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Amazon v. Amway: Managing Conflicts and a Case for Balancing Safeguards (Part 2)

Eashan Ghosh & Afzal B. Khan
10 Aug 2020 7:31 AM GMT
Amazon v. Amway: Managing Conflicts and a Case for Balancing Safeguards (Part 2)
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Eashan Ghosh & Afzal B. Khan

In Part 1 of this essay, we offered a background to the Amway claims and assessed the issue of consent of direct selling entities to subsequent third party sales of their products.

In Part 2, we explore a second issue: whether and under what conditions direct selling entities can oppose commercial dealing of their products by third party sellers under the considerably trickier statutory demands of the Trade Marks Act. We square off these competing legislative frameworks to present two possible outcomes in §6, before examining their resolution by the Amway rulings in §7.

§4 The Consent Requirement under Trade Mark Law

The consent requirement discussed in Part 1, §3 of this essay has a second dimension.

Sub-clause (3)(b) to Section 30 of the Trade Marks Act, 1999 extends a peculiar defence to product sellers. It permits them to sell or otherwise deal in products lawfully acquired by them, provided that the products have been put on the market by or with the consent of the proprietor whose trade mark is affixed on the products. In effect, it solves for the equivalent problem diagnosed by the Direct Selling Guidelines of sale of products to consumers from outside the authorized networks of the original or direct seller. The point of divergence, of course, is that, the platform for the action is trade mark infringement rather than a claim under consumer protection law.

Under Section 30, though, there is a further wrinkle. Sub-clause (4) to Section 30 is fashioned as an exception to sub-clause (3). It provides that a trade mark proprietor may oppose further dealings by the seller if it has "legitimate reasons" to do so, including but not limited to change or impairment of the product after it has been put on the market.[1] Since sub-clause (4) is an exception to a defence, its effect is of the right being asserted in the first instance. In other words, it may properly be viewed simply as an avenue for the original or direct seller to assert its rights over the product.

Taken together, sub-clauses (3) and (4) to Section 30 appear to put themselves in antagonism with sub-clauses (5) and (6) to Clause 7 of the Direct Selling Guidelines.

Closer inspection, however, demonstrates that this is not so.

Clause 7(5) offers a cause of action to an aggrieved consumer against a direct seller for failing to fulfill either purchase and delivery particulars [Clauses 7(5)(a) and (b)] or conditions to do with warranty, return or replacement [Clauses 7(5)(c) and (d)].

Under Section 30(4), the failure to fulfill such conditions could evidently fall within "legitimate reasons" to oppose the sale to the consumer. However, in this rendition, the cause of action would lie not with the consumer but with the original or direct seller only. This first seller may realize a cause of action against the second seller for trade mark infringement. This claim runs on the theory that the brand value residing in the trade mark affixed to the product is weakened by the "change or impairment" (or, indeed, other deficiency) in the product sold to the consumer, to the detriment of the trade mark proprietor.[2]

Therefore, while there is a slim possibility of the two causes under Clause 7(5) and Section 30(4) theoretically running in parallel on a single transaction, it is plain that they need not run into conflict.

Clause 7(6), meanwhile, asks the second seller to seek the prior written consent of the direct seller before offering for sale any product or service of such direct seller. By contrast, Section 30(3)(b) frames the consent requirement as a pre-condition or starting point built into the act of the product being put on the market, on which any further dealing by the second seller is contingent. Evidently, the potential conflict between the two centres on the consent requirement. Clause 7(6) requires the second seller to seek out this consent in advance of sale. Section 30(3)(b) requires merely for the second seller to lawfully acquire the product in advance of sale, after the trade mark proprietor has put it on the market or consented to doing so.

§5 The Kapil Wadhwa Ruling

Prior to the Amway cases, the field in this furrow of Indian trade mark law was held by a 2012 Delhi High Court ruling called Kapil Wadhwa v. Samsung Electronics.[3] It attached an explainer to the intricate scheme of legislation under sub-sections (3) and (4) to Section 30.

First, on a comparison with equivalent provisions in other jurisdictions,[4] it concluded that Indian law did permit second sales of legitimate products regardless of their origin.[5] However, more germane to our purpose, Wadhwa preserved a broad right of trade mark proprietors to challenge second sellers. It did so by identifying that, under Section 30(4), any alteration in the condition of a product between its first-sold state and its placement in the hands of consumer would raise a cause of action against the second seller.[6]

The Wadhwa Court went further. Dipping into a formidable body of America case law,[7] it volunteered an illustrative list of instances that could qualify as illegal alterations. These included differences in services, warranties, advertising, promotional efforts, packaging, quality control, pricing, product presentation, and the language of product literature accompanying the product. Compared with other jurisdictions which also consider the rights of the proprietor to be exhausted when the product is first put on the market, the sheer scope of the Wadhwa conditions is extraordinary.[8]

The breadth of these grounds of challenge to the second sale is critical to consumer protection law. In a free market, broader grounds for challenge ought to translate to a higher assurance of consumers purchasing genuine products. Narrower grounds for challenge do not necessary imply the converse,[9] but they can tie up such products in after-sales technicalities that considerably lessen their appeal to walk-in consumers.[10] On the other hand, liberally permitting second sales could offer a wider choice of products, in more markets, and possibly at lower prices, in addition to other benefits to consumers.[11]

§6 Two Possible Outcomes

This nervous balance drawn by Wadhwa now posed an important question before the Amway Courts. Here, the direct selling entities contended that their products bearing their trade marks were being advertised and sold, without their consent, on e-commerce platforms.

On its face, this suggested a violation of Clause 7(6) of the Guidelines at the door of the second sellers, for failing to seek the prior written consent of the direct selling entities.[12] If Clause 7(6) was attracted, the cause of action would lie in favour of the direct selling entities against second sellers.

However, applying a trade mark infringement lens to the same facts prompted a different conclusion. Presuming the direct selling entities put the products on the market upon their initial sale to their direct sellers, Section 30(3) would permit the second sellers to legally sell the products onwards to consumers. The only restrictions on the second sales would be on account of any change, impairment or other alteration to the product as sold, under Wadhwa.[13] If Section 30 was attracted, the cause of action in favour of the direct selling entities would accrue against second sellers only upon a Wadhwa violation. A claim against the direct sellers would also be available, but this would have to be a contractual claim.

§7 The Amway Resolution

On this subject, the Amway Single Judge highlighted three critical factual considerations.

First, the policies of the e-commerce platforms required sellers to undertake that they would not list or sell products without consent from the trade mark owners. Second, despite clear consumer protection laws to the contrary,[14] there was some evidence to suggest that some seller details on products listed on e-commerce platforms were missing or insufficient. This made it impossible to verify the authenticity of the products.[15] Finally, the contractual terms between the direct selling entities and their direct sellers were such that the latter's rights were conditional on direct sale to consumers. If they failed to execute sales to consumers, they would be powerless to prevent second sales on e-commerce platforms because stopping such sales would require them to exercise rights that had never incurred in their favour.[16]

The Amway Single Judge had little hesitation in ruling against second sellers on both Clause 7(6) and Section 30 grounds.

On both counts, the verdict rested on a useful and practical standard, drawn from European law.[17] It surmised that the act of putting products on the market had to be taken to mean a sale through which the trade mark proprietor had realized the economic value of its trade mark.[18] This, in turn, enabled a bright line of distinction: the sale of products to the direct sellers would not realize their economic value, but the sale of products to consumers would do so.

The finding had another consequence. It meant that the second sales could be opposed purely on Section 30(3) grounds, since the 'put on the market by the trade mark proprietor or with its consent' portion of Section 30(3)(b) was not met by the second sale. As such, it did not require direct selling entities to prove any change, impairment or other alteration of the products whatsoever under Section 30(4) to invalidate the second sale. (Nevertheless, the Single Judge did rule that the second sales, on these facts, fell foul of Wadhwa.[19])

On appeal, however, the Division Bench was unconvinced that treating the dispute under Section 30(3) was warranted at all. This was on account of the framing of the Plaintiffs' claim, which leaned on the enforcement of the Direct Selling Guidelines rather than setting up a case for violation of trade mark rights.

On balance, though it affirmed the Wadhwa conditions, the Division Bench left open the Section 30(4) issue. It reasoned that evidence of product tampering by the Defendants was a question of fact which would be best resolved at trial.[20]

***

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.

(The final part of this essay to be published tomorrow)

[1] This has strong parallels with the legal position in the European Union, embodied by Articles 5 to 7 of the First Council Directive 89/104/EEC of 21 December 1988 to approximate the laws of Member States relating to trade marks. Article 7(2) of this Directive, in particular, closely mirrors Section 30(4) of the Indian Trade Marks Act. As such, reference to European law has been of conspicuous assistance to Indian courts on Section 30(4) issues.

[2] Section 30(4) uses the words: "Sub-section (3) shall not apply where there exist legitimate reasons for the proprietor to oppose further dealing…in particular where the condition [of the products] has been changed or impaired after [the products] have been put on the market."

[3] 2013 (53) PTC 112 (Del)(DB).

[4] The Kapil Wadhwa Division Bench (at ¶44) compared the language in Section 30 with trade mark law provisions in the European Union, United Kingdom, Australia, Brazil, Turkey, Singapore, and Hong Kong.

[5] In trade mark terms, this is better diagnosed as the principle of exhaustion of rights: a legal line in the sand that divides an authorized first sale from an unauthorized second or subsequent sale(s) of the same product. It works on the theory that the value represented by the trade mark on a product is 'exhausted' by the revenue realized from its sale. However, opinions – and, indeed, legal systems – vary on when this exhaustion can be said to have occurred.

[6] The words "change or impairment" appearing in Section 30(4) to highlight such alteration, said the Court at ¶67, were "only a specie of the genus 'legitimate reasons', which genus embraces other species as well."

[7] See SKF USA v International Trade Commission 423 F.3d 1037 (2005, Fed Cir), Fender Musical Instruments v. Unlimited Music Center 35 USPQ 2d 1053 (1995), Osawa v. B&H Photo 589 F. Supp. 1163 (SDNY, 1984), PepsiCo v. Reyes 70 F.Supp 2d 1057 (CD Cal, 1999); Ferrerro USA v. Ozak Trading 753 F. Supp. 1240 (DNJ, 1991); Societe Des Produits Nestle v. Casa Helvetia 982 F.2d 633 (1st Cir, 1992), and Original Appalachian Artworks v. Granada Electronics, 816 F.2d 68 (2nd Cir, 1987).

[8] Owing to the close similarity of the equivalent exception to Section 30(4), the comparison with European Union law, again, is perhaps most apposite.

Early European case law on this subject is signposted by cases such as Hoffmann-La Roche v. Centrafarm [1978] ECR 1139, Centrafarm v. American Home Products [1978] ECR 1823, Pfizer v. Eurim-Pharm [1981] ECR 2913, Bristol-Myers Squibb v. Paranova [1996] ECR I-3457, Frits Löndersloot v. George Ballatine & Son [1997] ECR I-6227, Parfums Christian Dior v. Evora [1997] ECR I-6013, Mag Instrument v. California Trading Co [1998] ETMR 85, Silhouette International v. Hartlauer [1998] FSR 729, Sebago v. GB Unic [1999] 2 CMLR 1317, Pharmacia & Upjohn v. Paranova [2000] FSR 621, Sony Computer Entertainments v. Tesco [2000] ETMR 102, Zino Davidoff v. A&G Imports, Levi Strauss v. Tesco, Levi Strauss v. Costco [2001] ECR I-8691, Van Doren + Q v. Lifestyle Sports [2003] ECR I-3051, and Böhringer Ingelheim v. Swingward & Dowelhurst [2004] EWCA Civ 129.

What constitutes permissible repackaging and relabelling of products has long come to be identified as a thorny subject matter in Europe, prompting comment that it is an "area of law [which] has now come a maze of arcane rules which seem to be developed for their own sake rather than because they are justified by any fundamental trade mark reason." See Kitchin et al eds, Kerly's Law of Trade Marks and Trade Names (14th edn, 2005), at p. 550.

[9] Indeed, Wadhwa was ultimately decided in favour of the second seller. See Note 3, at ¶74.

[10] A good demonstration of this was provided in Wadhwa itself. The Delhi High Court upheld the second seller's freedom to offer after-sales services over the objections of the Plaintiff-Respondent, but then went on to specify – literally by dictation – what representations and warranties the second seller could advertise and offer with the product. See Note 3, at ¶74.

Several post-Wadhwa rulings have endorsed it in full without making mention of these limitations. See Microsoft v. Jayesh 2014 IV AD (Delhi) 571, Philip Morris Products v. Sameer 2014 (58) PTC 317 (Del), Philip Morris Products v. AK Singh MIPR 2014 (1) 357, Western Digital Technologies v. Ashish Kumar 2016 (68) PTC 554 (Del), and Patanjali Ayurved v. Masala King Exports Trading CS(COMM) 107/2019 (Delhi High Court, 18 March 2019), per Sanghi J.

[11] Indeed, the Plaintiff-Appellants in Wadhwa drew up a pros and cons chart that would not be out of place in a consumer law inquiry. See Note 3, at ¶62.

[12] Crucially, under the terms of this clause, a violation would implicate the second seller but not the e-commerce platform itself.

[13] Even here, the Defendants in Amway reasonably contended that minor forms of tampering ought not to be sufficient grounds for triggering Wadhwa and enabling the Plaintiffs to control the downstream distribution and sale of the products.

[14] See Section 86 of the Consumer Protection Act, 2019, Clause 7(5) of the Direct Selling Guidelines, 2016 and Rule 8(5) of the Draft Consumer Protection (Direct Selling) Rules, 2019.

[15] However, this was a point of some controversy, as the Amway Division Bench (at ¶134), sitting in appeal of this judgment, suggested that the Defendants' claim that these details were "clearly provided" on their platforms did "not appear to have been considered" by the Single Judge.

[16] Naturally, this also threw into grave doubt whether the products being advertised and offered for sale by the second sellers were, in fact, authentic. This was considered at length by the Amway Single Judge, at ¶77, 88, 98, 101, 189-190, 207-233, 279, 319-320.

An interesting point of comparison here is the decision in L'Oréal v. eBay International [2009] RPC 21, where a case similar to Amway's against Amazon had been brought against eBay in its capacity as an e-commerce platform. Ultimately, like the Division Bench opinion in Amway, the L'Oréal Court suggested that no liability ought to attach to the e-commerce platform. However, like the Amway Single Judge ruling, it supported, in this instance, the right of trade mark proprietors to oppose commercialization of tester products [for reasons akin to Section 30(3)] and unboxed products [for reasons akin to Section 30(4)].

[17] See Note 16, at ¶284-285, relying on Peak Holding v. Axolin-Elinor [2005] ETMR 75 (ECJ).

[18] Though the Amway Single Judge professed that the test emerges from Peak Holding, the rendition of the test in that case is somewhat different. Peak Holding pointedly found that exhaustion occurs solely by virtue of the act of the product being put on the market by the proprietor, and any other stipulation in the act of sale effecting the first putting on the market cannot preclude exhaustion. See Peak Holding, at ¶53-55.

[19] The judgment also concluded, more tenuously, that the actions of the e-commerce platforms themselves could be treated as trade mark infringement since they were, in effect, offering for sale infringing products without actual knowledge of their authenticity or compliance with the Wadhwa conditions. See Note 16, at ¶257-259, 262, 280-281.

[20] The reluctance of the Court to enter a finding on this point is disappointing but understandable. It observed that there were several discrepancies between the preliminary investigation and fact-finding reports that were to be individually answered by the e-commerce platforms in the various suits that had been combined in these appeals.

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