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Amazon v. Amway: Managing Conflicts and a Case for Balancing Safeguards (Part 1)

Eashan Ghosh & Afzal B. Khan
9 Aug 2020 3:42 AM GMT
Amazon v. Amway: Managing Conflicts and a Case for Balancing Safeguards (Part 1)
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Summary

The Amazon v. Amway dispute before the Delhi High Court in January 2020 raised some fascinating legal conflicts. At its conclusion, the Court rejected Amway's claim for an interim injunction, thus undercutting a detailed judgment in Amway's favour by the court of first instance. Since the dispute implicated the high-profile direct selling and the e-commerce industries, the outcome was bound to be a significant one.

The decision is of considerable interest to Indian law, not least because direct selling and e-commerce frequently intersect at the same set of consumers. In this three-part essay, we attempt perhaps the most exhaustive discussion yet of the Amway cases.

This discussion is in service of two contentions of our own.

First, we suggest that, even though the frameworks regulating direct selling and e-commerce may run into conflict, the dividing line of legality under both is similar. It is drawn, under both frameworks, by safeguards to secure consumers against market hazards such as product impairment and enforcing warranties. This, we argue, is a balance already familiar to Indian law and can be imported across Indian legislation with little loss of effect.

Second, we contend that this cross-disciplinary approach would be ideal for India. It would benefit direct sellers, permit e-commerce platforms to facilitate rather than interfere with online marketplaces, and, ultimately, promote better outcomes for consumers.

§1 Introduction

The industries of direct selling and e-commerce in India are undoubtedly on the upswing.

Their momentum is, in large part, because the two industries are close complements in the Indian marketplace. A 2013-14 estimate valued the size of the Indian direct selling industry in excess of US$ 1.2 billion.[1] The Indian e-commerce market, meanwhile, has followed an even more expansive trajectory, and was reckoned in 2017 to be worth US$33 billion.[2] The challenge for Indian law enforcement is to keep up with this breathless growth.

Run-ins between e-commerce and consumer protection law in particular have become more common in recent years.[3] It is, therefore, natural that legal attention has been diverted towards the direct selling industry. A whirl of recent legislative activity has attempted to legally ring-fence marketing, sale and distribution of products and services through a network of direct sellers. These have come to be popularly known under the umbrella expression "direct selling."[4]

In effect, direct selling shortens the traditional chain of distribution between sellers and purchasers. Instead of defined and sclerotic roles of producer and consumer, purchasers turn distributors through the exploitation of direct selling networks. These networks are then leveraged for advertising, for recommendations to other purchasers and, ultimately, for executing physical sales.

In September 2016, a notification by the Indian Ministry of Consumer Affairs, Food & Public Distribution published the Direct Selling Guidelines, 2016.[5] Though this is not the point of origin for Indian efforts to regulate the direct selling industry, it is a fine point of departure.

The Direct Selling Guidelines ("the Guidelines" hereinafter) carry the promise of much-needed clarity of instruction to sellers in an increasingly crowded direct selling marketplace.[6] Notably, they contain strong restrictions on misleading, false or deceptive trade and recruiting practices. These bind not just direct selling entities in their interactions with existing or prospective direct sellers[7] but also these direct sellers themselves.[8]

Two more provisions of the Guidelines call our attention at this time. Both are found under Clause 7 of the Guidelines, which appear under the marginal heading 'conduct for the protection of the consumer'.

Sub-clause (5) to Clause 7 binds direct selling entities to provide consumers upon purchase with information, including the name of the purchaser and seller, the delivery date of products or services, procedures for returning the products, and information regarding the warranty of the products and their exchange / replacement in case of defect.[9]

Immediately following it, sub-clause (6) to Clause 7 states:

"Any person who sells or offers for sale, including on an e-commerce platform / marketplace, any product or service of a direct selling entity must have prior written consent from the respective direct selling entity in order to undertake or solicit such sale or offer."

(emphasis added)

The cumulative effect of these provisions is appreciable. They extend traditional consumer rights – such as privity and security of purchase, product information, return and warranty, and grievance redressal – to purchases made from the direct selling model.

A second set of developments of note on this subject arrived in the latter half of 2019. This was marked by the signing into law of the Consumer Protection Act, 2019, followed soon after by the publication of the Draft Consumer Protection (Direct Selling) Rules, 2019.[10]

This 2019 reboot of the Consumer Protection Act has limitations, but it does benefit from a clarity of purpose.

Parliamentary discussions on the subject in July-August 2019 flagged the enforcement of consumer rights and, specifically, of recall, refund and return of faulty products as an important goal of the new Act.[11] They also deliberated in depth on whether, under this Act, consumers were adequately protected against damaged or deficient products especially from State service providers,[12] and whether stricter penalties should be introduced for supplying damaged or fake products.[13] There were also some misgivings over e-commerce platforms escaping liability for products purchased on their platforms,[14] and the need to secure the rights of consumers against them.[15]

The latter point in particular would gain prominent billing in the Amway cases.

Also of interest is the dedication in the 2019 Act of a robust substantive chapter to product liability actions, which can be initiated against product manufacturers (Section 83-84),[16] service providers (Section 83 and 85), or sellers (Section 83 and 86).[17] The extensive liability of product sellers under Section 86, in particular, piques our interest for two reasons.

First, it covers an exceptionally broad range of acts by a product seller who is not a product manufacturer. This provision makes it plain it offers a cause of action to consumers specifically against third-party sellers. This is of tremendous significance in the direct selling industry as well as for transactions conducted on e-commerce platforms, since it offers consumers a recourse against an entity other than the manufacturer.

Second, from a qualitative standpoint, it safeguards consumers from non-manufacturing faults in transactions concluded on an 'as is where is' basis. In fact, the provision makes explicit mention of post-manufacture product alterations and modifications, add-on warranties, and reasonable care in relation to product assembly, inspection and maintenance prior to sale.[18] Each of these are fashioned as grounds for consumers to initiate claims against product sellers.

As we shall see, these grounds are not just intrinsically valuable to aggrieved consumers but they bring consumer claims at par with causes of action afforded to brand owners, trade mark proprietors and manufacturers against product sellers in trade mark law. Securing this parity is deeply significant. It permits consumers to independently move complaints for unsatisfactory purchases rather than having to rely on rightsholders to bring legal action against sellers of their products.

With this legislative backdrop and with consumer protection considerations firmly in the foreground, we will now navigate through the key issues raised by the Amway cases in the rest of this essay.

§2 The Amway Claims

The Amway cases arose out of a thicket of lawsuits instituted by Amway India Enterprises and other direct selling entities against several e-commerce platforms and sellers.

Of particular interest to us are seven suits instituted before the Delhi High Court: five instituted by Amway in September-October 2018,[19] and one each by Modicare and Oriflame in February 2019.[20] Since common questions arose, the suits were heard together by a Single Judge as the court of first instance, which ruled in favour of the Plaintiffs in July 2019.[21] On appeal, this ruling was partly set aside by a Division Bench in January 2020.[22]

The dispute was driven by the direct selling entities. As Plaintiffs, they objected to the fact that several products originating from them or their authorized direct sellers were being advertised and offered for sale, without their authorization or consent, on various e-commerce platforms. It also emerged that the sale listings were being placed on the e-commerce platforms by independent sellers. Further, there were doubts about the condition of the products, if not their authenticity, at the point of final sale to consumers.[23]

This automatically presented the direct selling entities with two potential causes of action.

The first and most immediate was for clear violation of the Direct Selling Guidelines, most notably Clauses 7(5) and 7(6) detailed above. The second, interestingly, was for trade mark infringement. This option was opened up by the Plaintiffs' contention that sales by third party sellers without their consent amounted to unauthorized use of the trade marks affixed by the Plaintiffs onto their products.[24]

§3 The Question of Direct Seller Consent

The first hurdle before the Amway Single Judge, therefore, was of the applicability of the Direct Selling Guidelines.

The approach of the Single Judge in assessing the question was ideal in tone. It offered generous consideration for the special circumstances and contractual obligations baked into the direct selling industry. On the substance of whether the Guidelines would attach, the decision returned a clear finding.

Notwithstanding their nomenclature, the Guidelines were seen to have all the trappings of a general statutory rule: one which was not merely advisory but had the force of law. As a result, the Single Judge entered a strong finding for the Plaintiffs in favour of the applicability of the Guidelines to these facts.[25] Its upshot was that e-commerce platforms would be bound by the consent requirement under Clause 7(6).

The Division Bench, however, ruled in the opposite direction.

It held that a Gazette notification, by itself, was insufficient to give the Guidelines the force of law. This, said the Court, was because the Guidelines themselves were not executive instructions supplementing the Consumer Protection Act. Thus, they had to be considered as advisory and not binding.[26]

Even so, the Division Bench judgment acknowledged that, once notified, the Guidelines could create difficulties. Pointedly, the judgment identified that the written consent requirement – present in Clause 7(6) of the Guidelines and mirrored in Rule 8(6) of the Draft Consumer Protection (Direct Selling) Rules, 2019 – may come into conflict with other elements of the Plaintiffs' case under the Trade Marks Act and the Information Technology Act.

Finally, the Division Bench expressed surprise that it was direct selling entities such as the Plaintiffs (rather than the government) that were seeking the enforcement of the Guidelines against third parties (rather than "against those who might be bound by" the Guidelines).[27]

This is not just a terse treatment of the Guidelines but, in this context, it is also a false flag. Clause 7 of the Guidelines, very much at issue in these proceedings, illustrates the point.

Sub-clause (5), we may recall, offers a cause of action to consumers against direct selling entities for violation of certain guarantees. Similarly, sub-clause (6) is specifically framed to strengthen the hand of direct selling entities to act against online sellers, to better guarantee genuine products and services to consumers. Nowhere in the architecture of these sub-clauses are there conditions restricting their applicability to specific categories of litigants. The characterization of the Guidelines by the Division Bench as being so restricted is therefore without foundation.

In sum, the judgment is non-committal on the applicability of the Guidelines to future cases.[28]

***

Eashan Ghosh is a practitioner and consultant specializing in Indian intellectual property law. He is the author of Imperfect Recollections: The Indian Supreme Court on Trade Mark Law, and writes about Indian intellectual property law at: https://medium.com/@eashanghosh.

Afzal B. Khan is an advocate practicing in intellectual property law and commercial disputes before the Delhi High Court.



[1] Hindu Business Line Bureau, "India's Direct Selling Industry may reach Rs 64,500 cr by 2025: Report" <https://www.thehindubusinessline.com/economy/macro-economy/indias-direct-selling-industry-may-reach-rs-64500-cr-by-2025-report/article7961914.ece>.

Federation of Indian Chambers of Commerce & Industry, "Report on Direct Selling Industry in India: April 2013", available at <http://ficci.in/spdocument/20237/report-mark.pdf>

[2] Rajya Sabha Parliamentary Debates: Official Report (Floor Version), 6 August 2019, Vol. 249, No. 34, p. 32, per Mr KC Ramamurthy, MP.

[3] This is picked up in Part 2, §7 of this essay. See also Matrimony.com v. Google 2018 CompLR 101 (CCI) and Indigo Airlines v. KR Debbarma (2020) I CPJ 63 (SC).

[4] Clause 1(6) of the Direct Selling Guidelines, 2016, Section 2(13) of the Consumer Protection Act, 2019, and Rule 2(1)(f) of the Draft Consumer Protection (Direct Selling) Rules, 2019 each set out broadly ad idem definitions of "direct selling."

[5] The notification, identified under, envisioned these Direct Selling Guidelines being operationalized federally, and carried with it a request to state governments to "kindly take necessary action to implement" the Guidelines.

Notification F No 21/18/2014-IT (Vol II): 09 September 2016, available at: <https://consumeraffairs.nic.in/sites/default/files/file-uploads/direct-selling/Direct%20Selling%20Guidelines%20Final%20_0.pdf>

[6] The 2016 Guidelines were welcomed by several voices in the direct selling industry, including by the CEO of Amway India. This latter fact would make Amway's decision to sue multiple e-commerce platforms and direct sellers under its terms extremely apropos.

The Hindu, "Centre Issues Model Guidelines on Direct Selling: 12 September 2016", <http://www.thehindu.com/business/Industry/centre-issues-model-guidelines-on-direct-selling/article9100956.ece>

[7] Clause 3(7) of the Guidelines.

[8] Clause 5(6) of the Guidelines.

[9] These conditions are set out successively in Clauses 7(5)(a), (b), (c) and (d) of the Guidelines.

[10] Notification F No J-10/1/2019-CPU: 11 November 2019, <https://consumeraffairs.nic.in/draft-rule>.

However, what the Draft Consumer Protection (Direct Selling) Rules offered in terms of endeavour, they lacked in originality. Key provisions of these Rules are identical in every respect to the Direct Selling Guidelines, 2016. [The point is borne out particularly starkly by Clauses 7(5) and 7(6), quoted above, which are identical to Draft Rules 8(5) and 8(6) of the 2019 Draft Rules.] This would be brought to the attention of the Amway Court on appeal, which conceded that the entire body of the 2019 Draft Rules "almost entirely replicates" the 2016 Guidelines. Thus, unfortunately, there is little to be parsed from a discussion of these Rules. Therefore, we proceed hereinafter with reference only to the Guidelines, secure in the knowledge that the 2019 Draft Rules mirror them every step of the way.

This notification also circulated the Ministry's Draft Consumer Protection (E-Commerce) Rules, 2019, which also contain several points of interest. However, since they were not directly at issue in the Amway cases, we have opted to make mention of them here and no further.

[11] The pushback against this view, of course, was that it was uncertain whether the 2019 Act included enough procedural circuit-breakers to ensure that consumers would benefit from, rather than labour under, the consumer litigation process.

Lok Sabha Parliamentary Debates, First Session: 30 July 2019, 17th Series, Vol. IV, p. 35-37, per Mr BDP Rao, MP, and p. 53, per Dr K Veeraswamy, MP.

[12] See Lok Sabha Parliamentary Debates above, at p. 45-48, per Dr MKV Prasad, MP and p. 94-95, per Ms SS Sule, MP.

[13] See Lok Sabha Parliamentary Debates above, at p. 40, per Dr GR Reddy, MP.

[14] See Lok Sabha Parliamentary Debates above, at p. 49-50, per Dr MKV Prasad, MP, p. 78, per Mr SS Ulaka, MP, p. 96, per Ms SS Sule, MP, p. 111, per Mr AM Ariff, MP, and p. 126-127, per Mr PR Kumar, MP.

See also Rajya Sabha Parliamentary Debates above, at p. 32, per Mr KC Ramamurthy, MP, p. 80, per Dr A Yagnik, MP.

[15] See Lok Sabha Parliamentary Debates above, at p. 64, per Ms Pratima Mondal, MP.

[16] The liability of product manufacturers includes critical grounds such as deviation from manufacturing specifications [Section 84(1)(c)] and failure of the product to conform to express warranties [Section 84(1)(d)].

[17] Ms Sarangi, MP, speaking in support of the legislation, described the inclusion of product liability claims as a "wonderful thing".

See Lok Sabha Parliamentary Debates above, at p. 104, per Ms A Sarangi, MP.

[18] These grounds are set out in Sections 86(b), (c) and (e) respectively.

[19] These suits were docketed as CS(OS) 410/2018 Amway v. 1MG (instituted 27 August 2018), CS (OS) 453/2018 Amway v. Adinath (14 September 2018), CS (OS) 480/2018 Amway v. Pioneering (26 September 2018), CS (OS) 531/2018 Amway v. Flipkart (16 October 2018), and CS (OS) 550/2018 Amway v. Bright Lifecare (29 October 2018).

[20] These suits were CS (OS) 75/2019 Modicare v. Amazon Seller Services (05 February 2019) and CS (OS) 91/2019 Oriflame v. Dinender Jain/Amazon Seller Services (13 February 2019).

[21] Amway India Enterprises v. 1MG Technologies 2019 (79) PTC 425 (Del).

[22] Amazon Seller Services v. Amway India Enterprises 2020 (81) PTC 399 (Del)(DB). The underlying appeals were classified on the Delhi High Court docket as FAO(OS) 133/2019, 134/2019, 135/2019, 141/2019, 142/2019 and 157/2019.

[23] The facts are captured in summary here, as they were the cause of much disagreement between the two Amway Courts. We introduce more relevant factual material during our discussion of the rulings in Part 2 of this essay.

[24] The curiosity here arose not from the cause of action itself, which was perfectly valid, but from the framing of the Plaintiffs' claim for relief. The Amway Division Bench would eventually conclude that the Plaintiffs failed to adequately plead a case of trade mark infringement. See Note 22, at ¶102-107.

[25] "The fact that the Guidelines have been in operation since 2016, the same having been repeatedly notified to e-commerce platforms, who have chosen not to challenge them and the broader public/consumer interest behind the said Guidelines sought to be safeguarded, persuade this Court to hold that they are binding in nature," said the Single Judge. To find otherwise, she felt, would leave Direct Selling Entities "with no remedies to enforce a binding law." See Note 21, at ¶173-174.

See also Vestige Marketing v. Flipkart Internet (2020) I AD (Delhi) 568.

[26] "The Plaintiffs appear to have jumped the gun in not waiting for the law to be formally made and enforced," concluded the Court. See Note 22, at ¶88.

[27] See Note 22, at ¶91.

[28] However, it does recognize in passing the potential conflict between Clause 7(6) on one hand and the trade mark infringement defence under Section 30 of the Trade Marks Act, 1999 together with the accessibility of safe harbour classification to e-commerce platforms under Section 79 of the Information Technology Act, 2000 on the other. See Note 22, at ¶88.

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