Direct selling dilemma: Decoding the Delhi High Court ruling and its impact on e-commerce firms

The Delhi High Court ruled in favour of the direct selling companies and held that, although called ‘guidelines’, the restrictions on online sale were binding executive instructions that have the impact of law. The court noted that e-commerce companies had been repeatedly notified of the guidelines by direct selling companies and government agencies such as the Food Safety and Standards Authority of India (FSSAI) and the Department of Consumer Affairs. Despite such cautionary notices, the court observed that the defendant platforms had chosen not to comply with the guidelines.

Direct selling companies argued that unauthorised sale of their products on e-commerce platforms amounted to trademark infringement, resulting in the dilution of the reputation and goodwill of their respective brands. In support of this argument, these companies alleged that the defendant e-commerce platforms routinely listed products that used the name and marks of the direct sellers in a deceptive manner. Direct sellers also alleged that e-commerce entities and merchants deliberately re-packed, re-labelled, or otherwise tampered with sealed products before delivering them to consumers. They submitted that online merchants often sold products on a non-returnable/non-refundable basis, which contradicted their own consumer-friendly return and refund policies.

In their defence, the e-commerce players argued that direct sellers had no right to control or regulate the sale of their respective products after selling them to their distributors/resellers. They relied on Section 30 of the Trademarks Act, 1999, which codifies the doctrine of international exhaustion and creates an exception to the general rules of trademark infringement. The doctrine of exhaustion states that once a given product has been sold under the authorisation of the owner of the intellectual property therein, the rights of such owner are exhausted. The owner can no longer exercise his rights over those goods.

Again, the court ruled in favour of the direct selling companies. The court held that, in the present case, the passing of ownership over goods was conditional upon the buyer adhering to the terms and conditions imposed by the manufacturer. The court further held that a defence under Section 30 of the Trademarks Act, 1999 would apply only where there is no change or impairment to the nature or quality of the products. Notably, the court observed that any change in the contents of a product, the related services, and warranties or applicable refund and return policies would constitute impairment. Based on reports submitted by several court-appointed commissioners, the court found blatant and extensive tampering of products by the defendant companies. It therefore concluded that the allegations of the direct selling entities were warranted, and that the sale of direct sellers’ products on e-commerce platforms constituted, among other things, trademark infringement.

While discussing the liability of the defendant e-commerce platforms, the court noted that these entities are not mere passive intermediaries, but are, in fact, massive facilitators. The court discussed in detail the plethora of support and ancillary services provided by these e-commerce platforms to sellers. However, it did not elaborate on whether the provision of such value-added services renders these entities ineligible for the protection conferred on intermediaries. Instead, the court simply observed that this issue would need to be adjudicated at trial.

Nevertheless, the court analysed the existing legal framework governing intermediary liability and concluded that the defendant e-commerce entities would need to implement the policies and regulations that prohibit unlawful or infringing content. The court emphasised that as these policies are not mere ‘paper policies’, they need to be implemented in earnest. The court held that should e-commerce entities fail to implement and comply with their own policies, they would be taken out of the ambit of the safe harbour provided by the Information Technology Act, 2000.

On this issue, the Delhi High Court deviated from the ruling of the Supreme Court of India in Shreya Singhal v. Union of India by implying that e-commerce entities had knowledge of the impugned products, although these entities had not received court orders with this information. The court instead relied on notices issued by direct sellers and State authorities (i.e. FSSAI and Ministry of Consumer Affairs) to attribute such knowledge to the defendants. While this appears to be a major departure from the Shreya Singhal judgement, this verdict is unlikely to result in a significant change in India’s intermediary liability regime. When read holistically, the court’s ruling appears heavily influenced by the active and involved role that e-commerce entities play in re-labelling or tampering with products. It doesn’t appear that the court intends for this higher threshold to apply to all intermediaries.

The court did not specifically hold that a company that provides value- added services (such as packing, logistics and payment collection) would be disqualified from protection as an ‘intermediary’. However, the court clearly tried to distinguish between a passive intermediary and an intermediary that provides various support services or is otherwise actively involved in underlying transactions. This approach could be indicative of a growing reluctance of courts to treat all intermediaries and platforms alike.

Whatever the outcome of the case, the court’s interim ruling should warn all marketplace providers to sit up and take notice. These businesses would be best advised to re-evaluate the extent of ancillary support services that they provide to merchants. Any illicit activities, even if ancillary in nature, may weaken the overarching intermediary status sought to be enjoyed by e-commerce platforms.