Direct selling entities (DSE) sell their products through distributors either by creating a multi-level seller network or by selling directly to the customer in a non-market environment. Lately, sellers have been listing such products on e-commerce platforms without the approval of the supplying DSEs. Indian DSEs Modicare, Amway, Oriflame and others took this issue to the Delhi High Court over whether such sales infringed the intellectual property rights (IPR) of the DSEs.
The single judge in the case of Amazon Seller Services Pvt Ltd v Modicare Ltd & Ors in 2019 decided in favour of the DSEs. DSEs are regulated under the Model Guidelines on Direct Selling 2016 (guidelines), under which e-commerce platforms must obtain permission from DSEs before listing their products for sale. Relying on these model guidelines, the court held that they did not violate the rights of e-commerce platforms and upheld the IPR of DSEs. As the products of DSEs are sold by specified distributors instead of retailers, listing them for sale online disrupted the entire chain of sale. On appeal, the court observed that the guidelines were merely advisory and not mandatory. They are not enforceable and are merely recommendations from the central government, which the state governments are free to follow or not. The guidelines could be regarded as the law because the Supreme Court has held that guidelines without statutory backing are not laws and cannot be enforced through the courts.
The court then had to decide whether the sale of products supplied by DSEs through online shopping websites amounted to an infringement of the trademarks of those DSEs. The court noted that the plaintiff DSEs in the case before the single judge had not claimed trademark infringement in their original pleadings. The court held that once a DSE sells the products to a distributor, it loses the right to decide how to dispose of the products. A distributor can resell the products without violating the IPR of the DSE. Even if DSEs restrict their distributors from reselling their products, they cannot restrict e-commerce platforms from offering the products online because there is no privity of contract between the DSEs and online sellers. The court therefore held that the online e-commerce platforms had not infringed the trademarks of the DSEs.
The court also considered the question of whether e-commerce platforms were intermediaries and therefore whether they had interfered with the contractual relationships between DSEs and their distributors. The court held that the judgment being appealed erred in holding that the provisions of the information technology (IT) laws did not apply to active intermediaries. Therefore, the safe harbour provisions under IT law applied to e-commerce platforms, even if any particular platform provided such services as packing, storage and delivery, and payment in addition to the listing of the products for sale. Amazon stored, packed and shipped the products, but these additional facilities did not make it “a massive facilitator” that played “an active role in the process of sale”.
Hence, Amazon could not be held liable for breaches committed by the seller or distributor. Accordingly, e-commerce websites did not interfere with contractual relationships simply because the DSEs share a code of ethics with their distributors, which restricts the resale of products. This was held not to be a sufficient ground for claiming interference. Instead of pursuing e-commerce websites, the DSEs should have acted against their own distributors for breaches of their obligations.
In conclusion, while the DSEs had the benefit of the judgment of the single judge who ruled in their favour, the subsequent appeal reversed that decision in favour of the e-commerce platforms. This is a significant decision that will affect the future course of business of DSEs and e-commerce websites. The guidelines were held to be unenforceable in law, and the DSEs had no other compelling argument to advance in support of their case. In arriving at its decision the court also avoided interfering with the right of choice of the consumer. E-commerce websites will now be able to sell products supplied by DSEs without seeking their consent, and without violating their IPR.
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