2020 (1) TMI 1631 - HC - Law of Competition

Infringement of trademark - privity of contract - Injunction on Appellants from selling the goods of the Respondents who claim to be Direct Selling Entities ( DSEs ) in terms of the Model Framework for Guidelines on Direct Selling dated 26th October 2016 - commercial disputes falling within the purview of the Commercial Courts Act 2015 or not - Lifting the corporate veil - whether the DSGs were law and whether suits could have been filed by the Plaintiffs for enforcing the DSGs? Are Direct Selling Guidelines (DSGs) law? - HELD THAT - Since this Court is of the view that the learned Single Judge was in error in overlooking the aforementioned legal position and in holding the DSGs to be law the Court does not consider it necessary to examine the further question whether the DSGs are violative of any fundamental right under Article 19 (1) (g) of the Constitution and whether the restriction placed on the said right by them are beyond the purview of Article 19 (6) of the Constitution - The Court therefore leaves it open to the Appellants/Defendants to challenge the Direct Selling Rules under the CPA once they are notified as being violative of Section 30 of the TM Act and Sections 419 and 420 of the Sale of Goods Act 1930 ( SOGA ) Sections 23 and 27 of the Indian Contract Act 1872 ( ICA ) and the Competition Act 2002. There is no occasion for the Court in the present case to further examine these issues - The Court sets aside the findings of the learned Single Judge on the first issue that the DSGs are law and that as such they are enforceable. Trademark issues - Whether sale of Amway Oriflame and Modicare products on e-commerce platforms amounted to infringement of trademark passing off and misrepresentation etc.? - HELD THAT - Under Section 19 of the SOGA upon a contract for sale for a specific property the property and the goods are transferred to the buyer. The Code of Ethics framed by Amway itself states that once the sale takes place the title in the products is transferred to the buyer i.e. the ABOs on its first sale. Once the title passes to the ABO no condition could be further imposed upon the buyer. Clause 7 (6) of the DSGs imposes one such condition on the buyer that the buyer cannot resell the product online. With such a condition not being an enforceable law vis-a-vis the third party even if it were to be considered binding as such by means of the contract between Amway and the ABO Amway can at best seek to proceed against the ABO for breach of such condition. This is because there is no privity of contract between Amway or for that matter between Oriflame and Modicare with the online platforms. Lifting the corporate veil - HELD THAT - There could not have been a presumption that Cloudtail and Amazon are one and the same entity and that the obligations of the Cloudtail would bind Amazon and vice versa. There is merit in the contention of Amazon that by permitting private entities like Amway to restrict downstream distribution of genuine goods by enforcing contractual stipulations against third parties the judgment of the learned Single Judge recognizes a monopoly that can be exercised in perpetuity. The decision in Kapil Wadhwa 2012 (10) TMI 1246 - DELHI HIGH COURT - HELD THAT - The above passages in Kapil Wadhwa v Samsung Electronics (supra) are a complete answer to many of the contentions raised by Amway Modicare and Oriflame in the present case where it was held that the principle of exhaustion cannot be invoked by the Appellants/Defendants In the considered view of this Court the learned Single Judge was in error in distinguishing the decision in Kapil Wadhwa v Samsung Electronics (supra) by holding that the principle of exhaustion cannot be invoked by the Appellants/Defendants. Reports of the LC - HELD THAT - Where there are multiple sellers the details of the offers of all such sellers are said to be available. Such information it is submitted is generated directly by the said sellers and not modified by the Defendants in any manner. Only the buyer s information is withheld from the seller until after the sale has concluded a policy which is in the interest of the buyers insofar as it prevents the misuse of the buyers information by the sellers. These aspects do not appear to have been considered by the learned Single Judge. These too are matters in respect of which clearer answers would emerge hopefully at the conclusion of the trial - The Court is therefore unable to concur with the view expressed by the learned Single Judge that the Defendants could not invoke the principle of exhaustion in terms of Section 30 (3) read with Section 30 (4) of the TM Act 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. These findings are outside the purview and scope of pleadings in the suits and unsustainable in law. Are the Appellants intermediaries? - HELD THAT - The exemption under Section 79 (1) of the IT Act from liability applies when the intermediaries fulfil the criteria laid down in either Section 79 (2) (a) or Section 79 (2) (b) and Section 79 (2) (c) of the IT Act. Where the intermediary merely provides access it has to comply with Section 79 (2) (a) whereas in instances where it provides services in addition to access it has to comply with Section 79 (2) (b) of the IT Act. Under Section 79 (2) (c) of the IT Act the obligation of the intermediary is that in terms of the Intermediary Guidelines it publishes its policies for the information and convenience of its users. The enforcement of such a policy is another matter. Clause 17 of Amazon s policy prohibits sale on its platform of unauthorised products. This Clause 17 was put forth with the object of enabling Amazon to refuse listing of a product where for instance it originates from a country that does not follow international exhaustion. Amazon seeks to point out that this does not apply to India where the principle of international exhaustion is in fact followed. It is contended that Clause 17 cannot be interpreted to empower Amway to seek restrictions on the sale of its products on Amazon s online platform. This Court is unable to concur with the learned Single Judge that Amazon Snapdeal and Cloudtail would have to meet the diligence requirement failing which the benefit of the safe harbour provision i.e. Section 79 of the IT Act would not be available to them. Tortious interference - whether the platforms are guilty of tortious interference with a contractual relationship which incidentally is the central plank of Modicare s case? - HELD THAT - In the first place the tort of inducement to breach of contract necessitates that there be a contract in the first place between the online platforms and the DSEs. 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. It was incumbent on the part of the Plaintiffs to demonstrate active efforts on the part of or contracts entered into by the Appellants/Defendants to make a viable case for tort of inducement to breach of contract. No case for interim injunction - HELD THAT - Of the three elements to be considered for the grant of interim injunction the Plaintiffs in the considered view of this Court failed to establish that they have a prima facie case particularly since the DSGs could not be considered to be binding law. Interestingly the ABOs/direct sellers alleged to have committed the breach of the DSGs were not impleaded as Defendants - Even on the test of balance of convenience the learned Single Judge has only returned such a conclusion without actually examining whether the grant of injunction would have an adverse impact on online marketing. What was not considered is whether the requirement of online marketing entities to seek prior consent of the DSEs would not deprive the consumer of exercising the choice to buy such products on online platforms while ensuring free flow of trade. As regards irreparable loss and injury there was no empirical data placed before the learned Single Judge by the Plaintiffs in support of their contention that they had suffered huge losses. This again was a matter of evidence and not inference - the Court is unable to concur with the learned Single Judge that the three elements for the purposes of grant of interim injunction have been fulfilled in the present case. The impugned judgment of the learned Single Judge is hereby set aside. The applications seeking interim injunction in the suits stand dismissed - Appeal allowed.

Summary

Issues Involved:
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 the Plaintiffs' products on e-commerce platforms violates the Plaintiffs' trademark rights or constitutes misrepresentation, passing off, and results in dilution and tarnishes the goodwill and reputation of the Plaintiffs' brands?
3. Whether e-commerce platforms are "intermediaries" and are entitled to protection under the safe harbour provided in Section 79 of the Information Technology Act and the Intermediary Guidelines of 2011?
4. Whether e-commerce platforms such as Amazon, Snapdeal, Flipkart, IMG, and Healthkart are guilty of tortious interference with the contractual relationship of the Plaintiffs with their distributors/direct sellers?
5. What is the relief to be granted?

Issue-wise Detailed Analysis:

1. Whether the Direct Selling Guidelines, 2016 are valid and binding on the Defendants and if so, to what extent?

The Direct Selling Guidelines (DSGs) were framed as a model framework and advisory in nature, intended for State Governments to adopt into law. They were not issued as "executive instructions" and were not enforceable as law. The DSGs were traced back to the Consumer Protection Act, 1986, and their advisory nature was confirmed by a subsequent communication from the Department of Consumer Affairs. The learned Single Judge erroneously treated the DSGs as binding law, overlooking their advisory nature. The Court concluded that the DSGs were not enforceable as law and set aside the findings of the learned Single Judge on this issue.

2. Whether the sale of the Plaintiffs' products on e-commerce platforms violates the Plaintiffs' trademark rights or constitutes misrepresentation, passing off, and results in dilution and tarnishes the goodwill and reputation of the Plaintiffs' brands?

The learned Single Judge's finding that the Plaintiffs were owners of their respective trademarks was not supported by the pleadings in the suits. The suits were not framed as trademark infringement or passing off actions. The principle of exhaustion under Section 30 of the Trade Marks Act, 1999, was applicable, allowing further sale of lawfully acquired goods. The reports of the Local Commissioners did not conclusively establish tampering of goods by the Defendants. The Court concluded that the findings on trademark infringement, passing off, and misrepresentation were outside the scope of the pleadings and unsustainable in law.

3. Whether e-commerce platforms are "intermediaries" and are entitled to protection under the safe harbour provided in Section 79 of the Information Technology Act and the Intermediary Guidelines of 2011?

Section 79 of the Information Technology Act provides safe harbour protection to intermediaries, including those providing value-added services. The learned Single Judge misinterpreted Section 79 by restricting it to "passive" intermediaries. The exemption under Section 79 applies if intermediaries comply with the criteria laid down in Section 79 (2) and (3). The issue of whether an entity is an intermediary can only be decided after a trial. The Court found that the learned Single Judge's findings on intermediaries were premature and unsustainable.

4. Whether e-commerce platforms such as Amazon, Snapdeal, Flipkart, IMG, and Healthkart are guilty of tortious interference with the contractual relationship of the Plaintiffs with their distributors/direct sellers?

The tort of inducement to breach of contract requires the existence of a contract between the online platforms and the Direct Selling Entities (DSEs). The mere knowledge of the DSEs' Code of Ethics and contractual stipulations was insufficient to establish tortious interference. The Plaintiffs needed to demonstrate active efforts by the Defendants to induce a breach of contract. The Court concluded that the findings on tortious interference were premature and required evidence to be established at trial.

5. What is the relief to be granted?

The Court found that the Plaintiffs failed to establish a prima facie case, particularly since the DSGs were not binding law. The balance of convenience and irreparable loss and injury were not adequately considered by the learned Single Judge. Consequently, the applications seeking interim injunctions were dismissed, and the appeals were allowed with costs awarded to the Appellants.

Conclusion:

The impugned judgment of the learned Single Judge was set aside, and the applications seeking interim injunctions in the suits were dismissed. The appeals were allowed, and costs were awarded to the Appellants.