Proposed Amendment to E-Commerce Rules, 2020 A Pinch of Salt & the Devil in the Details

 

Proposed Amendment to E-Commerce Rules, 2020

A Pinch of Salt & the Devil in the Details

The Consumer Protection (e-Commerce) Rules, 2020 (the “ECR”) were framed and notified on 23-07-2020 under S.101(1)(zg) of the Consumer Protection Act, 2019 (the “Act”). The legislative rationale for the same was that: “the development of e-Commerce has rendered the consumer vulnerable to new forms of unfair trade and unethical business practices and also violation of personal data and information secrecy. Misleading advertisements, tele-marketing, multi-level marketing, direct selling and etailing pose new challenges to consumer protection.” The ECR were framed to compliment the Act by regulating all e-Commerce activities and transactions. The ECR have sought to govern e-Commerce activities by laying down duties and liabilities to be adhered to by e-Commerce entities, marketplace e-Commerce entities, sellers on marketplace, and inventory e-Commerce entities. The Act defines ‘e-Commerce’ under Section 2(16), as “buying or selling of goods or services including digital products over digital or electronic network”. The ECR are applicable to entities operating within India, or servicing customers within India. The ECR concern only with threats to consumers on E-Commerce platforms vis-à-vis (1) Information Sharing (such as unwanted programs – Adware, Spyware, Browser Parasites, Cyberstalking; risk to behavioural pattern data, etc.), (2) Ordering of Product (such as risk of misuse of the behavioural pattern data, malicious recommender system algorithm, etc.), (3) Payment (such as Phishing, Pharming attacks, Salami attacks, and risk to transaction related data, etc.), (4) Delivery (such as breach of contract of sale, e.g., Product Quality, delivery time, type of product, etc.), and (5) Support (processing of cancellation, refund request, service related issues, etc.).

The ECR spell out Duties of E-Commerce Entities such that they are obligated inter alia not to manipulate prices to gain unreasonable profit from consumers¹, or discriminate between consumers of the same class², or make arbitrary classification of consumers and thereby affecting their rights. They however, nowhere specify duties of such E-Commerce entities or E-Commerce Marketplace Entities vis-à-vis their competitors, such as brick and mortar retailers. These duties would be by their very nature linked to maintenance of fair competition in the market for consumers to be able to have the choice of shopping, either online or offline at any given point of time. Predatory pricing inter alia is a method of eliminating such competition in the long run, and the ECR has not provisioned for such market behaviour on part of E-Commerce Entities.

Thus the aforesaid issues were referred to the Rajya Sabha Committee on Subordinate Legislation (the “Committee”) which presented its Report on the ECR on March 24, 2021 suggesting certain amendments (the “Committee Report”).³ The Committee considered western examples of “E-Commerce Giants” gobbling up brick and mortar businesses due to predatory pricing without as much as making specific reference to examples or action taken by FTC or the CMA to prevent the same.⁴ We very well know that the US and UK have very stringent abuse of dominance norms, unlike the CCI that has very recently ruled out abuse of dominance by these very “E-Commerce Giants” on exclusive sale agreements.⁵ The Committee thus has suggested curbing Predatory Pricing, curbing Totally Exclusive sales, and Exclusive Only Online sales tie-ups, to protect Kirana Small Vendors,⁶ to safeguard employment opportunities to small scale / local vendors, and to devise ways that these small scale / local vendors are made a part of E-Commerce.

Hence from the above we see that enablement of the Central Consumer Protection Agency (the “CCPA”) under S.101 of the Act was the order of the day with the Committee.

Resulting suggested amendments and their Analysis:

E-Commerce Entity now would include “Related Party” as defined by the Companies Act, 2013 under S.2(76)⁷. This has been done to avoid related parties of E-Commerce platforms from selling at economically or cross-subsidized advantageous positions vis-à-vis other sellers. This is a welcome inclusion. Other welcome inclusions include Cross-Selling (Eg., selling of mobile damage insurance with mobile phones), Fall Back Liability (E-Commerce Marketplace is where the liability buck stops when a listed vendor fails to fulfill his part of the contract of sale), and Mis-Selling (Eg., selling engine oil stating it is suitable for use in diesel engines when it is only suitable for use in petrol engines).

Logistical Parity of Operations under proposed Rule 6(5) is a welcome inclusion. So now E-Commerce Marketplace’s logistics service providers can not discriminate between sellers, and create delivery asymmetries and thus hinder competition to the long term consumer disadvantage. So sellers thus can expect similar delivery times, and quality if they are placed similarly vis-à-vis a customer having placed an order of say XYZ Shampoo, being sold both by related party sellers and unrelated sellers. Proposed Rule 6(6) ensures against misuse of data analytics to the advantage of related parties and associated enterprises to skew competition. Here Associated Enterprises are also defined. Their relatedness is much more influential on a day to day operational and decision making basis.⁸

However inclusion of Flash Sale is a double edged sword.⁹ It can be used to hinder innovative new distribution and pricing mechanisms by E-Commerce platforms even other than Amazon and Flipkart. They may or may not include Predatory Pricing or Exclusivity Agreements. A selective enforcement of the definition would thus become a powerful political weapon. What if Nykaa were to indulge in Flash Sales that fit the very definition?

Recently the CCI has been tasked with investigating Unfair Trade Practices by these “E-Commerce Giants”, under what authority, one simply wonders, since the Competition Act, 2002 does not include UTP at all¹⁰, and UTP is the sole jurisdiction of the Consumer Commissions and the CCPA under the Consumer Protection Act, 2019. There needs to be a parity of implementation worked into the definition, and/or into the Rules. Since the Rules are under the Act, Consumer Interest needs to be kept paramount, with empirical evidence of harm to consumers as the yardstick, and not distant imaginary and lofty apocalyptic scenarios. Entities such as the CCPA with investigative powers can become political watchdogs when political agenda is used to hinder free market operations. A stark difference between the aforesaid definitions and that of Flash Sale is that no consumer would ever bring an action under Flash Sale provisions as it immediately benefits him. The Consumer Commissions under the Act entertain actions only from Consumers, and thus the CCPA’s power to enforce the Flash Sale provisions is suo motu and liable to misuse.

These proposed amendments have been circulated for comments from June 2021, and 06 July, 2021 is the closing date.¹¹

Predatory Pricing & Exclusive Agreements: Real Concerns or Imaginary Foe?

So, is there a clear and present danger from E-Commerce players to consumer interests? The answer is a resounding NO! Why? Firstly, because statistically speaking E-Commerce accounts for only 4% of the total retail sales in India.¹² Such a small market presence is effectively no match for the brick and mortar retailers, and also given the demographics, will never be. Secondly, because the flip side argument to all of the above is that given the difference in business models, why should not companies be allowed to benefit from their more efficient models like that adopted by Amazon and Flipkart. After all, business model innovation is what the current horde of startups are gaining prominence and funding for.¹³ These Hyperlocal Logistics, B2B, and B2C startups are the answer to brick and mortal survival against the imaginary monoliths that is the E-Commerce Giants.

We don’t need legal Davids to kill these E-Commerce Goliaths, but these local start ups to shine brighter for the brick and mortar sector. Regulation of E-Commerce in terms of predatory pricing is thus overkill, possibly to satisfy certain political promises or interests.¹⁴

1Eg. excessive prices than MRP if demand is high, or making use of paucity of essential commodities to charge excessively from consumers.

2Say treating Amazon Prime Members of Delhi differently than those of Mumbai, and thus providing different services, or quality of services depending upon the geographical location within India.

3The Committee Report can be found at: https://rajyasabha.nic.in/rsnew/Committee_site/Committee_File/ReportFile/12/131/245_2021_3_17.pdf

4See Point 12, pg 11 of the Committee Report.

5See Lifestyle Equities C.V. & Anr. v. Amazon Seller Services Pvt. Ltd. & Ors., Case No. 09/2020 DoD 11-09-2020, available at: https://cci.gov.in/sites/default/files/09-of-2020.pdf

6See Point 14, pg. 12 of the Committee Report: “… recommends that there should be a more clear-cut definition of what constitute Unfair Trade Practice and practical legal remedy to tackle such circumventing practices by e-Commerce entities specifically Multinational Companies and Kirana Small Vendors.”

7"Related Party", with reference to a company, means—

(i) a director or his relative;

(ii) a key managerial personnel or his relative;

(iii) a firm, in which a director, manager or his relative is a partner;

(iv) a private company in which a director or manager 1[or his relative] is a member or director;

(v) a public company in which a director or manager is a director 2[and holds] along with his relatives, more than two per cent of its paid-up share capital;

(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;

(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act:

Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity;

(viii) any body corporate which is—

(A) a holding, subsidiary or an associate company of such company;

(B) a subsidiary of a holding company to which it is also a subsidiary; or

(C) an investing company or the venturer of the company;";

Explanation.—For the purpose of this clause, “the investing company or the venturer of a company” means a body corporate whose investment in the company would result in the company becoming an associate company of the body corporate.]

(ix) such other person as may be prescribed.

8Proposed Rule 6(6) Explanation (ii): Two enterprises shall be deemed to be associated enterprises, if-

(a) enterprises are related to each other through a common chain of directors or managing partners;

(b) enterprises are related to each other through a common chain of shareholders, where such shareholders hold not less than 5 per cent of the shareholding in the related enterprises;

(c) enterprises having 10 per cent or more common ultimate beneficial ownership;

(d) where one enterprise can exercise a right to veto any decision, appoint one or more director(s) or in any other manner influence other entity’s decision making on any matter either through its shareholding or through an agreement including a shareholders’ agreement;

(e) where one enterprise holds, directly or indirectly, shares carrying the voting power in the related entities;

(f) where any person or enterprise holds, directly or indirectly, shares carrying the voting power in the related entities;

(g) there exists between the enterprises, any relationship of mutual interest, as may be prescribed.

9Proposed Section 3(1)(e): “Flash sale” means a sale organized by an e-commerce entity at significantly reduced prices, high discounts or any other such promotions or attractive offers for a predetermined period of time on selective goods and services or otherwise with an intent to draw large number of consumers.

Provided such sales are organised by fraudulently intercepting the ordinary course of business using technological means with an intent to enable only a specified seller or group of sellers managed by such entity to sell goods or services on its platform.

10Reiterated by the CCI many times over in cases such as: Ravi Beliwala v. Lexus Motors Ltd., Case No. 79/2016 [at https://www.cci.gov.in/sites/default/files/79%20of%202016%20Order%2026%282%29.pdf], Kiran Enterprise v. Abbott Healthcare Pvt. Ltd., Case No. 91/2016 [https://www.cci.gov.in/sites/default/files/case%2091%20of%202016.pdf], and Indiacan Education Pvt. Ltd. v. Aldine Ventures Pvt. Ltd., Case No. 71/2016 [https://www.cci.gov.in/sites/default/files/26%282%29%20Order%20in%20Case%20No.%2071%20of%202016.pdf].

11See https://consumeraffairs.nic.in/sites/default/files/file-uploads/latestnews/Comments_eCommerce_Rules2020.pdf

12See https://www.msn.com/en-us/money/other/why-india-wants-to-put-an-end-to-amazon-and-flipkart-flash-sales/ar-AALiKzu

13Eg. of B2B: Bizongo, Zetwerk, Infra.Market, Jumbotail, Sheokonnect; Eg. of Logistics Tech: EcomExpress, Xpressbees, Delhivery, Porter, Loadshare; Eg. of Hyperlocal B2C: Swiggy, Zomato, Dunzo, Urban Company, and even Uber Delivery! [See EY’s E-commerce and Consumer Internet Sector: India Trendbook 2021 (March 2021) Report: https://assets.ey.com/content/dam/ey-sites/ey-com/en_in/topics/e-commerce/2021/e-commerce-and-consumer-internet-sector-india-trendbook-2021.pdf]

14See https://mediaindia.eu/business/cci-probe-against-amazon-flipkart/