[Deeksha Gabra is a chartered accountant and Shivam Gupta is a final-year law student at the Rajiv Gandhi National University of Law, Punjab]
Direct selling (also known as network marketing or multi-level marketing), as the name suggests, refers to selling products directly to the consumer in a non-retail environment. The product moves from the manufacturer to a direct sales company, which are then sold to consumers directly by the company’s distributors or representatives. In India there are various direct selling companies such Amway India Enterprises Limited, a wholly owned subsidiary of Amway Corporation (now known as Alticor, Inc.), one of the largest direct selling companies in the world, Oriflame India Pvt. Ltd., Modicare Ltd., HerbaLife, Tupperware India and the like.
Three of the most prominent direct selling companies Amway, Oriflame and Modicare, as the petitioners being aggrieved by the tortious and illegal conduct of the Indian e-commerce platforms such as Amazon, Snapdeal, Flipkart, 1MG, and Healthkart, filed seven different petitions against the e-commerce companies before the Delhi High Court. These petitions were later clubbed by the Court on the grounds of identical issues raised. On 8 July 2019, in a detailed judgment the Court ruled in favour of the petitioners granting relief on all the four issued raised.
The judgement comes as a relief to the direct sellers, thereby establishing a pedestal of trust and transparency on the Indian vision of promotion of direct selling industry. In this post, the authors seek to analyze the Delhi High Court’s judgement in light of the facts, issues raised, arguments made and reliefs granted.
The petitioners are engaged in the business of manufacturing, marketing and selling skin care products, health care products, nutrition and other related products. They use the direct selling system to sell their products, implying that the products are sold directly through their website or by direct sellers who are under the direct seller’s contract. The direct sellers are bound by a ‘code of ethics’ which governs their conduct. The petitioners also explicitly mention and submit that their products are not available for sale through any e-commerce or online distribution channel which is not managed by the petitioners.
The direct selling companies follow the Direct Selling Guidelines, 2016 issued by the Government of India for safeguarding the interest of direct sellers and for regulating the direct selling business. According to the Guidelines, a direct selling company is required to provide full refund and buyback guarantee within 30 days to the consumers even if the product is used. Clause 7(6) of the Guidelines requires that any e-commerce platform or marketplace should take prior consent from the direct seller before selling the products of the direct seller. Not following the framework is rendering the direct selling companies liable to misconduct themselves.
The gist of the grievances of the petitioners is that their products are being sold on the e-commerce platforms such as Amazon and 1MG without their consent. The usage of the company trademark by the e-commerce platforms on their websites without prior permission is an infringement of their rights. The refund policy of ecommerce platforms is against the Guidelines. Further, the products sold are not genuine, being tampered with and sold at much cheaper prices resulting in financial as well as reputational loss to direct sellers and direct selling companies
These grievances were presented before the e-commerce platforms in the form of letters and emails time and again but they were not addressed with the appropriate gravity. Hence, there was no other alternative left with the petitioners but to present their apprehensions before the Court.
There were four main issues raised before the Court:
I. Whether the Direct Selling Guidelines, 2016 are valid and binding on the defendants and, if so, to what extent?
In this issue the defendants raised the plea that Guidelines are not law and they do not apply to the defendants. Also, it was contended that the Guidelines are violative of their fundamental right under article 19(1)(g) of the Constitution.
The Court, while discussing the background and intent behind formulating the Direct Selling Guidelines, held that such Guidelines are law. As far as the infringement of the fundamental right under article 19(1)(g) is concerned, the Court opined that the main intention of the Guidelines is to regulate trade, ensure fair practice and, whenever a trade is regulated, the right to carry business cannot be involved. Thus, the Guidelines are not violative of the fundamental right of the defendants.
II. Whether the sale of the petitioners’ products on e-commerce platforms violates the petitioner’s trademark rights or constitutes misrepresentation, passing off and results in dilution and tarnishes the goodwill and reputation of the petitioners’ brands?
The Court opined that in order to use petitioners’ trademarks, the defendants should take prior permission; the goods should be genuine and untampered. In the instant case defendants did not take prior permission from the petitioners, and the goods were also found to be tempered with. Thus, the Court opined that there is clear infringement of the petitioners’ trademark. The compromised quality, differential return policy and flawed customer redressal mechanism clearly tarnish the goodwill and reputation of the petitioners.
In the instant case the sellers did not take consent to sell the products on online platforms. The prices and information of the products displayed on the website are also portrayed in a deceiving manner, which clearly amounts to misrepresentation.
III. 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?
The Court, while dealing with this issue, opined that according to the Intermediary Guidelines, 2011 it is the duty of an intermediary to follow a certain code of conduct and exercise due diligence. In the instant case the e-commerce platforms are infringing the trademarks of the petitioners and are in contravention of various other ethical considerations. In order to plead safe harbour, an intermediary should be compliant with the Intermediary Guidelines, 2011 and its own code of conduct. Thus, the e-commerce platform cannot take the plea of safe harbour in the instant case.
IV. Whether e-commerce platforms such as Amazon, Snapdeal, Flipkart, 1MG, and Healthkart are guilty of tortious interference with the contractual relationship of the petitioners with their distributors/direct sellers?
The main contention put forth by the defendants was that they are not directly involved in the sale of the products, but rather that they only act as an intermediary and hence cannot be held guilty for tortious interference. The Court, while rejecting the contention, held the defendants to be liable for tortious interference with a contractual relation; the interference need not be direct, it could be indirect as well. Thus, the defendants are guilty of tortious interference with the contractual relationship.
Direct selling companies have come under attack from flourishing e-commerce in India. Trading in products of direct selling companies is an established practice by the e-commerce operators. Even after multiple requests and solicitations by the direct selling companies, the e-commerce operators have taken no notice of the issue. This left the direct selling companies with no other option than to seek justice before the courts. The judgment of the Delhi High Court could be seen as a silver lining for the direct selling companies.
The judgment was long overdue and worth the wait because of its threefold benefits. First, it guards the reputation and business of direct selling companies; second, it ensures the protection of the direct seller’s trade and, last, it protects the customer from getting deceived and defrauded.
– Deeksha Gabra & Shivam Gupta