The Division Bench of the Delhi High Court, comprising of Justice S. Muralidhar and Justice Talwant Singh, has overturned an order from a Single Judge of the Delhi High Court, which had restrained platforms such as Amazon and Snapdeal from selling goods of Direct Selling Entities like Amway, Modicare and Oriflame.

Amazon Seller Services Private Limited (represented by Saikrishna Rajgopal), Cloudtail India Private Limited (represented by Gurukrishna Kumar) and Snapdeal Private Limited (represented by Rajshekar Rao) had appealed the order.

This is a significant judgment for all intermediaries, given that both the courts and the government are imposing greater “due diligence” obligations on intermediaries. The court, in the latest order, has said that:

  • Section 79 of the IT Act governs both passive and active intermediaries, and doesn’t distinguish between them so as far as the availability of safe harbour provisions are concerned.
  • The Division Bench judgment in Myspace vs Super Cassettes says that Section 79 of the IT Act is not an “enforceable provision”, but merely provides an “affirmative defence” to entities which fulfill the criteria of being intermediaries.
  • Section 79 of the IT Act is meant to ensure that the liability for non-compliance and/or violation of law by a third party, that is, the seller is not fastened on the online market place.

The issues under consideration in the case

1. Permission required, as per the Direct Selling Guidelines

Among the considerations in the previous order, to restrain the sale of products from direct selling companies on online platforms was the fact that as per Clause 7(6) of the Direct Selling Guidelines (DSG), both sellers and platforms were required to take consent of direct selling companies before selling such products online. The clause states that:

Any person who sells or offers for sale, including on an e-commerce platform/ marketplace, any product or service of a Direct Selling Entity must have prior written consent from the respective Direct Selling Entity in order to undertake or solicit such sale or offer.

The previous order had said that the gazetted DSG had the force of law, and thus were enforceable.

The Division Bench ruled that the Direct Selling Guidelines are not law, nor are they executive instructions, nor can they be traced back to a statute (because the Consumer Protection Act hasn’t been notified). “The mere fact that the FSSAI may have written to e-commerce platforms to comply with the guidelines would not make them law.”

The Court has left it open to the parties in question to challenge the Direct Selling Rules once they are notified. The Court also noted that Amway, Oriflame and Modicare sought enforcement of the DSG against third parties, and not against those who might be bound by the Direct Selling Guidelines, as and when it becomes law.

2. Trademark issues and product tampering

The previous order had ruled that in order for the platforms to use the companies’ trademark for displaying, advertising and offering for sale the disputed products, the products are required to be genuine. The Court relied on the reports of the local commissioners who inspected the premises of certain e-commerce platforms and noted that “there is a large scale of tampering of goods that is taking place”. This, it said, led to tarnishing of the companies’ marks, products and business.

The Division Bench, however, held that once the sale takes place, the title in the products transfers to the buyer, and no further condition can be imposed on the buyer. Even if there was a binding contract between Amway and its direct selling agents, at best, Amway can seek to proceed against a seller, and not the platform.

The Division Bench also re-examined the report from local commissioners, and said that from the four reports, it was unclear how it was concluded that Amazon or Cloudtail were tampering with Amway products. Additionally, “the Single Judge has failed to appreciate Snapdeal‘s submissions that unlike Amazon, it does not even engage in large-scale fulfillment‘ of orders, and consequently has very few storage and transportation facilities and barely comes into contact with the products sold on its platform.

3. Safe harbour protection and e-commerce platforms

The previous order had said that safe harbour protections do not apply to e-commerce platforms because they failed to fulfill the requirement of due diligence, while at the same time provided value added services and facilitation in terms of warehousing, logistics, packaging and delivery.

The Division Bench said that the previous order appears to have misinterpreted the IT Act in concluding that it is restricted to passive intermediaries.

“In terms of Section 79 of the IT Act, there does not appear to be any 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 Division Bench ruled that even though the platforms provide value-added services, this does not dilute the safe harbour granted to them under Section 79 of the IT Act. Section 2(1)(w) of the IT Act does envisage that such intermediaries could provide value-added services to third party sellers. This interpretation is sought to be buttressed by Press Note No. 2 issued by the Ministry of Commerce and Industry. In particular, reference is made to para 5.2.15.2.4 (vi), which reads as under:

“In marketplace model goods/services made available for sale electronically on website should clearly provide name, address and other contact details of the seller, post sales, delivery of goods to the customers and customer satisfaction will be responsibility of the seller.”

The Division Bench said that “There was no occasion for the learned Single Judge 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.”

4. Interference in a contractual relationship

The previous order had held that the continued sale of products on the platforms without the consent of the direct selling companies leads to the inducement of breach of contract between the companies and their distributors. This was, as the judgement noted, the central plank of Modicare’s case. The Division Bench held that the tort of inducement to breach of contract necessitates that there be a contract between online platforms and the Direct Selling Enterprises.

“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.”