Direct Selling Companies and E-Commerce

Coram: Justice Pratibha M. Singh

CS (OS) 410/2018

CS (OS) 453/2018

CS (OS) 480/2018

CS (OS) 531/2018

CS (OS) 550/2018

CS (OS) 75/2019

CS (OS) 91/2019

Issues:

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

2.     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? brand?

3.     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? 

4.     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? 

Rules:

1.     Direct Selling Guidelines issued by the Government of India titled ―Direct Selling Guidelines, 2016 dated 26th October, 2016.

2.     Clause 7(6) of Direct Selling Guidelines.

3.     Section 79 of Information Technology Act, 2000.

4.     Information Technology (Intermediary Guidelines), 2011.

5.     Section 29, 30 of The Trademarks Act, 1999. 

Analysis:

Issue 1: Whether the Direct Selling Guidelines, 2016 are valid and binding on the e-commerce platforms and if so, to what extent?

The contention of the Plaintiffs in the cases is that the Direct Selling Guidelines bar the sale of goods sold through Direct Selling, on e-commerce platforms, and the same is binding on all e-commerce platforms and their sellers. On the other hand, the contention of the Defendants is that the Direct Selling Guidelines are not law and they are merely advisory in nature. They are merely a model framework for State Governments and Union Territories to come out with an actual legal mechanism to enforce the same. They are not binding in nature. It is further urged that the Direct Selling Guidelines are not law under Article 13 of the Constitution of India as they impinge upon Fundamental Rights of the platforms and the sellers on the platforms. Guaranteed under Article 19(1)(g) of the Constitution. Since the guidelines do not trace their origin to any statutory provision, and were also not placed before Parliament for ratification, they are not binding.

The Supreme Court analysed the meaning of executive instructions and held that the residue of govt. functions which are neither legislative nor judicial, constitute executive functions. It is not necessary for a law to be in existence for the powers of the Executive to be exercised. The Supreme Court, further, clearly, held that every executive instruction need not trace its origin to a statute. The Government is entitled to conduct its business by means of executive instructions. Unless and until fundamental rights are impinged, the rigours of Article 13 of the Constitution need not be satisfied.[1]

It is thus a settled legal proposition that Fundamental Rights can be curtailed only by valid law as per Article 13 of the Constitution of India but exercise of executive powers, where there is no impinging of Fundamental Rights, cannot be questioned, even if the same is not traceable to a statute. To the same effect are the two judgements cited by the Defendants viz., Bijoe Emmanuel[2] and Navin Jindal[3].

In Gulf Goan Hotels[4] , the Supreme Court was dealing with a challenge to environmental guidelines which were issued in the form of directives, one notification and orders by different authorities from time to time. The Petitioners in the said case were owners of hotels and resorts in Goa, which were facing demolition. It was claimed by them that the bunch of regulations/rules which were being enforced and cited against them were not law, as the same were not in existence, when the said hotels/resorts were built.

The Direct Selling System is a unique system, which has now been prevalent in India for several years. The fulcrum of this system is the sale by distributors/sub-distributors/sellers directly to the consumers. The Government thought it fit to regulate the Direct Selling System by issuing the Direct Selling Guidelines of 2016. The background of the issuance of these guidelines was that the direct selling business was being hit by the Prize Chits and Money Circulation Schemes [PCMCS] Act. The said Act failed to distinguish between genuine direct selling activities from illegal money circulation schemes. This resulted in victimization of the Direct Selling Entities by the State police authorities under the provisions of the PCMCS Act.

The said Guidelines, though initially issued as Advisory were duly gazetted and have also been implemented in a large number of states namely Rajasthan, Mizoram, West Bengal, Orissa, Andhra Pradesh, Telangana, Sikkim and Tamil Nadu. In Delhi a nodal officer has been appointed to implement the Guidelines. Thus, though the initial terminology used to describe these executive instructions was ‘Guidelines‘, with the issuance of the gazette notification and the implementation of the same by various States, they constitute binding executive instructions. The notification issued by the Government in the official Gazette is a General Statutory Rule (“GSR”). Thus, these are not merely advisory in nature but have force of law.  

Thus, the entire direct selling business is a regulated trade/business. It is not unusual for businesses to be regulated, owing to their unique character and impact. Some businesses are regulated due to health concerns, some are regulated to maintain law and order, some are regulated in consumer and public interest. The Direct Selling Business is one such trade, which has been regulated after enormous deliberation and discussions took place, including consideration by a parliamentary committee. Whenever any trade is regulated, the right to carry on business cannot be invoked.

The Supreme Court has held that no infraction of fundamental rights could be claimed by: Regulation of publishing of government textbooks in Ram Jawaya Kapur[5]; Regulating minimum wages in U. Unichoyi & Ors. v. State of Kerala[6]; Restricting sale of medicines used in government hospitals and dispensaries from public sector manufacturers only in Indian Drugs & Pharmaceuticals Ltd. & Ors. v. Punjab Drugs Manufacturers Association & Ors.[7]; and  Issuing directions for compulsory packaging of specified commodities in jute packaging material in Dalmia Cement (Bharat) Ltd. v. Union of India[8], to name a few. 

In the present case, the Direct Selling Guidelines, owing to the unique nature in which Direct Selling operates, merely, require the e-commerce platform to obtain consent of the Direct Selling Entity before offering for sale or selling the products of Direct Selling Entity on their platforms. Ecommerce platforms cannot claim a Fundamental right to sell products which are only meant to be sold through direct selling. It would not be correct to argue that these Guidelines are not binding on e-commerce platforms. Though, the Guidelines are issued to regulate the Direct Selling industry, the wording of Clause 7(6) of the said Guidelines is clear i.e. 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 sellers on such platforms cannot claim that they have a fundamental right to sell the goods of Direct Selling Entities without their consent. Their fundamental right to do business is not impinged in any way. In the case of products sold only by Direct Selling the guidelines require consent prior to sale on e-commerce. The Direct Selling business being unique in nature and the Government having considered it to be fit for being regulated in consumer interest and public interest, the sellers on these platforms are bound to abide by the said guidelines.

Moreover, e-commerce platforms have been repeatedly notified of the Direct Selling Guidelines since the time they were issued in 2016. The Guidelines are in line with the conditions under which companies like Amway have been permitted to conduct direct selling business in India. The Direct Selling Entities have notified the e-commerce platforms of these Guidelines. Despite repeatedly having been cautioned and being notified of the Guidelines, the platforms have chosen not to challenge the same, as they are well aware of the background of the issuance of these Guidelines and the existence behind the same.

At the interim stage, the fact that the Guidelines have been in operation since 2016, the same having been repeatedly notified to ecommerce platforms, who have chosen not to challenge them and the broader public/consumer interest behind the said Guidelines sought to be safeguarded, persuade this Court to hold that they are binding in nature as they do not impinge on any Fundamental Rights of either the sellers or the platforms. Moreover, the Guidelines fully regulate the conduct of business by Direct Sellers who are bound by them. If platforms are permitted to violate the Guidelines, the Direct Selling Entities will be left with no remedies to enforce a binding law. The Guidelines have been duly issued and have been authenticated by a gazette notification, as required.  It is, accordingly, held that the Direct Selling Guidelines are binding on ecommerce platforms and the sellers on the said platforms.

Conclusion:

The effect of the said guidelines being binding, would be, that the sellers/platforms would have to take consent of the Direct Selling Entities to offer, display and sell the products of Direct Selling Entities on their platforms, in compliance with clause 7(6) of the Guidelines.

Issue 2 : 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? brand?

The plaintiffs in each of the suits are the owners of their respective trademarks. The use of the said marks and control over the products bearing the said marks, would exclusively vest with the respective owners, in accordance with law. None of the Defendants challenge the ownership rights of the Plaintiffs in the respective trademarks. The question that, therefore, arises is 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 in law, as envisaged under Section 30 of the Trade Marks Act to continue to sell the Plaintiffs products.

It is a matter of common knowledge that unless there is any prohibition in respect of sale of a product, all products can be sold through e-commerce platforms. However, there are two exceptions – First, there should be no prohibition in selling the same and secondly, the condition of goods ought not to be impaired and the goods ought not to be tampered with in any manner.

There is a separate ‘code of ethics’ which govern the relationships between the Plaintiffs [Amway, Oriflame & Modicare] with their distributors. The grievance of the Plaintiffs is that the Plaintiffs have their own unique quality control clauses and also provide for warranties, refunds and returns which are consumer friendly. The Return and Refund Policy of the Plaintiffs and the defendants are completely different.

Enormous reliance is placed by the Defendants on the judgment of the Delhi High Court in Kapil Wadhwa[9] which holds that India follows international exhaustion. On the strength of this judgement it is argued that the products being genuine, even if the unique codes/QR codes are removed, even if the warranties/return and refund policies are changed, the Plaintiffs would not have any right in law to control advertising, distribution and sale of the products after the initial first sale. The submission is that once the title in the product has passed from the Plaintiffs to the distributor/direct seller who purchases it from the Plaintiffs, the Plaintiffs cannot seek to control the downstream distribution and sale of the products.

The Plaintiffs, who are Direct Selling Entities manufacture, sell and distribute these products through their own distribution networks. The said products are sold either through the said distribution networks or on the Plaintiffs? own online platforms. The products of the Plaintiffs are unlike other manufacturers and sellers whose products are distributed, advertised and sold in the mainstream retail stores. The isolated situation wherein the Plaintiffs? product may have found their way to pharmacists or retail stores is a matter to be adjudicated at trial. There is, however, no doubt that the Plaintiffs and other similar Direct Selling Entities have adopted a unique method of distributing and selling their products. In order to determine the legal issues, the nature of use of the marks on the platforms, the policies of the platforms, the condition of goods being sold on the platforms etc., need to be considered.

It is clear that if proper trade practices are not adopted, common law principles need to be adjusted, to mould in the ever changing circumstances and techniques of commerce. While there is no doubt that a genuine, un-tampered product could be sold by a seller in the market if there is no impairment and the conditions of the product are not changed, the Court cannot condone misuse of a mark, dilution of a mark, tarnishment of a mark and impairment of a product in the manner as has been narrated hereinabove.[10]

A perusal of Section 29 shows that while it is perfectly permissible for the seller of a product to use a trademark to signify the source of the products - if the products are genuine, it cannot at the same time, indulge in any conduct which would result in taking unfair advantage of the distinctive character of the mark. Further, if the use by the seller is detrimental to the reputation of the mark, the mark is stated to be infringed. Use of a mark in meta-tags or in advertising without the consent of the proprietor is also violative of trademark rights of the owner. Section 29(6) is categorical that if a person uses a mark or affixes the mark on the packaging, puts the product in the market or stocks them or offers them for sale or even uses the mark in advertising, it would constitute infringement. To be able to use the mark for purposes such as packaging, offering for sale, selling, use in advertising, etc., consent of the proprietor would be required.

Section 29(8) also makes it clear that if any advertising of a mark takes unfair advantage of the mark or is detrimental to its distinctive character even without a sale taking place, there is infringement. While Section 30(3) could come to the aid of a person who wishes to sell the goods in the market or otherwise deal in them, if the products are genuine, the same does not mean that there can be unhindered and unbridled use of the mark in the form of affixation on the packaging, exposing the products for sale, offering the goods for sale, using in advertising, especially when there is a grave apprehension that the products are being impaired and their condition is being changed. Thus, changes in warranties, refund/return policies, changes in packaging, removal of codes of the products, and any other conduct that causes damage to the reputation of the mark and is likely to undermine the quality of the mark would constitute ‘impairment‘.

Even if it is presumed that the responsibility of the products being sold on the platforms are that of the seller, there can still be no justification for use of the trade marks by the platforms in their advertising, promotion, sale offers and in the meta-tags, so that the product listings on the platforms are thrown up on search results. In fact, illustratively, in the FBA program, the sale itself being consummated by Amazon on behalf of the sellers, the responsibility cannot, thus, be washed away as the website and the platform is purely under the control of Amazon and is managed by it. Similar is the case with the other platforms that provide warehousing, transport and other logistical facilities. In order to be able to use the Plaintiffs? marks, for the purpose of advertising, promotion and to depict the Plaintiffs as the source of the products, on the websites, the products have to be genuine, un-tampered and consent would be required. In the absence of the same, there is clear infringement of the Plaintiffs? trademarks and the doctrine of exhaustion does not come to the aid of the Defendants.

The use of the Plaintiffs? marks clearly constitutes `”USE” under Section 2 (2)(c) of the Trademark Act, 1999 which is the reason why the platforms obtain licenses for the marks from the sellers and warranties that they are authorised and that the products are genuine. These licences are themselves FAKE because the so called licensors are not the owners of the marks nor do they have any permission to licence the marks. What is not owned cannot be licensed. Sellers have no rights if owners have not given consent.

Considering the manner in which the Plaintiffs have conducted their businesses, through direct selling and through a controlled distribution channel and network, the sale on e-commerce platforms by itself could result in impairment of the Plaintiffs? mark/ business and hence be treated as an exception to the principle of exhaustion. The sale on e-commerce platforms of the Plaintiffs? products would be infringement of the Plaintiffs? trademark rights as the Defendants are also using the Plaintiffs? trademarks, their trade names for promotion of the products, sale of products, display of products, and advertising of the products in a manner that is detrimental to the distinctive character and reputation of the Plaintiffs? marks. The platforms are also indulging in conduct falling under Section 29(6) of the Trade Marks Act as they are affixing the marks on the products, packaging the same and putting the same in the market for sale. Amazon is specifically using the Plaintiffs? mark Amway in advertising, without actual knowledge that the said products being sold on its platform are genuine or not and whether they are tampered with or not.

Broadly, applying these principles, presuming the goods are genuine, the Plaintiffs have only ‘put the goods in a market’ which is niche i.e. Direct Selling market, subject to conditions. The `economic value? would only be realised if the products are sold in the manner that they are meant to be sold. Sale on the e-commerce platforms in the manner sought to be done in the present cases is clearly leading to erosion of the economic value of their trade marks. In none of these cases is there any person who has been shown as the lawful acquirer of the products and seller of the Plaintiffs? products without tampering and with consent from the trade mark owner, for sale on e-commerce platforms. Neither of the platforms, nor any of the sellers can claim rights through the said identified persons. Lawful acquisition of the goods has, therefore, not been established at the prima facie stage. In fact, the Local Commissioner’s reports show that the source of the products is highly nebulous and hazy. There are no documents on record to support lawful acquisition of these products.

Moreover, a perusal of the product listings and the manner in which the expressions ‘by Amway’, ‘by Oriflame’, ‘by Modicare’ and the full name of the Plaintiffs, use of the logo, name of manufacturer etc., are used on the landing pages also show that the first impression that a consumer gets is that these products are being offered for sale by the Plaintiffs. A consumer cannot be expected to be so discerning so as to look at the fine print, to decipher that the sale of a product of the Plaintiffs is not by an authorized seller but by a third party who may or may not be authorized. When a consumer is expected to look at the product listing in such depth, that by itself constitutes misrepresentation as to the source of the products. The entire purpose of a trademark is that it signifies a specific source and if the source of the product is itself being either obliterated or even being hazed in any manner, the same would be deceitful and result in confusion for the customer.

Conclusion:

It is held that use of the mark by the sellers and by the platforms is violative of the Plaintiffs trademark rights and the Defendants are not entitled to the defence under Section 30. The manner of sale on the e-commerce platforms also constitutes passing off, misrepresentation and dilution/ tarnishment of the Plaintiffs marks, products and businesses. 

Issue 3: 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 question that arises under this head is as to whether the e-commerce platforms are entitled to the protection of safe harbour under Section 79 of the IT Act as intermediaries. The concept of an intermediary, as the expression itself denotes, means a person or an entity, which is in between two other persons. An online market place or an e-commerce platform would be an intermediary, if it is in between the buyer and the seller.

The buyer and the seller have to be identifiable persons. The intermediary ought to be acting as a bridge between the said two persons, i.e. a passive platform, which merely brings them together. In the case of passive platforms such as auction websites where the users upload their wares to sell the same, or the users upload their photographs for being viewed, the platform plays no role. The issue, however, becomes more complex in the case of an online marketplace or an e-commerce platform which are not merely passive players but in fact are massive facilitators. Platforms provide warehousing, logistical support, packaging, delivery services, payment services, collection gateways etc.

Insofar as Section 79 of the IT Act is concerned, the provision itself as contended by the Plaintiffs would not merely be a defence, but would also create enforceable rights for parties, who are affected by non-compliance of the provisions by intermediaries. If intermediaries have to be exempt from liability, they ought to satisfy the conditions contained in Section 79(2) and should not fall foul of Section 79(3) of the IT Act.

The scheme of Section 79 of the IT Act is clear. In order for a party/platform to be entitled to the exemption from liability, the said party must merely be hosting/listing third party information/data or providing a communication link only. The said third party has to be clearly identifiable on the platform. The exemption would not apply if the role of the intermediary is not limited for providing access to a communication system. The exemption would also apply only if the intermediary is not involved in initiation of the transmission, selecting the receiver of the transmission, and does not modify the information. In the context of e-commerce, the role of the marketplace, which provides the services enumerated above, would, therefore, have to be understood in this context.

The provisions of Section 79(2)(c) of the IT Act, therefore, gain importance. As per this Section, due diligence would have to be observed by the intermediaries in terms of setting up proper polices for IPR protection and for taking down of objectionable content in terms of the Intermediary Guidelines, 2011. Any information, which infringes patent, trademark, copyright or other proprietary rights, would be required to be taken down as per the due diligence provisions of the Intermediary Guidelines, 2011.

If any content on the marketplace violates trademark or other proprietary rights, the same would have to be taken down upon receiving notice. As per the Intermediary Guidelines. 2011, the marketplaces have to publish the rules and regulations and polices and they are bound to implement the same. The policies of the various platforms, as discussed in the previous section themselves require the sellers to be `authorised? and require warranties from the sellers that the goods are genuine. They also take a trade mark licence to use the marks on their respective platforms. The Policies have to more than mere `Paper policies‘. They have to be implemented in right earnest. All the policies require the sellers to be authorised and not to be infringing any IP rights. 298. This Court has held above that the use of the Plaintiffs? marks and the sale of the products without the consent of the Plaintiffs is violative of the Plaintiffs? trademark rights and results in passing off and misrepresentation and dilution. The sale of the Plaintiffs? products, also violates the Direct Selling Guidelines, which are valid and binding.

Conclusion:

In order for the platforms to continue to enjoy the status of intermediaries, subject to adjudication at trial, the due diligence requirements would have to be met and complied with, as per the Platforms own policies, and as per the Intermediary Guidelines, 2011, non-compliance with the Platforms own policies would take them out of the ambit of the safe harbour.

Issue 4:  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?

The tort of inducement of breach of contract traces back its origin to the 19th century. The tort is enforced in a manner in which performance of contractual obligations are insisted upon even by third parties, who are not privy to the contracts.

The interference with contractual relationships need not only be direct, but it could also be indirect interference. If any party procures breach of a contract, that is sufficient to constitute inducement of the breach, and make them liable under the tort.[11]

E-commerce platforms such as Amazon, Flipkart and Snapdeal, carry out substantial sales of consumer products from their platforms. They 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. The said parties ought to be conscious of the sellers, whom they permit to operate on their platforms, and the kind of products that are being sold. They are not merely passive non-interfering platforms, but 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.

The companies and entities, which run e-commerce platforms, have a greater obligation to maintain the sanctity of contracts, owing to the sheer magnitude and size of their operations. When an e-commerce platform is notified of existing contracts and violation of the same on its platform, the least that the platform would have to do would be to ensure that it is not a party, which encourages or induces a breach. The manner, in which e-commerce platforms operate, makes it extremely convenient and easy for ABOs/distributors/direct sellers 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, thereafter, put them in the e-commerce stream, without any quality controls. In this manner, such ABOs/distributors/sellers may sell outdated products, expired products, damaged products and hide behind the cloak of the platforms themselves. Since none of the platforms, except 1MG, to an extent, are even disclosing the complete details of the sellers, they offer a comfortable refuge for parties breaching their contracts with the Plaintiffs. This refuge by itself constitutes inducement.

Conclusion:

The minimum conduct expected by the e-commerce platforms is adherence to their own policies, which they have failed to do in the present case. Thus, this Court has no hesitation in holding that the continued 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.

[1] Ram Jawaya Kapur, AIR 1955 SC 549, ? 12, 17, 18, 19.

[2] (1986) 3 SCC 615.

[3] (2004) 2 SCC 510.

[4](2014) 10 SCC 673 ? 15.

[5] Supra note 1.

[6] AIR 1962 SC 12.

[7] (1999) 6 SCC 247.

[8] (1996) 10 SCC 104.

[9] 2012 SCC OnLine 1004.

[10] Consumer Distributing Company v. Seiko Time Canada Ltd., (1984)1 R.C.S.

[11] Aasia Industrial Technologies, 1998 PTC (18).