European product liability directive : going digital again

Hogan Lovells

With the initiative “Adapting liability rules to the digital age and circular economy” this summer, the EU has taken another step towards a revision of the Product Liability Directive 85/374/EEC (the “Directive”). Since October 2021 and until 10 January 2022, a public consultation is now open – which means all stakeholders can have their voice heard. It’s been more than three years ago since the European Commission (the “Commission”) published its Fifth Report (the “Report”) on the application of the Directive (dated 7 May 2018), together with a comprehensive non-routine evaluation (the “Evaluation”) of the practical implementation of the Directive across member states. The major difference is that the Commission’s current initiative aims to amend the Directive, whereas in 2018 the focus was on developing guidelines to the Directive. One can expect changes in relation to digital technologies, but also in general product liability rules.

The hunt for an EU product liability regime fit for tech products continues

It’s been more than three years ago since the European Commission (the “Commission”) published its Fifth Report (the “Report”) on the application of the Directive (dated 7 May 2018), together with a comprehensive non-routine evaluation (the “Evaluation”) of the practical implementation of the Directive across member states (please see Newsflash 2017 and 2018).

What happened since the publication of the Report together with the Evaluation in 2018?

The Commission set up expert panels to develop its thinking on next policy steps; various documents were issued such as the Preliminary Concept Paper for the Future Guidance on the Product Liability Directive 85/374/EEC, the Expert's views on matters not covered by the future Guidance on the Product Liability Directive 85/374/EEC (please see Newsflash 2019) and the report Liability for Artificial Intelligence (“AI”) and other emerging digital technologies; and, besides, there were European elections and the composition of the Commission was renewed.

The economic landscape has continued to evolve since 2018, with the digital age moving ahead rapidly. Thus, the question of whether the liability regime introduced in 1985 is still fit for the current technical revolution is more topical than ever before. Reason enough for the new Commission to start the initiative “Adapting liability rules to the digital age and circular economy” with an Inception Impact Assessment (the “Assessment”, dated 30 June 2021). The aim of the initiative is to bring a legislative change – in contrast to the consultations, expert meetings and other work following the Report and Evaluation of 2018, which all relied on the assumption that the Directive would remain untouched.

Following a first feedback period on the Assessment (in July 2021), during which a targeted consultation was conducted with various key stakeholders, a larger and public consultation was launched and is currently underway until January 2022 to provide further insights to the Commission and allow a comprehensive impact assessment of the policy options outlines in the Assessment.

The public consultation is addressed to all stakeholders, such as for example members of the public, manufacturers, software developers, consumers, consumer and industry associations, insurers, academics, non-governmental organisations and Member State authorities.

The current target is an adoption of a draft revised Directive by the Commission in the third quarter of 2022. Nothing is certain yet and it remains to be seen precisely how large an impact the current consultation will have in light of the previous episodes in this area.

Policy options to adapt strict liability rules to the digital age and circular economy

One should not be deceived by the title of the Commission’s initiative: “Adapting liability rules to the digital age and circular economy”. Although the Assessment as well as the questions of the mentioned public consultation mainly focus on whether the current liability rules are fit for the digital age and circular economy, the Commission highlights two overall objectives.

Not surprisingly, the first objective of the Commission is to modernise liability rules to take account of the characteristics and risks associated with recent technology and new digital and circular business models.

The assumption is simple: the liability rules under the Directive are not fit for the digital age and the circular economy. For example, under the Directive, importers are treated as producers for product liability purposes. The rise of ecommerce has enabled consumers to buy products from outside the EU without there being an importer, leaving in certain cases consumers with no liable person in the EU from whom to seek compensation under the Directive in the event of damage.

Another difficult area is to determine liability in case of defects resulting from changes to products – because they have been repaired, recycled, or refurbished – after they are put on the market.

To take another example of issues identified with the current Directive, any environmental damage caused by defective products cannot be compensated under the Directive at the moment.

Whether the Directive's concepts as they currently stand continue to be relevant is not a new question. In 2018, the Report already made clear that there are open questions about what delineates a product compared to a service (especially where products and services interact in the digital field), the scope of damage covered (currently limited to material damage) and the defect notion.

In its Assessment, the Commission finally addresses these questions and sets out various policy options.

The first possible option is to revise the Directive to extend strict liability rules to cover intangible products (e.g. digital content/software) that cause material damages and to address (i) defects resulting from changes to products after they have been put into circulation, (ii) defects resulting from interactions with other products and (iii) connectivity and cybersecurity risks. In addition, the strict liability rules would be extended to online marketplaces where the producer cannot be identified.

Another option would be, in addition to the first one, to extend the range of damages for which compensation can be claimed under the Directive to non-material damages (e.g. data loss, privacy infringements or environmental damage).

In the eye of the Commission, extending strict liability rules (as options 1 and 2 suggest) should lead to more successful compensation claims and therefore result in a reallocation of the costs for the damage from the injured party to the responsible operator, either in insurance premiums or in compensation paid to the injured party.

The last envisaged and self-standing option is to harmonise the national existing strict liability schemes of operators/users that apply to AI-equipped products and providers of AI-based services. Some of the features of emerging digital technology like AI could make it hard to trace the damage back to a human behaviour, which would in turn make it difficult to ground a tort liability action for any injured party. The purpose of the Commission is here to ensure that consumers of by AI-equipped products or AI-based services benefit from an adequate level of protection equivalent to the one offered to consumers of other products and services.

Policy options to reduce obstacles to compensation

The second objective of the ongoing Commission’s initiative is “to reduce obstacles to getting compensation” (Assessment, p. 4) – in general – and with respect to innovative products. Thus, generally, the liability regime for all products (not only innovative or tech products) could be strongly affected by a legislative change, depending on the finally adopted policy options.

The effectiveness of the various concepts of the Directive, including the burden of proof, was already subject of the discussions in 2017 and 2018. Report and Evaluation stated that especially in the area of complex products, which would include inter alia pharmaceutical products, it would be difficult for injured parties to prove that a defect in a product caused the damage and there are cases where costs are not equally distributed between consumers and producers.

What is new is the Commission's current comprehensive approach to generally removing obstacles to compensation. However, these "obstacles" are precisely the factual prerequisites of a claim for compensation. If one thinks this through to the end, the claim, without these factual prerequisites, would change from a strict liability regime into a kind of compensation mechanism funded by product manufacturers.

In the current discussion, pharmaceuticals and medical devices are again explicitly mentioned as examples of “complex products”. Yet, it would be necessary to clarify what exactly is to be understood with this notion of “complex products” on which some of the policy options rely.

Whilst the Commission back in 2018 stated that “clarifications on the burden of proof” would render the Directive’s application more effective but the burden of proof “is a requirement that cannot be set aside” – currently the Commission initiated the discussion around an alleviation of the burden of proof.

One of the possible options envisaged is actually a complete reversal of the burden of proof. This means that, in the event of damage, the producer would have to prove the product was not defective.

Another potential option is an easing of the burden of proof either (i) by creating a kind of “right to information” or (ii) by accepting the application of so-called “presumption rules” by national courts. Both types of simplification of evidence are already the subject of controversial discussions in some member states or are even being applied in other member states. For example in Germany for pharmaceuticals a statutory right to information vis-à-vis the pharmaceutical company exists. In France, on the other hand, there is a case law (confirmed by the CJEU) according to which, under certain conditions, the existence of presumptions (if not proven otherwise by the defendant) is sufficient to ground a tort liability claim.

The impact assessment and consultations currently being carried out should also clarify whether all products should be covered by an alteration of the burden of proof, or only certain products, such as "complex" products, or specific types of products such as pharmaceuticals, medical devices or IoT products.

Even though it is not surprising, given the Evaluation carried out in 2018 and the CJEU case law over the last years, that the burden of proof distribution is once again a central topic, it is noteworthy that the Commission is now seriously considering a change to this basic principle of the Directive and tort liability in general.

In the course of the impact assessment, stakeholders should be mindful that the Directive is intended to lead to a fair balance between protecting those who suffer injury and ensuring fair competition on the single market. If such a central aspect of liability is now to be changed, other screws may have to be tightened to ensure a fair balance of interests between the different stakeholders.

Additionally, the Assessment mentions potential additional amendments of the Directive: namely, an abolishment or reduction of the threshold below which consumers are not allowed to claim compensation for property damage (500 EUR), as well as an extension of the producer’s liability beyond the current 10 years after the product was put into circulation or to allow consumers to start legal proceedings after the current 3 years from the moment the defect, the damage and the identity of the producer become known.

These two topics were already discussed in the Evaluation in 2018. Back then, the Commission in particular had stated that the number of claims rejected due to the expiry of limitation periods appears to be insignificant and emphasised that limitation periods are part of the balance of interests that the Directive is intended to achieve. This item will need to be closely monitored as a change in these limitation periods will undoubtedly affect the balance of interests sought by the Directive.

Outlook

The Commission's impact assessment is in full swing and all interested parties are invited to express their views (via the public consultation). The concrete outcome of the impact assessment and the Commission's decision in terms of next step remains to be seen. Anyhow, one can only advise that a reform of the Directive maintains some balance between (technical) innovation and effective consumer protection.

As the various potential policy options would affect the different industries (such as autonomous driving, health care products, consumer goods, machinery) to different degrees, a detailed assessment for each sector is essential. Hence, this article will be followed in the coming weeks by further articles – each one addressing the specific possible impacts on the product safety and product liability aspects of a particular industry sector and in the various jurisdictions that need to be considered.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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