The Rise of E-commerce and Intermediary Liability

In recent times, there has been a spate of litigation surrounding the e-commerce space and immunities afforded to intermediaries. As almost everything can now be selected and purchased online, the role and responsibilities of e-commerce companies hosting such platforms is exalted. However, the rise of e-commerce has also witnessed a rise in associated IPR violations among other unlawful and tortious acts in this space. The Indian courts and especially the Delhi High Court has been quite proactive and circumspect in adjudicating on these issues. While in MySpace Inc. v. Super Cassettes Industries Ltd., [236 (2017) DLT 478], the Court emphasized on the need for safe harbour protection to intermediaries who follow notice and take down procedure with due diligence to not knowingly host any infringing content; in Christian Louboutin SAS v. Nakul Bajaj and Ors [2018(76) PTC 508(Del)], the Court observed that e-commerce platforms which actively conspire, abet or aide, or induce commission of unlawful acts on their website cannot go scot free. The Court made it clear that when an e-commerce platform becomes an active participant as opposed to merely being an intermediary, then it would automatically lose safe harbour protection. Such immunity can be provided to only passive transmitters of information on their platforms, which in the true sense is the role of intermediaries. Thus, the protection afforded to intermediaries is not absolute and if they also initiate the transmission, select the receiver or select or modify the information contained in the transmission then they may lose the immunity to which they are otherwise entitled.

The strict approach by the Court towards e-commerce players, which appears to be the need of the hour, has not only been adopted to stall piracy and counterfeiting but to also curtail trademark infringement of all kinds – even as to sale of genuine branded products but in “impaired” or altered conditions, and tortious interference in contractual commercial relationships, etc.

Recently, the Delhi High Court in Amway India Enterprises Pvt. Ltd. v. 1Mg Technologies Pvt. Ltd. & Anr. along with six other suits that were heard together, passed combined orders as part of a detailed decision delivered on July 8, 2019 against several e-commerce players. All these cases involved overlapping issues. One of the main issues was the conflict between Direct Selling Business and e-commerce platforms. The plaintiff Amway India Enterprises Ltd., a part of Alticor, Inc. which is one of the world’s largest direct selling companies, filed suits against a number of defendants (e-commerce companies) to restrain them from selling, offering for sale and advertising the plaintiff’s branded products without any consent or authorization. Amway’s “Direct Selling” model is based on the sale of products through direct seller members under a contract and is in consonance with the Direct Selling Guidelines, 2016 issued by the Indian Government. Prior to filing of the suit, Amway had sent cease and desist notices to these e-commerce entities found to be selling its products without permission at prices much cheaper than the market price, which also led to interference with the plaintiff’s direct selling agreements with its distributors. In response to the cease and desist notices, the e-commerce entities refused to comply with Amway’s requisitions asserting that they were intermediaries entitled to safe harbour provisions under Section 79 of the Information Technology Act, 2000 and were merely facilitators of the transactions between the buyers and the sellers. They also asserted that the sellers were responsible for ensuring that they were authorized to sell the products and the e-commerce platforms required no such authorization from the plaintiff. In the lawsuits, Amway argued that the sale of its products on such e-commerce websites did not guarantee the authenticity or quality of such products. Also, there was tampering with the packaging resulting in inter alia removal of its unique product codes that could affect Amway’s reputation, and the terms and conditions of sale, refund and return were also altered all of which exposed it to the risk of losing its license to conduct business in India as a Direct Selling Entity. It was pleaded that such tortious interference by the defendants would also adversely affect Amway’s contractual and business relationship with its Direct Sellers as well as the relationship with its consumers; effectively diluting and tarnishing Amway’s goodwill and reputation in the market. On the basis of Amway’s case, local commissioners were appointed by the Court who visited the premises of the defendants and submitted their reports. Ad-interim injunctions were also granted in Amway’s favour. The defendants argued amongst other grounds that since the products sold on their platforms were genuine, the plaintiffs cannot preclude the sellers to sell the products and that such sales do not constitute infringement. Moreover, since they were mere facilitators of such sales as intermediaries, they cannot be made liable. During the suit proceedings the local commissioners’ report came up which inter alia revealed that on product packages recovered from the defendants’ premises thinners were being used and that the unique product codes were tampered with or altogether removed. The Court after hearing the parties framed the following main issues:

  1. Whether the Direct Selling Guidelines, 2016 are valid and binding on the defendants and if so, to what extent?
  2. Whether the sale of plaintiffs’ products on e-commerce platforms violates its trademark rights or constitutes misrepresentation, passing off and results in dilution and tarnishes the goodwill and reputation of its brands?
  3. Whether e-commerce platforms are intermediaries entitled to protection under the safe harbour provided in Section 79 of the Information Technology Act and the Intermediary Guidelines of 2011?
  4. Whether the e-commerce players such as the defendants are guilty of tortious interference with the contractual relationship of the Plaintiffs with their distributors/direct sellers?

On the first issue, the Court observed that Direct Selling Guidelines have been formulated for protecting the legitimate rights and interests of the industry and consumers. It was observed that these guidelines were duly gazetted, have been implemented in a large number of states and constitute binding executive instructions. Thus, they are not merely advisory in nature but have the force of law. It was also observed that the entire direct selling business is a regulated trade/business and in the present case, as per these Guidelines, the defendants were merely required to take consent of the plaintiffs (Direct Selling Entity) before offering for sale or selling the plaintiffs’ products on their platforms. As the Guidelines would be applicable to “any person who sells or offers for sale any product or service of a Direct Selling Entity” the same would take within its ambit such e-commerce platforms as well who are selling the plaintiffs’ products. The Court accordingly held that the Direct Selling Guidelines are binding on e-commerce platforms and the sellers on such platforms.

On the second issue, the Court observed that although sale of genuine goods by e-commerce platforms without brand owners’ consent would not ipso facto constitute infringement, however any impairment in the condition of goods through such sales including the condition of packaging or associated after sales services etc., may constitute infringement. This issue also brings into discussion the principle of ‘exhaustion of trademark rights’ also known as ‘First Sale’ doctrine as to whether the plaintiffs can control the sale of their products by the defendants once the goods have been lawfully procured/bought from the plaintiffs. As per the report of the local commissioners, the Court noted that the inner seal of the products were broken, QR codes / unique product codes removed through the use of thinners, re-sealing of products done, new bar codes affixed, all under the control and supervision of the defendants / e-commerce companies. Other kinds of tampering with the products of the plaintiffs were also seen in the warehouses owned by the e-commerce platforms. The Court noted that due to such tampering there were negative customer reviews that caused enormous damage to the reputation and goodwill of the plaintiffs’ brands. All the defendants relied on Section 30 of the Trade Marks Act, 1999 (“the Act”) that products once sold by the plaintiffs cannot be controlled with respect to subsequent sales. However, the Court relying on the observations made in the case of Kapil Wadhwa & Ors. v. Samsung Electronics Co. Ltd. & Anr. MIPR 2012 (3) 0191 noted that impairment of goods need not only be physical to preclude the immunity/exemption to the defendants from infringement under the ‘First Sale’ doctrine. Even differences in services and warranties, advertising and promotional efforts, packaging, quality control, pricing and presentation would amount to impairment of the products, under section 30(4) of the Act. Thus, it was held that the doctrine of exhaustion cannot give legitimacy to such tampering and mutilation of the products themselves and it was also observed that as these are beauty and healthcare products there could be severe repercussions on the wellbeing of consumers. These were held to be legitimate reasons for the plaintiffs to oppose further dealings by the defendants under section 30(4) of the Act. The Court also held and observed that lawful acquisition of the plaintiffs’ goods has also not been established and the plaintiffs have only ‘put the goods in a market’ which is niche i.e. Direct Selling market, subject to conditions and that the economic value of the goods is clearly being eroded through unauthorized sales on e-commerce platforms. It was held that use of the trademarks by the sellers and the e-commerce platforms is violative of the plaintiff’s trademark rights and the defendants are not entitled to the defence under Section 30 of the Act. It was also held that such sales on these platforms constitute passing off, misrepresentation and dilution/ tarnishment of the plaintiffs’ marks, products and businesses.

On the third issue, the Court observed that an e-commerce platform would be an intermediary if it is in between the buyer and seller, acting merely as a bridge between the two. The question is whether such e-commerce platforms, who are not merely passive players but are massive facilitators, also entitled to safe harbour immunities. It was observed that in order to be exempted from liability, intermediaries have to satisfy the conditions in Section 79(2) and should not fall foul of Section 79(3) of the Information Technology Act. These include inter alia being functionally limited to the role of providing mere access to a communication system for transmittance, temporary storage and hosting of third party information, observing due diligence as per the Intermediary Guidelines and not to abet, conspire and aid or induce the commission of an unlawful act/violation of IPR and to also immediately remove and disable access to infringing material on being so notified. The Court observed that determining whether such e-commerce platforms are providing their own value–added services and performing an active role, thus having knowledge of / abetting the unlawful activities complained of, would be a matter of trial. It was held that any non-compliance of the above due diligence requirements as per the Intermediary Guidelines and failure to adhere to their own policies would make the e-commerce platforms liable.

On the fourth issue, the court observed that Direct Selling Entities operate in a specific framework which is regulated and these entities have also given their undertakings to the Government to be bound by the Direct Selling Guidelines, in consumer interest. These contracts/guidelines, the court noted were all notified to the defendants when plaintiffs discovered sale of their products on these platforms. However, despite being notified, none of the e-commerce platforms agreed to take down the plaintiffs’ products. These platforms never ensured that the contracts of the plaintiffs with their distributors are fulfilled and their business integrity is maintained. The Court observed that the tort of inducement of breach of contract and tortious interference with contracts is a well-recognized tort and e-commerce platforms were obligated, upon being so notified, to ensure that they do not induce breach of contracts in any manner. It was observed that these e-commerce platforms were offering a refuge for parties breaching their contracts with the plaintiffs and this refuge itself constitutes inducement. It was thus held that the defendants’ activities complained of resulted in inducement of breach of contract and tortious interference with contractual relationships of the plaintiffs with their distributors.

The court accordingly granted interim reliefs to the plaintiffs by inter alia awarding interim injunctions restraining the defendants/e-commerce platforms from displaying, advertising, selling, and facilitating repackaging of the plaintiffs’ products, except of those sellers who produce written permission/consent of the plaintiffs for listing their products. The court also ordered that during the pendency of the suit if the plaintiffs find the display of their products by sellers without their consent, then on take-down notice being given the e-commerce platforms shall take down such product listings within a period of 36 hours.

The evolving jurisprudence on intermediary liability significantly impacts all e-commerce players and necessitates them to tread more cautiously. The time has come for e-commerce companies to act with a greater degree of responsibility. This includes showing greater sensitivity towards the intellectual property of the rights holders as well as their other legal rights and obligations arising out of the respective businesses.

Rise of e-commerce and Intermediary liability by Dheeraj Kapoor

Article was 1st published in IP Link