Amazon vs. Amway: E-Commerce Websites Permitted to Sell Products of Direct Selling Entities Without Their Consent

AMAZON VS. AMWAY: E-COMMERCE WEBSITES PERMITTED TO SELL PRODUCTS OF DIRECT SELLING ENTITIES WITHOUT THEIR CONSENT

In the battle between the Direct Selling Entities(“DSEs”) and e-commerce platforms like Amazon and Snapdeal, the Hon’ble High Court of Delhi ruled in favor of the latter and decided that selling the products of the DSEs online without taking their consent is not a trademark infringement. On January 31, 2020, in the case of Amazon Seller Services Pvt. Ltd. and Others Vs. Amway India Enterprises Pvt. Ltd. and Others, the Learned Division Bench of the Hon’ble Delhi High Court overturned the decision of the Single Judge which restrained Amazon and Snapdeal from selling goods of DSEs like Modicare, Amway and Oriflame. The case discussed the validity of the Direct Selling Guidelines 2016 (“DSGs”), whether sale of the products of the DSEs constituted violation of trademark rights and passing off, the safe harbor protection under Section 79 of the Information Technology Act, 2000 (“IT Act”) and the contentions regarding tortious interference and breach of contract.

Facts and Decision of the Single Judge: Amway, Modicare and Oriflame had filed cases against Amazon, Cloudtail and Snapdeal against sale of their products on the e-commerce platforms without their permission and claimed trademark infringement due to such unauthorized sale, and that such sale was against the DSGs, which governed the DSEs. A batch of seven suits raising overlapping issues were heard together by the Single Judge of the Delhi High Court. On July 8, 2019, the Single Judge of the Delhi Court pronounced a judgment in favour of Amway and the other plaintiffs and held that: (i) the DSGs were issued and notified in terms of Article 77 of the Constitution of India and hence they are binding law; (ii) Amazon and the other defendants were guilty of infringement of the trademarks of the DSEs, dilution of the trademarks, passing off and misrepresentation; (iii) Amazon and Snapdeal were not intermediaries under Section 79 of the IT Act as they were providing warehousing, logistical support, packaging and delivery services and to be eligible for the exemption the defendants must observe due diligence required under Section 79(2)(c); and (iv) the continuous sale of the products of the DSEs on the e-commerce platform, amounted to inducement of breach of contract and tortious interference with the contractual relationship of the DSEs with their distributors.

Appeal to the Division Bench: Amazon preferred an appeal against the order passed by the Single Judge and the Division Bench then took the following issues into consideration:

Whether the DSGs were binding and had the force of law?

Amway and the other DSEs had claimed that under Clause 7(6) of the DSGs, both the sellers and the platforms were required to take consent of the DSEs before selling the products online. The Single Judge had accepted the contention of the DSEs and ruled that the DSGs were binding in nature.

However, the Division Bench held that the Single Judge had erroneously framed the question of the constitutional validity of the DSGs, wherein the e-commerce platforms had not challenged the constitutional validity of the guidelines. The Division Bench also held that the DSGs are not law nor are they executive orders nor can they be traced back to a statute as the DSGs are yet to be enacted into law, pending the adoption of the new Consumer Protection Act, 2019 and the rules thereunder. The Division Bench stated that Clause 7(6) of the DSGs could be enforced against third parties as there was no privity of contract between the DSEs and the e-commerce platforms. The Division Bench felt that the DSEs jumped the gun in not waiting for the Consumer Protection Act, 2019 to be enacted and formally made into law. Hence, the Delhi High Court held that the DSGs were merely guidelines and advisory in nature; and hence could not be enforced.

Whether there was trademark infringement and product tampering by the e-commerce platforms?

The Learned Single Judge stated in her judgment that the DSEs were the owners of their respective trademarks and held the e-commerce platforms guilty of infringing and diluting the trademarks of the DSEs. The judge held that the e-commerce platforms tried to misrepresent their association with the DSEs and concluded that the principle of exhaustion of trademarks in terms of Section 30 (3) of the Trademarks Act 1999 would not exempt them from liability. The Single Judge also relied on various reports submitted by the Local Commissioners (“LCs”) who conducted searches at various locations where Amazon, Cloudtail and Snapdeal kept the products of the DSE, which reports stated that there was large scale tampering of the products by the e-commerce platforms. The Single Judge, relying on such reports held that such product tampering led to tarnishing the trademarks, products and business of the DSEs.

The Division Bench pointed out that in the absence of a specific pleading with regard to ownership of trademark, it was erroneous on the part of the Single Judge to declare that the DSEs were the trademark owners. Further, the Bench noted that in any case, the parties to the suits did not own their trademarks, it was held by the parent companies incorporated abroad. The Division Bench discussed the principle of exhaustion of trademarks in detail. The Bench, by relying on the Kapil Wadhwa v. Samsung Industries judgment, reiterated that India followed the principle of international exhaustion. It means that once a good is lawfully acquired, the rights over the said good vests in the buyer and the buyer has the right to further sell those products. Section 30(3) of the Trademarks Act, 1999 does not restrict the lawful acquisition and further sale to include an international market. The Division Bench pointed out that Amway itself also had a “Code of Ethics” which stated that once the product has been sold to the direct seller, no further condition can be imposed. Considering these circumstances, the Division Bench decided that the sale of Amway products by the direct sellers on the online platforms could not be deemed to be an infringement. The Bench observed that reliance could not be placed on the exception under Section 30 (4) of the Trademarks Act, 1999 as the reports of the LCs were unclear as to how Amazon and Cloudtail tampered with Amway products and that the Single Judge errored in placing reliance upon those reports. Hence, it was concluded by the Bench that the platforms were not liable for trademark infringement and product tampering.

Whether the e-commerce platforms could claim protection under Section 79 of the IT Act?

The Single Judge ruled that the e-commerce platforms could not avail the safe harbor protections as they were not passive players, rather they had provided warehousing, packaging and delivery support to the sellers and had failed to observe due diligence under S. 79 (2)(c). The Single Judge in her decision made a distinction between active and passive intermediaries and stated that only passive intermediaries could claim protection under the safe harbor provision.

To give a clear understanding, Section 79 states that any intermediary which abides by the provisions under sub-clause 2 and 3 of Section 79, shall not be held liable for any third-party data, information or link which is hosted on its website. Amazon and the others contended that the IT Act did not differentiate between active and passive intermediaries and that the safe harbor protection was granted to all the intermediaries.

The Division Bench prefaced its findings with the observation that there was no prayer for declaration that Amazon and Snapdeal were not intermediaries under S. 79 of the IT Act. It went on to hold that the IT Act mentions that the safe harbor protection would be granted to all intermediaries who comply with the conditions mentioned under S. 79 (b) and (c) and there was no distinction made between active and passive intermediaries. The Bench stated that the IT Act under the definition of an intermediary under Section 2(1)(w) envisages that intermediaries could provide value added services and that the e-commerce platforms had also listed down their due diligence obligations as required under the Intermediary Guidelines 2011. The Division Bench, thus, upheld the wide scope of S. 79 and held that even though the e-commerce platforms had provided value added services to the sellers, they could claim protection under the safe harbor provisions of the IT Act.

Whether the act of the e-commerce platforms resulted in inducement of breach of contract and tortious interference with the contractual relationship of the DSEs with their distributors?

The Single Judge stated in her order that it was the onus of the e-commerce platforms to ensure that the sellers on their platforms abide by their contractual obligations and by allowing the sellers to sell the products of the DSEs on their websites without the consent of the respective DSEs, the platforms were aiding in breach of contract.

The Division Bench stated that in order for there to be a tort of inducement of breach of contract, there needs to be a contract between the DSEs and the e-commerce platforms, which does not exist. The mere fact that the platforms had knowledge about the DSGs and the contracts between the DSEs and the sellers was not enough proof to claim tortious interference. Due to the DSEs failing to prove that the platforms played an active role to induce breach of contract, the Division Bench held that there was no inducement to breach of contract by the platforms.

Conclusion: The Division Bench of the Delhi High Court reversed all the findings of the Single Judge and at various points mentioned that the Single Judge had erred in framing the issues and had adjudicated on issues which were not prayed for. The Bench, in their findings, mentioned that the suits were framed as infringement suits, nor were there questions related to the constitutional validity of the DSGs; yet the Single Judge ruled on these points which ran contrary to the structure and frame of the suits themselves. The Bench also noted that the Single Judge had summoned an officer of the Union of India (UOI) – the Additional Solicitor General of India (ASG), as a witness in the trail to discuss the validity of the DSGs, when the UOI was not even a party to the trial; hence the Single Judge requiring the ASG to address arguments on behalf of the UOI was untenable. The judgement of the Bench widely discussed the international principle of exhaustion of trademarks in light of various Indian judgements; and concluded that there exists a principle of international exhaustion of trademarks in India which is embedded in the central legislation of The Trademarks Act, 1999 under Section 30. The Bench held that the declaration of the DSGs as binding law and the differentiation between active and passive intermediaries under S. 79 of the IT act, were an error in law. The Bench stated that the title of the DSGs explained its nature clearly: “Advisory to State Governments/ Union Territories: Model Framework for Guidelines on Direct Selling”; thereby making it clear that the DSGs were not meant to be treated as law themselves, much less binding law. The Bench also felt that the DSEs should have waited for the DSGs to be notified as rules under the Consumer Protection Act, 2019 as the Consumer Protection (Direct Selling) Rules, 2019 almost entirely replicated the DSGs. It is possible that once these rules are enacted, the question of whether Clause 7(6) of the DSGs replicated as Rule 8(6) of the Consumer Protection (Direct Selling) Rules, 2019 would be violative of Section 30 of the Trademarks Act, 1999 or Section 79 of the IT Act. It would be interesting to see what entails once these rules get enacted, as they would be open for challenge by the e-commerce platforms under various statutes including the Trademarks Act, 1999.