In the digital age: unpacking the new EU PLD

July 2023  |  FEATURE | RISK MANAGEMENT

Financier Worldwide Magazine

July 2023 Issue

When a consumer buys a product or a service, the purchase is generally made in good faith. No purchaser expects or desires a product or service to be defective, and they certainly do not expect it to have the capacity to cause physical harm or, in extreme circumstances, be fatal.

As far as a product manufacturer or service provider is concerned, any defective commodities produced by them puts them in the frame for a consumer’s accident or injury. This liability can vary from jurisdiction to jurisdiction and may result in paying significant damages to claimants.

Across the European Union (EU), product liability currently falls under the purview of the Product Liability Directive 1985. However, since its enactment, nothing has been done to broaden the scope of the legislation and bring it more in line with wider definitions of products, such as software, digital services and artificial intelligence (AI) systems.

“The EU’s product liability framework is codified in the Product Liability Directive (PLD) (85/374/EEC),” explains Katie Chandler, a partner at Taylor Wessing. “Under the existing PLD, producers are strictly liable for products if a consumer can establish that the product is defective and caused the harm suffered.

“It is a no fault regime, meaning that the consumer does not need to establish fault or negligence on the part of the producer, which makes it easier to bring claims,” she continues. “It is widely considered, however, that the PLD needs updating so that it is fit for purpose in the digital age.”

To that end, in September 2022 the EU announced proposals to update the 1985 PLD. If introduced, the proposals will have a significant impact on product manufacturers and, in all probability, lead to increased product liability litigation.

The new PLD

The proposal for a new directive on liability for defective products – the New Product Liability Directive (new PLD) – was published as part of a number of measures designed to adapt liability rules to the digital age, the circular economy and the impact of global value chains.

“The PLD has been a cornerstone of the internal market for four decades,” said Thierry Breton, the commissioner for the internal market at the European Commission (EC). “This new proposal will make it fit to respond to the challenges of the decades to come. The new rules will reflect global value chains, foster innovation and consumer trust, and provide stronger legal certainty for businesses involved in the green and digital transition.”

In addition, the proposed revision of the existing PLD will give businesses legal certainty so they can invest in new and innovative products, as well as providing an assurance to victims that they can get fair compensation if defective products, including digital and refurbished products, cause them harm.

“The proposal aims to bring the PLD up to speed and make it easier for consumers to bring claims against technology companies bringing complex software products to the market,” affirms Ms Chandler. “There are particular challenges with establishing liability for defective digital products such as the intangibility, complexity, connectivity and, with AI in particular, opacity, continuous learning and limited predictability.

“The proposals are designed to address some of these challenges through the introduction of certain rebuttable presumptions and disclosure obligations on manufacturers,” she continues. “The new rules will bring better protection for consumers and certainty for businesses as to liability without stifling innovation.”

Key proposals

With the revised Directive modernising and reinforcing the current, long-established rules, product manufacturers need to get up to speed with how the new PLD proposals are likely to impact their operations as they increasingly adopt new technologies in the delivery of products and services.

Intended to ensure fair and predictable rules for businesses and consumers alike, the key proposals of the new PLD as set out by the EC, are outlined below.

First, modernising liability rules for circular economy business models. This revision will ensure that liability rules are clear and fair for companies that substantially modify their products.

Second, modernising liability rules for products in the digital age. This will allow compensation for damage when products like robots, drones or smart-home systems are made unsafe by software updates, AI or digital services that are needed to operate the product, as well as when manufacturers fail to address cyber security vulnerabilities.

Third, creating a more level playing field between EU and non-EU manufacturers. When consumers are injured by unsafe products imported from outside the EU, they will be able to turn to the importer or manufacturer’s EU representative for compensation.

Lastly, putting consumers on an equal footing with manufacturers. This proposal requires manufacturers to disclose evidence, introduces more flexibility to the time restrictions to introduce claims, and alleviates the burden of proof for victims in complex cases, such as those involving pharmaceuticals or AI.

“The main advantages of the proposed changes to the PLD are the enhancement of consumer protection when using connected devices, AI systems and other emerging technologies, and giving consumers a defined route to bring claims against multiple parties for compensation where such products are defective,” says Ms Chandler. “The newly defined liability regime should also provide certainty for technology companies when assessing liability risks which will assist in investment in innovation, insurance coverage, risk assessments, claims handling processes and other risk mitigating factors.”

Mixed reception

Despite the EU’s high hopes for its legislation, it would be fair to say that stakeholder reaction to the PLD has been somewhat mixed. This may be unsurprising given the fine line between modernising the current product liability regime to adequately protect consumers from the risks of new and emerging technologies, and the need to avoid stifling innovation.

In its ‘European Commission’s Proposal for a Revised Product Liability Directive: Feedback of the European Law Institute (ELI)’ commentary, the ELI welcomes the current proposal for a new PLD and is happy to see that the calls for reform have been heard and acted upon. In particular, the ELI strongly supports the extension of the liability regime to digital products as well as recognition of the need to adjust the 1985 text to peculiarities of modern-day products.

Also broadly supportive of the proposed PLD is the European Consumer Organisation (BEUC), which particularly welcomes the proposal to broaden the scope of the PLD by including software. The BEUC believes the definition of product should explicitly state that software, including AI, is covered as a component of a product, as a standalone product and as a service. It also welcomes the proposal to include “related digital services”.

However, one arena that has given the updated PLD a less than positive reception is the insurance industry. In Insurance Europe’s ‘Key messages on the European Commission’s proposal for a revision of the Product Liability Directive (PLD)’ the federation flags a number of concerns, as outlined below.

First, the proposed changes would, if adopted in their current form, compromise insurers’ ability to price risk, most notably the risk of personal injuries, including “medically recognised damage to psychological health” and the proposed extended liability risks for producers.

Second, the proposal to extend liability risks for producers to include cyber risks is problematic from an insurance point of view, primarily because cyber risks are difficult to insure for a number of reasons, including the fact that they are evolving. Consequently, the extent to which cyber insurance can, in practice, be integrated into product liability policies remains to be seen.

Finally, the EU’s proposed adjustments to the PLD increase the liability placed on the producer, which will thus result in increased litigation risks and, ultimately, costs for consumers. In other words, the EC has opted to alter the careful balance between consumers and producers that has existed and worked well for decades, and that has supported innovation. The insurance industry is concerned that the proposed amendments to the PLD will harm, rather than support, innovation.

Fellow legislation

As it happens, the newly proposed PLD is not the only piece of product liability-related legislation to be proposed by the EU in recent times, with the AI Liability Directive and the Consumer Redress Directive (the EU’s new collective redress regime under the Representative Actions Directive (EU) 2020/1828) also under consideration.

The purpose of the AI Liability Directive is to lay down uniform rules for access to information and alleviation of the burden of proof in relation to damages caused by AI systems, establishing broader protection for victims (be it individuals or businesses), and fostering the AI sector by increasing guarantees.

The AI Liability Directive will also harmonise certain rules for claims outside the scope of the PLD, in cases in which damage is caused due to wrongful behaviour. This covers, for example, breaches of privacy, or damages caused by safety issues. The new rules will, for instance, make it easier to obtain compensation if someone has been discriminated against in a recruitment process involving AI technology.

Meanwhile, the intent of the Consumer Redress Directive, which covers representative actions for the protection of the collective interests of consumers, is to introduce a right to collective redress across the EU. It requires member states to put in place procedures for “qualified entities” to bring representative actions to obtain injunctions, damages and other remedies on behalf of a group of consumers harmed by a trader that has allegedly infringed EU law.

According to the EU, once implemented by member states, the Consumer Redress Directive could have a significant impact on the balance of power in consumer redress and is likely to facilitate the current trend of increased commercialisation of consumer rights and actions in Europe.

Together with the proposed revision of the PLD, the AI Liability Directive and the Consumer Redress Directive initiatives complement the EC’s effort to make liability rules fit for the green and digital transition.

In summary

As envisioned by the EC, the new PLD will bring the EU’s product liability regime up to speed with the digital age, providing legal certainty for businesses and ensuring consumers are well protected in the event something goes wrong. On the road to enactment, the PLD proposal now needs to be adopted by the European Parliament and the Council.

“The proposed amendments to the PLD bring technology companies into the scope of the strict product liability regime, allowing consumers to claim compensation for damage when products are defective,” concludes Ms Chandler. “Expanding the scope of the PLD in this way provides some clarity on determining liability for products manufactured in the digital age, but how the various changes will be applied in practice remains to be seen.”

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Fraser Tennant