Amazon Seller Services Pvt. Ltd. v. Amway India Enterprises Pvt. Ltd. & Ors. FAO(OS) 133/2019  (and connected matters), Delhi High Court (decided on 31 January, 2020)

Relevant Facts:

The appeals were filed against the judgment passed by the SJ in interlocutory order injuncting the Appellants/Defendants, i.e. Direct Selling Entities / DSEs (Amazon, Cloudtail and Snapdeal) from selling the products of the Respondents/Plaintiffs, viz. Amway, Oriflame and Modicare. The Appellants claim to be DSEs in terms of the Model Framework for Guidelines on Direct Selling dated 26 October, 2016 i.e. Direct Selling Guidelines (DSGs).

The suits were filed by the Respondents/Plaintiffs inter alia seeking injunctions against Defendants/DSEs from in any manner purchasing, possessing, selling, distributing, offering for sale, advertising/ displaying their products on the websites.

The SJ had formulated four issues and concluded that:

(i) DSGs have been framed in terms of the legal procedure, and are binding in law. They have been issued and notified in terms of the Article 77 of the Constitution of India and it is the only document that regulates the business of Direct Selling; 

(ii) The Appellants/Defendants were found guilty of infringing the trademarks of the Respondents/Plaintiffs, of dilution/tarnishment, passing off, and misrepresentation; 

(iii) The Defendants were not merely passive players but in fact, massive facilitators inasmuch as they were providing warehousing, logistical support, packaging and delivery services; the bare minimum that the Defendants are required to do to avail the exemption under Section 79(2)(c) of the IT Act, would be to observe due diligence required under Section 79(2)(c); 

(iv) The continued sale of the products of the Plaintiffs on the e-commerce platforms without their consent, results in inducement of breach of contract, and tortious interference with contractual relationships of the Plaintiffs with their distributors;  

(v) The balance of convenience lies in the favour of the Plaintiffs; the online platforms were unable to establish that the products of the Plaintiffs sold thereon were genuine and not tampered with or impaired.

Judgment:

While overturning the SJ’s order in all counts, the DB held in respect of four issues as under:

1. Whether the DSGs are law and whether suits could have been filed by the Plaintiffs for enforcing the DSGs?

The SJ erred in phrasing this issue as ‘Whether the DSGs ―are valid and binding on the Defendants, and if so, to what extent?’ as well as in rephrasing the same as ‘Whether any right under Article 19 (1) (g) of the Constitution is impinged by the issuance of these guidelines?’ What was required to be addressed first was the issue whether the DSGs were indeed ‘law’ and were the suits seeking enforcement of such law be maintainable? 

The guidelines were issued by the DoCA. Its power to frame such guidelines can be traced back to the Consumer Protection Act, 1986 (CPA). The mere fact that the FSSAI may have written to e-commerce platforms to comply with the guidelines would not make them law. The CPA, 2019, itself is yet to become operational, as it is awaiting the formulation of Rules thereunder. Had the SJ addressed the issue whether the DSGs did in fact have the character of law, there would have been no need to go into the further issue of whether they violated any fundamental rights.

Therefore, the DB did not consider it necessary to examine the further question whether the DSGs are violative of any fundamental right under Article 19(1)(g) of the Constitution and whether the restriction placed on the said right by them are beyond the purview of Article 19(6) of the Constitution. 

Thus the DB left it open to the Appellants/Defendants to challenge the Direct Selling Rules under the CPA, once they are notified, as being violative of Section 30 of the TM Act and Sections 419 and 420 of the Sale of Goods Act, 1930 (‘SOGA‘), Sections 23 and 27 of the Indian Contract Act, 1872 (‘ICA‘) and the Competition Act, 2002.

2. Whether sale of Amway, Oriflame and Modicare products on e-commerce platforms amounted to infringement of trademark, passing off and misrepresentation, etc.?

Trademark Issues: A fundamental error was committed by the SJ in noting that-the Plaintiffs are owners of their respective trademarks and there is no dispute regarding the ownership. In none of the plaints, the Plaintiffs assert or even mention anything about trademark registration. There was no occasion for the Plaintiffs to assert ownership of such trademarks. In fact, there is no such pleading to that effect at all.  The action brought by the Respondents/Plaintiffs in the shape of the suits in question, was not one of trademark infringement or passing off.

Lifting the Corporate Veil : There could not have been a presumption that Cloudtail and Amazon are one and the same entity and that the obligations of the Cloudtail would bind Amazon and vice versa. Amazon’s contention that by permitting private entities like Amway to restrict downstream distribution of genuine goods, by enforcing contractual stipulations against third parties, the judgment of the SJ recognized a monopoly that could be exercised in perpetuity and hence ran contrary to the legal position explained in Kapil Wadhwa v. Samsung Electronics MIPR 2012 (3) 0191, hold merit.

The SJ was in error in distinguishing the decision in Kapil Wadhwa v Samsung Electronics (supra) by holding that the principle of exhaustion cannot be invoked by the Appellants/Defendants.

Reports of Local Commissioners : The facts revealed in the LCs reports were insufficient to make any specific conclusions regarding the impairment of the products vis-à-vis each of the present Appellants.

3. Whether Amazon, Cloudtail and Snapdeal were in fact intermediaries within the meaning of Section 79 read with 2 (1) (w) of the IT Act?

The SJ misinterpreted Section 79 of the IT Act in concluding that it is restricted to ‘passive’ intermediaries. As per section 79 there is no distinction between passive and active intermediaries so far as the availability of the safe harbour provisions are concerned. In terms of Section 79, an intermediary shall not be liable for any third-party information, data or communication link made available or posted by it, as long as it complies with Sections 79(2) or (3) of the IT Act. 

The exemption under Section 79(1) of the IT Act from liability applies when the intermediaries fulfil the criteria laid down in either Section 79(2)(a) or Section 79(2)(b), and Section 79(2)(c) of the IT Act. Where the intermediary merely provides access, it has to comply with Section 79(2)(a), whereas in instances where it provides services in addition to access, it has to comply with Section 79(2)(b) of the IT Act.  The Appellants – provided services in addition to access. Thus, they had to show compliance with Section 79(2)(b) of the IT Act.

Given the disputed questions of fact that emerge from the pleadings in the suit, it is obvious that the issue of whether an entity is an intermediary or not can be decided only after a trial. In holding that Amazon is in fact not an intermediary, the SJ obviated the need for any evidence to be led in the matter. There was no occasion for the SJ to have, at the stage of considering applications for interim injunction, returned a conclusive finding that Amazon is – a massive facilitator and plays an active role in the sales process. DB did not agree with the SJ that the Respondents would have to meet the diligence requirement, failing which the benefit of the safe harbour provision i.e. Section 79 of the IT Act would not be available to them.

4. Whether the platforms are guilty of tortious interference with a contractual relationship?

The mere fact that the online platforms may have knowledge of the Code of Ethics of the DSEs, and the contractual stipulation imposed by such DSEs on their distributors, is insufficient to lay a claim of tortious interference.

It was incumbent on the part of the Plaintiffs to demonstrate active efforts on the part of or contracts entered into by the Appellants/Defendants to make a viable case for tort of inducement to breach of contract.  On the facts of the present case, whether in fact any of the online platforms induced a breach of contract between the DSE and its ABOs/sellers is at best a matter of evidence, and not of inference.

No case for interim injunction : 

Of the three elements to be considered for the grant of interim injunction, the Plaintiffs, failed to establish that they have a prima facie case particularly since the DSGs could not be considered to be binding law.

Even on the test of balance of convenience, the learned SJ has only returned such a conclusion, without actually examining whether the grant of injunction would have an adverse impact on online marketing.

As regards irreparable loss and injury, there was no empirical data placed before the learned SJ by the Plaintiffs in support of their contention that they had suffered huge losses.

Comments:

The DB held that the SJ erred in many essential respects in coming to its findings. The fact that the rudimentary framing of the primary issue was erroneous indicates the mechanical nature of the order and non-application of mind. The DB observed that the impugned order callously made sweeping conclusions without proper consideration of all aspects and contentions and in fact went beyond the pleadings to deal with issues not prayed for.

The Judgment in turn is a significant one for intermediaries as the same reaffirms Section 79 of the IT Act as an affirmative defence that cannot be elevated to be an enforceable provision. It also highlights the Principle of Exhaustion under the Trade Mark Act and its applicability internationally (as followed by India) thereby holding that contractual post sale restrictions cannot be imposed to restrain sales on e-commerce platforms.

If the DB Judgement is taken to the Supreme Court, it is to see if and how the Apex Court takes care of the issues decided in interlocutory applications.