Stricter product liability – Commission Proposal for a new EU Product Liability Directive

The draft Directive confirms that AI systems and AI-enabled products are “products” that fall within the scope of the new EU Product Liability Directive. If defective AI causes damage, the injured person can – just like with any other product – claim compensation without having to prove the manufacturer’s fault. So far, it has been unclear whether software is a “movable” object and, hence, whether it is a “product” within the meaning of the EU Product Liability Directive.

The Commission’s draft puts an end to this discussion: in addition to movables, electricity and AI systems, the EU Product Liability Directive also applies to software and digital manufacturing files, which will be included within the definition of “product” in the future, even if they are not placed on the market in tangible form (for example, “embedded” in a product). Consequently, a provider of digital services which affect how a product works (such as a navigation service in an autonomous vehicle) can also be held liable on the basis of the new EU Product Liability Directive.

Until now, only manufacturers, quasi-manufacturers (i.e. anyone who, by putting his or her name, trademark or other distinguishing feature on the product, presents himself or herself as its manufacturer) and importers have been subject to liability under the German Product Liability Act (and secondarily also suppliers, where the manufacturer could not be identified).

The draft now provides that also a manufacturer’s authorised representatives (natural or legal persons established within the European Union who have received a written mandate from the manufacturer to act on its behalf in relation to specified tasks under product safety law) and fulfilment service providers (companies providing order handling services, such as warehousing, packaging or dispatching, to other companies) are liable for damages if defective products cause personal injury or property damage. Moreover, also operators of online platforms are intended to be liable when they perform the role of manufacturer, importer or distributor in respect of a defective product. This is to ensure that injured persons have an enforceable right to compensation even if the manufacturer is established outside the European Economic Area (EEA).

So far, the aforesaid economic operators have not been subject to any such product liability risks, but should be prepared to be subject to  such risks in the future. Finally, economic operators may be considered manufacturers in the future and be liable like manufacturers if they “substantially modify” a product and such modification is undertaken outside the original manufacturer’s control. Substantial modifications are defined as modifications that either create a new risk or heighten a risk that already exists.

Under the Product Liability Directive currently in force, a product is considered to be defective if it does not provide the safety which the public at large is entitled to expect. A list of criteria provides information about the circumstances to which the public’s safety expectations can legitimately be related. For the new Product Liability Directive, this list is now being extended to include criteria such as the presentation of the product and its reasonably foreseeable use. However, product safety requirements and safety-relevant cybersecurity requirements are also to be taken into account in this respect. Product recalls issued by a manufacturer could also be an indication that the product is defective. What's more, the draft provides that even a product which, in itself, does not contain any defect has to be regarded as defective within the meaning of product liability law if this product may present a risk when used together with a  product of another manufacturer.

The defectiveness of a product is still to be determined based on the safety standard which the general public is entitled to expect in relation to the product. The general public is entitled to have particularly high safety expectations in relation to, for example, life-sustaining medical devices. Even where the actual defectiveness of such a medical product cannot be established, this medical product may still be considered defective if it belongs to the same production series as a product already proven to be defective. The draft additionally extends the definition of damage to include loss or corruption of data which is not used exclusively for professional purposes.

There is a new rule whose relevance should not be underestimated and according to which companies may be required by a court to disclose and surrender evidence in their possession. This procedure, which is known as “disclosure of documents” in Anglo-American legal systems, is in principle alien to German procedural law.

The rule is due to frequent complaints about a lack of evidence preventing an injured person from proving that the product was defective and that it caused the damage suffered. This is said to apply in particular in view of the manufacturer’s advantage in terms of technical and scientific information. The injured person often does not have such information, or does not understand its implications.

This is why an injured person’s access to evidence to be used in legal proceedings (for example, technical design documents) is to be facilitated. If the company fails to comply with its obligation to disclose and surrender evidence, the court will presume the defectiveness of the product. Courts must, of course, consider the confidentiality of trade secrets as best as possible. It remains to be seen how precisely the EU Member States will transpose these obligation to disclose evidence into their respective national law.

In addition to the above, in the draft version of the new Product Liability Directive, the EUR 500 deductible for injured persons in the event of damage to property and the liability limit (the German Product Liability Act currently provides for a maximum amount of liability of EUR 85 million for personal injury) have been removed without replacement. These changes are likely to lead to higher insurance premiums for companies.

The European Council and the European Parliament have already reached an agreement on the principles of the new EU Product Liability Directive. Once the Directive enters into force, the Member States will probably have 24 months to transpose the requirements of the Directive into their respective national law – for example, by amending the German Product Liability Act.

The Proposal for a new EU Product Liability Directive will lead to a further tightening of the product liability regime, rather than easing the burden on the economic operators concerned.

Affected companies will need to prepare for heightened product liability risks and adjust their risk management accordingly. Fulfilment service providers, technology companies and online platforms that are not currently exposed to liability risks under the German Product Liability Act should assess the liability risks which may result from the new EU Product Liability Directive in relation to the specific products sold.