Delhi High Court Allows E-commerce Platforms to Sell Products of Direct Selling Entities

[Kajal Kashyap is a 4th year B.A. LL.B. (Hons) student at NALSAR University of Law]

In Amazon Sellers Services Pvt. Ltd. v. Amway India Enterprises Pvt. Ltd., a division bench of the Delhi High Court overruled an earlier judgment passed in 2019 by a single judge of the same court, thereby allowing e-commerce platforms like Amazon and Flipkart to sell products of Amway and other direct selling entities (“DSEs”).

DSEs or multi-level marketing companies are those that do not follow the traditional channel of distribution. They directly sell their products to consumers through a non-salaried workforce, i.e., distributors.  DSEs were earlier not regulated by any specific legislation and suffered from lack of a regulatory framework. In September 2016, the Department of Consumer Affairs issued a Model Framework for Guidelines on Direct Selling (the Direct Selling Guidelines” or “DSGs”) in furtherance of India’s aim to promote the direct selling industry.  Clause 7(6) of the DSGs requires the e-commerce platforms to take prior consent from these DSEs before making their products available for purchase on their websites. The single judge of the Delhi High Court held the DSGs to be valid and not in violation of the fundamental right of the e-commerce platforms to carry their business. Selling these products on an online platform with different information and lower prices was held to be in violation of their trademark protection. The plea of safe-harbour raised by these platforms under the Information Technology Act, 2000 (the “IT Act”) read with the Information Technology (Intermediary Guidelines) Rules, 2011 (the “IT Rules”) was also rejected. Further, they were held liable for interfering with the contractual relationship between the DSEs and their un-salaried workforce.

This post aims to analyse the judgment passed by the division bench, which sets aside the single bench judgement passed earlier.

Facts

The present appeal was filed by various e-commerce platforms, including Amazon, as a result of the judgment delivered by the single judge, which injuncted them from selling products of Amway and other DSEs on their website and mobile application. They were obligated to obtain Amway’s prior written consent before selling their products.

Issues raised

1. Whether the DSGs are law and hence, binding? If yes, then to what extent?

The Ministry of Finance, by way of a notification dated 26 October 2016, notified the “Model Guidelines on Direct Selling”. It is evident from the wording of the notification that the DSGs were supposed to be advisory, and that it was upon state governments to adopt it into law.  They are not in the form of executive instructions. The Department of Consumer Affairs notified these guidelines under the powers they derive from the Consumer Protection Act, 1986 (“CPA”). However, the CPA itself is awaiting formulation of the rule, and hence is yet to become operational. Therefore, clause 7(6) of the DSGs is purely advisory and not law, much less binding law. The DSGs do not attain the status of ‘law’ as defined under Article 13 of the Constitution merely because they are notified in a gazette. The Supreme Court has held that “guidelines per se do not partake the character of a statute” and that “such guidelines in the absence of statutory backdrop are advisory in nature”. Further, it has been held that guidelines or executive instructions that are not statutory are not “laws”, and compliance thereof cannot be enforced through courts. Hence, the division bench set aside the findings of the learned single judge who held the DSGs to be law and enforceable.

2. Does the sale of Amway and other products on an e-commerce platform amount to infringement of trademark?

It must be noted that the plaintiffs did not mention anything about trademark infringement in the plaints.  However, under section 19 of Sale of Goods Act (SOGA), upon the sale of a specific property by way of a contract the title over the property and the goods are transferred to the buyer.  The Code of Ethics of Amway states the same. Hence, upon sale to the un-salaried workforce, i.e. the direct sale contract holders, no further condition can be prescribed as to further resale of the products. Even if we consider this condition of no further resale to be binding, it cannot be enforced against the third party, i.e., e-commerce platforms because of privity of contract between Amway and the online platforms. Hence, it cannot be said that there is any trademark infringement.

3. Are e-commerce platforms intermediaries?

The learned single judge erred in restricting the application of section 79 of the IT Act to only “passive” intermediaries. Upon a literal reading of section 79, it cannot be said that there is a distinction between passive and active intermediaries with regards to the applicability of safe harbour provisions under the IT Rules. Even though Amazon and other online platforms provide services in addition to access, which includes packaging, storage and delivery, the entire transaction and the choices are controlled by the buyer. Amazon merely stores, packs and ships the products, and these additional facilities do not make it “a massive facilitator” who plays “an active role in the process of sale”. Hence, section 79 of the IT Act would act as a safe harbour for Amazon and other online platforms who are intermediaries from being held liable for a breach committed by the third party, i.e., the seller.

4. Are e-commerce platforms guilty of tortious interference with the contractual relationship?

It is a well-settled principle of law that the tort of inducement of breach of contract necessitates the presence of a contract between the two parties. The mere fact that there exists a Code of Ethics of DSEs, which restricts the further sale of their products by their distributors, is not sufficient to hold e-commerce platforms liable for tortious interference. The DSEs shall instead proceed against their distributors for breach of contractual obligations. The DSEs failed to place any empirical data to support the losses they claim to have suffered due to such interference.

Conclusion

The division bench observed that there was no question raised by the parties either in the plaint or the written statements in relation to the constitutional validity of the DSGs. The single judge kept in mind the interests of the DSEs but ignored the adverse impact that an injunction would have on the online platforms. There was a failure to examine whether the requirement of the online platforms to seek the prior consent of DSEs would not deprive the right of the buyer who would want to purchase such products from these online marketing entities.

The judgment passed by the learned single judge was seen as a ray of hope by the DSEs. However, with the division bench overruling the earlier judgment, there is a situation of flux. It is interesting to note that rule 8(6) of the Draft Consumer Protection (Direct Selling) Rules is a verbatim copy of clause 7(6) of DSG. If these draft rules are passed, the question of the act of the e-commerce platforms might lead to violation of the said rule, trademark protection of DSEs and section 79 of the IT Act and, hence, this is only likely to add on to the prevailing uncertainty.

Kajal Kashyap 

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