July 11, 2019

India: E-Commerce platforms are prohibited to sell Amway, Modicare and Oriflame products in violation of the Direct Selling Guidelines – Delhi High Court

 

The war between Direct Selling Companies and E-Commerce entities started in the year 2018 when Amway India Enterprises Pvt. Ltd., filed a series of suits against E-commerce websites such as 1MG.com, Heathkart.com, Snapdeal.com, Flipkart.com, etc., for perpetual injunction, tortious interference with its legitimate business, and unfair competition. The premise of such legal action was the violation of its Direct Seller’s Contract (hereinafter referred to as the ‘DSC’), which allows sellers to market, distribute, sell products and provide services to the end consumers. The said contract is dictated by Amway’s Code of Ethics and Rule of Conduct. However, the direct sellers are not permitted to sell Amway’s products on any e-commerce platform or in retail or wholesale stores without prior authorization from Amway. A large number of Amway products bear unique codes which are used to track the source of the seller.

Vide Notification dated October 26, 2016, the Government of India, issued the Direct Selling Guidelines to regulate the business of Direct selling entities and protecting the interest of the consumers. Clause 7(6) of the said guidelines prescribes that no person shall sell the goods or services of a direct selling entity including on an E-Commerce marketplace without prior permission of the direct selling entity. In accordance with the said Guidelines, Amway had submitted its undertaking that it is 100% complaint with the said guidelines.

When Amway came across the unauthorized and illegal listing of its products on various E-Commerce platforms, it sent legal notices requesting them to delist their products. In fact, various Government agencies such as FSSAI, ASCI, also wrote to the major E-Commerce platforms to comply with the DSA Guidelines. However, they continued to list such products on their website.

Needless to mention that Amway products were sold on these e-commerce platforms at very cheap prices compared to the original market prices, which raised the risk of circulation of counterfeit products in the market. Further, these E-Commerce platforms had conflicting return and refund policies as compared to Amway’s official 30 days return and refund policy even of 30% consumed product. Hence, E-commerce platforms were not passing on such benefits to the consumers. There were many reviews on the said portals wherein the complainants had even complained about the authenticity and genuineness of the products sold to them.

Another main grievance of Amway was that the products being sold through E-commerce portals were reaching the customers in tampered conditions. The sellers who were offering to sell Amway products through e-commerce platforms were tampering the internal and outer seal of the products to remove the unique codes and were resealing them. The said illegal and unauthorized activities were eating into the business of Amway’s direct sellers and its reputation and goodwill earned for close to six decades. Amway was also losing the end customers confidence and trust in its products as well as it’s relationship with its direct sellers. Amway also made the allegation that these e-commerce platforms are in connivance with the sellers of Amway products and are neither complying with the Direct Selling Guidelines issued by the Government of India nor the Information Technology Act, 2000 or the Guidelines thereunder, which provides the provision for safe harbor only in case the intermediary are observing due diligence as prescribed under the IT Guidelines.

Further, the unauthorized and illegal acts of all the E-Commerce portals in connivance with the sellers, were rendering Amway liable for violation of its own undertaking given to the Govt. of India under the DSG and its permission granted by the Govt of India, to conduct Direct selling business in India in the year 1994 may also be revoked.

In the said suits, the Hon’ble Delhi High Court had appointed local commissioners to conduct raids at the premises of E-Commerce platforms to obtain their agreements with their sellers between as well as the sellers at E-commerce platforms. During the raid proceedings the Local Commissioners found Amway products in tampered conditions and even some expired products were also found. The sellers were using thinners, glue, for tampering the unique codes imprinted on the internal and outer seal of Amway products and were resealing them. The said fact was even admitted by the sellers in their statement given on oath during the court hearings. Most of the sellers were either previously terminated by Amway on account of their acts or were sourcing these products from some unknown sources or some of them were existing sellers who were in clear violation of Amway’s DSC and gave undertaking in the Hon’ble Court, not to sell Amway products in the future.

Thereafter, other companies such as Modicare and Oriflame filed suits against e-commerce platforms, therefore all the suits were heard together, and a common judgment was passed by Hon’ble Mrs. Justice Pratibha M. Singh of the Delhi High Court on July 8, 2019 in seven suits.

Common defenses taken by all E-Commerce platforms –

  1.  They are merely an intermediary under Section 79 of the IT Act and are entitles to the safe harbor provisions.

  2.  They do not select, modify or alter the information uploaded on their portal by third parties.

  3.  They do not manufacture, procure, produce, list, advertise, sell or price any of the products made available on its platform, including Plaintiffs’ products. The same are listed by third-party sellers.

  4.  All the information relating to the products including the guarantees, warranties, return, refund policy etc. are uploaded by third-party sellers.

  5.  Even the Direct Selling Companies cannot complain against the sale of their goods below the MRP as their agreements with their sellers permits the sale of products below MRP.

  6.  That the invoice generated after purchase of the product gives the name, PAN number and GST registration number of the seller, through which the seller can be traced.

  7.  The fact that the e-commerce platforms are providing logistic, storage, packaging and payment would not take away their title of being an intermediary.

  8.  The products sold on their platforms are not counterfeit and are the genuine products of the Plaintiffs.

  9.  The Plaintiffs in all the cases cannot restrict their sellers from reselling their goods under the rule of exhaustion once the title of the good is passed on to its seller. If the goods are legally acquired by Plaintiff’s sellers under their contracts, they don’t need the permission of the Plaintiffs. Reliance was placed upon Samsung Electronics Company Ltd. vs Kapil.

  10. The Direct Selling Guidelines are not law under Article 13 of the Constitution of India; hence they are not enforceable by the Court. There are mere administrative instructions issued by the Government of India and do not create any rights in favor of the Plaintiffs to sue the Defendants. Reliance was placed upon Bijoe Emmanuel vs State of Kerela and Union of India vs Navin Jindal.

  11.  In any case, the word, ‘no person’ written in clause 7(6) of the DSG will not include the E-Commerce platforms. It is only enforceable against the sellers.

  12. As per the intermediaries, such restriction to sell the products of direct selling guidelines amounts to violation of fundamental rights to conduct business provided under Article 19 (1) (g) of the Constitution of India.

  13. The word ‘actual knowledge’ given under Section 79 of the IT Act means a court order as envisaged by the Hon’ble Supreme Court in Shreya Singhal.

  14. The e-commerce platforms do not have any contractual relationship with the Direct Selling companies; hence they are not bound by the guidelines.

  15.  The e-commerce platforms cannot police their website to protect the intellectual property rights of the brand owners and such duty is of the brand owners, the Plaintiffs herein.

  16. A failure by the Plaintiffs to ‘reign in’ their own distributors cannot form the basis of a cause of action against the Defendants.

  17.  The Guidelines were framed for the consumers interests and cannot be used against the intermediaries.

Therefore, the Hon’ble Court analyzed the four questions which arose from the above pleadings of all the seven suits.

  • Whether the Direct Selling Guidelines, 2016 are valid and binding on the Defendants and if so, to what extent?

  • 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‟ brands?

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

  • 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?

On the aspect of the enforceability of the DS Guidelines the Hon’ble Court heard the submission of Mrs. Maninder Acharya, Learned ASG who stated that the guidelines have been authenticated, approved and Gazetted under Article 77 of the Constitution of India, 1950. Till date and since the time the Direct Selling Guidelines were introduced in 2016, there has been no challenge to the same. The Direct Selling Guidelines have the force of law, as the power exercised to frame them is not arbitrary or perverse. Hence, the Guidelines are duly authenticated and binding. Further, the Court observed that 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, etc. In Delhi a nodal officer has been appointed to implement the Guidelines. Thus, these are not merely advisory in nature but have force of law. The e-commerce entities have already been cautioned about the said guidelines by various government agencies, however, they have chosen not to challenge the same.

With regard to Question no. 2, the Hon’ble Court held that the Plaintiffs in each case are the owners of their respective trademarks and their ownership rights are not disputed by the Defendants. With regard to applicability of Section 30 of the Trade Marks Act, i.e. the rule of exhaustion, the Hon’ble Court took the view that there are two exceptions to it, a). there should not be any prohibition on selling the same, b). there should not be any impairment of goods. Answering the first condition, the Court was of the view that since the sellers themselves signed DSCs with the Direct Selling entities, they are bound by the code of ethics and the terms and conditions contained therein which includes specific embargo on sale in retail stores and e-commerce websites. Answering the second condition, the Court relied upon the reports of the local Commissioners, wherein it was mentioned that thinner and glued products were found at the Defendants’ premises to temper the seals and various products were indeed found in tempered condition. Further, the e-commerce entities and sellers are not passing on the return and refund policies of the customers. Hence, the defense of section 30 is not available to the Defendants.

The Court also took note of the manner in which the e-commerce entities were using the name, logo and details of the Direct Selling entities on their portals. The details of the sellers were completely missing from the portals; hence it could lead to the consumer into believing that the products are originating from their manufacturers, i.e. the Plaintiffs herein. In this regard the court also took into consideration, the agreements executed between E-commerce entities and their sellers and their terms of use and policies. The Customer reviews which were illustratively relied upon by their parties showed that enormous damages were being caused to the reputation and goodwill of the Plaintiffs. The said question is also decided in favor of the Plaintiffs.

With regard to question no 3 of safe harbor provision of the IT Act, the Court observed that the e-commerce entities are admittedly providing their sellers various other services such as logistic payment portal, delivery, return, etc. They become massive facilitators rather than being passive players. Reliance was placed on Christian Louboutin vs Nakul Bajaj. The question as to how the platforms are providing the value-added services and whether they are performing an active role in the same, would have to be finally adjudicated at trial. Thus, 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 harbor.

The fourth question is also answered in favor of the direct selling companies. The Court took the view that all the direct selling companies operate in a specific framework and are also regulated by the direct selling guidelines. The E-commerce portals have been ignorant of their legal notices wherein they were notified of the Plaintiffs’ contract, responsibilities of distributers/sellers and the direct selling guidelines and took the common stand that they are intermediaries and the sales are in fact done by the sellers on their platform. However, the platform has shifted their neutral position on intermediaries and defended their acts on merits by arguing that their fundamental rights cannot be impinged. The Court recognized the principal of Tort of inducement of breach of contract, which 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. In the context of the present cases, E-commerce platforms carry out substantial sales of consumer products on their platforms and invest heavily on their logistics, warehousing, etc. They should 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 they have a duty to ensure that the contractual relationships of the Plaintiffs with their sellers are not unnecessarily interfered with. The preservation and maintenance of the integrity of commercial contracts is a necessity in the modern-day world. If society is permitted to induce or encourage breach of commercial contracts and the aggrieved persons are left only with their remedies of specific performance or damages by the persons breaching the contract, it would result in complete dissipation of contractual integrity. The legal system has to work towards preservation and compliance with contractual terms and not encourage violation of the same.

Conclusion
The Court passed the following directions while allowing the injunction applications of the Plaintiffs in all the suits as under -

  1. The Defendants who are impleaded as sellers are restrained by an interim order of injunction from advertising, displaying, offering for sale products of the Plaintiff, on all the ecommerce platform or on the mobile application.

  2.  The E-Commerce entities are restrained from displaying, advertising, offering for sale, selling, facilitating repackaging of any of the Plaintiffs’ products on their websites and mobile applications, except of those sellers who produce written permission/consent of the Plaintiff for listing of their products on the set e-commerce platform.

  3.  The sellers, if any, who produce consent given by the Plaintiffs, allowing sale of its products through ecommerce platforms, the ecommerce platforms shall, clearly, provide the name, address and contact details of the said sellers, including the telephone numbers, email address, etc., in a prominent manner, along with the product description.

  4.  If the Plaintiffs find during the pendency of the suit that any of the sellers have displayed their products on the E-commerce platforms or mobile application without thier consent, then they shall give notice to the e-commerce platforms for taking down the listings of such sellers, which shall be duly taken down within a period of 36 hours by e-commerce platforms.

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