A new regime for a new era: How the EU Product Liability Directive will reshape product liability in Germany

Introduction 

Following years of intense debate among EU institutions, the final compromise text of the new EU Product Liability Directive (PLD) has recently been adopted by the European Parliament. It will replace the current directive from 1985 which had introduced a no-fault strict liability regime in EU Member States. The current directive, while having proven remarkably agnostic to different industries and evolving technologies, required a comprehensive update through the PLD to adapt the European product liability regimes to the digital age. Following a detailed discussion of the final text of the PLD, this blogpost deals with the specific implications of the PLD on German product liability law. 

In summary, the PLD will drastically change German product liability law. Not only does it broaden the scope of products by including non-embodied software as well as AI, it also expands the range of possible defendants significantly by extending liability to almost every “economic operator” in a supply chain dealing with a product. Other significant changes concern procedural mechanisms such as the introduction of disclosure obligations and presumptions as to a product’s defectiveness, causation, or both.

Expected changes in German product liability law

With the adoption of the PLD, the German legislator will have to initiate a comprehensive overhaul of the current German Act on Liability for Defective Products (ProdHaftG). As the PLD requires full harmonisation (Article 3), Member States are not allowed to deviate from it when transposing its provisions into national law. It therefore precludes almost any legislative leeway.

New types of recoverable damages

According to Section 1 ProdHaftG, the manufacturer of a defective product shall compensate an injured person for the personal injury or damage to private property caused by the product’s defectiveness. This no-fault liability will be extended to new types of damage (Article 6 PLD): First, to the destruction or corruption of data that is not used for professional purposes. Second, to medically recognized damage to psychological health, which strengthens the position of claimants when recovering immaterial losses.

Extended range of products that can trigger liability

Under current German product liability law, a product is defined as a movable object, even if it forms part of another movable object or an immovable object, as well as electricity (Section 2 ProdHaftG).

Given that digital manufacturing files (at least for 3D-printers), raw materials and embodied software have already been recognized as products by German case law, the most important changes introduced by the PLD are the inclusion of inter-connected movables, such as smart home-systems and, even more importantly, non-embodied software such as AI systems (Article 4 (1) PLD). In essence, the PLD introduces a no-fault liability for damages caused by AI-enabled products. In contrast, the AI Liability Directive (another piece of emerging EU legislation on AI) envisages changes to fault-based liability regimes.

New tests for defectiveness

Pursuant to Section 3 ProdHaftG, a product is defective if it does not provide the safety which one is entitled to expect, taking different circumstances into account that are already largely consistent with those required by the PLD. However, the PLD also introduces new aspects that Member State courts shall consider when assessing defectiveness, such as evolving technologies (e.g. a product’s ability to continue to learn or acquire new features after it is placed on the market) and relevant product safety and cybersecurity requirements (Article 7 PLD).

Broader scope of potential defendants

The definition of ‘manufacturer’ under German product liability law refers to the person who (i) manufactured the product (or a component thereof), (ii) presents themselves as the manufacturer or (iii) imported the product. A supplier faces secondary liability as a quasi-manufacturer unless they provide information on the identity of the manufacturer or their own supplier.

Article 8 PLD considerably expands the number of entities that may be held liable for damages, introducing the concept of ‘economic operators’. It includes as the manufacturers of products or components, providers of related services, authorized representatives of a manufacturer, importers, fulfillment service providers or distributors (Article 4 (15) PLD). Thus, the PLD expands a ‘cascade’ of potential defendants to a product liability claim who, in principle, can be held liable jointly and severally.

• First, the PLD establishes liability of the manufacturer. With a view to the EU’s plans for a circular economy, the definition of manufacturer includes re-sellers who refurbish and thereby substantially modify a product outside the original manufacturer’s control. While the aspect of substantial modification has not yet been explicitly addressed in German product liability law, liability for ‘up-cycled’ products has already been established in case law; 
• Second, where the manufacturer is established outside the EU, the importer, the authorised representative, or the fulfilment service provider can be held liable. Their liability is without prejudice to the manufacturer’s and should enable injured person to direct a claim against at least one defendant in the EU;
• Third, the PLD requires to establish liability of any distributor (including online platforms within the meaning of the Digital Services Act), but only if they, upon the request of the injured person, fail to identify an up-stream economic operator seated in the EU or their own supplier.

Fewer exemptions from liability

Under Section 1 (2) and (3) ProdHaftG, defendants are exempted from liability in certain scenarios, such as where it is reasonable to assume the defectiveness only materialised after the product had been put on the market or where the defectiveness could not have been discovered given the scientific and technical state of the art at the time of market entry.

The PLD introduces a couple of new exemptions, i.a. for the manufacturer of a component in Article 11 (1), in particular if the defectiveness is attributable to the design of the product as a whole or to instructions given by this product’s manufacturer, and for the person who substantially modifies the product if the defectiveness is related to a part not affected by the modification. Article 11 (2), in turn, derogates from these exemptions and from current German product liability law: Even if it is probable that the defectiveness did not exist at the time the product was placed on the market, a manufacturer faces liability where the defectiveness is due to a related service, to software updates or upgrades (or lack thereof) or a substantial modification, provided these circumstances are within the manufacturer’s control.

Claimant-friendly procedural features: presumptions of fact and disclosure obligations

Under the current German product liability law, the burden of proving the defectiveness, the damage and the causal link between the two lies with the injured person, while the manufacturer bears the burden of proving circumstances exempting them from liability (Section 1 (4) ProdHaftG). 

In principle, the PLD does not change the burden of proof (Article 10 (1) PLD). But while the German regime only provides for few presumptions of fact that have been developed by case law to apply in a narrow range of circumstances, the PLD introduces a couple of presumptions that effectively shift the burden of proof to the defendant (Article 10 (2)-(4)). Two presumptions stand out:

First, a presumption for both the defectiveness and the causal link (between the defectiveness and the damage incurred) where a claimant faces excessive difficulties and demonstrates a certain likeliness of a defectiveness, the causal link, or both (Article 10 (4)).

Second, the defectiveness is being presumed where the defendant fails to disclose relevant evidence (Article 10 (2) (a)). The disclosure obligation stipulated in Article 9 is without precedent in current German procedural law, where it is each party’s responsibility to investigate the facts and present them to the court and where courts have very limited powers to order disclosure of documents. The PLD, however, requires the German legislator to ensure that at the request of a claimant or defendant, the respective opposing party shall disclose all relevant evidence at their disposal, albeit limited to what is necessary and proportionate. 

Considering that failure to disclose could trigger the above-described presumptions, the disclosure obligation has enormous implications for the ways in which manufacturers organise their document retention policies and internal guidance on knowledge sharing. This is particularly important when considering that evidence may still need to be available in cases where an injured person brings a claim for latent harm shortly before the longstop date, being 25 years after the product had first been placed on the market (Article 17 (2) PLD).

Liability cap to be discarded

The ProdHaftG caps the maximum amount of compensation to be paid by a defendant at EUR 85 million (Section 10 ProdHaftG). The PLD does not provide for such a cap. In light of the degree of harmonisation required by Article 3 PLD and the restrictions on exclusions or limitations of liability (Article 15 PLD and recital 56), the German legislator will need to abolish the cap when implementing the PLD’s provisions into German law.

Outlook

The PLD still needs to be formally adopted by the Council of the EU. After entering into force, the PLD will bring about significant changes in Germany’s product liability law. By broadening the scope of potential defendants, extending presumptions as to damage and causation and introducing an obligation to disclose evidence, the PLD, once transposed into national law, will increase the number of product liability claims in Germany. This holds all the more true when considering the plaintiff bar’s appetite for mass litigation and the recently introduced Redress Action, which - while not fit to accommodate product liability cases that greatly differ in the harm suffered and thus lack commonality - could at least be used to clarify common prerequisites for individual product liability claims.

Any business that operates within a supply chain for a product designed to enter the German market should prepare for the legislative changes by revisiting their supply and distribution contracts to check whether risk is adequately allocated, and by ensuring compliance with document retention and knowledge sharing policies to be in the best possible position should a product liability claim eventually surface.