American Manufacturers Beware: Product Liability in the European Union

By Daniela Stele
November 01, 2003

Until recently American manufacturers were not likely to be sued in Europe. Now, however, with legislation enacted by European Union Member States, an American manufacturer may be found strictly liable for a defective product.

The Directive

Before 1985 there was no uniform law on product liability in Europe. Each Member State had its own system for granting damages in cases of defective products, generally based on the proof of fault or negligence of the producer.

In 1985, the Council of the European Union adopted Directive 85/374/EEC (“Directive”) on the approximation of the laws, regulations and administrative provisions of the Member States concerning liability for defective products. Notwithstanding the fact that Member States were given 3 years to implement the Directive, it was not until 1998 that all the Member States had enacted legislation. According to the EC Treaty, Member States enjoy a certain degree of freedom in the form and method by which they implement directives into national legislation but are bound to achieve the results laid down in the directive.

The Directive introduces a general system of strict liability for producers with respect to damage caused by defective products and aims for a uniform degree of protection of consumers throughout the European Union, removing barriers to the free movements of goods and avoiding distortion of competition in the internal market. The Directive seeks to balance the interests of consumers and producers and does not expressly authorize the Member States to adopt or maintain more stringent provisions in favor of consumers with respect to the issues dealt by the Directive.

Defective Product

The Directive defines “products” as all movables, including those incorporated in another product (eg, a component or raw material), electricity and the products of soil, stock-farming and fisheries. A product is deemed defective when it does not provide the safety expected by the consumer, taking into account circumstances like the presentation of the product, its use and the time at which it was put on the market (“consumer expectation test”). The Directive specifies that a product is not considered defective solely because a better product is subsequently put into circulation.

In an Italian case, a consumer claimed and obtained damages, according to Decree No. 224/1998 implementing the Directive in Italy, because a bottle of mineral water exploded in his hands soon after he took the bottle from the shelf of a shop. The court recognized that the bottle was defective because it did not offer the safety that a consumer ordinarily may expect from products of the same type, taking into account all the circumstances.

Since the introduction of a directive on general product safety in 1992 (ie, directive 92/59/Cee), the concept of “defective product” seems to be interpreted also in light of the concept of “safe product.” Directive 92/59/Cee defines safe product as “any product which, under normal or reasonably foreseeable conditions of use, including duration, does not present any risk or only the minimum risks compatible with the product's use, considered as acceptable and consistent with a high level of protection for the safety and health of persons.”

Strict Liability

The strict liability rule introduced by the Directive applies to “producers.” Producers are defined not only as manufacturers of finished goods, but also of raw materials and component parts. The definition also extends to those who hold themselves out as product manufacturers by putting their name or trademark on a product and those who import defective products into the Member States for sale, hire, leasing or any form of distribution in the course of business.

Because the Directive holds liable the entity that puts its trademark on a product (even if the manufacturer is identifiable), it is conceivable that large chains of resellers and department stores might be found strictly liable. Similarly, an importer is liable, even if the manufacturer of the product is identifiable. In such cases, the injured person is potentially free to sue either the manufacturer or the importer/trademark user.

If the manufacturer or the importer cannot be identified, the supplier is liable for the defective product, unless the supplier informs the injured person within a reasonable time (eg, 3 months in Italy and 1 month in Germany) of the identity of the manufacturer or of the person who supplied him/her with the product. The Directive does not seek to extend strict liability to mere suppliers in any case of defective products, but only in those where the producer is not identifiable.

This conclusion was confirmed by the European Court of Justice (ECJ) in European Communities v. French Republic. In that case, the Commission brought an action against the French Republic, pleading that Law No. 98-839, implementing the Directive in France, infringed the provisions of the Directive because it provided that the supplier of a defective product was liable in all cases and on the same basis as the producer. The ECJ explained that the intention of the Directive was to avoid multiple proceedings.

According to the Directive, where two or more persons are liable for the same damage (eg, the producer of an assembled product and the manufacturer of a single component where the cause of the defect cannot be identified), they are jointly and severally liable according to national rules concerning rights of contribution and recourse.

Exclusion of Liability

As a general rule, the liability of a producer may not, in relation to the injured person, be limited or excluded by contract. However, the Directive sets forth a principle of fair apportionment of risk between the injured person and the producer and allows the manufacturer to exclude its liability where it can prove that:

(i) it did not put the product into circulation; or

(ii) the defect did not exist when the product was put into circulation; or

(iii) the product was not manufactured by it either for sale or any form of distribution for economic purposes or in the course of business; or

(iv) the defect is due to compliance with mandatory rules issued by public authorities; or

(v) in the case of a manufacturer of a component, that the defect is attributable to the design given by the manufacturer of the final product where the component was fitted or the instructions given by the manufacturer of the final product; or

(vi) the state of scientific and technological knowledge at the relevant time was not such as to enable the existence of the defect to be discovered.

The exemption of liability because the producer did not “put into circulation” a defective product was the subject matter of Case C-203/99, a referral to the ECJ for a preliminary ruling in a proceeding before a Danish court. In particular, a perfusion liquid manufactured by a hospital and used for preparing a kidney for transplant was defective and rendered the kidney not usable for the transplant. The ECJ explained that the term “put into circulation,” not being defined, must be interpreted in accordance with the purpose of the Directive. Accordingly, a professional operator who produces a preparation, for use in the course of his business and within his organization, cannot avoid liability if the preparation causes damages to clients by arguing that he did not put the product into circulation. In the same case, the ECJ further clarified that the exemption from liability for not having manufactured products for any form of distribution for economic purpose may not be invoked by hospitals that use defective products in providing their medical services, even if such services are financed entirely from public funds and the patient is not required to pay any consideration.

The development risk defense, similar to the state-of-art defense in the United States, was subject to the examination of the ECJ in Commission of the European Communities v. United Kingdom of Great Britain and Northern Ireland. The ECJ explained that the availability of the defense does not depend on the subjective knowledge of the producer. In any case, the Directive allows Member States to provide in their national legislation that the producer is liable even if he proves that the state of scientific and technical knowledge at the time when he put the product into circulation was not such as to enable the existence of a defect to be discovered. The development risk defense allowed a Dutch producer to be exempted from liability in a case involving HIV-contaminated blood supply. In that case, the Netherlands court said that in the late 1990s anything other than 100% virus-free blood was defective. However, at the time the product was placed in the market and the injury occurred, which was the early-to-mid 1990s, the defect (the existence of the virus in the blood supply) was scientifically undiscoverable.

In addition, the liability of the producer may be reduced or disallowed when, having regard to all the circumstances, the damage is caused both by a defect in the product and by the fault of the injured person or any person for whom the injured person is responsible.

Damage

The injured person is required to prove the damage, the defect and a causal relationship between the two.

The Directive restrictively provides that consumers may claim compensation only for damages regarding personal injury, death and damage to, or destruction of, any item of product other than the defective product itself over EUR 500 (was 500 ECU), provided that the item of property: (i) is of a type ordinarily intended for private use or consumption, and (ii) was used by the injured person mainly for his own private use or consumption. Notably, the damage envisaged by the Directive does not cover the defective product itself.

The threshold of EUR 500 raised some interpretative doubts. In Commission of the European Communities v. Hellenic Republic and Commission of the European Communities v. French Republic, the European Court of Justice explained that the threshold aims at avoiding an excessive number of actions and cannot be abolished by the Member States in their national legislation. Accordingly, in the event of minor material damage, the victims of defective products may bring an action under their ordinary domestic law on contractual or noncontractual liability, but cannot rely on the strict liability principle laid down in the Directive.

The Directive does not provide for punitive damages and does not deal with claims for noneconomic damages. Thus, an injured person may sue under the strict liability scheme for obtaining economic damages and under the contractual or noncontractual scheme of his/her Member State for damages for pain and suffering and other noneconomic damages.

In addition, the Directive does not provide for uniform procedural rules, such as burden of proof, discovery rules and multi-plaintiff actions, all of which are left to domestic law.

Conclusion

The Directive does not fully harmonize national legislation on product liability and is the result of a complex balancing of different interests, including trade within the common market, nondistortion of competition, consumer protection and sound administration of justice. However, the Directive successfully introduced a general strict liability scheme in favor of consumers in case of defective products in all the Member States and provides manufacturers with clear indications with regard to their potential risks in marketing products throughout the European Union. This is an admirable achievement, even though very few consumers rely on the Directive to bring claims before their national courts, and the national courts often ignore the Directive to impose liability for defective products, preferring to rely on their well-known contractual or extra-contractual remedies. This may be explained by a number of facts.

In some Member States, such as France, the Directive was only recently implemented; consequently, consumers and practitioners are not yet acquainted with it. In other Member States, such as Germany or Spain, the national extra-contractual remedies achieve the results contemplated by the Directive in a more effective way. In still other Member States, such as Italy, judicial proceedings are costly and lengthy, and in most Member States there are no class actions or multi-party actions ' the decisions are taken by professional judges and not by juries. Generally, most European jurisdictions have a “loser pays rule” which restrains litigation and encourages out of court settlements.

On the other hand, the policy of protecting consumers within the framework of the European Union has considerably progressed since the approval of the Directive, both guaranteeing a high standard of product safety in manufacturing the products and establishing post-sale remedies where products do not meet the standards consumers reasonably expect. There is a general legislation on product safety of consumer products; the safety of many sectors is specifically regulated (eg, cosmetics, pharmaceuticals, toys, medical devices) and consumers are entitled by law to warranties for noncompliance of products. Finally, the Directive may have a deterrent effect on manufacturers.

In any case, the effects and the implementation of the Directive in the Member States are regularly monitored by the European Commission, which is entitled to propose to the European Council all the necessary amendments to enhance effective consumer protection and the functioning of the common market. To date, the only change to the Directive was to include primary unprocessed food products in the scope of the Directive in response to the emergence of the “mad-cow” disease. Only time and experience will say whether, and how, it is advisable to consumers to reshape further the balance of interests between consumers and producers introduced by the Directive.

Daniela Stele www.allenovery.com.