SpicyIP Fellowship 2019-20: Through the Looking Glass – Alice and the Wonders of the ‘Liability of Online Marketplaces’ in the Delhi HC

Image from here

We’re pleased to bring to you another guest post on the recent Delhi High Court decision in Amway & Ors. v. 1MG Technologies & Ors. by our Fellowship applicant, Arushi Gupta. Arushi is a 2nd year student at Maharashtra National Law University, Mumbai. This is her fourth submission for the Fellowship.

Eashan Ghosh’s guest post on the same decision, published last week, can be viewed here.

Through the Looking Glass: Alice and the Wonders of the ‘Liability of Online Marketplaces’ in the Delhi HC

Arushi Gupta

“With Great Power Comes Great Responsibility”. On 8^th July, 2019, the Delhi High Court embellished its landmark decision with these words. For Justice Pratibha M. Singh, these words were not fallow lands but watered by the wisdom in her decision.

The approach of the law towards intermediary liability is pertinent since only one other judgment has extensively dealt with it— Christian Louboutin SAS v Nakul Bajaj and Ors, also delivered by Justice Pratibha M. Singh. Thus, the present decision becomes interesting since the Indian jurisprudence on intermediary liability may be credited to a lone rider.

In the decision of 8^th July, 2019 (“Amway decision”), a batch of seven suits with overlapping issues was heard together. The Plaintiffs comprised Amway, Modicare and Oriflame. The Plaintiffs had instituted suits against the Defendants for violation of Direct Selling Guidelines, trademark infringement under Section 29 of the Trade Marks Act, 1999 and tortious interference with contractual relations. The Defendants comprised sellers; some were authorized distributors and others were third parties who had acquired goods through unauthorized channels, and e-commerce websites—Flipkart, Amazon, Snapdeal and 1MG. With respect to trademark infringement and intermediary liability, the Defendants raised a twin-fold defense:

1. The “use” of the trademark was protected under Section 30(3). It relates to the doctrine of natural exhaustion. Both raised this defense.
2. The actions of intermediaries fall under the safe harbor of Section 79 of the IT Act 2000.

The Plaintiffs prayed for a perpetual and mandatory injunction. However, this decision was limited to a suit for temporary injunction. Thus, the Amway decision, at present, is an interim relief.

The Plaintiffs sell their goods through a unique distribution channel, which is called a “Direct Sellers Contract”. Under this, authorized sellers distribute, promote and sell the goods. They have to comply with a strict standard called the “Code of Ethics” wherein one of the conditions is that the sellers must not sell goods on e-commerce platforms or to retailers. Apart from direct sellers, the Plaintiffs sell their goods online through their websites. Thus, the sale of products on e-commerce websites is a flagrant violation of law and the contract.

To this effect, the Court framed four legal issues:

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‟ brand?
3. Whether the e-commerce platforms are “intermediaries” and are entitled to the protection of the safe harbor provision under 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?

In this post, I would restrict my attention to Issue II and Issue III. To understand Issue II and Issue III, the Court bifurcated the judgment in the following fashion. I would follow the same:

1. Whether the actions of the intermediaries fall under Section 29 of the Trade Marks Act, as a “seller” under the provisions of the Act?
2. Whether the defense of “doctrine of first sale”, under the Section 30 of the Trade Marks Act, is available to the seller and the intermediaries?
3. Whether the actions of the intermediaries, in relation to the infringing activities of the sellers, fall under the safe harbor provisions of Section 79 of the IT Act?

Whether the Actions of the Intermediaries Fall Under Section 29 of the Trade Marks Act, As A “Seller” under the Provisions of the Act?

First, I am not dealing with an analysis of the activities of the sellers to fall under Section 29. For fairly obvious reasons, these actions fall under Section 29 since unauthorized use of a mark is violative of the rights of the proprietor. There is an express prohibition on sale on e-commerce websites. The goods were also tampered with. Further, the use took unfair advantage of the mark. Rather, it is the actions of the intermediaries that merit discussion, as it is (largely) uncharted territory.

Second, the Court contemplated whether the actions of e-commerce websites amount to “use” under Section 2(2)((c)) and “infringing use” under Section 29 by undertaking a detailed discussion on the span of its activities.

On the position of liability of e-commerce platforms and the doctrine of exhaustion, the Court held, “A perusal of Section 29 shows that while it is perfectly permissible for the seller of a product to use a trademark to signify the source of the products – if the products are genuine, it cannot at the same time, indulge in any conduct which would result in taking unfair advantage of the distinctive character of the mark. Further, if the use by the seller is detrimental to the reputation of the mark, the mark is stated to be infringed. Use of a mark in meta-tags or in advertising without the consent of the proprietor is also violative of trademark rights of the owner. Section 29(6) is categorical that if a person uses a mark or affixes the mark on the packaging, puts the product in the market or stocks them or offers them for sale or even uses the mark in advertising, it would constitute infringement. To be able to use the mark for purposes such as packaging, offering for sale, selling, use in advertising, etc., consent of the proprietor would be required.

Section 29(8) also makes it clear that if any advertising of a mark takes unfair advantage of the mark or is detrimental to its distinctive character even without a sale-taking place, there is infringement. While Section 30(3) could come to the aid of a person who wishes to sell the goods in the market or otherwise deal in them, if the products are genuine, the same does not mean that there can be unhindered and unbridled use of the mark in the form of affixation on the packaging, exposing the products for sale, offering the goods for sale, using in advertising, especially when there is a grave apprehension that the products are being impaired and their condition is being changed. Thus, changes in warranties, refund/return policies, changes in packaging, removal of codes of the products, and any other conduct that causes damage to the reputation of the mark and is likely to undermine the quality of the mark would constitute ̳impairment.”

The Court held that in the following situations, the responsibility of the selling of the goods would fall squarely on platforms: (1) advertisements, (2) offers of sale, (3) meta-tags, and (4) promotions. For instance, under the program “Fulfillment by Amazon”, Amazon is “consummating the sale on behalf of its sellers”. Lastly, offline, platforms provide logistical support, warehouses, cataloguing services, etc. Thus, the Court held that the “use” squarely falls within Section 2(2)((c)).

The aforementioned is crucial. The Court has identified key activities undertaken by the platforms, which make it a seller under the Act.

Whether the Defense of “Doctrine Of First Sale”, under Section 30 of The Trade Marks Act, is Available to the Seller and the Intermediaries?

Section 30 (3) Where the goods bearing a registered trade mark are lawfully acquired by a person, the sale of the goods in the market or otherwise dealing in those goods by that person or by a person claiming under or through him is not infringement of a trade by reason only of—

(a) the registered trade mark having been assigned by the registered proprietor to some other person, after the acquisition of those goods; or

(b) the goods having been put on the market under the registered trade mark by the proprietor or with his consent.

(4) Sub-section (3) shall not apply where there exists legitimate reasons for the proprietor to oppose further dealings in the goods in particular, where the condition of the goods, has been changed or impaired after they have been put on the market.

First, the decision discusses the meaning of “put on the market”. The Court referred to Kerly’s, which states it as, “released into the market by an act of sale” and the ECJ in Peak Holding v. Axolin-Elinor, which held “A sale which allows the trade mark proprietor to realize the economic value of his trade mark exhausts the exclusive rights conferred…” In light of these broad principles, the Court concluded that the goods were “put on the market” when they entered the Direct Selling Market.

Second, the Court settled the plea of the Defendants regarding the defense of first sale. It held that the defense does not apply. The acts of the Defendants squarely fall within the exception of Section 30(4). Thus, the Court held, “The sale on e-commerce platforms of the Plaintiffs‟ products would be infringement of the Plaintiffs‟ trademark rights as the Defendants are also using the Plaintiffs‟ trademarks, their trade names for promotion of the products, sale of products, display of products, and advertising of the products in a manner that is detrimental to the distinctive character and reputation of the Plaintiffs’ marks.”

Whether the Actions of the Intermediaries, In Relation to the Infringing Activities of the Sellers, Fall Under the Safe Harbor Provisions of Section 79 of the IT Act?

This part of the decision is (naturally) problematic. First, conceptually, after platforms have been constituted as “user” of the trademarks and primarily liable under Section 29, only actions that serve to make them secondarily liable, i.e., for the acts of the sellers, must be assessed. For this purpose, it has to be ascertained whether they are active or passive platforms. If it is an active platform, it cannot enjoy safe harbor.

Second, the Court itself recognized that the nature of the intermediary must be factually assessed. It did not provide a factor test. To my mind, it was inclined to recognize online marketplaces as “active” intermediaries.

Third, since this is an interim order, the Court left the determination of the nature of the intermediary for adjudication at trial. Rather, it conclusively ascertained the requirements for an intermediary to enjoy safe harbor.

The Court held that to get protection under safe harbor, the intermediary must abide by the “due diligence efforts” delineated in the Act, Rules and its own policy. This is the “bare minimum” that the platform must do.

Intermediary Liability: Clarity on the Law Till Now  

This decision follows Christian Louboutin—extensively covered on the blog, here and here. While Louboutin laid the (shaky) foundation, Amway (shakily) builds. I would refrain from criticism, since this is but only an interim order. Rather, I would attempt to summarize the legal position till now.

In Louboutin, the Court had held that the intermediaries must comply with “due diligence” efforts as laid down in the statute as well as its own policies. These must not be “paper policies” and have to be implemented in order to qualify for safe harbor protection. The Court continues to subscribe to this view. However, till now, it has not offered insight on the meaning of “due diligence” but seemingly held the view that compliance with the statute is necessary but not sufficient.

Unlike in Louboutin, the Court made no reference to “conspiring, aiding, abetting or inducing” the unlawful act, as contemplated under Section 79(3)(b). For now, this leaves a void.

Lastly, once again, the Court leaves the problematic discussion of “actual knowledge” alone. In line with Shreya Singhal v. UOI (“Shreya Singhal”), knowledge means a Court order. However, in MySpace v Super Cassettes (“Myspace”), the Delhi High Court had held that Shreya Singhal is limited to Article 19(2). It buttressed its position by relying on the view of the Division Bench in Kent RO Systems Ltd. v. Amit Kotak. In Amway, the Court relied on the ratio of Myspace.

While determining the liability of the platforms under Section 29(6), the Court made a damning statement, “Amazon is specifically using the Plaintiffs‟ mark Amway in advertising, without actual knowledge that the said products being sold on its platform are genuine or not and whether they are tampered with or not.”

This is a misstep. Let’s wait and see if Alice wades through the IP landscape and finds us a solution, after all.