ISPs and Direct Selling Entities at loggerheads over US$ 1.7 billion opportunity

ISPs and Direct Selling Entities at loggerheads over US$ 1.7 billion opportunity

The Direct Selling Entities (“DSEs”) Amway, Oriflame and Modicare that have a specific business model are embroiled in dispute with leading e-tailers, Amzon, Snapdeal, Cloudtail alleging the sale of their products on e-commerce platforms are unauthorized and without their consent. The Single Judge found in favour of DSEs and passed a common order in interlocutory applications restraining Amazon, Cloudtail and Snapdeal   from selling the goods of the DSEs. The said order was challenged by way of six appeals (to the Division Bench), which were heard together as they involved a common question of law. The post briefly summarizes the Single Judge order and focuses on Appellate Bench order that took a completely different view on Direct Selling Guidelines (“DSGs”) and ISP liabilities. Indian direct selling industry accounts for INR 13,000 crore (approx. US$ 1.7 billion) business and directly or indirectly employs around 5.7 million people as of the FY 2018-19. Thus the ruling has legal and economic ramifications.

The Single Judge framed the following main issues:

a)        Whether the DSGs, 2016 are valid and binding on the Defendants and if so, to what extent?

b)        Whether e-commerce platforms are “intermediaries” and are entitled to protection under the safe harbour provided in Section 79 of the Information Technology Act, 2000 (“IT Act”) and the Intermediary Guidelines of 2011?

After hearing the arguments of all the parties involved, the Single Judge concluded that:

(i)        The DSGs are binding in nature as they do not impinge on any fundamental rights of either the sellers or the platforms. The DSGs having been authenticated by a Gazette notification are binding on e-commerce platforms and sellers on such platforms.

(ii)       While the court was of the view that the issue of an entity being an intermediary or not is subject to adjudication at trial, it went on concluding that the Defendants were not merely passive players but in fact, “massive facilitators” inasmuch as they were providing warehousing, logistical support, packaging, delivery services, payment services, collection gateways, etc. That the Defendants would have to meet the “due diligence” requirement, failing which the benefit of safe harbour provision under Section 79 of the IT Act would not be available to them.

The Appellate Bench set aside the Single Judge order and allowed the appeals while making the following observations:

1.         Are the DSGs law?

• As the title of the document “Advisory to State Governments/Union Territories: Model Framework for Guidelines on Direct Selling“ explains, it is clear that the DSGs were not meant to be treated as law themselves, much less binding law. It was only to be a model framework and “advisory” in nature. It was for the State Governments to adopt it into law.
• Merely because the DSGs are notified in the Gazette, they do not attain the status of “law”. The source of the power to frame such guidelines is traceable only to the Consumer Protection Act (“CPA”). With the CPA, 2019 itself not having been notified, these draft guidelines could not have attained the character of “binding Rules” under the CPA, 2019, or for that matter, even under the older law (CPA, 1986).

2.         Are the Appellants intermediaries and entitled to safe harbour provision under Section 79 of the IT Act?

• The value-added services provided by the Appellants as online marketplaces do not dilute the safe harbour granted to them under Section 79 of the IT Act.
• The court found merit in Amazon’s contention that merely because it packs and ships the product does not mean that the sale is consummated by Amazon. That when the sale of product is “fulfilled by Amazon”, all it means is that Amazon guarantees the quality of the product by rendering logistical support services, which include storage, packaging and delivery.
• That if the intermediary follows certain minimum standards and has safety measures on its site like the Appellants have observed in the present case, it shall act as an affirmative defenseto claim such exemption under Section 79 of the IT Act, as held in Myspace Inc. v. Super Cassettes Industries Ltd. case.

Our comments

This is a preliminary ruling, and the last word on ISP liabilities is yet to be written and will be subject to trial with oral and documentary evidence to be led by parties. Several cases are pending in courts on this issue at various stages. Thus clarity may emerge in the near future. The DSEs business with this ruling may take a hit as distribution/availability of products on e-commerce portals or mobile apps at unwarranted discounts seems to strike at their very existence. On a different but related note, it seems this ruling being pre Covid-19 may in short to medium term favour DSEs, as personal contact and delivery is likely to be avoided by consumers for some time. Thus DSEs may need online portals’ help in distribution, sale, and delivery!

ISPs and Direct Selling Entities at loggerheads over US$ 1.7 billion opportunity

The Direct Selling Entities (“DSEs”) Amway, Oriflame and Modicare that have a specific business model are embroiled in dispute with leading e-tailers, Amzon, Snapdeal, Cloudtail alleging the sale of their products on e-commerce platforms are unauthorized and without their consent. The Single Judge found in favour of DSEs and passed a common order in interlocutory applications restraining Amazon, Cloudtail and Snapdeal   from selling the goods of the DSEs. The said order was challenged by way of six appeals (to the Division Bench), which were heard together as they involved a common question of law. The post briefly summarizes the Single Judge order and focuses on Appellate Bench order that took a completely different view on Direct Selling Guidelines (“DSGs”) and ISP liabilities. Indian direct selling industry accounts for INR 13,000 crore (approx. US$ 1.7 billion) business and directly or indirectly employs around 5.7 million people as of the FY 2018-19. Thus the ruling has legal and economic ramifications.  

The Single Judge framed the following main issues:

a)        Whether the DSGs, 2016 are valid and binding on the Defendants and if so, to what extent?

b)        Whether e-commerce platforms are “intermediaries” and are entitled to protection under the safe harbour provided in Section 79 of the Information Technology Act, 2000 (“IT Act”) and the Intermediary Guidelines of 2011?

After hearing the arguments of all the parties involved, the Single Judge concluded that:

(i)        The DSGs are binding in nature as they do not impinge on any fundamental rights of either the sellers or the platforms. The DSGs having been authenticated by a Gazette notification are binding on e-commerce platforms and sellers on such platforms.

(ii)       While the court was of the view that the issue of an entity being an intermediary or not is subject to adjudication at trial, it went on concluding that the Defendants were not merely passive players but in fact, “massive facilitators” inasmuch as they were providing warehousing, logistical support, packaging, delivery services, payment services, collection gateways, etc. That the Defendants would have to meet the “due diligence” requirement, failing which the benefit of safe harbour provision under Section 79 of the IT Act would not be available to them.  

The Appellate Bench set aside the Single Judge order and allowed the appeals while making the following observations:

1.         Are the DSGs law?

·       As the title of the document “Advisory to State Governments/Union Territories: Model Framework for Guidelines on Direct Selling” explains, it is clear that the DSGs were not meant to be treated as law themselves, much less binding law. It was only to be a model framework and “advisory” in nature. It was for the State Governments to adopt it into law.

·       Merely because the DSGs are notified in the Gazette, they do not attain the status of “law”. The source of the power to frame such guidelines is traceable only to the Consumer Protection Act (“CPA”). With the CPA, 2019 itself not having been notified, these draft guidelines could not have attained the character of “binding Rules” under the CPA, 2019, or for that matter, even under the older law (CPA, 1986).

2.         Are the Appellants intermediaries and entitled to safe harbour provision under Section 79 of the IT Act?

·       The value-added services provided by the Appellants as online marketplaces do not dilute the safe harbour granted to them under Section 79 of the IT Act.

·       The court found merit in Amazon’s contention that merely because it packs and ships the product does not mean that the sale is consummated by Amazon. That when the sale of product is “fulfilled by Amazon”, all it means is that Amazon guarantees the quality of the product by rendering logistical support services, which include storage, packaging and delivery.

·       That if the intermediary follows certain minimum standards and has safety measures on its site like the Appellants have observed in the present case, it shall act as an affirmative defense to claim such exemption under Section 79 of the IT Act, as held in Myspace Inc. v. Super Cassettes Industries Ltd. case.

Our comments

This is a preliminary ruling, and the last word on ISP liabilities is yet to be written and will be subject to trial with oral and documentary evidence to be led by parties. Several cases are pending in courts on this issue at various stages. Thus clarity may emerge in the near future. The DSEs business with this ruling may take a hit as distribution/availability of products on e-commerce portals or mobile apps at unwarranted discounts seems to strike at their very existence. On a different but related note, it seems this ruling being pre Covid-19 may in short to medium term favour DSEs, as personal contact and delivery is likely to be avoided by consumers for some time. Thus DSEs may need online portals’ help in distribution, sale, and delivery!