August 22, 2019
Delhi High Court: Intermediaries may lose safe harbor protection in case of non-compliance with their own policies; clarifies the scope of the first sale doctrine under trademark law
In a recent judgment, the Delhi High Court held:
Direct selling businesses (such as Amway, Oriflame, etc.) were concerned about their products being sold on the e-commerce platforms due to several reasons such as sale without authorization. Hence, suits were filed by Amway India Enterprises Pvt. Ltd. and Modicare Ltd. and Oriflame India Pvt. Ltd. (collectively “Plaintiffs”) against e-commerce platforms Amazon Seller Services Pvt. Ltd, 1MG Technologies Pvt. Ltd., Flipkart Internet Pvt. Ltd., Jasper Infotech Pvt. Ltd. (“E-commerce Platforms(s)/Platform(s)”) and independent sellers enlisted on the said e-commerce platforms (“Independent Sellers”) (E-commerce Platforms and Sellers collectively referred as “Defendants”).
The judgment1 is an interim order passed by the Delhi High Court (“DHC/Court”), inter alia, directing e-commerce platforms to prevent all sales of the Plaintiffs’ products on their platforms without first obtaining prior written consent from the Plaintiffs. The Defendants have recently filed appeals against the judgment which remain pending before the Division Bench of the DHC.2
Business of Plaintiffs
The Plaintiffs are in the business of direct selling i.e. the products of the Plaintiffs can only be sold through individuals (known as direct sellers) engaged by each Plaintiff. Sale through such direct sellers is regulated by way of agreements between the respective Plaintiff and its sellers and each Plaintiff’s code of ethics/conduct. Direct sellers of the Plaintiffs are prohibited from selling the products in retail stores and e-commerce websites under the code of ethics/conduct formulated by each Plaintiff. Direct selling businesses are regulated by way of the Direct Selling Guidelines, 2016 (“DSG”) issued by the Government of India.3
In each of the seven cases filed, the contentions of the respective Plaintiffs are similar. The Plaintiffs became aware of their products being sold on the E-commerce Platform by several sellers without their consent. The Plaintiffs separately wrote to the E-commerce Platforms stating that:
Based on these facts, the Plaintiffs contended in their respective suits that:
Contentions of the E-commerce Platforms:
Judgment of the DHC:
I. The DSG are law and not merely advisory in nature.
The DHC held that the DSG have the force of law and are binding upon direct selling businesses. The DHC also clarified that the DSG apply to ‘any person who sells or offers for sale’10 the products of direct selling entities (such as the Plaintiffs) and therefore the E-commerce Platforms and all sellers of the Plaintiffs’ goods on E-commerce Platforms are bound by the DSG. The DHC noted that government authorities including the Food Safety and Standards Authority of India have informed the E-commerce Platforms of the applicability of the DSG upon such E-commerce Platforms.
II. Owner of a trademark may object to subsequent sale of products bearing their trademark in cases of “impairment” of the product
The Plaintiffs’ alleged that under Section 29(6) of the TMA, use of the Plaintiffs’ trademarks by the Defendants for advertising, sale of products, etc. without prior authorization from the Plaintiffs amounts to infringement. In response to this, the Defendants argued that the Plaintiffs have already made the first sale of their products to the Independent Sellers and therefore, as per Section 30(3), the Plaintiffs now do not have a right to object to resale or prevent the E-Commerce Platforms from otherwise dealing in their products.
However, the DHC held that Defendants cannot seek protection under the first sale doctrine when there is substantial impairment in the condition of the goods, as provided under Section 30(4)11. The DHC noted that impairment of goods does not have to be physical impairment but can also include differences in services, warranties, packaging, pricing, quality control etc.
To determine if there was “impairment” in the facts of the cases at hand, the DHC considered the reports prepared by Local Commissioners appointed to visit the warehouses and storage facilities of the Defendants (“LC Reports”). The LC Reports stated that:
It was further noted by the DHC that when the Plaintiffs’ products are listed on the E-Commerce Platforms, the return policies of the E-Commerce Platforms become applicable which are different from the return policies offered by the Plaintiffs. Further, some of the Plaintiffs produced evidence that on some platforms the products were being sold at a price higher than the selling price set by the respective Plaintiff.
The Delhi HC therefore noted that the E-commerce Platforms are changing the warranties/ return/ refund policies/ prices of the products which amounts to “impairment” of the goods and therefore, protection under Section 30(3) of the TMA cannot be sought.
III. Intermediaries must comply with the due diligence requirement provided under the Intermediary Guidelines or risk losing safe harbor protection
The DHC noted that for intermediaries, including the E-commerce Platforms, to continue to enjoy the status of intermediaries, the due diligence requirements provided under the Intermediary Guidelines need to be complied with.12 These due diligence requirements include formulating terms and conditions for users informing them not to host, display, upload, modify, publish, transmit, update or share any information which, inter alia, infringes upon a third party’s intellectual property rights or is unlawful in any manner.
In addition to formulating such policies, the Court noted that all intermediaries have to strictly adhere to their own policies failing which intermediaries may lose protection under Section 79 of the IT Act.
The DHC noted that the policies of the E-commerce Platforms provided, inter alia, that sellers must be authorized sellers and sellers must not act in violation of intellectual property rights of third parties. It was noted that the Plaintiffs had intimated the Platforms of unlawful acts of several sellers on their platforms and therefore, the Platforms had actual knowledge that:
The Court held that since the Platforms had knowledge of violation of their policies by certain sellers on account of the aforementioned acts, they were required to follow their policies and prevent further sales from such sellers to be in compliance with the due diligence requirement and continue to stay protected as intermediaries.
IV. E-commerce platforms may be held guilty of tortious interference with the contractual relationship of the Plaintiffs with their distributors/direct sellers
Under the tort of inducement/tortious interference, when a third party acts in a manner which may induce a party to a contract to breach the contract, the non-breaching party can sue the third party for tortious interference. The Court noted that inducement may be indirect and it is enough for a Plaintiff to establish that the defendant had knowledge that their acts caused a breach of contract.13 It is not required to show that the defendant had an intent to cause the breach.14
The DHC noted that E-commerce Platforms carry out substantial sale of products through their platforms and do not act merely as passive players but actively provide several value added services to their sellers. Further, the manner in which Platforms function (details of sellers not shared with consumers, no verification of authenticity of products, etc.) makes it easy for Independent Sellers to breach contracts or sell unlawfully. The Court held that on account of the magnitude of the operations of the Platforms, they had a duty to ensure that their actions do not interfere with the businesses of the Plaintiffs. The DHC noted that the Platforms had knowledge of existing contracts between the Plaintiffs and their sellers and violation of the same on their platforms. The Plaintiffs had even informed the E-commerce Platforms that unauthorized sales and sales of tampered products could result in the consumers losing confidence in the Plaintiffs’ brands.
Despite receiving notices from the Plaintiffs, the Platforms did not take any action to remove the products of the Plaintiffs from their websites or had any discussion with the Plaintiffs to ensure that the contracts of the Plaintiffs with their distributors/ sellers are fulfilled. The Court therefore held that continued sale of the Plaintiffs’ products on the Platforms would result in tortious interference.
The DHC granted interim relief to the Plaintiffs and held that:
1 CS (OS) 410/2018; CS(OS) 453/2018; CS(OS) 480/2018; CS(OS) 531/2018; CS(OS) 550/2018; CS(OS) 75/2019; CS(OS) 91/2019
2 FAO(OS) 135/2019; FAO(OS) 134/2019; FAO(OS) 133/2019; FAO(OS) 142/2019; FAO(OS) 141/2019
4 See Clause 4, DSG
5 See Clause 5, DSG
6 Clause 7(6), DSG
7 79. Exemption from liability of intermediary in certain cases.–(1) Notwithstanding anything contained in any law for the time being in force but subject to the provisions of sub-sections (2) and (3), an intermediary shall not be liable for any third party information, data, or communication link made available or hosted by him.
(2) The provisions of sub-section (1) shall apply if–
(a) the function of the intermediary is limited to providing access to a communication system over which information made available by third parties is transmitted or temporarily stored or hosted; or
(b) the intermediary does not–
(i) initiate the transmission,
(ii) select the receiver of the transmission, and
(iii) select or modify the information contained in the transmission;
(c) the intermediary observes due diligence while discharging his duties under this Act and also observes such other guidelines as the Central Government may prescribe in this behalf.
(3) The provisions of sub-section (1) shall not apply if–
(a) the intermediary has conspired or abetted or aided or induced, whether by threats or promise or otherwise in the commission of the unlawful act;
(b) upon receiving actual knowledge, or on being notified by the appropriate Government or its agency that any information, data or communication link residing in or connected to a computer resource controlled by the intermediary is being used to commit the unlawful act, the intermediary fails to expeditiously remove or disable access to that material on that resource without vitiating the evidence in any manner.
Explanation.–For the purposes of this section, the expression ―third party information‖ means any information dealt with by an intermediary in his capacity as an intermediary.
8 (2015) 5 SCC 1. Please see the NDA Hotline here http://www.nishithdesai.com/fileadmin/user_upload/pdfs/NDA%20Hotline/IT_Act_Hotline_March_26_2015.pdf
9 Section 30(3) provides:
Where the goods bearing a registered trade mark are lawfully acquired by a person, the sale of the goods in the market or otherwise dealing in those goods by that person or by a person claiming under or through him is not infringement of a trade by reason only of—
(a) the registered trade mark having been assigned by the registered proprietor to some other person, after the acquisition of those goods; or
(b) the goods having been put on the market under the registered trade mark by the proprietor or with his consent.
10 Clause 7(6) of the DSG
11 Section 30(4) provides:
Sub-section (3) shall not apply where there exists legitimate reasons for the proprietor to oppose further dealings in the goods in particular, where the condition of the goods, has been changed or impaired after they have been put on the market
12 Section 79(2)(c) of the IT Act
13 The court placed reliance on Aasia Industrial Technologies Ltd. v. Ambience Space Sellers Ltd. 1998 PTC (18) (DB