e-commerce platforms allowed to list products of direct selling entities without their consent

E-commerce websites such as Amazon, Flipkart, Snapdeal and 1MG (“Online Platforms”) can now breathe a sigh of relief. The Division Bench of the Delhi High Court (‘Division Bench’), in a recent judgment in Amazon Seller Services Pvt. Ltd. v. Amway India Enterprises Pvt. Ltd. & Others[1], allowed e-commerce websites/ platforms/ mobile applications to list products of direct selling entities like Amway, Modicare and Oriflame (“Direct Selling Entities”) without their consent.

In July 2019, a single-judge (“Single Judge”) bench of the Court had, in Amway India Enterprises Pvt. Ltd. v. 1MG Technologies Pvt. Ltd. & Another[2], restrained such online platforms from displaying, advertising, offering for sale, selling, facilitating repackaging of any products of Direct Selling Entities, without their written permission/ consent. The Single Judge had also directed Direct Selling Entities to give notice to the concerned Online Platforms to take down relevant listings if they found their products being displayed on such platforms without their consent. Accordingly, the Online Platforms would then have to take down the said listings within 36 hours.

By reversing the order of the Single Judge, the Division Bench has provided relief to Online Platforms from the aforementioned restraints and left Direct Selling Entities worse off. Given the ramifications of the Division Bench judgment for Direct Selling Entities, this will not be the last word on the issue and the matter is likely to be taken to the Supreme Court.

Genesis of the Dispute

Direct Selling Entities sell their products either directly to consumers or through multi-level marketing, i.e. members enrolled in their network (such members being “Direct Sellers”). They are governed by the Direct Selling Guidelines, 2016 (“Guidelines”), which were issued by the Ministry of Consumer Affairs, Food and Public Distribution, Government of India.[3] The Guidelines were issued to protect the interests of consumers, and also make Direct Selling Entities responsible for compliance of these Guidelines by all their Direct Sellers.[4] The Guidelines also stipulate that any person who sells or offers for sale (including on an Online Platform) any product or service of a Direct Selling Entity must have prior written consent from the Direct Selling Entity.[5]

Direct Selling Entities found that their products were available for purchase on Online Platforms without prior written consent. They also found that the manner in which these products were being listed/ represented on e-commerce platforms suggested that they were being sold directly by the Direct Selling Entities.

Since agreements between Direct Selling Entities and their Direct Sellers prohibit sale of genuine products on Online Platforms, the Direct Selling Entities had reason to believe that the products available for purchase on such platforms were either counterfeit and/or tampered products. On the other hand, the assumption that genuine products were being offered for sale on Online Platforms by Direct Sellers implied breach of contract by these Direct Sellers. The Direct Selling Entities were aggrieved by this situation and hence had approached the Delhi High Court.

The Online Platforms took the stand that (i) their role was only to facilitate transactions between sellers who list their products for sale and buyers who purchase them; (ii) they were exempt from liability under Section 79 of the Information Technology Act, 2000 (“IT Act”) in respect of any third-party data on the Online Platform; (iii) they were only required to take down content once they receive actual knowledge that the content is infringing or in violation of law, for which, actual knowledge had to be provided in the form of a court order as per the Supreme Court’s judgment in Shreya Singhal v. Union of India[6]; and (iv) they were not required to police the online marketplace by providing any filters to ensure compliance of trademark laws or Guidelines by third-party sellers.

Highlights of the Division Bench Judgment

The Division Bench took the view that the Guidelines are not enforceable and once ownership of the products passes from the Direct Selling Entities to their respective Direct Sellers, no restriction can be imposed on the Direct Sellers regarding online sale of the products. Even if the said restriction (which is contained in the Guidelines) is treated as part of the agreements between Direct Selling Entities and their Direct Sellers, the Online Platforms are not a party to the said agreements. Further, the Division Bench did not find the various reports relied upon by the Single Judge sufficient to conclude that products of Direct Selling Entities were being tampered and/or impaired before being listed for sale on Online Platforms. The Division Bench also proceeded on the basis that the mere fact of Online Platforms providing additional services like warehousing, packaging and shipping does not disentitle them from taking the benefit of the exemption from liability under Section 79 of the IT Act.

Way Forward for Direct Selling Entities

Against this backdrop, Direct Selling Entities are now likely to approach the Supreme Court against the Division Bench judgment. By not even directing Online Platforms to clearly display and disclose the names of all third-party sellers, the judgment has made it difficult for Direct Selling Entities to identify errant third-party sellers. The Direct Selling Entitles are likely to emphasize that such non-disclosure by the Online Platforms effectively prevents them from proceedings against the actual wrongdoers and that the Online Platforms should take a fair and neutral position as intermediaries by making clear disclosures of the actual sellers.

The fact that Online Platforms provide various additional services to third-party sellers in relation to their products such as warehousing, packaging and shipping is likely to continue to be the argument of the Direct Selling Entities’ challenge against the Division Bench judgment. The exemption from liability under Section 79 of the IT Act is available only under certain circumstances. The Supreme Court will now have to decide whether the provision of the aforementioned additional services by the Online Platforms falls outside the purview of those circumstances.

The Direct Selling Entities are also likely to highlight the issue of genuine products being tampered with and/or impaired before being listed for sale on Online Platforms and contend that this is an exception to the principle of exhaustion (i.e. once a genuine product has been sold, its re-sale does not amount to infringement of trademark).

Way Forward for Online Platforms

Being the obvious beneficiaries of the Division Bench judgment, the Online Platforms would be waiting for the Direct Selling Entities to make the next move. At the same time, they will be aware that the Division Bench judgment reverses most of the important findings of the Single Judge on mere technical grounds like absence of pleadings in the plaint and scope of inquiry at the interim stage. They will also be aware that the conduct of the Online Platforms in this dispute, especially the delay/ hesitation in providing details of sellers, was an important factor for the Single Judge and may also have an impact on how the Supreme Court will view the matter.

Implication for Consumers

While this dispute between Direct Selling Entities and the Online Platforms is driven by their respective commercial interests, the consumers who purchase such products from Online Platforms are also stakeholders. A large number of consumers may be surprised to learn that the Online Platforms have no direct agreement with the manufacturer/ service provider whose products are being listed for sale. At the very least, consumers ought to be able to view the full details of the seller before making a purchase, so that they can make their own assessment regarding the likelihood of the product being counterfeit and/or tampered.

Closing Observations

There needs to be a balance between the legitimate interests of Direct Selling Entities on the one hand and those of Online Platforms on the other. In doing so, the overriding thought needs to be that the interests of consumers is paramount. The Online Platforms, despite the Division Bench judgment, may consider prominently displaying the name, address and other details of third-party sellers, along with the product. This would go a long way in conveying that the Online Platforms are truly acting as intermediaries, despite providing various additional services to sellers. Online Platforms may also consider putting in place a system of verifying whether third-party sellers are authorised to sell the products being listed and rating sellers on the basis of compliance with the same. This will help consumers make a more informed decision before buying such products.

[1] Judgment dated January 31, 2020 in FAO(OS) 133/2019 and connected matters.

[2] Judgment dated July 8, 2019 in CS(OS) 410/2018 and connected matters.

[3] See G.S.R. 1013(E) dated October 26, 2016, which required every direct selling entity to submit an undertaking by December 9, 2016 stating that it is in compliance with the Guidelines and providing details of its incorporation.

[4] Clause 3(8) of the Guidelines.

[5] Clause 7(6) of the Guidelines.

[6] (2015) 5 SCC 1.