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Update: Reform of product liability adopted - New liability and litigation risks for companies!

Published

Nov 19 2024

Written By

daniel achtelik Module
Daniel Achtelik

Associate
Germany

As an associate in our Commercial, Dispute Resolution and Compliance Practice Group in Düsseldorf, a member of our Automotive Sector Group and our German ESG Group, I advise domestic and international clients on a wide range of commercial law and dispute matters as well as compliance matters in the field of ESG.

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Miriam Richter

Partner
Germany

As a Partner in our Commercial and Automotive teams in Munich, I advise domestic and international companies on commercial law matters as well as on product liability and product safety law.

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On 18 November 2024, the new EU Product Liability Directive [1] was published in the EU Official Journal. The European Parliament had already formally adopted the new EU Product Liability Directive on 12 March 2024 under the corrigendum procedure, following the provisional agreement in the trilogue on 14 December 2023. After the European elections in June 2024, the newly elected European Parliament approved the new EU Product Liability Directive on 17 September 2024, meaning that only the Council's adoption was required to complete the legislative process. The Council formally adopted the new EU Product Liability Directive on 10 October 2024. For companies, the reform significantly tightens up product liability!

Reform causes and objectives

The current EU Product Liability Directive [2], on which the German Product Liability Act (the so-called Produkthaftungsgesetz, “ProdHaftG”) is based, dates back to 1985. Given that the World Wide Web was only launched in 1989, it is hardly surprising that the European legislator believes that the European product liability regime needs to be updated for the digital age.

The increasing digitalisation of the economy and society brings to light new technologies that pose challenges for product liability law. These include smart products and systems with artificial intelligence (AI), which, due to their complexity, connectivity, and data dependency, overstrain current legal terminology, concepts and conditions. The reform aims to integrate these products into European product liability law and to amend or extend outdated legal concepts. 

In addition, the new EU Product Liability Directive is also part of the EU’s sustainability strategy (“European Green Deal”) [3]. The EU Commission aims to establish business models for a circular economy, in which products are regularly repaired, recycled and refurbished. This raises the issue of liability for products that have been modified after being placed on the market. Under the new EU Product Liability Directive, companies are liable as manufacturers if they modify a product outside the original manufacturer’s control in a way that is deemed to be a substantial modification, and thereafter make the product available on the market. This could have implications for the automotive industry, among others. For example, attachment manufacturers and start-ups in the field of autonomous driving will be at risk of being held liable as the manufacturer of the entire vehicle, even though they had little or no influence at all on parts of the vehicle. 

Furthermore, globalisation and digitalisation are leading to new supply chains with modern economic operators (fulfilment service providers, online platforms) that have not yet been in the focus of European product liability law. They will be liable under the new EU Product Liability Directive.

The central objective of the new EU Product Liability Directive is to contribute to the proper functioning of the EU single market (Art. 1 para. 2 of the new EU Product Liability Directive). The European legislator assumes that this objective will be achieved by maximising the level of consumer protection. This is why the reform removes limitations of liability and imposes significant liability and litigation risks on companies. 

The following table provides an overview of the main contents of the reform. In addition to broadening the group of affected economic operators, the amendments also adjust the conditions of liability (extending the concepts of product, defectiveness and damage, removing limitations of liability and thresholds). For companies, the procedural risks are particularly significant. These include a partial extension of the expiry period, new disclosure obligations and various simplifications of the claimant’s burden of proof.

An overview of the most important changes

  Current EU Liability Law
(Directive 85/374/EEC) 		New EU Product 
Liability Directive
(Directive (EU) 2024/2853)  
Affected economic operators
(potentially liable parties) 		 Principle: Liability of the producer, quasi-producer or importer; 
subsidiary liability of the supplier if a producer cannot be identified.
(Art. 1, 3 Directive 85/374/EEC, Sections 1, 4 ProdHaftG) 

1st level:

  • manufacturer and 
    quasi-manufacturer
  • manufacturer of a component, where that component has been integrated into, or inter-connected with the product within the manufacturer’s control and has caused the product to be defective
  • any natural or legal person that substantially modifies a product outside the manufacturer’s control and thereafter makes it available on the market

2nd level, in the case of a manufacturer established outside the EU:

  • importer of the product/component
  • authorised representative of the manufacturer (in terms of product safety law)
  • subsidiary: fulfilment service provider (Storage, packing and shipping service provider)

3rd level, in the case that none of the above economic operators can be identified:

  • distributor
  • provider of online platforms

(Art. 8) 
Extension of the definition of 
“product”
 
 Product means all movables, with the exception of primary agricultural products and game, even though incorporated into another movable or into an immovable.”
(Art. 2 Directive 85/374/EEC)

There has been some dispute among scholars as to the extent to which non-embodied software (no data carrier, no combination of hardware and software) is covered.  

“‚Product‘ means all movables, even if integrated into, or inter-connected with, another movable or an immovable; it includes electricity, digital manufacturing files, raw materials and software.“
(Art. 4 no. (1))
I.e., an explicit extension of the product concept to:

  • digital manufacturing files 
    (esp. files for 3D printing)
  • raw materials (e.g., gas and water)
  • any software, including stand-alone software and AI systems (except free and open-source software) 
Extension of the concept of 
“defectiveness”
 
 

The central condition for liability is a product defect. A product is defective when it does not provide the safety which a person is entitled to expect, taking all circumstances into account, including: 

  • presentation of the product
  • use to which it could reasonably be expected that the product would be put
  • time when the product was put into circulation
    (Art. 6 Directive 85/374/EEC; Section 3 ProdHaftG) 

Amendment of the list of the relevant circumstances, among others:

  • effect on the product of any ability to continue to learn or acquire new features after the product is placed on the market (e.g., AI systems)
  • in case of smart products, where the manufacturer retains control over the product after placing the product on the market, the moment in time when the product left the manufacturer’s control will be relevant, i.e., not just the moment in time when the product was placed on the market (e.g., updates)
  • reasonably foreseeable effect on the product of other products that can be expected to be used together with the product, including by means of inter-connection
  • relevant product safety requirements, including safety-relevant cybersecurity requirements
  • any recall of the product or any other relevant intervention relating to product safety by a competent market surveillance authority
  • specific needs of the group of users for whose use the product is intended 
    (e.g., life-sustaining medical devices)
  • in case of products whose very purpose is to prevent damage, any failure to fulfil that purpose (e.g., smoke detectors)

(Art. 7) 
Extension of the definition of  “damage” 

The producer shall be liable for damage caused by a defect in his product.“
(Art. 1 Directive 85/374/EEC)

  • Included are damages caused by death or by personal injuries, and 
  • damage to, or destruction of any item of property other than the defective product itself, provided that the item of property is of a type ordinarily intended for private use or consumption, and was used by the injured person mainly for his own private use or consumption.
    (Art. 9 Directive 85/374/EEC) 
  • Clarification that personal injury includes medically recognised damage to psychological health
  • Extension to damage caused by the destruction or corruption of data that are not used for professional purposes (e.g. costs for rescuing or restoring data
  • Retention of the exemption of damages to the product itself, even if damaged by integrated or inter-connected components
  • No compensation for damage to, or destruction of any property only, if the property is used exclusively for professional purposes

(Art. 6) 
Elimination of 
exemptions from liability and thresholds 
  • Maximum amount for damage resulting from personal injury of at least EUR 70 million
    (Art. 16 Directive 85/374/EEC; 
    e.g., in Germany: maximum amount of EUR 85 million, cf. Section 10 ProdHaftG)
  • Threshold of EUR 500 for damage to or destruction of property
    (Art. 9 lit. b) Directive 85/374/EEC; Section 11 ProdHaftG)
  • Exemption from liability for products that were neither manufactured by the producer for sale or any form of distribution for economic purpose nor manufactured or distributed by him in the course of his business 
    (Art. 7 lit. c) Directive 85/374/EEC; Section 1 para. 2 no. 3 ProdHaftG) 
  • No maximum amount for damage resulting from personal injury 

  • No threshold for damage to or destruction of property

  • No exemption from liability for placing products on the market outside business activity

(Further exemptions from liability: Art. 11)  
Prolongation of the expiry period 
  • Standard limitation period of 3 years beginning from the day on which the injured party becomes aware of the damage, or should reasonably have become aware
    (Art. 10 Directive 85/374/EEC; Section 12 ProdHaftG)
  • Expiry period of 10 years from putting a product into circulation
    (Art. 11 Directive 85/374/EEC; Section 13 ProdHaftG)
  • In principle: Continuation of the standard limitation period of 3 years from the injured party’s knowledge
    (Art. 16 para. 1)

  • Continuation of the expiry period of 10 years from placing the product on the market or putting it into service resp. making the product available or putting it into service following its substantial modification (Art. 17 para. 1)
  • Possible prolongation of the expiry period to 25 years for latent health damages where proceedings could not have been initiated within the expiry period 
    (Art. 17 para. 2) 
Obligation to 
disclose evidence 		 No disclosure of evidence 
  • Conditions: Successful request by the claimant before a national court; presentation of facts and evidence sufficient to support the “plausibility” of the claim
  • Consequences: Obligation to disclose all relevant evidence as far as the court deems necessary and proportionate

(Art. 9) 
Statutory easing of the burden of proof for claimants 

Principle: The claimant is required to prove the damage, the defect and the causal relationship between defect and damage.

(Art. 4 Directive 85/374/EEC; Section 1 para. 4 ProdHaftG) 

Substantial simplifications of the burden of proof for claimants, among other things:

  • Presumption of defectiveness when in breach of the obligation to disclose evidence.
  • Presumption of causality for typical damages, if defectiveness has been established.
  • In complex cases: Presumption of defectiveness and/or causality if the claimant can demonstrate likelihood.

(Art. 10 para. 2-5) 

 

Changes of particular relevance to companies

As the new EU Product Liability Directive significantly extends the group of potentially liable parties, it is precisely those companies that were not previously among the liable parties (modifying manufacturers, authorised representatives of the manufacturer, fulfilment service providers, operators of online sales platforms) that need to prepare for potential claims for damages.

Under current law, software programs stored on a data carrier, combined hardware and software products or industrially produced off-the-shelf programs are already covered by product liability. However, for companies that develop or distribute smart products or AI systems, the almost unlimited extension of product liability to these products and the corresponding adaptation of the term defectiveness should not be underestimated. 

Most importantly, the new procedural obligations and risks will affect all companies. The new disclosure of evidence will have far-reaching consequences for the chances of success in liability proceedings, as it effectively leads to a quasi-reversal of the previous burden of proof. The claimant may only have to prove the plausibility of his claim. It remains to be seen what standard the courts will apply when interpreting the term “plausibility”. It cannot be ruled out that a claimant may be granted access to a company’s internal business documents, such as design information and findings from product monitoring. Failure to comply with the obligation to disclose evidence could result in the loss of the case due to the presumptions provided under Art. 10 of the new EU Product Liability Directive. 

Outlook

The new EU Product Liability Directive will enter into force on the twentieth day following that of its publication in the EU Official Journal. Thereafter, the member states will have 24 months to transpose the new EU Product Liability Directive into national laws, so we expect it to apply from the fourth quarter of 2026 onwards. 

An agreement on the supplementary “AI Liability Directive” is pending (not to be confused with the Regulation (EU) 2024/1689 of the European Parliament and of the Council of 13 June 2024 laying down harmonised rules on artificial intelligence, the so-called “AI Act”). The EU Commission’s proposal for an AI Liability Directive from 28 September 2022 is still in discussion. However, an agreement on a final text has not yet been reached. The EU Commission’s proposal for an AI Liability Directive includes further disclosure obligations and rules of evidence. The European Parliamentary Research Service recently published a study on the EU Commission’s proposal for an AI Liability Directive on 19 September 2024, including proposals to extend the scope of the AI Liability Directive. This study might accelerate the ongoing legislative process for the AI Liability Directive.

In light of the stricter product liability, it is advisable for companies to review the new risks and responsibilities within the supply and distribution chains and to amend their contracts in line with the changes to the new EU Product Liability Directive. We are glad to support you in preparing for the new product liability regime. Please contact us to discuss how the product liability reform will affect your business and how you can take precautions.

 

[1] Directive (EU) 2024/2853 of the European Parliament and of the Council of 23 October 2024 on liability for defective products and repealing Council Directive 85/374/EEC.
[2] Council Directive of 25 July 1985 on the approximation of the laws, regulations and administrative provisions of the Member States concerning liability for defective products.
[3] The European Green Deal also includes stricter requirements on product design and sales according to the planned Ecodesign for Sustainable Products Regulation, the Repair of Goods Directive and the recently adopted Directive Empowering Consumers for the Green Transition.