filed by three direct selling entities, M/s Amway India Enterprises Pvt. Ltd (Amway), M/s Modicare Ltd (Modicare) and M/s Oriflame India Pvt. Ltd (Orliflame) against various entities who are either running e-commerce platforms or are sellers on the said platforms. The issues in these cases were whether the sale of goods on e-commerce platform which are meant to be sold by distributors/ selling agents appointed by the direct selling companies a) violates Direct Selling Guidelines, 2016 framed by government of India b) violates trademark rights of the companies or constitutes  misrepresentation, passing off and results in dilution and tarnishes the goodwill and reputation of the direct selling companies brand c) Whether the e-commerce platforms are entitled to the protection under  safe harbour provision, as intermediaries, under Section 79 of the Information Technology Act and the Intermediary Guidelines of 2011 d) Whether e-commerce platforms such as Amazon, Snapdeal, Flipkart, 1MG, and Healthkart are guilty of tortuous interference with the contractual relationship of the company with their distributors/direct sellers.

Background

Amway, Modicare and Orliflame (hereinafter Direct Selling Entities) are engaged in marketing and selling of various products through a system of direct selling. Direct Selling Guidelines have been issued by the Ministry of Consumer Affairs, Food and Public Distribution on 26th October, 2016 to regulate the Direct Selling Entities (DSE). The Direct Selling Entity, as per the guidelines, is obliged to provide the name of the purchaser and seller, delivery date of the goods and other services. Amway alleged that it served notice on 22nd Sept 2017 upon e-commerce entities to cease and desist from displaying any of Amway’s products on their websites. In response to the notice, the e-commerce entities refused to stop sales of Amway products on the ground that they are merely “intermediaries” and are entitled to safe harbor under Section 79 of the Information Technology (IT) Act. Subsequently, Food Safety and Standard Authority of India (FSSAI) on 9th April, 2018, issued a letter to all major e-commerce entities operating in India, namely Flipkart, Amazon, Snapdeal, and Shopclues, asking them to stop sale of direct selling products in contravention of the Direct Selling Guidelines. The said letter was neither challenged nor complied with. Aggrieved by inaction on part of e-commerce platform, Amway and other DSE thus filed the suits at the Delhi High Court. The suits have been clubbed and heard together.

Submission of Direct Selling Entities (DSE)

  1. The sale of DSE products on e-commerce platforms is prohibited, except with prior written consent. The sale of products without their consent is violation of the Direct Selling Guidelines. These products are sold on e-commerce platforms without disclosing name and contact details of the seller. Further, the role of these platforms is not merely that of an intermediary especially Amazon. In fact they are completely involved right from the listing of the products till final delivery, return, exchange of the product etc.
  2. The selling price of products on e-commerce platforms was lower than the Maximum Retail Price (MRP) which further creates question on the genuineness of these products. In case of Amway’s products, it is alleged that unique code and QR code have been removed which shows that the products were severely tampered. Even if the goods are genuine, DSE have not consented to sale of products on e-commerce platforms.
  3. Section 79 of the IT Act is not a mere defense, but an enforceable right. Section 79 imposes duties on the intermediaries and it also stipulates when they would not be liable. The role of e-commerce platforms in this case is not limited to providing access. Therefore they are not intermediaries and protected by section 79 of the IT Act.

Contentions of e-commerce platforms

  • The Direct Selling Guidelines (DSG) does not apply to intermediaries. The language of DSG read as a whole makes it clear that the Guidelines apply only to Direct Selling Entities and their distributors/direct sellers.
  • If products are lawfully acquired, consent of the brand owner is not needed to sell on e-commerce platforms.
  • DSE cannot have a grievance that the sale price is lower than the MRP. Allegedly, Amway has agreement with ABO (Amway Business owners) that itself permits ABO to sell at lower price than MRP.
  • DSE are themselves violating the DSG by selling their products on their own platform/web stores.
  • Direct Selling Guidelines are not law they are merely administrative instructions issued by the Govt and they do not create rights beyond what is provided in the statue.
  • The support services provided by e-commerce platform does not take them outside the purview of definition of an intermediary.
  • The requirement to disclose the seller’s name, details, address, etc. is duly complied at the time of purchase when the seller’s name and the GSTIN number of the seller is provided. Any consumer can trace the seller by using the GSTIN number.
  • They have no control over the content of the platform. As per snapdeal packaging is done by seller wheras as per Amazon price listing is done by the seller.
  • One of parties, Cloudtail (a seller on Amazon) submitted that Direct Selling Guidelines do not constitute law. The guidelines cannot restrict the fundamental right under Article 19(1) (g), guaranteeing all citizens right to practise any profession, or to carry on any occupation, trade or business. According to defendant the present suit is nothing but an attempt to seek a writ of mandamus for enforcement of Direct Selling Guidelines. So long as the sale is lawful under the provisions of the Trade Marks Act, no injunction can be granted.

Court Ruling

The High court framed following four questions for adjudication in the present cases:

  • Whether the Direct Selling Guidelines, 2016 are valid and binding on the e-commerce platforms and if so, to what extent?

That the DSG merely requires e-commerce platforms to obtain consent from Direct Selling Entities before they offer products for sale on their platform. The court held that e-commerce platforms cannot claim fundamental right to sell the products which are only meant to be sold through direct selling. The wording of Clause 7(6) of DSG is clear and it applies on “any person who sells or offers for sale”. This would take within its ambit, all sellers of goods on e-commerce platforms. The e-commerce platforms have been repeatedly notified about the direct selling guidelines since they were issued in 2016. The FSSAI notified the e-commerce platforms on 9th April 2018. The Department of Consumers Affairs has also notified the platforms of the existence of these Guidelines. Therefore, these guidelines are binding on the e-commerce platforms.

  • Whether the sale of the DSE products on e-commerce platforms violate their trademark rights or constitutes misrepresentation, passing off and results in dilution and tarnishes the goodwill and reputation of the DSE’s brand?

The High court reviewed the contracts and policies of e-commerce platforms and held that their own policies makes it clear that those products for which the seller is not an authorized seller would not be liable to be sold on any of the platforms.. DSE has a unique customer refund policy. If a customer is not satisfied with the Amway’s product, it is returnable within 30 days and a full refund can be obtained. The refunds are available even if 30% of the product has been used. Modicare also provide refunds wherein not more than 25% of the product has been used. The refund policy of e-commerce platform is completely different than the DSE. The court held that the refund policies are made consumer friendly and the change in these policies itself constitutes impairment and change of conditions. Therefore the plaintiffs have established a prima facie case. The court appointed Commissioner’s report also reveals that there is serious tampering with the products at the seller’s premises or at the platforms warehouses. The court held that there is serious threat to the reputation of DSE’s brands. DSE have no way of knowing whether their products on these platforms are genuine or not. The e- commerce platforms have also not provided the name and contact details of the sellers on their website. These websites conceal more than they reveal. The prices of the products are more than the MRP price and fake discounts is being offered on these platforms. The doctrine of exhaustion cannot give legitimacy to tampering and mutilation of the products. The court thus concluded, on the basis of these facts use of marks by e- commerce platforms and the sellers on the platform is violative of DSE rights. The e- commerce platforms and the sellers are not entitled to defense under section 30 of the trademarks act.

  • Whether the e-commerce platforms are ―intermediaries and are entitled to the protection of the safe harbour provision under Section 79 of the Information Technology Act and the Intermediary Guidelines of 2011?

The court observed several practices adopted by the platforms show lack of due diligence and active role being played by them. However, the court left the question open for trial. The court thus concluded in order for the platforms to be entitled to seek safe harbour as per section 79 of IT act, they have to observe strict adherence to their own Excluded Products‘List, Prohibited Content policy and the Intellectual Property Violations policy, without which they would be running foul of Section 79 of the IT Act, read with the Intermediary Guidelines, 2011. Non-compliance with the platform’s own policies would take them out of the ambit of the Section 79.

The court thus restrained the e-commerce platforms from selling, advertising, displaying   Amway, Modicare and Orliflame products through their website/portals or Apps .The court however provided liberty to platforms and their seller to sell the products, if they produce written consent of DSE.

To sum up a number of issues went against e-commerce platforms

  1. violation of DSG issued by Ministry of Consumer Affairs, Food and Public Distribution which they were notified by DSE and FSSAI
  2. Masking of seller’s details and expecting the consumer to look at the product listing in-depth.
  3. role of e-commerce platforms exemplified by control over return policy being different to DSG guidelines, active role in storage and delivery of products was more than that of “intermediaries”.
  4. The evidence of tampering of the products leading to failure of doctrine of exhaustion.

The decision is likely to be appealed in particular court’s scathing observation that e-commerce platforms are performing function(s) more than that of the intermediaries, goes at the very root of e-commerce platforms’ business, and obviously not to their comfort.