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Delhi HC restrains e-commerce platforms from selling products of ‘Direct Selling Entities’

The Delhi High Court has restrained e-commerce platforms Amazon, Flipkart, Healthkart and Snapdeal and several sellers from displaying, advertising and offering for sale the products of companies that are ‘direct selling entities’ without their consent, as Bar and Bench reports. The interim injunction was passed on July 9th by a Single Judge Bench, in clubbing of suits filed by direct selling entities like Amway, Modicare and Oriflame.

Amway, Modicare and Oriflame deal in healthcare and beauty products. The companies alleged that the aforementioned e-commerce platforms are sourcing and selling their products in an unauthorized manner at cheaper rates, resulting in financial losses to companies.

The companies’ arguments against e-commerce platforms

The companies have pleaded that their trademark, names, logos, etc. being used by the e-commerce platforms without their consent. Further, they argued that several sellers are selling their products on these platforms in violation of the Direct Selling Guidelines, 2016.

Issued in October 2016, The Direct Selling Guidelines provide a framework for direct selling. Under the Guidelines, a Direct Selling Entity is expected to also enter into a specific agreement with the Direct Sellers, before enrolling them as part of the distribution network.

The companies also alleged that their products are being tampered and sold without unique codes and QR codes on these platforms while hiding the sellers’ names and contact details. It is their contention that such tampering is in violation of Section 30(3) of the Trade Marks Act, 1999 as the sales of tampered products through unknown sellers on these platforms constitute dilution and eclipsing of the brand value of plaintiffs.

Section 30(3) of the Trade Marks Act, 1999 provides an exemption from liability for infringement to the person who wishes to sell the products of original seller in the market or otherwise deal in them, if the products are genuine. However, such person cannot offer and advertise the product when there is a grave apprehension that the products are being impaired and their condition is being changed.

The platforms replied that they are merely intermediaries under Section 79 of the IT Act, 2000 and are not liable for the products that different sellers sell on their marketplaces. They further argued that Direct Selling Guidelines are merely advisory and are not binding as law. Finally, they contended that such guidelines restrain e-commerce platforms as well as sellers from exercising their fundamental right to freedom under the Constitution to practice any profession.

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Delhi HC’s order in favour of ‘Direct Selling Entities’

The Court held that the companies have established their case against e-commerce platforms on the following grounds that:

1. Direct Selling Guidelines have the force of law: The Court held that the Guidelines have been issued by a gazette notification, therefore “they constitute binding executive instructions”. Therefore, both sellers and platforms are required to take the consent of the Direct Selling Entities before selling such products, as required by Clause 7(6) of the Guidelines.

“The notification issued by the Government in the Official Gazette is a General Statutory Rule (“GSR”)”.

Also, the Court opined that the “while the Defendants’ (e-commerce platforms) and sellers insist on their Article 19(1)(g) rights being jeopardised, what is lost sight of is the fact that the Plaintiffs’ (the companies) right to carry on business is being affected. Further, the rights of genuine consumers are being affected, as is evident from the various comments, which consumers have put up on these platforms, after purchasing the Plaintiffs’ products from the said platforms”.

2. The unauthorized sale of products on e-commerce platforms constitutes passing off, misrepresentation and dilution/tarnishment of their mark: The Court observed that in order to use the companies trademark for displaying, advertising and offering for sale the disputed products, the products are required to be genuine. However, the Court relied on the reports of the Local Commissioners who inspected the premises of certain e-commerce platforms and noted that “there is a large scale of tampering of goods that is taking place”.

As the platforms are facilitating the sale of the tampered products while hiding the sellers’ contact details and portraying it as the companies’ genuine product without their consent, such unauthorized sale constitutes passing off, misrepresentation and dilution/tarnishment of the companies’ marks, products and businesses.

3. The e-commerce platforms don’t come within the ambit of the safe harbour protection: For the intermediaries that are seeking exemption from liability, it is the requirement to satisfy conditions contained in Section 79(2) of the Information Technology Act. As per Section 79(2)(c) of the IT Act, due diligence would have to be observed by the intermediaries in terms of setting up proper policies for IPR protection and for taking down of objectionable content. Further, it was held in the case of Shreya Singhal, that in order to be an intermediary, an online platform has to comply with due diligence requirement as per the platforms’ own policies and as per the Intermediary Guidelines, 2011.

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The Court held that as the defendants have failed to fulfill the requirement of due diligence as per their platforms’ own policies, they are not entitled to intermediary protection under Section 79.

“The Policies of all the platforms clearly are simply “Paper policies” which are clearly not being adhered to as the facts of these cases go to show. They are a mere lip-service to the Intermediary Guidelines of 2011. None of the platforms is insisting on any of the sellers obtaining the consent of the Plaintiffs (the companies) for sale of their products on the e-commerce platforms, where their own policies require them to do so.”

4. E-commerce platforms guilty of wrongful interference with the contractual relationship of the companies with their distributors/direct sellers: The Court held that the platforms “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 companies of unauthorised sales on their platforms, they have a duty to ensure that the contractual relationships between the companies and their distributors/ direct sellers are not unnecessarily interfered with by their businesses.

Conclusively, the Court observed that the balance of convenience is in favour of the companies. The Court said that “irreparable injury would be caused to plaintiffs, their businesses, and all those who depend on plaintiffs’ successful business, such as employees, distributors/direct sellers, agents, and finally the consumers if interim relief is not granted”.

[embeddoc url=”http://lobis.nic.in/ddir/dhc/PMS/judgement/08-07-2019/PMS08072019S4102018.pdf” download=”all”]

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