What Can You Expect From the New Product Liability Directive

What Can You Expect From the New Product Liability Directive?

March 14, 2024, Covington Alert

At the end of 2023, the EU institutions informally agreed on the EU Directive on Liability for Defective Products (the "New PLD"), which will repeal (and thus replace) the existing EU Product Liability Directive (the "Existing PLD"). The New PLD will substantially change the EU product liability landscape as it has existed for the last 40 years, as we discuss below.

The New PLD's stated aims are to update liability rules to reflect the nature of products in the digital age and their associated risks, to ensure that individuals are better protected and can prove their claim in complex cases - while maintaining a fair balance between the legitimate interests of product manufacturers and injured parties - , and to improve legal certainty generally. In practice, the New PLD may lead to an increase in product liability litigation across the EU in areas such as pharmaceuticals and medical devices, technology and food and drink. The scope of the New PLD extends to components incorporated into covered products and so may affect not only consumer-facing businesses but also business-to-business sales.

As regards the timing of the New PLD, EU institutions are signaling that they expect to adopt the New PLD in the first half of 2024. EU Member States will then be required to implement it into their national laws within two years from the date of its entry into force. Member States must implement the New PLD carefully, as the legislation does not allow Member States to derogate from its provisions to achieve a different (i.e., more or less stringent) level of protection (other than in limited respects, including, significantly, the 'state of the art' defence). The New PLD will only apply to products placed on the market or put into service once the two-year deadline extended to Member States to implement the New PLD has expired. It will not apply to products placed on the market or put into service before then, which will be subject to the Existing PLD.

The key updates that the New PLD will make to the EU product liability landscape can be summarized as follows:

• The New PLD explicitly applies to standalone software (including AI), with some limited exceptions. Companies may therefore need to consider whether their software falls inside the scope of the New PLD.
• The New PLD expands the number of potentially liable entities for products or components of products (including software and related services). Companies that offer business-to-business products and/or companies that are importers, authorized representatives of manufacturers or fulfilment service providers should consider whether they will fall within the scope of the New PLD.
• The New PLD requires disclosure to be made available to claimants in product liability claims, including claims brought on a collective basis. Companies will need to develop strategies to deal with such disclosure across Member States, including how to protect confidential and privileged documents.
• The New PLD sets out a number of situations where a product is presumed to be defective or where it is presumed that a causal link exists between a defect and damage. This is intended to make it easier for claimants, including collective or group claimants represented by a qualified representative, to pursue civil remedies. There appears to be a low bar set for triggering rebuttable presumptions regarding a product's defectiveness and/or the causal link to damage. Further presumptions apply where the claimant faces "excessive difficulties" in proving the defect or the causal link between the defect and the damage (due to the "technical or scientific complexity" of the products).
• The New PLD allows Member States to derogate from the "state of the art" defence. The New PLD exempts manufacturers from liability where the state of scientific and technical knowledge at the relevant time (i.e., the time the product was manufactured) was such that the defectiveness not be discovered. However, Member States have discretion to omit this exemption when implementing the New PLD.
• The New PLD extends the right to compensation for natural persons to new types of damage. For instance, it explicitly covers medically recognized damage to psychological health and damage resulting from the destruction or corruption of data, provided that such data is not used for professional purposes.
• The New PLD sets out new criteria that courts should consider when assessing whether a product is defective. These criteria include whether the product complies with relevant product safety requirements, such as safety-related cybersecurity requirements, and has the capacity to learn or acquire new features after deployment.

Covington's leading product liability team would be happy to assist companies with any of the issues outlined above, or with mapping the implementation processes and practices across the 27 EU Member States and with engaging with Member States and/or the European Commission on the implementation of the New PLD. Our detailed analysis of the New PLD is set out below.

I. What Is the Scope of the New PLD?

The New PLD gives natural persons (i.e., individuals; not only consumers) the right to claim compensation on a strict liability basis from manufacturers of products and, in some cases, components of products, placed on the EU market or put into service in the EU for certain damages they have suffered due to a defect in that product. The New PLD establishes a framework to make it easier for individuals to bring and establish such claims.

The New PLD defines "product" very broadly to include raw materials and stand-alone software, including AI software, although free and open-source software developed or supplied outside the course of a commercial activity is excluded. A "component" is any item, raw material, or any related service that is integrated into or inter-connected with a product. The New PLD therefore extends to services integrated into a product, although generally it does not extend to services.

The right to compensation applies to the following damages:

• death or personal injury, which will now include medically recognized damage to psychological health;
• damage to, or destruction of, any property, other than (a) the defective product itself; (b) a product damaged by a defective component that is integrated into, or inter-connected with, a product by the manufacturer of that product or within that manufacturer's control; or (c) property used exclusively for professional purposes; and
• destruction or corruption of data that is not used for professional purposes. (If the damage relates to data that is used both for professional and private purposes, it is not in scope.)

The right to compensation covers: (i) all material losses resulting from the above-mentioned damage, leaving it to the Member States to determine the rules for calculating the amount of compensation; and (ii) non-material losses, such as pain and suffering, where these are compensable under national law. The New PLD does not allow claims for other damages, such as pure economic loss, privacy infringements, or discrimination.

II. What Would Be Considered a Defective Product under the New PLD?

A product is considered defective if it "does not provide the safety that a person is entitled to expect or that is required" by EU or national law. The assessment of defectiveness by a court will involve an objective analysis of the safety that the public at large is entitled to expect, rather than referring to the safety that any particular person is entitled to expect.

The New PLD lists several factors that a court should consider in assessing defectiveness. These include: (i) presentation and characteristics of the product including labelling, design, composition, packaging and instructions for the product; (ii) the reasonably foreseeable use of the product; (iii) the specific needs of the class of users for whom the product is intended; (iv) the effect on the product of any ability to continue to learn or acquire new features; and (v) the reasonably foreseeable effect on the product of other products that can be expected to be used together with the product. Other relevant factors arise under other EU legislation, such as:

• "relevant product safety requirements, including safety-relevant cybersecurity requirements", e.g., requirements arising from the NIS2 (Directive 2022/2555) implementing legislation; and
• "any recall of the product or any other relevant intervention by a regulatory competent authority or by an economic operator relating to product safety", e.g., product safety enforcement under the General Product Safety Regulation (Regulation 2023/988/EU).

III. Who May Bring the Compensation Claims Under the New PLD?

The right to compensation belongs to: (i) the natural person who has suffered the damage; (ii) a person who has succeeded or been subrogated to the rights of the injured person by virtue of EU or national law or by contract; and (iii) a person acting on behalf of one or more injured persons by virtue of EU or national law, e.g., pursuant to Member States' laws implementing the Representative Actions Directive (EU) 2020/1828. This opens up the possibility of significant representative actions in the product liability context across the EU. Claims can be brought through the various redress mechanisms available at the national level, including judicial proceedings, out-of-court settlements, alternative dispute resolution, or representative actions.

IV. Against Whom May Compensation Claims be Brought Under the New PLD?

Any person with a right to compensation may bring a claim against: (i) the manufacturer of the defective product; and (ii) the manufacturer of a defective component, if the manufacturer of the product authorized or consented to its integration in, inter-connection, or supply with a product. If the damage is caused by a defective component, the natural person may seek compensation from the manufacturer of the component and/or the manufacturer of the product.

Defendants may seek a contribution from other relevant economic operators, except that manufacturers that integrate software into their products do not have a right to recourse against any manufacturer (i.e., developer) of the integrated software that was a microenterprise or small enterprise at the time the software was placed on the market, where the manufacturer has waived that right against the microenterprise or small enterprise.

If the manufacturer is located outside the EU, claims may also be brought against: (i) the importer; (ii) the manufacturer's authorized representative; or (iii) the fulfilment service provider. If more than one entity is liable for a particular damage, they are jointly and severally liable. This liability cannot be excluded by contract. If the claimant is unable to identify the manufacturer or, in the case of non-EU manufacturers, any of the other entities mentioned above, then any distributor of the product may be held liable for the damage. In certain circumstances, online platforms may also be held liable.

V. New PLD Will Likely Increase in Product Liability Litigation Across the EU

The New PLD will make it easier for: (i) claimants bringing claims on an individual or collective basis; and (ii) bodies representing collective claimants to bring claims related to allegedly defective products. The New PLD will be available to both individual and collective claimants. This means that the toolsof disclosure and rebuttable presumptions described below, which are primarily designed to assist individual consumers who may find themselves in difficulties proving a claim alone, are likely to be used strategically by well-funded claimant lawyers pursuing claims on a collective basis.

A. Disclosure

The New PLD introduces a new disclosure regime for potential claimants, including for representative actions. Claimants only need to provide "facts and evidence to support the plausibility of the claim for compensation" to obtain disclosure.

Following a request, the defendant will be required to disclose necessary and proportionate evidence in its possession that the claimant can use to support its claim for compensation. Protections will only be extended to confidential information and trade secrets. National courts are empowered to protect (alleged) trade secrets when used or referred to during proceedings and after legal proceedings, but are not obliged to do so.

The New PLD does not provide protection for other types of confidential information, privileged information, or intellectual property, unless a Member State has adopted such rules at the national level. Existing rules on pre-trial disclosure in the Member State will continue to apply.

B. Rebuttable presumptions

Claimants previously had to prove the defect in the product, the damage suffered, and the causal link between the two. Under the New PLD, in certain situations: (i) the defect of a product; and/or (ii) the causal link between the defect and damage may be presumed. The burden then shifts to the defendant to rebut any presumptions.

A product is presumed to be defective if: (i) the defendant has failed to disclose relevant evidence as a result of a disclosure order mentioned above; (ii) the claimant proves that the product does not comply with EU or Member State mandatory product safety requirements intended to protect against the risk of damage; or (iii) the claimant proves that the damage was caused by an "obvious malfunction of the product during reasonably foreseeable use or under ordinary circumstances".

The causal link between the defect of the product and the damage is then presumed if it is established both that the product is defective, and the damage caused is of a "kind typically consistent" with the defect in question.

In addition, defectiveness of a product and/or the causal link between the defect of the product and the damage is also presumed where two conditions are met: (1) if, despite the disclosure of evidence and taking into account all relevant circumstances of the case, the claimant faces "excessive difficulties" (in particular due to technical or scientific complexity), in being able to prove the defect of the product or the causal link between its defect and the damage, or both, and (2) the claimant proves that it is "likely" that the product is defective or that there is a causal link between the defect and the damage, or both.

C. State of the art defence

The New PLD provides for certain defences to liability, for example, under a "state of the art" defence. This defence is available under the New PLD where "the objective state of scientific and technical knowledge" at the time the product was placed on the market, put into service or during the period in which the product was under the manufacturer's control was not such as to enable the defect to be discovered. This defence will not apply in certain cases, such as when the product's defect is caused by a lack of software updates or upgrades necessary to maintain the product's safety.

Importantly, however, the New PLD also allows Member States to omit this defence on implementation. In those Member States that do so, manufacturers may be held liable even if they can prove that the defectiveness could not be discovered due to the state of knowledge at the time.

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Covington is closely following the adoption of the New PLD and will continue to monitor its implementation in the various EU Member States.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Commercial Litigation, Public Policy, Privacy and Cybersecurity practices.

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