Product Liability in Europe: The Hot Topics for 2007 and Beyond

01 June 2007

Rod Freeman and Matthew Hibbert, Lovells

In this article we have highlighted, from our experience in dealing with these issues for our clients on a pan-European basis, some of the “hot topics” for product liability in Europe. We cover both issues that we see as presenting challenges for product manufacturers now, and some emerging issues that we anticipate will become increasingly important for those manufacturers over the coming months and years.

A New Level of Enforcement of European Product Safety Laws

Through 2006 and into 2007, one of the recurring themes of European Commission policy has been a greater emphasis on more active and effective enforcement of EU product safety laws. Having devoted significant resources over past years to developing product safety regulations affecting all industry sectors, the Commission has recognised that such measures will be ineffective if they are not enforced diligently and consistently at a national level. As a result, the Commission is rolling out a range of initiatives to encourage more active enforcement of product safety laws throughout the EU. At the same time, as EU product regulation continues to proliferate within a rapidly expanding European Community, differences in implementation, interpretation and enforcement of such laws at a national level creates increasing problems for product manufacturers seeking to market their products across the EU. The recent problems created in the EU by measures such as the WEEE Directive, the RoHS Directive, and the Phthalates Directive are prime examples of EU legislation finding differing interpretations in different member states, giving rise to very difficult and costly issues for product manufacturers who wish to ensure compliance with the laws in all the countries in which their products are marketed – an essential requirement for those wishing to protect a valuable reputation in the marketplace.

Of all of the Commission’s recent initiatives to regulate product safety in the EU, none has had more impact on product manufacturers in virtually all consumer product sectors than the revision of the General Product Safety Directive (GPSD), which came into effect in 2004.

Experience of enforcement of the GPSD by member state authorities continues to develop. One of the issues that continues to concern those who represent manufacturers in product recalls and other corrective actions under the GPSD is the inconsistent approach that authorities in different member states can sometimes take to the same product safety risk.

An important component of the new GPSD regime is the obligation on producers and distributors to immediately notify the national authorities in every affected EU country if they discover they have marketed a dangerous product. Although the Commission has taken various steps to try to alleviate this burden, in practice, in a regime where responsibility for enforcement of the product recall laws is not centralised in the EU, a prudent manufacturer with a valuable reputation in the marketplace to protect has no real option but to liaise directly with national authorities in every member state where the product has been marketed. This will become even more of an issue as national authorities become increasingly interventionist in their approach to product safety issues in their own country – evidence of which we are already starting to see.

The enforcement of product safety issues is also taking on an increasingly global flavour. For example, the European Commission recently entered into an agreement with the United States Consumer Product Safety Commission (the CPSC) whereby they agreed to exchange information on emerging issues of health and safety relevance, risks posed by products and actions taken in response, product testing, and major recalls of mutual interest. A similar agreement has also been entered into between the Euorpean Commission and the government of China. This new level of cooperation creates particular challenges for product manufacturers and must be carefully managed, particularly as the threshold for triggering dangerous product notifications is different in the US to that under the GPSD. We have already seen examples of communications between the CPSC and European authorities creating issues for product manufacturers seeking to effectively manage their product safety issues on a global basis.

There is no doubt that as national authorities in the EU, with the encouragement and support of the European Commission, become more active in the enforcement of product safety laws, the tensions created by inconsistencies in approach will create greater risks for product manufacturers. These risks will also result in significant costs for the manufacturers if not anticipated and managed effectively as they arise.

The Interplay Between Product Liability and Product Safetly Regulation in Europe

When Lovells reported to the European Commission in 2003 on the results of the study it carried out for the Commission on the practical operation of product liability systems in the EU, one of the important issues raised for consideration was whether product manufacturers and suppliers should be able to rely, in defending product liability claims, on their products’ compliance with relevant safety regulations. It has been argued, particularly by manufacturers in highly regulated industries such as pharmaceuticals, that in deciding product liability cases, the courts should not be able to impose higher safety standards than those contained in industry regulations by finding products which comply with those regulations to be defective.

This complex issue touches on the boundaries between product safety and product liability. This issue recently has been considered by courts across the EU on a number of occasions. In two cases in 2005, different German courts held, respectively, that compliance with up-to-date regulations was a defence to a product liability claim and that non-compliance with mandatory safety requirements rendered a product defective. In contrast, an English court in 2006 considered that non-compliance with voluntary safety standards did not automatically render a product defective.

The relevance of regulatory compliance in claims under the Product Liability Directive is a question that is beginning to be asked of courts across the EU, and although the European Commission has no plans to amend the directive in this regard in the immediate future, the way in which the courts answer that question over the next few years will be significant in influencing policy on this important issue.

Class Actions Across the EU?

At least at present, there are no EU-wide rules dealing with class actions procedures in the member states. However, some European countries have rules that permit the consolidation of groups of claims which raise similar or related issues of fact or law.

In recent times a number of member states have introduced new proposals aiming to enhance the claimant’s ability to group together for the purposes of bringing product liability and other consumer claims. For example, the recent moves by President Chirac in 2005 to introduce class action procedures in France created much controversy and international attention. There have been developments in Italy to introduce a form of class action procedure. In the Netherlands, new legislation has been passed enabling consumer associations to represent classes of claimants and bind them to settlements with defendants and Spain has had a procedural framework in place since 2001 that enables collective consumer claims to be brought using a process similar to the US class action procedure. In various other EU jurisdictions, such as Ireland and Finland, proposals for legislation enabling collective actions to be brought are also currently under consideration.

Such developments signal an increased inclination on the part of European governments to introduce procedural measures to better facilitate consumer access to justice. As the inertia of these developments at a national level grows, so will the European Commission’s interest in intervening, with the introduction of EU wide measures to facilitate access to justice – particularly where it relates to consumers’ rights to enforce EU-initiated legislation. Indeed, in March 2007, one of the very first actions of the new EC Commissioner for Consumer Affairs was to announce proposals to better facilitate group claims against product manufacturers in the EU, and this is being considered by the Commission.

The Future of the Development Risks Defence

Article 7(e) of the EU Product Liability Directive provides a defence to a product liability claim under the directive for those producers who can show that the state of technical knowledge at the time the product was marketed “was not such as to enable the existence of the defect to be discovered.”

Until recently, this “development risks” defence was thought to be of limited practical use to producers, having been successfully relied on in only one case across the whole of the EU in over 20 years (a Dutch case involving contaminated blood products).

The defence was very controversial at the time of adoption of the directive, and courts in the EU have traditionally taken a very narrow view of the scope of the defence, led by the opinion of the advocate general, and the subsequent decision of the European Court of Justice, in the case of Commission v United Kingdom.

In the Lovells’ report to the Commission on the Product Liability Directive, it was noted that, notwithstanding that there was little experience of the defence having been successfully relied upon by any manufacturer in defence of a claim under the directive, it was nevertheless regarded as an important element of the “balance” struck by the directive between the various interests in the liability context. This conclusion was supported by a subsequent study conducted for the Commission by Fondazione Roselli on the economic impact of the development risks defence in the EU.

In October 2006, the Commission published its third report on the operation of the Product Liability Directive. The Commission concluded, based on the Lovells and the Fondazione Roselli studies, that the defence should remain in the Directive. However, the Commission did say that this would be subject to ongoing review.

This ongoing review is significant, particularly as more recently the defence has successfully been relied upon in two further cases, one before the Paris Court of Appeal and another before the Court of Brescia in Italy. It might be expected that as manufacturers become more successful in relying on the defence, greater impetus might arise on the part of those who represent consumer interests to challenge the conclusion that it should remain part of the liability regime established under the directive.

Reach - The New EU Regime for Regulating the Safety of Chemicals

Proposals for an EU-wide regulation on the regulation, evaluation and authorisation of chemicals, first advanced in 2003, have fi- nally become law in the EU. The impact on industry of these measures cannot be overstated. The REACH regulation will become effective from 1 June 2007, replacing over 40 pieces of legislation governing different aspects of chemical regulation and bringing under its umbrella over 100,000 chemicals. Aimed at tightening the controls over the chemicals on the market, and improving the overall safety and efficiency of the supply and regulation of chemicals in the EU, the new regime will have a significant impact on product manufacturers in a broad range of product sectors, as well as those who supply and import chemicals.

There are a number of aspects of the REACH regime that give rise to new product liability issues which need to be anticipated and managed. The need to disclose data about safety risks in chemicals used in products is of particular concern for industry, particularly when considering the provisions for such information to be made available to the public. As a result, businesses will need to take great care, and obtain proper expert guidance, when considering how such information should be dealt with. The onus on businesses to take responsibility for gathering and disclosing to the authorities the safety data on the chemicals they use also gives rise to a fresh source of liability, if questions are later raised about the safety of the chemicals in question and the adequacy of disclosure comes to be scrutinised.

Corporate Social Responsibilty and Product Liability

By now, most global product manufacturers have published corporate social responsibility statements that set out various important principles by which the businesses are operated.

Although those policies typically deal with matters such as environmental responsibility and workforce issues both within the operation of the company itself, and within the supply chain, few deal in any detail with some of the “corporate responsibility” issues that arise in a product liability context.

As the behaviour of companies comes under greater scrutiny, it might be anticipated that some difficult product liability issues, that have perhaps not previously been expected, may start to confront global product manufacturers.

For example, while some product manufacturers adopt a policy that their products sold throughout the world should all be designed and constructed to the same safety standard regardless of whether such standards are required by local regulations, such an approach is not always practical for all product manufacturers. Furthermore, one might question whether it is at all necessary for a particular national or regional product safety standard to be met all around the world if that standard can reasonably be regarded as unnecessarily precautionary – particularly if the cost of the product to consumers would be materially higher if that standard had to be met in all jurisdictions. However, it is easy to foresee that a company could be criticised if it does adopt differing product safety standards in different countries, even if such an approach is perfectly justified.

Similar issues arise for companies when conducting global product recalls. Questions might be raised as to whether it is appropriately “responsible” conduct for a good corporate citizen in the global marketplace to undertake different forms of corrective action in different countries simply because of differing regulatory requirements.

These are issues which should not be overlooked by product manufacturers as they seek to develop appropriate corporate social responsibility policies.

Conclusions

We are moving through a period of rapid change in the product liability environment in Europe. The pattern of those developments continues to be dominated by regulatory intervention at an EU level, and the risks for manufacturers who do not take sufficient care to be aware of the challenges, and respond to them, is quickly increasing. Those risks are multiplied when considering changes in the litigation landscape in European countries.

Although international product manufacturers have previously been able to regard the US as the region of greatest product liability risk in the global arena, the complexity and rapid rate of change in the nature of the risks in Europe means that this is no longer a safe assumption. The sources of risk in Europe are different, but the ultimate cost for manufacturers of failure to adequately manage the risks can be the same.

In Europe, manufacturers need to manage these issues having proper regard to the complexities and differences that can arise at a national level, even when dealing with laws that have their origin at an EU level. This involves an understanding of national legal systems and cultural traditions as well as knowledge of the EU laws themselves.

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