Direct Selling Business Model – Bane or Boon?

Aparna Venkat

Associate, Surana & Surana International Attorneys

An increasing number of companies now rely on e-commerce strategies for selling and reaching out to customers. Online channels eliminate the need to physically run a shop. This pattern brings together companies that offer products with different segments of customers who can potentially buy the said products. On one hand, customers benefit from higher accessibility, and on the other hand, companies benefit from a cheap and easy to maintain sales channel. In other word, it is an “Online Supermarket”.

However, the question which many companies are confronted with is to whether host the online shop by themselves or to go for a retail marketplace like Amazon. Both options have certain disadvantages – while hosting includes big efforts in managing the supply chain activities like shipping, payment, and warehouse management, retail marketplaces may limit the customization of the online presence or put pressure on the sales margin. Therefore, e-commerce platforms which allow companies to manage their online shop as well as all their supply chain activities, are currently trending. This trend has also seeped into the Direct Selling Model. The Direct Selling Model is a business model in which the sales of products or services generate revenue to the Direct Selling Entity through a network of salespeople who directly sell the products or services to customers.

In the online B2C business of the Direct Selling Model, the goods of the Direct Selling Entity [a company which distributes and provides its products and services to the consumer without (involving) the participation of intermediaries involved in the traditional channel of sale] are offered on e-commerce platforms by Direct Sellers [a person or entity that is entitled to buy and/or sell the products of the Direct Selling Entity and further entitled to recruit other Direct Sellers]. However, this has now begun to cause disruptions for the Direct Selling Model which has led to several trademark infringement litigations between the Direct Selling Entities (DSEs) and e-commerce platforms.

In the recent combat between the DSEs and e-commerce platforms in the leading case of Amway India Sellers Services Pvt. Ltd. and Ors. Vs Amazon Seller Services Pvt. Ltd. and Ors., the Divisional Bench of the Delhi High Court has now reversed the judgment of the Single Judge and favored e-commerce platforms by declaring that selling products of DSEs online without the prior consent of the Direct Selling Entity does not amount to trademark infringement.

A worm’s eye view of the two conflicting judgments passed by the Delhi High Court will be captured and analyzed in this write up which earnestly attempts to uphold the underlying principle of ‘ubi jus ibi remedium’ i.e. ‘where there is a right, there is a remedy’.

Brief Facts of the case:

Amway is a wholly-owned subsidiary of Amway Corporation, now known as Alticor Inc., headquartered at Ada, Michigan, USA. Amway is engaged in the manufacture and distribution of its healthcare, wellness, cosmetic, and home products through the Direct Selling Business Model (‘DSBM’).

Amway Corporation is stated to be a member of the World Federation of Direct Selling Associations (‘WFDSA’) and is stated to operate in more than 100 countries and territories worldwide. Explaining the DSBM, Amway states that such a model offers an “unparalleled opportunity” to Indian customers “to own and operate their own business by enrolling themselves as a Direct Seller” with Amway and sell its “high-quality consumer products on a principal-to-principal basis under a Direct Seller Contract”. It is the founder member of the Indian Direct Sellers Association (‘IDSA’) which is stated to be an “autonomous self-regulatory body for the direct selling industry in India”.

In the year 2017, Amway learnt that its products were being sold on Amazon and other e-commerce platforms. The said products that were being sold by Amway’s direct sellers were alleged to be either tampered products or counterfeits. On 22nd September, 2017, Amway sent a Cease and Desist notice to Amazon, asking it “to remove reference to any statement/advertising/display of ‘Amway products’ from its website. In retort, Amazon denied Amway’s contentions and emphasized that it merely provided an online platform for sale of various consumer goods and products by different registered sellers/vendors; that it did not monitor or control the transactions occurring on its website or mobile application, and that Amway could initiate action against its vendors/sellers, who were engaged in selling Amway products online without its authority or consent or selling spurious and counterfeit products under its name. It further proclaimed that it is merely an intermediary and is liable to be exempted from any liability under the Information Technology Act, 2000.

Amway, in its pleadings, submitted before the Delhi High Court that it did not authorize or permit these e-commerce platforms to sell its products online as was required under Clause 7(6) of the Direct Selling Guidelines, (DSG) 2016.

The following issues were framed by the Delhi High Court and adjudged:

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 harbor” 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, 1MG and Healthkart are guilty of tortious interference with the contractual relationship of the Plaintiffs with their distributors/ direct sellers?

Summary of the Judgment dated July 08, 2019 delivered by Justice Pratibha M. Singh.

(i) The Direct Selling Guidelines have been framed in terms of the legal procedure, and are binding in law. They have been issued and notified in terms of Article 77 of the Constitution of India and it is the only document that regulates the business of Direct Selling;

(ii) The Defendants, i.e. the e-commerce platforms, were found guilty of infringing the trademarks of the Plaintiffs i.e. the DSEs, causing dilution/tarnishment of the said trademarks, passing off, and misrepresentation; (under Sections 29(6) and 29(8) of the Trade Marks Act, 1999 and the same was further concluded based on the reports submitted by the Local Commissioner that showcased large scale tampering);

(iii) The Defendants were not merely passive players but in fact, “massive facilitators” inasmuch as they were providing warehousing, logistical support, packaging and delivery services; the bare minimum that the Defendants are required to do to avail the exemption under Section 79(2)(c) of the IT Act, would be to observe due diligence required under Section 79(2)(c);

(iv) The continued sale of the products of the Plaintiffs on the e-commerce platforms without their consent, results in inducement of breach of contract, and tortious interference with contractual relationships of the Plaintiffs with their distributors;

(v) The balance of convenience lies in the favour of the Plaintiffs; the online platforms were unable to establish that the products of the Plaintiffs sold thereon were “genuine and not tampered with or impaired”.

Side Note: It is vital to note that the impugned judgment of the learned Single Judge was passed in seven suits, five of which, i.e. CS (OS) 410/2018, 453/2018, 480/2018, 531/2018 and 550/2018, were filed by Amway and one each, CS (OS) 75/2019 and 91/2019, were filed by Modicare and Oriflame respectively.

Excerpts of Judgment dated January 31, 2020 delivered by Justice S. Muralidhar and Justice Talwant Singh.

Issue 1: At the outset, it was noted that this issue was erroneously framed and was outside the purview of the subject matter. No prayer to that extent was made in the pleadings seeking the Court to declare and enforce Direct Selling Guidelines, 2016 (DSG) as a binding law.

The Single Judge had ruled that the said guidelines are to be considered a law under Article 13 of the Constitution by virtue of it being notified in the Official Gazette. The Divisional Bench emphasised that the title of the manuscript clearly states that it is an “Advisory to the State Governments/ Union Territories: Model Framework for Guidelines on Direct Selling”, thus making it clear that the said guidelines do not have a statutory character and therefore cannot be enforced through courts. The Court also noted that the Single Judge had crucially overlooked the fact that these were not in the form of “executive instructions” and consequently observed that Clause 7(6) of these ‘model guidelines’ is also purely advisory.

The Court also observed that any doubt in this regard stands dispelled by the communication dated 11th November, 2019 issued by the DoCA in the Ministry of Consumer Affairs under the subject “Rules to be notified under the Consumer Protection Act, 2019(CPA, 2019) – Comments from the stakeholders on draft rules-Reg”. This has come as a result of the CPA, 2019, which was published in the official gazette on 9th August, 2019.

It is further noteworthy to mention here that the Court found that a comparison of the draft of Consumer Protection (Direct Selling) Rules, 2019 with the DSG shows that the former almost entirely replicates the latter. Rule 8 (6) of the draft Rules, for instance, is a verbatim reproduction of Clause 7 (6) of the DSG. The CPA, 2019, itself is yet to become operational, as it is awaiting the formulation of the Rules thereunder.

With the above being said, the findings of the Single Judge regarding the first issue have been set aside.

Issue 2: The Division Bench further pointed out that it was erroneous on the part of the Single Judge to adjudge the trademark issues allegedly involved in the absence of a specific pleading to that extent. Regardless, the Bench noted that the Plaintiffs to the suit were not proprietors of the trademarks but the said trademarks were held by their parent companies incorporated abroad.

The Division Bench relied on the judgment in KapilWadhwa Vs. Samsung Industries and reiterated that India follows the Principle of International Exhaustion. It means that once a good is lawfully acquired, the rights over the said goods vests in the buyer. The Division Bench further recorded in its findings that, Amway itself had a “Code of Ethics” which stated that once the product has been sold to the Direct Seller, no further condition can be imposed. Therefore, there was no trademark infringement. With respect to Section 30(4) of the Trade Marks Act, 1999, the Division Bench ruled that there existed no prima facie evidence pertaining to misrepresentation or passing off of the trademark via which the impugned dealings on the e-commerce websites could be opposed.

With the above being said, the findings of the Single Judge regarding the second issue have also been set aside.

Issue 3:The Division Bench ruled that the aim of Section 79 of the Information Technology Act, 2000 is to protect the intermediaries from incurring liability due to acts of third parties. In terms of the said section, 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, as laid down by the Single Judge. It rather encompasses both ‘passive’ and ‘active’ intermediaries who either merely aid in information sharing and/or those who provide services, so long as they do not interfere in the transaction as provided under Section 79.

The Court further observed that according to Section 79(1), any intermediary that complies with the provisions mentioned in Sections 79(2) and 79(3) shall not be liable for any third party information, data, or communication link made available or hosted by him. Specific reference must be made to Section 79(2)(b) of the IT Act which provides that, to gain safe harbor protections, the intermediary must not (i) initiate the transmission, (ii) select the receiver of the transmission, and (iii) select or modify the information contained in transmission and pursuant to Section 79(3), must observe due diligence while discharging its duties.

The Intermediary Guidelines 2011 lists down the due diligence obligations of the intermediaries under Rule 3(1) of the Rules. It states that an intermediary must publish its policies for the information of the users. In this regard, Amazon’s policy was brought into purview, in which Clause 17 stated that, Amazon shall prohibit sale on its platforms of ‘unauthorized products’. In light of the Principle of Exhaustion, the impugned products were not unauthorized per se, because after the first sale, Amway had lost its right to regulate further sales.

The Division Bench also took into account that Amazon was not an active facilitator and had no role to play in the sales process. Thus, Amazon was in compliance with Section 79 and should be granted protection under the “Safe Harbour” provision.

With the above being said, the findings of the Single Judge regarding the third issue have also been set aside accordingly.

Issue 4: The Single Judge had ruled that the responsibility of the e-commerce companies and entities is to ensure that it does not encourage or aid the breach of contract between the DSEs and its Direct Sellers. The Single Judge further observed that since the platforms are allowing for the Direct Sellers to sell the products without quality control or without disclosing their complete details, they are aiding in the breach of contract between the DSEs and its Direct Sellers.

The Division Bench observed that 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. Further, it was accepted that even using the facilities offered by these platforms is entirely voluntary. It is 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. In the absence of such evidence, a conclusion contending that there is an inducement to breach contract is at best a matter of evidence, and not of inference.

With the above being said, the findings of the Single Judge regarding the fourth issue have also been set aside.

Other observations made by the Divisional Bench:

> The Amway Business Owners/ Direct Sellers alleged to have committed the breach of the DSG have not been impleaded as Defendants.

> The Direct Selling Entities are entitled to file suits against their Direct Sellers, if there exists a grievance.

> In due course of the adjudication, the Divisional Bench has on numerous occasions mentioned that an extensive review of facts and evidence can be ascertained only post trial.

The Division Bench further held that it is unable to concur with the decision of the Single Judge, even on the test of balance of convenience. Consequently, it was ruled that no case for interim injunction was made out and the said applications seeking interim injunctions stand dismissed accordingly.

With the ongoing digital transformation, many companies choose to sell their products and services online. It enables easiness and flexibility. A way of directly selling products to the targeted customer segment allows companies to tighten the customer relationship by providing custom content. The customer experience is becoming more and more important to keep up with fast-changing customer perceptions. Thus, the order of the day is to accept and tackle the nuances of the digital era.