Trends and Developments Concerning Liability of Intermediaries in India

counterfiet-goodsIndia has been witnessing a boom in e-commerce over the past few years and it has become India’s fastest growing and most trending medium for commercial transactions. As per the India Brand Equity Foundation report of October 2019, the Indian e-commerce market is expected, by 2026, to have increased its value five-fold from its 2017 value. India’s internet economy is also expected, in 2020, to double its value from that of April 2017, which shall be largely attributable to the e-commerce space. It has also been estimated that India’s annual growth rate in e-commerce revenue is the highest in the world.

With such a paradigm shift in the way goods and services are bought, sold and rendered, it is expected this will have ramifications in the legal space and pave the way for the development of the legal landscape for e-commerce players and intermediaries. In fact, India is already witnessing a revolution concerning the determination of rights, duties and liabilities of intermediaries, sellers and intellectual property rights holders in the digital space.

More particularly, recently there has been a spate of litigation surrounding the e-commerce space and on the aspect of immunities afforded to intermediaries. As almost everything can now be selected and purchased online, the roles and responsibilities of e-commerce companies hosting such platforms has increased. The trend appears to be shifting to a stricter approach by courts towards e-commerce players in the interest of consumers and rights holders since the boom has also brought with it an escalated number of grievances by rights holders in this space. These grievances include intellectual property rights (IPR) violations and other unlawful and tortious acts.

It all started in 2008 when a dispute arose between Myspace (an entertainment and social networking website that allows users to upload and download music, videos and images) and Super Cassettes Industries (a popular Indian music production house) wherein the latter sought an injunction against Myspace allegedly hosting content over which Super Cassettes claimed copyright. On hearing the matter, a single judge of the Delhi High Court granted an interim injunction in favour of Super Cassettes so as to prevent any form of infringement of the intellectual property rights of the right holder. Subsequent to this order, certain provisions in the Information Technology Act and the Copyright Act were amended. In an appeal by Myspace before the division bench of the Delhi High Court viz MySpace Inc v Super Cassettes Industries Ltd, [236 (2017) DLT 478], which was allowed, the Court interpreted the relevant provisions of the Information Technology Act and the Copyright Act in a harmonious manner.

Further, it was also held and observed that the remedy is not to target intermediaries but to ensure that infringing material is removed in an orderly and reasonable manner. The need for a balancing act between freedom of speech and privatised censorship was given credence. Accordingly, the court held that corrective measures by an intermediary, ie, a notice and take down procedure, is the right balance for allowing freedom of speech and expression and at the same time policing the unauthorised use of intellectual property.

This judgment has been a source of great respite to e-commerce players and intermediaries doing business in India, however, the last few years has also seen an increase in IPR violations and the Indian courts and especially the Delhi High Court has been quite proactive in adjudicating on these issues. While, in the above-mentioned case the Court emphasised the need for safe harbour protection to intermediaries who follow notice and take down procedure with due diligence when not knowingly hosting 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 unpunished.

The Court made it clear that when an e-commerce platform becomes an active participant, as opposed to merely being an intermediary, it will automatically lose safe harbour protection. Such immunity can be provided only to 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.

In the case of Luxottica Group SPA and Ors v Mify Solutions Pvt Ltd and Ors 2019(77) PTC 139(Del) the plaintiffs, right holders of various famous brands of eye-wear and sunglasses filed a suit against the defendants. It was learnt that the defendants were responsible for the sale of counterfeits on their website under the plaintiff’s famous trade mark OAKLEY. The Delhi High Court granted an ex-parte ad interim injunction, restraining the defendants from manufacturing, supplying, advertising and selling goods under the plaintiff’s trade mark or any deceptively or confusingly similar mark. Subsequently, in their defence, the defendants relied on their website as being merely an intermediary and a shopping portal and that no direct sales were attributable to them. The only issue that needed to be determined in this case was whether the website of the defendant(s) was an intermediary or not and, if so, to what effect?

The court observed that any online market place or e-commerce website which allows storing of counterfeit goods would be falsifying the mark. Any service provider, who uses the trade mark in an invoice, thereby giving the impression that the counterfeit product is a genuine product, is also falsifying the mark. Displaying advertisements of the mark on the website so as to promote counterfeit products would also constitute falsification. Enclosing a counterfeit product with its own packaging and selling the same or offering for sale would also amount to falsification. All these acts would aid the infringement or falsification and would bring the e-commerce platform/online market place outside the purview of immunity granted to intermediaries.

The presence or absence of the above factors would help determine whether the entity in question is an “intermediary” or not. In other words, the presence of any element which shows active participation could deprive intermediaries of the immunities. The Court then went on to peruse the user rules and policies of the website in question and noticed that there was no specific clause in respect of taking down the infringing goods upon receiving notice, or reports in respect of violation of intellectual property rights. The terms and conditions of the user agreement were also observed to be extremely vague and in some places were contradictory. It was also noted that the seller was not depicted in the screenshots.

After consideration of all the above, the Court held that the due diligence and care expected out of an intermediary, as required under Section 79 of the Information Technology Act, 2000 had not been met in this case. As a result, the Court held that the defendants’ website was not entitled to any immunity. It was also observed that even the invoice that was issued for the questionable sale, used the letter head of; this fact was admitted by the defendants and there was also no denial that the product was a counterfeit. As such, the Court held the defendants to be guilty of infringement of trade mark and copyright.

The strict approach by the Court towards e-commerce players has been adopted to stall piracy and counterfeiting. It is also aimed at curtailing trade mark infringement, of all kinds. This includes those cases of trade mark infringement where even genuine branded products are sold in the market, however, in “impaired” or altered conditions, in an unauthorised manner. The strict approach towards intermediaries has also taken into its ambit issues of tortious interference in contractual commercial relationships. This being said, the jurisprudence on these issues is still evolving and, on 31 January 2020, the Division Bench of the Delhi High Court set aside a detailed decision of a single judge in a set of combined cases which have assumed much importance and legal focus. This also raises questions on the due process to be followed while adjudicating on these issues, keeping in mind the impact of a decision on the intermediary’s business interests.

Last year, a single judge of 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 8 July 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 authorisation. 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 authorised to sell the products and the e-commerce platforms required no such authorisation 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 indicated 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 four issues, including: whether the Direct Selling Guidelines, 2016 are valid and binding on the defendants and if so, to what extent; whether the sale of plaintiffs’ products on e-commerce platforms violates its trade mark rights or constitutes misrepresentation, passing off and results in dilution and tarnishes the goodwill and reputation of its brands; 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; and 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. 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. 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 trade mark 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.

It was held that use of the trade marks by the sellers and the e-commerce platforms is violative of the plaintiff’s trade mark 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/tarnishing 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 between the buyer and seller, acting merely as a bridge between the two. 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 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 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.

The Court observed that the tort of inducement of breach of contract and tortious interference with contracts is a well-recognised 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 by the court that these e-commerce platforms were offering a refuge for parties breaching their contracts with the plaintiffs and this refuge itself constitutes inducement.

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 defendants in the above cases, particularly Amazon Seller Services Pvt Ltd, Cloudtail India Pvt Ltd and Snapdeal Pvt Ltd being aggrieved by the decision of the learned single judge, filed their appeals before the division bench of the Delhi High Court. In appeal, the division bench noted that in none of the suits was there any prayer for a declaration that Direct Selling Guidelines are law which bind the defendants and that they are enforceable. It was also noted that there was no prayer for a declaration that Amazon and Snapdeal were not intermediaries within the meaning of Section 79 of the Information Technology Act; nor were the suits framed either for passing off or for infringement in terms of the Trade Marks Act. So it was held that the specific findings of the single judge were contrary to the structure and frame of the suits. It was further noted that these findings gave the impression that they are final and conclusive in nature when they ought to have been prima facie or tentative, limited for the purpose of granting interim relief.

On the first issue, the division bench set aside the decision of the learned single judge that Direct Selling Guidelines are not merely advisory in nature but has the force of law. It was held and observed that such guidelines are advisory in nature as model guidelines, and are not law and as such, also not enforceable. On the second issue as well, the decision of the single judge was set aside. It was noted by the division bench that the question as to whether the goods were in fact tampered with could only be settled by examining evidence, since the report of the Local Commissioner did not indicate that he actually witnessed such tampering by the defendant(s).

It was noted that the facts revealed in the Local Commissioners’ reports were insufficient to arrive at conclusions regarding the impairment of products. Thus, the division bench observed that it was unable to concur with the observations of the single judge that the defendants could not invoke the principle of exhaustion under Section 30(3) read with Section 30(4) of the Trade Marks Act, 1999 or that the sale of the Plaintiffs’ products on e-commerce platforms violates their trademark rights, constitutes misrepresentation and passing off, and results in the dilution and tarnishing of the goodwill and reputation of the Plaintiffs’ brand.

On the third issue whether the defendants were intermediaries, the division bench noted it to be a matter of trial for which evidence needed to be examined. The division bench also observed that the value-added services provided by the defendants as online market places, do not dilute the safe harbour granted to them under Section 79 of the Information Technology Act. On the last issue of tortious interference, the division bench set aside the finding of the single judge and observed that in the absence of any contract between the plaintiffs and the defendants, mere knowledge on their part of the Code of Ethics of the Direct Selling Entities and the contractual stipulation imposed by such entities on their distributors, is insufficient to lay a claim of tortious interference. On a separate note, the division bench also made it clear that it disapproves the reasoning of the learned single judge in the case of Christian Louboutin SAS v Nakul Bajaj and Ors (supra).

It is evident from the above that the rapidly evolving jurisprudence on intermediary liability significantly impacts all e-commerce players. It remains to be seen what the future holds for the rights, immunities and liabilities of intermediaries in India and whether the Honourable Supreme Court would be occasioned to infuse finality on these contentious issues.

Trends & Developments Concerning Liability of Intermediaries in India, Trade Marks, India Chapter by Manisha Singh and Dheeraj Kapoor

1st published on Chambers & Partners, Practice Guides