Decoding The New Consumer Protection Act, 2019

The new legislation has earned raves of late. The enactment promises to protect the consumers by regulating the actions of the sellers and by providing an effecting redressal mechanism. Following are noteworthy definitions and features of the new Consumer Protection Act from the perspective of direct selling medium:

Definition of Consumer

The definition includes the term customer also. If the usage of the product or service is made by a person other than the person who purchased it/paid for it, but the product/merchandise was utilized with his/her approval, that first-person can file a complaint under the Consumer Protection Act.

This definition excludes those persons who purchase the product for commercial use. However, if the person uses the product so purchased by him for earning his livelihood or for his self-employment, it would not be counted as "commercial use", and such person will be eligible to file a complaint.

Therefore, this definition will include direct sellers who utilize the product for their self-employment and for earning their livelihood. But if the direct seller is not using the product but purchasing it for resale, it would amount to 'commercial purpose', and the direct seller would not be covered under the definition of Consumer.

For instance, where a salon owner orders hair colour products from the marketing company/brand owner/manufacturer. When s/he uses the same products for colouring hair of the clients, the salon owner becomes a consumer under the Act. However, when the salon owner offers these hair products in the salon for sale to the clients, the salon owner is not a consumer because s/he must "use" the product to claim right as a consumer.

Extending this understanding to the area of direct selling, when a direct seller uses the product that he usually resells, he is a consumer and when the direct seller sells these goods to earn money, s/he is not using them and therefore he is not a consumer. In this case, the direct seller may or may not be a consumer.

What is relevant here is that the enactment has specifically included direct selling enterprises and multi-level marketing within the arena of where/whom the goods are purchased from.

Definition of direct selling

The Act has included the definition of direct selling to mean marketing, distribution and sale of goods or provision of services through a network of sellers, other than through a permanent retail location.

Definition of the e-commerce entity

An e-commerce entity means any person who owns, operates or manages digital or electronic facility or platform for electronic commerce. However, this term does not include a seller who offers his goods or services for sale on a marketplace e-commerce entity.

One must note the difference between e-commerce entity and marketplace e-commerce entity because marketplace e-commerce entity is defined as an entity that provides an information technology platform on a digital or electronic network to facilitate transactions between buyers and sellers. An example of such marketplace e-commerce entities would be Flipkart, Amazon, Myntra and eBay.

This definition will also cover foreign e-commerce websites such as Alibaba and as per Rule 4(1)(a) of the E-commerce Rules, 2020.

Definition of the inventory e-commerce entity

This means an e-commerce entity which owns the inventory of goods or services and sells such products or services directly to the consumers and shall include single-brand retailers and multi-channel single-brand retailers. As on date Fab India and Ritu Kumar come under this classification.

Definition of a manufacturer

Definition of a manufacturer includes not only those who manufacture the goods or any part thereof but also those who assemble and with the ones who put their mark on the goods that are produced by another person/entity. Therefore, if a product is manufactured by one but the trademark is put by another, the other person/entity will also be captured within the definition of the manufacturer apart from the person/entity who/which made/produced that good. 

Definition of the product manufacturer

A product manufacturer will not include a person/entity who/which is only a reseller/distributor, such as a direct seller because a person must make AND/OR sell products. However, the definition of 'trader' which includes any person who sells /distributes for sale and consists of a manufacturer will cover the entity engaged in direct selling. In simpler terms, only that person who manufactures the good is called a manufacturer or the one who produces as well as sells this definition will cover it. Merely making sales does not make a person product manufacturer under this definition.

Definition of the product seller

The product seller includes direct sellers within its definition since it points out that any person who sells or distributes (among other things) products in the course of business will be termed as a product seller. 

Definition of a product service provider

If any person provides services concerning the product concerned, he will be called a product service provider. Generally, the direct seller will not amount to a product service provider. However, when he provides any service such as advice, after-sales services, agency services (e.g. insurance agents/advisors advising customers to switch funds - equity/balanced/debt).

Definition of the restrictive trade practices

This legislation includes "unreasonable delays" in delivery of products as restrictive trade practice provided it is done so that it leads to/ is likely to lead to an increase in the price of that good/service. For example, if Uber causes a delay in connecting a traveller to a driver without any server-based congestion issue at 7.30 a.m., just so that the rider/traveller/customer will have to pay the peak hours from 8 a.m. onwards when the taxi is booked, it would amount to a restrictive trade practice under this definition.

Similarly, if a direct seller, knowing well that the product's prices will be revised, causes a delay in delivery of the product so that more amount can be earned from the Customer, it will be captured by this definition.

Trade practice wherein a consumer is required to buy, hire or avail of any goods or, as the case may be, services as a condition precedent for buying, leasing or availing of other products or services also amount to a restrictive trade practice.

Definition of unfair contract

The definition is relevant from the perspective of direct selling agencies. An unfair contract "unfair contract" means an agreement between a manufacturer, brand owner or trader or service provider on the one hand, and a consumer on the other, having such terms which cause a significant change in the rights of such Consumer, including the following, namely:

  1. requiring manifestly excessive security deposits to be given by a consumer for the performance of contractual obligations; or
  2. the imposition of any penalty on the Consumer, for the breach of contract thereof which is wholly disproportionate to the loss, occurred due to such breach to the other party to the contract; or
  3. refusal to accept early repayment of debts on payment of applicable penalty; or
  4. entitling a party to the contract to terminate such contract unilaterally, without reasonable cause; or
  5. permitting or has the effect of permitting one party to assign the contract to the detriment of the other party who is a consumer, without his consent; or
  6. imposing on the Consumer any unreasonable charge, obligation or condition which puts such Consumer to a disadvantage.

Here point (iv) emphasizes that if unilateral termination without any reasonable cause is enforced, it will amount to an unfair contract. Also, the practice of asking the Customer to bear the shipping/courier charges/restocking fees in a case where expired/defective products/irrelevant products are supplied would be frowned upon as per point (vi) of the definition.

One must note that the contract in such cases is legally tenable when looked in plain sight. It is usually when one reads and analyses, the unfairness of the contract surfaces.

Unfair trade practice

Unfair trade practice involves adopting deceptive or unfair mechanisms to increase or make sales. These activities include making false statements w.r.t. The information, use or characteristics of the product or service, unsubstantiated warranty or guarantee regarding its performance, false promises of replacement or repairs or about his affiliation with /about approval of the manufacturer for sale of products. This would also include false statements that disparage goods or service of another person as well as activities of hoarding of goods to increase their prices.

As per the Clause 7(6) Direct Selling Guidelines "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 to undertake or solicit such sale or offer." This clause was used in the case of Amazon Seller Services Pvt Ltd v. Modicare Ltd & Ors (order dated 31 January 2020) wherein the direct selling companies (Modicare, Amway and Oriflame) requested the court to restrain Amazon from selling their products on Amazon's platform. The Delhi High Court's division bench set the restraining order aside because Direct Selling Guidelines were merely advisory in nature and had no enforcement value. Going by that basis, the existing definition of unfair trade practice will capture inventory e-commerce entities if they sell the products of the direct selling companies without their permission/approval. However, whether this provision will capture marketplace e-commerce entities is doubtful because of the very nature of operation of these entities. This is so because the marketplace e-commerce entities provide a market for the sale of products by sellers, and the e-commerce platform itself does not claim to be the seller or manufacturer of that product. Clarity is still awaited on this front.

Furthermore, if a product is advertised/ permitted to be advertised to be sold at a bargain price which is not intended for sale at such a bargain price will also amount to unfair trade practice. On the other hand, if a lottery, contest or gift is organized which is not free but is covered in the price of the product/service, it would be termed as an unfair trade practice (UTP).

If goods do not comply with standards established by the competent authority in different respects including performance, ingredients, etc. that, in the absence of such knowledge can be injurious to the Consumer, would also be covered by UTP.

Another aspect of UTP is the sale of counterfeit goods and refusal to take back the defective products. Non-issuance of cash bills/ cash memos/receipt of sold goods also amounts to UTP.

Furthermore, refusing to take back the defective goods after-sale and refusing refund within 30 days or within the stipulated time as mentioned in cash memo would also amount to UTP. The calculation of the period of 30 days is not specified in the definition. Whether one should calculate 30 days from the date of sale or should it be from the date of receipt of the product is not specified. In our opinion, the 30 days should be calculated from the date on which the product is received by the Consumer (actually or constructively).

Disclosure of confidential information supplied by the Consumer should be avoided since it amounts to a kind of unfair trade practice too. This area will be interesting to see since service providers such as search engines (Google, Duckduckgo, bingo, Baidu, etc.) use information searched and input fed on various websites to suggest advertisements and search results. Though Google may not be captured under this definition since it is free of cost, the paid sites who would end up supplying confidential information of consumers to other agencies to make sales or for data analysis will be captured by this definition of unfair trade practice. On similar lines, the hospital chains use confidential data of the Consumer to make changes in their services in different countries and cities and for research. Though that data is usually anonymized, it still is a disclosure. Whether the definition of unfair trade practice will capture them and whether courts will opt for the technical interpretation or purposive interpretation will be seen in the times to come.

Nature of complaint

A complaint can arise in any of the following circumstances:

  1. an unfair contract / unfair trade practice / a restrictive trade practice has been adopted by any trader or service provider;
  2. goods bought by him/ agreed to be acquired by him suffer from one or more defects;
  3. the services hired /availed of / agreed to be hired /availed of by him suffer from any deficiency;
  4. a trader or a service provider has charged for the goods or the services mentioned in the complaint, a price in excess of the price:
    1. fixed by or under any law for the time being in force; or
    2. displayed on the goods or any package containing such goods; or
    3. displayed on the price list exhibited by him by or under any law for the time being in force; or
    4. agreed between the parties;
  5. the goods, which are hazardous to life and safety when used, are being offered for sale to the public:
    1. in contravention of standards relating to the safety of such goods as required to be complied with, by or under any law for the time being in force;
    2. where the trader knows that the goods so offered are unsafe to the public;
  6. the services which are hazardous or likely to be dangerous to life and safety of the public when used, are being offered by a person who provides any service and who knows it to be injurious to life and safety;
  7. a claim for product liability action lies against the product manufacturer, product seller or product service provider, as the case may be;

Consumer Rights

Consumer rights have been enumerated in the statute this time, and they include the following:

  1. right to be protected against the marketing of goods/products/services which are hazardous to life and property
  2. right to be informed about the quality, quantity, potency, purity, standard and price of goods, products or services
  3. right to be assured, wherever possible, access to a variety of goods, products or services at competitive prices
  4. right to be heard
  5. right to seek redressal

Central Consumer Protection Council

CCPC will be established as an advisory council for rendering advice on promotion and protection of the consumers' rights under the enactment. Similarly, every state will have a state-level protection council who will serve the same purpose within the state, and the work will be further decentralized through district consumer protection councils.

Regulation of E-commerce

  1. Through the CPA E-Commerce Rules 2020, an attempt has been made to regulate e-commerce platforms from the perspective of consumer protection.
  2. These rules apply to a) all goods and services bought or sold over the digital or electronic network including digital products;(b) all models of e-commerce, including marketplace and inventory models of e-commerce; and (c)  all e-commerce retail, including multi-channel single-brand retailers and single-brand retailers in single or multiple formats.
  3. These rules apply to all electronic retailers who are registered in India or abroad but are offering goods and services to Indian consumers. This is a great move to clear the air around extraterritoriality of the definition of e-commerce platform and the extent of applicability of these Rules.
  4. E-commerce participants will have to display the total price of goods and services offered for sale along with a break-up of other charges. The amount cannot exceed the maximum retail price as was earlier decided by NCDRC in the case of M/S Cargo Tarpaulin Industries vs Sri Mallikarjun B. Kori (5 July 2007).
  5. They are also required to mention the 'expiry date' of goods, 'country of origin' of goods/services, details about return, refund, exchange, warranty and guarantee, delivery and shipment, etc. This is necessary for enabling the Consumer to make an informed decision for deciding on the purchase of goods.
  6. An interesting provision that has been included in the Rules is that the e-platform cannot charge a cancellation fee unless sellers are ready to pay similar charges in case cancellation of orders are made from their side.
  7. The e-retailers are now required to bear the burden of accountability towards payment gateways too. The platform will have to provide information w.r.t available payment methods, the security of those payment methods, any fees or charges payable by users, including contact information, etc. to the consumers.
  8. These entities will have to display prominently the details about the 'sellers' offering goods and services, including the name of their business, whether registered or not. They must also display sellers' geographic address, customer care number, and any rating/feedback about such seller too.
  9. Grievance officers have to be appointed to address complaints filed by the consumers and his name, contact details, and designation must be available on the platform.
  10. The e-retailer must generate a ticket number for each complaint lodged, through which the Consumer can track the status of the complaint
  11. Sections 49(2) & 59(2) of the enactment empower the Commissions at state & national level to consider terms of the contract between the Consumer and the service provider/product manufacturer that are unfair to any consumer, to be ineffective and void. This is a useful tool in the hands of the Commission.

Redressal Mechanism

  1. Pecuniary jurisdiction: The original pecuniary jurisdiction of the consumer commissions has been revised wherein the District Commission can handle cases worth up to Rs. 1 crore, the State Commission can handle cases from Rs. 1 crore to Rs. 10 crores and the National Consumer Disputes Redressal Commission will only deal with cases that are valued more than Rs. 10 crores. Appeal from NCDRC will lie to the Supreme Court.
  2. Territorial Jurisdiction: A consumer or an association can now institute a complaint before the competent authority within the jurisdiction of the Commission where the complainant resides or personally works for gain. This option is available apart from the usual choice of filing complaint where the opposite party resides, works for gain or has a branch office.
  3. Limitation period: the period of limitation for filing a complaint is still two years, and there is a provision for condonation of delay under Section 69.
  4. Mediation as a means of dispute resolution: Subject to the satisfaction of the competent Commission, the matter can be referred to mediation for a peaceful resolution between the parties. However, apart from the subjective satisfaction of the Commission, the consent of the parties in writing will also be required to ensure free will.  The mediation is performed through consumer mediation cell, which would be more economical and accessible to a common man and the companies. Usually, intervention is perceived as an expensive but peaceful mechanism opted only by those who have deep pockets. State organized mediation cell is expected to be cheaper and is a welcome move for all stakeholders.
  5. Duration: The period contemplated for redressal of complaint under this new Act is three months from the date of notice to opposite party.
  6. Deposit: Opposite Party must now deposit 50% of the amount ordered by the District Commission before preferring an appeal to the State Consumer Disputes Redressal Commission in comparison to the earlier ceiling of maximum Rs. 25,000/-.
  7. Fund for unidentified injured parties: If found guilty, the Commission has the power to order a sum to be paid in respect of unidentified consumers where harm may have been caused to many, but they cannot be identified conveniently. This is a massive step in the direction of effective protection of consumers and prevents future litigations too.

Compliance by Companies

  1. Direct selling platforms cannot charge a cancellation fee.
  2. Consumer has the right to be informed about the quality, quantity, potency, purity, standard and price of goods, products or services (S.2(9)
  3. Consumer must be assured, wherever possible, access to a variety of goods, products or services at competitive prices
  4. Direct seller, if using an e-commerce platform, must ensure that the electronic retailer mentions the total price of goods and services offered for sale along with a break-up of other charges on the platform used for displaying/retailing.
  5. Since e-platforms are used to sell direct selling companies' products too, one must note that e-commerce entities are now required to display prominently the details about the 'sellers' who are offering goods and services, including the name of their business, whether registered or not. They must also display sellers' geographic address, customer care number and any rating/feedback about such seller.
  6. Rule 6 of E-commerce Rules, 2020 applies to all sellers who sell their products on marketplace e-commerce platforms. This will include direct sellers too.
  7. Rule 6(3) points out that the sellers on such platforms cannot refuse to take back the goods if they are defective, spurious, or where the goods do not carry the features as described/advertised by the seller or are delivered later than the stipulated time ( except due to extraneous circumstances such as lockdown) etc.
  8. Grievance officers must be appointed to address complaints of the consumers.
  9. Direct sellers should not indulge in unfair trade practice. They should be informed that providing inaccurate information about the price, description, quality, quantity, etc., would amount to unfair trade practice and should be avoided at all times.
  10. Non-issuance of cash bills/ cash memos/receipt of sold goods amounts to Unfair Trade Practice too.
  11. Refusing to take back the defective goods after-sale and refusing refund within 30 days would also amount to unfair trade practice. The Rules do not explain as to from what date the 30 days period shall commence.
  12. Disclosure of confidential information supplied by the Consumer should be avoided since it amounts to a kind of unfair trade practice.
  13. Section 84, 85 and 86 are extremely relevant for any direct selling company. Section 84 of the Act lays down in what conditions the product manufacturer will be responsible. One must note that the manufacturer will have strict liability under this section, i.e. intent does not matter. Section 85 points out the conditions in which the service provider will be responsible, and Section 86 establishes the grounds on which product seller will be held accountable.
  14. The application of Section 86(d) covers foreign companies/entities whose products are sold by product sellers in India. This is to arrest the activities of those entities that can't be touched by the domestic laws of India.

Protection to DSA

  1. Going by the definition of "unfair trade practice", any person who falsely claims to be associated with the manufacturer or claims that he is selling under the approval of the manufacturer, it would amount to an unfair trade practice and would be punishable with fine and imprisonment. Drawing from this, if a rogue direct seller/suspended or an unauthorized direct seller attempts, among other persons, to sell a product belonging to the manufacturer who has neither approved nor sponsored the seller to sell or distribute the product nor is that seller affiliated to the DSA, it will amount to unfair trade practice.
  2. Defences against product liability are available to the product seller in certain cases as provided under Section 87 wherein in timely information, adequate instructions and warnings can save the seller from being held liable for the harm caused to the other party.
  3. Central government has been empowered to take measures to prevent unfair trade practices in e-commerce & direct selling under Section 94. This is a welcome step for promotion & sustenance of genuine direct selling companies.

Regulator - Central Consumer Protection Authority

This authority will regulate matters relating to the violation of consumers' rights as provided in the Act, unfair trade practices and false or misleading advertisements which are prejudicial to the interests of the public. It will also promote, protect and enforce the rights of consumers as a class.

Similar to the formation of Competition Commission of India, this regulator will have an investigation wing wherein Director-General will conduct inquiries and investigations when directed by the Authority.

Where the violations affect the consumers as a class, the complaint can be made to the Central Authority or his delegates to initiate the inquiry. If found in violation, the CCPA has the power to:

  1. recall goods or order withdrawal of services which are dangerous, hazardous or unsafe;
  2. to reimburse prices of goods/services to purchasers of such goods or services;
  3. order discontinuation of unfair practices that are prejudicial to consumers' interest;
  4. to discontinue misleading advertisements or order modification;
  5. impose a penalty in this respect;
  6. ban the endorser from endorsements of any product for a year extending up to 3 years in cases of subsequent violations.

Since its jurisdiction closely overlaps with the Competition Commission of India apart from sector-specific regulators, it is imperative that the provision such as Section 19(2) exists which talks about cooperation to be extended by the CCPA towards other authorities.

Other Features

Actors who associate themselves with endorsements for goods/products that are misleading in nature are in for trouble. Not only there are provisions for imposition of a penalty when they appear in misleading advertisements, but also, they can be banned from endorsements of any product for a year extending up to 3 years in cases of subsequent violations. The factors of the frequency of advertisements, target audience and gross revenue generated will also be taken into consideration. The only defence available to him is if he had performed due diligence on the good/service that he was endorsing.

Open questions under the Act

The Act promises a lot and with proper enforcement, is capable of protecting consumer rights more effectively than under the earlier regime. However, much remains to be said in the times that this enactment is being enforced. Ideally, the consumer rights are protected since they do not possess bargaining power as against the established companies who indulge in the manufacture, distribution and sale of goods. However, with the increasing dependence on electronic platforms for small start-ups, household and cottage businesses, the expenses to meet the rules would go higher and in some cases, uneconomical. For example, a person selling homemade pickles online via his/her online retail platform will now have to show dedicated grievance redressal mechanism, including grievance officer, customer care operation, etc. among other things.

Another challenge that is likely to arise under the new law is the question of extraterritoriality. If a different platform does not comply with the terms and conditions laid down by the current law, what actions can the regulatory authority take to effectuate compliance? If found in violation, how can the administration impose a penalty, would be a beaming question. One cannot apply domestic law on an entity registered in another sovereign state without the coordination and a treaty with that country in this respect, which undoubtedly is a difficult task.

The law has indeed bridged consumer protection in a number of ways and is a beacon of hope for consumers who have been at the receiving end of the deal since last few decades. India, a country that witnesses high consumerism, is moving in the right direction to ensure that its customers continue to enjoy services of the sellers and businesses keep blooming with this surge of consumerism.

© 2020 By Priya Misra, Associate @ Strategy India, a direct selling consulting agency (An associate member of Indian Direct Selling Association)

All rights reserved.