E-Commerce Companies And The Intermediary Conundrum

In the hullaballoo following the release of Press Note 2 of 2018 by the Department of Industrial Policy and Promotion (DIPP), the confusions unleashed by the Louboutin Case, seem to have been overlooked.

The Court also held that other factors like preventive measures undertaken by a marketplace to ensure that no unlawful acts are committed by the sellers on its marketplace and due diligence conducted by it on the sellers would also be considered...

The release of Press Note 2 of 2018 (Press Note 2) by the Department of Industrial Policy and Promotion (DIPP) took the Indian e-commerce sector by storm resulting in speculations on the impact of Press Note 2 and consequent potential exodus of foreign players from the e-commerce market. In this hullaballoo, attention seems to have shifted from the upheaval caused by the judgement passed by the Delhi High Court (Court) in the case of Christian Louboutin SAS v Nakul Bajaj & Ors CS (COMM) 344/2018 (Louboutin Case). 

Until the Louboutin Case, e-commerce companies viewed themselves as ‘intermediaries’ under the Information Technology Act, 2008 (IT Act) which only ‘receives, stores or transmits a particular electronic record or provide service with respect to the record’. Consequently, they took shelter under the safe harbour provision, available to an intermediary, under Section 79 of the IT Act in cases pertaining to product liability, unlawful acts committed by sellers on the marketplace and trademark infringement. 

The Louboutin Case, however, introduced for the first time in India, the concept of an ‘active’ marketplace and a ‘passive’ marketplace, and held that the safe harbour provision of the IT Act would only be available to a passive marketplace (i.e. marketplaces that are mere conduits or passive transmitters of records or information). To determine if a marketplace is an active participant, the Court laid down an indicative list of services, like providing logistics support services, product listing services, product review services, call centre assistance, payment gateway services, etc., which if undertaken by a marketplace, could render the marketplace an active participant and consequently, the safe harbour exemptions granted to the e-commerce platform as an intermediary under Section 79 of the IT Act would not be available. As the Court succinctly opined “……any active contribution by the platform or online market place completely removes the ring of protection or exemption which exists for intermediaries under Section 79”. 

The Court also held that other factors like preventive measures undertaken by a marketplace to ensure that no unlawful acts are committed by the sellers on its marketplace and due diligence conducted by it on the sellers would also be considered while determining the applicability of the safe harbour provision.

The views in the Louboutin Case were upheld by the Court in 3 other cases namely Luxotica Group S.P.A. & Another v Mify Solutions Pvt Ltd & Ors., Skullcandy Inc v Shri Shyam Telecom & Ors and L’Oreal v Brandworld & Anr.

By introducing the distinction between active and passive participants, the Louboutin Case may have created complications for e-commerce players who are providing services such as warehousing, logistics, payment gateway, collection of payments, call centre services, etc., all of which are well within the scope of permissible support services that an e-commerce player may undertake under Press Note 2. Therefore, even though an e-commerce player may be FDI complaint, it may not get the benefit of the safe harbour provisions under the IT Act.

Another noteworthy development that was introduced in the e-commerce sector was the issuance of the draft rules vide Gazette Notification dated 28 August 2018 to amend the Drugs and Cosmetics Rules, 1945 (Draft E-Pharmacy Rules). The Draft E-Pharmacy Rules intend to regulate the sale of medicines through e-commerce and, amongst other things, mandate the e-commerce marketplace to provide various support services to the sellers such as pharmacist helpline services, return of product services, complaint redressal services, etc. If the Draft E-Pharmacy Rules are notified, an e-pharma marketplace will always be an active participant and will not be eligible for safe harbour exemptions.

Given that the National E-Commerce Policy is still at the draft stage, the Government must try to address this conundrum by incorporating appropriate measures in the final National E-Commerce Policy as the same would balance out or resolve the ambiguity that has come to the fore now, one which may have serious implications for a sector which is already in a state of flux.

The views of the author(s) in this article are personal and do not constitute legal / professional advice of Khaitan & Co. For any further queries or follow up please contact us at editors@khaitanco.com.


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