UK: Feature - European Commission´s Third Report On The Product Liability Directive

The European Commission's third report (the "Report") on the Product Liability Directive¹ (the "Directive") was published on 14 September 2006. The Report was produced in line with Article 21 of the Directive, which states that the Commission must prepare a report to the Council on the application of the Directive on a five-yearly basis. It specifically takes into account two studies carried out for the Commission, namely Lovells' report on the application of the Directive,² published in 2003, and the 2004 Fondazione Rosselli report on the development risks defence.³

Over the last eight years, a number of potentially significant reforms have been proposed at EU level, many of which would have been likely to have had a significant impact on the delicate balance the Directive achieves, and would have had huge knock-on implications for product manufacturers, suppliers and their insurers. The Report confirms that, for the moment at least, the Directive will remain unchanged. This is by and large good news for industry, although it is clearly the Commission's intention to continue to monitor a number of central issues of the Directive with a view to possible future reforms.

The Directive had its beginnings in the thalidomide tragedy of the 1960s, in which the limitations of negligence in cases involving complex products whose risks were not fully appreciated became apparent. It was not until 1985 that the legislation was finally agreed, and the key feature that it introduced was the principle of liability without fault. Pursuant to the Directive, any producer (a term which can include a manufacturer of a component, someone who presents himself as a producer by putting his name to a product, or an importer of a product) is liable for a defect in his product that causes injury to a consumer. Although the Directive does not permit the co-existence of general product liability laws that provide consumers with greater protection than its own provisions, it does exist alongside the contractual and extra-contractual systems of the different member states. As one of the key aims of the Directive is to proceed towards "greater harmonisation with a view to establishing a regulatory framework which is as comprehensive, coherent, balanced and effective as possible",⁴ it was agreed that its provisions and practical operation should be reviewed on a regular basis.

The current debate over possible reforms to the Directive began in earnest with the European Commission's 1999 Green Paper on Liability for Defective Products.⁵ The Green Paper invited opinion on certain possible reforms to the Directive, which included reforms relating to the role of the development risks defence, the burden of proof on claimants, and suppliers' liability. Response to the Green Paper was inconclusive, and in its Second Report on the Directive in 2000,⁶ the Commission concluded that further work was necessary in order to obtain more data about the practical impact of the Directive across the EU. That conclusion resulted in the Lovells and Rosselli studies, and the formation of two working groups whose purpose was to monitor the functioning of the Directive.

The Lovells study, which began in December 2001, was the largest and most comprehensive of its kind and involved a survey of hundreds of participants, including producers, insurers, consumer representatives, regulators, practising lawyers and academics. It sought to analyse the extent to which the Directive was being used, as well as the impact it was having on consumer protection across the EU. Amongst the report's key findings were

• product liability risks do differ as between member states, but there is little evidence that these differences "create significant barriers to trade or distortion to competition in the EU"
• product liability claims have increased significantly in the last 10 years, but socio-cultural factors such as increased consumer awareness of rights, access to information, and media activity were the dominant causes of such increase, rather than the Directive
• the Directive "strikes an appropriate balance between the respective needs of producers/suppliers and consumers", and
• the Directive has only moderately increased the prospects of product liability claims being brought, and of the success of those claims.

The Lovells report also found that there was some collective experience of the Directive being used in almost all member states, and that the Directive offered a common level of protection for consumers and a common basis for liability of producers throughout the EU. Those surveyed made no uniform call for major reform of the Directive, and the Lovells report highlighted that it was important to look at the Directive as one part of a broader system involving product safety and consumer protection laws, judicial practices and procedures and cultural and social factors. The Lovells report recommended that any reform of the Directive could not be considered in isolation, but had to be approached with these broader issues in mind.

A year after the Lovells report was published, Fondazione Rosselli published a smaller study on the discrete question of the economic impact of the development risks defence contained in Article 7(e) of the Directive. A producer will be able to rely on this defence if he can show that "the state of the scientific and technical knowledge was not such as to enable the existence of the defect to be discovered".

The need for a separate study on the development risks defence reflected the controversy surrounding its introduction in the Directive, and was designed to consider the economic impact of the defence and, ultimately, whether there was a need to retain it. The Rosselli study concluded that the development risks defence was an important feature of the Directive which helped achieve the balance between producers and consumers, and that its removal could stifle innovation. Lovells' report had also concluded that there was little justification for the removal of the defence, since, even though at the stage that the report was written, it had only been successfully relied on once, it was seen by producers and distributors as an important element of the no-fault liability regime.

The Commission held meetings with the Directive's working groups in 2003 and 2004, and concluded that both groups were generally in favour of maintaining the balance struck by the Directive between competing interests, and that there were no demands for major reform. However, some members of the groups raised concerns about distortion of competition across the EU due to differing interpretations of certain provisions of the Directive by national courts of member states. The Commission's Report concluded that the European Court of Justice ("ECJ") could assist in the elimination of these inconsistencies through its case law, and made reference to nine judgments handed out in relation to the interpretation of the Directive since 2001.

Another point of concern raised by the groups was the €500 threshold for property damage under Article 9(b). This provision states, in the definition of "damage", that damage to personal property must have a lower threshold of €500. As such, claims for relatively low value damage cannot be brought under the Directive.

The Commission had regard to all of the above materials in reaching the conclusion in its Report, consistent with Lovells' study, that "the Directive works by and large in a satisfactory way" and that there is "no need for amendments at present".

The Commission also accepted, on the basis of the findings in the Lovells study, that the prospect of "total harmonisation" of product liability laws "is not only unrealistic but also not necessary in view of the limited impact (if any) that its absence would have on the Internal Market". This is an interesting concession, since the Commission's intention has always been for the Directive to be a maximum harmonisation directive, an intention supported by numerous judgments of the ECJ, which in one case pointed out that the Directive "seeks to achieve, in the matters regulated by it, a complete harmonisation of the laws, regulations and administrative provisions of the Member States".⁷

The Report does recommend the ongoing monitoring of certain key concepts of the Directive, particularly having regard to the sometimes contrasting approaches of member states' courts. These key concepts include the burden of proof, the concept of defect and the development risks defence.

Article 4 of the Directive states that the claimant must prove "the damage, the defect and the causal relationship between defect and damage".

The possibility of reversing the burden of proof in whole or in part has been put forward on a number of previous occasions. The Commission acknowledges a perception that consumers are unfairly disadvantaged by the burden of proof because of a lack of legal or other resources to investigate the issues. In contrast to this, producers and insurers have expressed concerns that if the burden of proof is relaxed then this may give rise to spurious claims.

Courts in different member states have been prepared to assist claimants who have to shoulder what might otherwise be a heavy burden, and this is reflected in the Report, which refers to, for example, the law in Portugal and Austria, where there is a presumption of the defendant's fault in the event of his non-fulfilment of contractual obligations.

The Report also makes reference to the courts of a number of member states that "have been prepared to infer the existence of fault from the fact that the product is defective". This practice, the Report says, operates as "a reversal of the burden of proof, with a requirement for the defendant to present evidence that he was not at fault, notwithstanding the defective condition of the product". This is a curious reference, since the Directive is concerned with questions of defect and causation, not with questions of fault. What many courts have been prepared to do is infer the existence of a defect in circumstances where the product fails without explanation. This is particularly evident in the approach of the Austrian courts, whose jurisprudence on the Directive is as extensive as that of the courts of any other member state. The approach generally taken by the Austrian courts is that the more obvious a product's failure is, the less burden there is on the claimant to establish its exact cause.⁸ This is in line with the so called "malfunction doctrine" applied by many US courts and formulated in §3 of the Restatement (Third) of Torts – Product Liability.⁹

The approach of allowing a claimant to recover merely by showing that the product failed has been used in a less coherent way in cases in France, Belgium and Spain. On the other hand, in their early decisions on the Directive, English courts required the claimants to demonstrate the mechanism by which the product failed.¹⁰ As jurisprudence on the Directive gathers, this latter approach is looking increasingly outdated.¹¹

The Directives defines "defect" by reference to "the safety to which a person is entitled to expect". The Report notes that the subjective nature of this test means that the principle is incapable of precise definition. It is certainly true that interpreting the meaning of defect has proven difficult for courts in certain cases, as is highlighted by the example given in the Report of the differing approaches of the English High Court to the question in two very different cases.¹² In the first case, involving contaminated blood products, the Court, in finding against the National Blood Authority, said that the conduct of the defendant was not a factor to be taken into account when considering whether a product was defective. This can be contrasted with the second case, involving a cup of McDonalds hot coffee that a customer spilled on her lap. In finding for McDonalds, the Court thought it relevant to take into account the steps taken by the defendant in training its staff in relation to safety with hot drinks.

In addition to questions of the defendant's conduct, the Report also raises the question whether a risk/benefit analysis should be undertaken in considering the level of safety that a person is entitled to expect. In the United States, such an analysis becomes relevant under strict product liability laws when the defect in question relates to the product's design,¹³ and it is in relation to so-called "design defects" that the consumer expectation test sometimes appears something like a square peg destined for a round hole. It is extremely difficult for courts to consistently and objectively decide what a reasonable person's expectations are in relation to novel or complex products or products that carry inherent risks. It is often in relation to pharmaceutical products that these issues arise, and for that industry in particular there would seem to be a strong case for the introduction of the type of "risk/benefit" analysis used in the US,¹⁴ since such an analysis underpins the regulation of such products in the EU.¹⁵

Lovells' study revealed that some producers were in favour of the approach followed in the US in relation to innovative products and design defects, and this observation is reflected elsewhere in the Report.

The Commission acknowledges in its report that, despite the ECJ's best attempts to clarify matters,¹⁶ there has been some difficulty in the interpretation of the defence in Article 7(e), as is reflected in the diametrically opposed conclusions of English and Dutch courts in similar cases involving contaminated blood products.¹⁷

The test in Article 7(e), which exonerates a producer 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", gives rise to two possible interpretations. The first is that it applies only when the scientific and technical knowledge was not such that anyone knew of the particular risk that materialised. The second is that it applies where knowledge of the particular risk did exist, but its discovery in any single product was not possible. The difference between the two interpretations is particularly important in relation to cases involving "non-standard" products.¹⁸

On its face, the second reading would seem both to be a more natural interpretation of the clause and to offer a more realistic defence. However, the majority of jurisprudence to date, including the German bottle case¹⁹ the English case of A v National Blood Authority,²⁰ has opted for the first interpretation. It is perhaps for that reason that, until recently, there appears to have been only one reported example where the defence was successfully used, in which a Dutch court, taking the second interpretation, held that the unavailability of a reliable HIV screening test entitled blood suppliers to avail themselves of the defence in respect of contaminated blood.²¹

In the last 18 months however, there have been two other decisions in which the defence has been successfully relied upon. In the first, the Paris Court of Appeal²²invoked the development risks defence in a case concerned with the supply by the defendant of a drug that caused the claimant to develop serious kidney disease. The Court held that the state of scientific and technical knowledge at the time when the medicine was put into circulation was not such as to enable the existence of the defect to be discovered, even though there was knowledge of the drug's potential to cause such disease. Then, in April this year, the Italian Court of Brescia²³ upheld an equivalent of the development risk defence in a case brought by a haemophiliac who contracted HIV, allegedly as a result of a blood treatment.²⁴ The Court concluded that at the time HIV had been contracted the risk of the virus was not yet discoverable even with the most advanced screening tests available. In both of these cases the second, more accessible, interpretation of the defence was relied upon, and it will be interesting to see whether this trend continues. Certainly, if it does, the defence may begin to be regarded as more than a token one.

The Report acknowledges that the possibility of a "defence of regulatory compliance" had been supported by some of those consulted in Lovells' study, particularly those in the pharmaceutical industry. This defence would be available to producers who had fully complied with any applicable safety regulations governing the placing of their products on the market, and would effectively provide that if particular safety aspects of a product were governed by safety regulations, a product could not be considered "defective" by reason of those safety aspects if it complied with the applicable regulations. In other words, a court in a product liability case under the Directive could not impose on a producer a standard of safety greater than that prescribed by the applicable safety regulation.

The issue of the product liability implications of compliance or otherwise with safety regulations is one that has begun to appear before the courts only recently, with a German court holding that compliance with up-to-date regulations constituted a defence in that case.²⁵ In contrast, an English court held, perhaps surprisingly, that non-compliance with a voluntary safety standard did not render a product defective,²⁶ and another German court held that non-compliance with a mandatory safety requirement did.²⁷ Clearly there is a case, particularly in heavily regulated industries, for providing that compliance with relevant safety standards, even if not affording a complete defence, provides at least a presumption of non-defectiveness. Such an approach is taken in relation to product safety under the General Product Safety Directive,²⁸ but as yet there are no plans at Commission level for an equivalent approach in the Directive.

There is also discussion in the Report regarding the minimum threshold provision of Article 9, although the Commission does not intend to abolish that threshold at present.

Having considered the information presented to it, in the main by the Lovells report, the Commission's view is that no amendment to the Directive is necessary, but that further harmonisation can and should be achieved through, in particular, increasing usage of the case law of the ECJ and ongoing monitoring by the working groups of the Directive's impact and usage.

One point in respect of which the Commission has taken a positive stance is in rejecting the possibility, raised in a Council Resolution of 19 December 2002, that the Directive should be modified in order to allow national rules on suppliers' liability to be based on the same ground as producers' liability under the Directive. That would be inconsistent with one of the Directive's aims of channelling all liability back to the party who has greatest control over the properties of the product. The Commission's stance on this issue also reflects recent jurisprudence of the ECJ.²⁹

As Lovells' report noted, the Directive is only one part of a wider system of laws, rules and culture all of which contribute to the risks that both consumers and producers face in relation to products. In light of this, and the general satisfaction with the Directive expressed by those surveyed by Lovells, the conclusions are unsurprising. Having said that, there has been some evolution in recent times of the courts' approach to key issues under the Directive. Somewhat worryingly for product manufacturers, courts seem increasingly inclined to infer a defect where a consumer has been unable to furnish proof of one. Encouragingly however, a more liberal interpretation of the development risks defence has been in evidence recently, and courts are beginning to acknowledge the relevance of regulatory compliance in considering the question of defectiveness. If these patterns continue to prevail, the Commission may well give thought to reform in these areas before its next five-yearly report is due.

Although there have been no major developments in relation to the substance of the Directive itself, it is worth noting that the EU litigation climate is constantly evolving and, since the last Commission report, the revised General Product Safety Directive has been universally implemented, there have been calls for an EU wide legal aid directive, 10 new member states have joined the EU, and most recently there have been proposals in multiple member states for more widely available group or representative actions. These developments, as the Lovells study showed, can have as much of an impact on product liability risks as the substantive laws themselves.

Footnotes

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