Conundrum of Intermediary Liability in Light of Consumer Protection (E-Commerce) Rules

[By Megha Shaw and Mrunal Mhetras]

The authors are students at the WB National University of Juridical Sciences (NUJS), Kolkata.

The government of India has recently replaced the old Consumer Protection Act, 1986 with the new Consumer Protection Act, 2019 ( “CPA” ) that came into effect from 20th July 2020. Accordingly, the Ministry of Consumer Affairs, Food and Public Distribution introduced the  Consumer Protection (E-commerce) Rules, 2020 ( “Rules” ) on 23rd July 2020. These legal developments took place during a period of increasing reliance on E-commerce entities caused by the pandemic. The new Rules aim to protect the rights and interests of consumers in the digital age in order to curb unfair trade practices of the e-commerce entities. This post seeks to, firstly, shed light on the significant changes brought upon by these Rules; secondly, discuss the dilemma of exemption of liability of marketplace E-commerce entities under the Information Technology Act, 2000 ( “IT Act” ) , and lastly, the impact of these Rules on the prior settled position of law.

Highlights of Consumer Protection (E-Commerce) Rules

Scope and Applicability

 The CPA 2019 extends the scope of consumer protection to e-commerce businesses and online services as such changes were necessary to expand the realm of consumer protection to digital consumers. The new E-commerce Rules apply to all goods and services bought or sold digitally, all models of E-commerce, all forms of E-commerce retail, and all foreign entities selling to Indian consumers.[1] These rules are expressly made applicable to online service providers as well. Hence it is clear that it also includes service providers such as cab-hailing or sharing companies, event management or ticket vending platforms, food delivery companies, content streaming platforms, etc. Thus, it thoroughly encompasses goods as well as services available online.

Obligations of Platforms

The Rules have imposed certain duties and liabilities on the marketplace E-commerce entities and some of such key duties and liabilities are discussed below-

  • Consumer Grievances- The Rules introduce a time-bound grievance redressal mechanism and impose a duty on E-commerce entities to appoint a grievance redressal officer to ensure that complaints are acknowledged within forty-eight hours and redressal is provided within one month of the date of receipt of the complaint.
  • Information Disclosure- The Rules make it mandatory for E-commerce companies to provide details of the sellers and any other information required by the consumers to make informed choices. They need to take an undertaking from their sellers, ensuring that they display accurate information about their goods and services. They are also required to reveal the country of origin for the goods sold on their platform. However, the rules lack clarity on how the country of origin of a good is to be determined, especially for goods assembled from different countries, repackaged goods, or goods manufactured in one country, under license, by another company in a different country.
  • Ranking and Differential Treatment Disclosure- The Rules make it incumbent on marketplace e-commerce entities to explain the main parameters used to decide the ranking of goods or sellers. The relative significance of such parameters should also be made available to the public. They are further required to disclose any differential treatment given to any of their sellers. This compliance requirement is aimed at those E-commerce entities which directly indulge in product targeting by providing differential treatment to certain companies by displaying them in top search results. This disclosure requirement aims to bring about greater transparency. 
  • Pricing, Consent, and Cancellations- The Rules specify that the platforms are prohibited from engaging in any unfair trade practices and from manipulating the price of goods or services sold on these E-commerce entities. The Rules also mandate that E-commerce entities can record consent for purchase by a consumer only when it is expressed explicitly through affirmative action. Thus, the practice of automatic deduction of charges from the consumers without their affirmative consent has to be done away with. E-commerce entities are also restricted from imposing cancellation charges on consumers unless they are willing to bear similar charges on unilateral cancellations made by them.

However, it is pertinent to note that the Rules are applicable from the date of their notification, so there is no window for compliance to these Rules given to E-commerce entities. And, in case of any violation of these Rules, penal provisions of the CPA are applicable.[2]

The Conundrum of Exemption of Liability of Marketplace E-commerce Entities

While these rules impose substantial obligations on E-commerce entities, the liability on non-compliance of these obligations by E-commerce entities remains a grey area. Even though liabilities are created by the E-commerce rules under the CPA, there remains uncertainty due to the exemption of liability provided to the intermediaries under section 79 of the IT Act. 

Applicability of IT Act on Marketplace E-Commerce Entities

Section 79 (1) of the IT Act provides an exemption from liability to intermediaries for any third party information posted by them. This provision is applicable notwithstanding any other law except for Sections 79 (2) and 79 (3) of the IT Act. As per section 2 (w) of the IT Act, an online marketplace is included in the definition of an intermediary. Under the Rules, a marketplace E-commerce entity is defined as “an e-commerce entity which provides an information technology platform on a digital or electronic network to facilitate transactions between buyers and sellers”. So it is clear that the definition of a marketplace E-commerce entity fits into the ambit of the ‘online marketplace’ which is defined as an intermediary under the IT Act.

The Conundrum of Intermediary Liability

 In addition to this, Rule 5 of the E-commerce Rules allows the marketplace E-commerce entity to avail the exemption from liability under section 79 of the IT Act, if they comply with sections 79 (2) and 79 (3) of the IT Act.[3] However, in contrast, Rule 8 states that in case of any violation of the e-commerce Rules, provisions of the CPA will apply. Therefore, there is some uncertainty as to whether the marketplace e-commerce entity would be exempted under section 79 of the IT Act in case of any violation of the Rules.

The nature of the provisions relating to exemption from intermediary liability is elucidated in the cases discussed subsequently. In My Space Inc. vs Super Cassettes Industries Ltd, the court observed that as per section 79 (2)(b), an intermediary could avail the protection under section 79 if it is not involved in the initiation of the transmission, selection of receiver, and modification of the information. Moreover, an intermediary has to comply with due diligence provision under section 79 (2)(c) of the IT Act according to Rule 3 of the Information Technology (Intermediary guidelines) Rules, 2011. In Christian Louboutin vs Nakul Bajaj, Delhi High Court held that an intermediary could not be granted exemption from liability under section 79 if it was an active player in selling the products on its E-commerce platform. The court held that the safe harbour provision of exemption from liability is introduced for inactive intermediaries, and the same cannot be used by active intermediaries to escape liability.

However, in Kent Systems Ltd. vs Amit Kotak, the court observed that if the intermediaries have to scrutinize all the information uploaded by third parties to verify whether it leads to infringement of IP rights, then it would impose a heavy obligation on them by transforming intermediaries into a body that examines whether any information hosted by the platform amounts to any infringement. In Amazon vs Amway, the court had held that Amazon is an intermediary and it should be exempted from any liability under section 79 as: firstly, there was no distinction between passive and active intermediaries under Section 79, and secondly; amazon had complied with Sections 79 (2) and 79 (3) of the IT Act. The court further held that Amazon cannot be denied the status of an intermediary merely because it provided logistical support and other services to its sellers.

Thus, it is clear that Section 79 of the IT Act protects online marketplaces by bringing them to a safe harbour, exempting their liability for any information posted by the sellers. Section 79 intends to give protection to intermediaries to boost digital trade and economy. If such safe harbour protection were not provided to the intermediaries, then they would be liable for acting as a mere facilitator. Moreover, the safe harbour protection has to be used cautiously by the courts to balance the rights and interests of intermediaries and consumers, and to carve out a fair and reasonable solution to the various issues pertaining to marketplace e-commerce entities in India.

In light of these decisions, the conundrum of intermediary liability has to be solved as the introduction of the new Rules disrupts an earlier settled position of law as they impose new liabilities on marketplace e-commerce entities which are otherwise exempted by the IT Act. While these rules impose many duties and liabilities on the marketplace E-commerce entities, the provision regarding the penalty on violation of the rules needs further clarity. Before the introduction of these rules, it was settled that if an intermediary is complying with section 79 (2) and (3) of the Act, then they would be exempted from any liability, but, now, the compliances have increased by the introduction of the new rules. And it is uncertain whether the non-compliance of these new rules would impede the marketplaces E-commerce entities to seek exemption from liability under the safe harbour provision of the IT Act.

Conclusion

The IT Act has a non-obstante clause that provides an exemption to marketplace E-commerce entities from liability for the information uploaded by third-party sellers. However, the new E-commerce Rules have contrary provisions assigning liabilities on marketplace E-commerce entities. Thus, this dilemma of the protection available to marketplace E-commerce entities under the IT Act needs to be solved. It would be interesting to find out the opinion of the court on the extent of the applicability of the exemption from liability under the IT Act in case of any violation of the Rules. With the government strengthening various regulations surrounding e-commerce, many E-commerce entities might face difficulties in complying with the new rules. Hence, how the application of the new Consumer Protection Act, 2019, and enforceability of the Consumer Protection (E-commerce) Rules, 2020 will playout for the e-commerce entities is yet to be seen.

Endnotes:

[1] Rule 2, Consumer Protection (E-commerce) Rules 2020.

[2] Rule 8, Consumer Protection (E-commerce) Rules 2020.

[3] Rule 5, Consumer Protection (E-commerce) Rules 2020.

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