Product liability in the European Community: implications for United States business

INTRODUCTION

The elimination of trade barriers and the insistence on the free movement of goods, persons, services, and capital has captured the attention of the world. Cynics see the move as an attempt to build Fortress Europe and keep out foreign competition

Among the unification efforts undertaken by the Community is the attempt to harmonize product liability law throughout the countries comprising the EC.(3) Variations in the individual Member States’ domestic laws were perceived as distorting competition and affording differing levels of consumer protection to Community members.(4) To that end, the EC Council of Ministers(5) passed a Directive(6) setting forth a Community-wide strict liability standard for injuries caused by defective Consumer goods(7) and requiring that Member States bring their domestic law into compliance. The harmonization effort is nearly complete. The process was to have been finalized by 1988

Viewed in perspective, the drive to standardize product liability is not the most visible initiative in the panoply of efforts to unify Europe into a single market.(9) It does, however, have significant repercussions for businesses in the United States that export or are contemplating the export of consumer goods to the EC. Although increasing the level of potential liability may result in some businesses withdrawing from or choosing not to enter markets, the Directive can be viewed as an opportunity, rather than a disincentive, for U.S. businesses to compete successfully in Europe. The shift to strict liability in Europe does not and should not present a barrier to the decision to export. United States businesses have experienced decades of strict liability for all products manufactured and sold domestically

This article reviews the Directive on Product Liability, examines the harmonization efforts that followed, and offers a thumbnail sketch of the laws of the Member States with respect to product-related harm. Next we consider several factors that comprise the decision to export and examine them in the context of European standardization under strict liability. We review business safety practices and suggest ways in which U.S. companies can apply those practices in Europe. Finally, we conclude that U.S. businesses’ vast experience with strict liability allows them to compete more easily in the new European product liability environment than manufacturers without similar experience.

A BRIEF HISTORY OF THE PRODUCT LIABILITY DIRECTIVE AND HARMONIZING LEGISLATION(12)

The Product Liability Directive was first proposed in 1976.(13) Years of intense lobbying, political gamesmanship, and amendments delayed the issuance of the final Directive until 1985.(14) The Directive as passed imposes strict liability(15) for the manufacture of consumer products, but permits Member States to derogate from certain provisions. In spite of the resulting variations, the clear result is substantial uniformity throughout the Community in the law of product liability.

One variation permits Member States to adopt the development risks defense,(16) commonly known in the United States as the state of the art defense, which protects manufacturers from liability for scientifically unknowable risks in new products.

The opportunity to include the development risks defense was a political compromise crafted to avert a threatened veto of the Directive. (17) As a further variation, the Directive permits individual Member States to impose a cap on damages, as long as it does not fall below a Directive-imposed floor.(18) Two other provisions permit some variations in the laws of the Member States. A state may choose to include agricultural products within the definition of consumer products.(19) Additionally, the Directive does not preempt the entire body of product liability law in the Member States. Existing national law covering such subjects as punitive damages, assumption of the risk, and contribution from joint tortfeasors supplements the Directive’s provisions.(20)

The Directive standardizes the definition of a defective product as one that “does not provide the safety which a person is entitled to expect, taking all circumstances into account ….”(21) It defines producer broadly to include “the manufacturer of a finished product, the producer of any raw material … the manufacturer of a component part and any person who, by putting his name, trade mark or other distinguishing feature on the product present, himself as its producer.”(22) The definition also includes “any person who imports into the Community a product for sale, hire, leasing or any form of distribution in the course of his business . . .”(23) Suppliers may be held liable as producers if the actual producer cannot be identified or, in the case of an imported product, if the product does not indicate the identity of the importer, even if the producer is known.(24) The purpose is to have someone within the Community’s jurisdiction who can be held liable for the defect.(25)

Two provisions extend liability beyond that existing in many Member States by compelling the imposition of joint and several liability(26) and by eliminating the possibility of waivers, disclaimers, and other contractual provisions that reduce or abolish the producer’s liability.(27) The latter provision does not eliminate such clauses in contracts between producers and suppliers or producers and distributors.

The Directive also dictates uniform time limits on causes of action. The statute of limitations for bringing an action is three years, measured from the time the injured party should have been aware of the damage, the defect, and the identity of the producer.(28) Producers cannot be held liable for injuries caused by defects in products that have been in circulation for ten years.(29)

The Directive also sets forth a number of defenses that can be asserted to deflect a claim.(30) Most permit the defendant, to establish that it had nothing to do with the product or with handling the product when it was defective. One defense relieves the defendant from liability if the defect results from compliance with a mandatory regulation issued by a public authority.(31) This is not the typical defense that relieves manufacturers from liability if their products conform to an applicable government standard. Rather, to escape liability under this provision, the mandatory government standard itself must be the source of the defect.(32)

The Directive provided a template for the Member States to follow, with the individual states remaining free to accommodate local law and custom in enacting their harmonizing legislation. Notwithstanding the opportunities for variability, the Directive does unify the law of product liability in the EC around a set of common standards for strict liability. Although courts in Member States will have some latitude in interpreting and applying these definitions, they represent a commonality completely lacking prior to the Directive.

The road to implementing the Product Liability Directive has been bumpy and the going slow.(33) Some countries complied within the deadline. Other countries adopted legislation, but after the deadline had passed. Still others passed legislation, but have been notified by the Commission that some provisions do not comply with the Directive and enforcement proceedings have been initiated against them in the European Court of Justice. Others have yet to pass any legislation at all. The Commission has instituted proceedings against the latter group as well.

Despite the opportunities to derogate from the Directive, Member States did not often choose to do so and the subsequent harmonizing legislation is remarkably similar. Most Member States chose to include the development risks defense. Of the nine states that have harmonized with the Directive, only Luxembourg has not included the defense.(34) Luxembourg is a pro-consumer state(35) and its refusal to include the defense is not surprising. However, although Belgium(36) and France(37) have the same reputation as Luxembourg, Belgium does recognize the defense(38) and an early draft of proposed French legislation included it.(39) It may well be that Luxembourg will be the only state in the EC not to offer the defense’s protection. Italy and Great Britain are being challenged for their development risks defense provisions. Each drafted the defense into its respective legislation, but they have been too generous to producers.(40) The English statute applies the defense when “the state of scientific and technical knowledge at the relevant time was not such that a producer of products … might be expected to have discovered the defect if it had existed in his products while they were under his control.”(41) Italy’s law calls for the defense “when the state of scientific and technical knowledge at the time when the producer put the product into circulation was not such as to be able to consider the product as defective.”(42) The effect of the language in each of these laws is to permit the producer more time to react to scientific and technological changes than is contemplated in the Directive.

The derogation for agricultural products has, like the derogation from development risks, proceeded rather uniformly in the Member States. Only one country, Luxembourg, chose to apply strict liability standards to unprocessed agricultural products. This decision is consistent with Luxembourg’s pro-consumer reputation, but once again may place Luxembourg’s law at odds with the rest of the Community.

The establishment of a financial ceiling for multiple claims arising out of the same defect has shown far less congruence among Member States than either the development risks defense or the agricultural products exception. To date, only three states have capped damages. However, the Directive’s cap is largely symbolic, because even the lowest amount at which Member States may cap damages(43) “constitutes nearly unlimited exposure” in the European Community.(44)

Three Member States have yet to decide what provisions to include in their harmonizing legislation. France has decided that it will amend its civil code to accommodate the new law. Two draft documents have been circulated. None has passed. Even so, current French law will accommodate strict liability without new legislation. Spain is in a similar position.(45) Prior to the Directive, it passed legislation that imposed strict liability on producers of food, automobiles, appliances, cosmetics, and drugs.(46) Therefore, existing national law is not far removed from the provisions of the Directive, at least insofar as these products are concerned. Ireland’s national law, unlike that of France and Spain, applies only negligence principles to product-related injuries.(47) Its failure to pass harmonizing legislation creates a defective product haven where producers have less liability risk than in the rest of the EC. The Commission has instituted proceedings against Spain, France, and Ireland for their failure to pass timely legislation.

Despite the fact that all countries have not adopted uniform legislation and some have not adopted legislation at all, it is possible to discern uniform principles that have emerged as a result of the Directive. First, strict liability is standard throughout the Community.(48) Second, the development risks defense and the exemption of agricultural products have garnered the support of eight of the nine states that have harmonized with the Directive. Finally, Member States have generally not adopted legislated financial ceilings on damages. Although differences will persist as a result of the derogations and procedural differences in Member States’ laws, businesses exporting to the European Community now, for the first time, will be dealing with a substantially unified product liability environment.

The European Community’s Liability Environment

In theory, the explicit shift from fault-based to strict product liability in the European Community exposes businesses to a significantly increased level of liability to injured consumers. However, the rules do not act in a vacuum. The legal, social, and political climate in the EC is such that the actual impact of the change will be much less dramatic than that experienced by United States companies when American jurisdictions reformed their laws to include a strict product liability cause of action. This is true both because of the Community’s strikingly dissimilar political and social climate and because of Member States’ legal procedures, which do not encourage or facilitate litigation.

The political and social climate in the EC countries discourages litigation in several ways. Member States have comprehensive social programs that compensate injured consumers. Generally speaking, national health plans provide free medical care, and employment compensation systems protect against lost earnings.(49) In many situations of product-related injury, therefore, there are no damages, or only minimal damages, for which to sue. In addition, European countries rely on legislation,(50) not litigation, to bring about broad social change. Because there is relatively little expectation that reforms in consumer protection will be accomplished through policy making by the courts, there is no tradition of using them for that purpose.

Legal rules and procedures also create barriers to litigation. Contingent fees are virtually unknown in Europe

In addition, discovery procedures are substantially different in the Member States than in the United States. Some countries do not permit discovery(53) and some allow only very limited discovery closely supervised by the court.(54) The inability to acquire information through the discovery process may make it more difficult for the plaintiff to prove his or her case or to ascertain additional causes of action.

Traditionally, damage awards in Member States have been significantly lower than those in the United States. This can be explained in part by the fact that salary scales and health care costs are generally lower in the EC,(55) making damages much lower in an absolute sense. In addition, allowable damages often do not include the noneconomic damages permissible under the law in the United States.(56) Even when noneconomic damages for items such as pain and suffering are allowed, they are significantly limited by law or tradition.(57) Furthermore, of all the Member States, only Ireland permits punitive damages in products cases.(58) European courts do not use juries for tort suits at either civil or common law

Because of the political and social climate in the EC and the limitations on litigation and damages provided by procedure and tradition, the exposure of companies to liability is significantly limited. These limitations are not cause-of-action specific. There is no evidence to indicate that the shift to strict liability will cause a dramatic increase in the number of lawsuits brought. In other words, a liability explosion is unlikely. Indeed, the legal environment clearly suggests otherwise. The only significant potential additional exposure to liability comes, then, from the easing of the plaintiffs burden of proof with the elimination of the element of fault. Although there will certainly be some increase in liability, it should not be significant.

Guidelines for U.S. Firms to Manage Within the EC Product Liability Directive

The challenges posed by the move to strict liability in Europe should be considered neither ominous nor insurmountable. American business interests have been implored, cajoled, and bullied into taking seriously the concept of a single-market Europe. What will this unified Europe be: a territorial behemoth that brooks no incursions, or a manageable creature that savors product diversity? It would be wise to consider the Directive as an incentive for good manufacturing practice rather than a barrier to market entry. U.S. manufacturers supplying goods to domestic markets have operated in a strict liability environment for a long time. Making the transition to a European strict liability environment should prove no more difficult than moving into a new market in another state. When a U.S. firm considers whether to export its products into the EC, the new product liability regime is simply one of many factors to take into account. The heightened responsibility of producers and importers under the Directive may give pause. However, we contend that it should not deter U.S. businesses from pursuing an export program. U.S. businesses should therefore approach the EC as a market opportunity without undue concern for uncontrolled liability and debilitating damage awards that may be wrongly associated with the introduction of a strict liability regime.

The product liability environment in the U.S. is less uniform than that of the EC and experience with it should readily prepare companies for EC market entry. Ever since the landmark decision of Greenman v. Yuba Power Products,(61) Successful U.S. manufacturers of virtually all consumer products have coped with, reacted to, and accommodated no-fault product liability. Thirty years of exposure to strict liability, its standards, elements of proof, and defenses gives U.S. firms significant experience with the doctrine. They have implemented strategies for the design, manufacture, testing, and labeling of products that take into account the responsibility demanded by the standard. Systems of record creation and retention that facilitate the recall of products and that provide litigation support are in place. Litigation management techniques to handle multiple suits for the same product defect exist. In sum, companies have integrated the idea of strict liability into every aspect of a product’s life.

The advantages flowing from the depth of experience with the doctrine and its uncertainties are inestimable when a firm decides to export its products into the European Community. Although EC product liability law is not perfectly uniform, that should pose little difficulty for United States firms. Product liability law in the United States is not uniform either. Repeated attempts by Congress to pass a federal product liability law have been unsuccessful.(62) Consequently, the lack of uniformity domestically favors the U.S. firm looking toward Europe as a potential market. Surely if the firm can cope with the variations that exist in the domestic product liability law, it can adapt to the relatively minor variations presented in the EC countries. As compared to U.S. product liability law, the variations in Europe are fewer and less far-reaching.(63) Some may be outcome determinative, such as a decision not to include agricultural products in the harmonizing legislation, but more likely the EC’s variations will affect the amount of the award, for example, some damages are recoverable in Member States and not others.

Critics of strict liability raised the spectre that soaring insurance rates would accompany the shift to strict liability in the EC. They alleged that increased product prices resulting from manufacturers passing on the cost of insurance to consumers would create a competitive disadvantage. Indeed, the possibility of a significant rise in insurance rates was of great concern to the Commission as it debated instituting a strict liability regime for the Community. However, as early as 1976, the European Committee on Insurance expressed its opinion that the insurance industry would be able to provide the necessary coverage without a significant increase in general product costs,(64) stating “it is not so much strict liability as such but the system within which it operates which has contributed towards the so-called product liability crisis in the [United] States in recent years.”(65) One commentator, speaking more recently, agreed that the legislative changes made and proposed by the Member States in response to the Directive would not have any significant effect on either the cost or the availability of product liability insurance.(66) He asserted that there is “no foreseeable crisis in European liability insurance, no explosion of claims activity, no deterioration in product claims experience and no need for a wholesale re-examination of policy cover.”(67) In fact, he notes that U.S. risk managers have been purchasing insurance from European casualty insurers for their overseas risks.(68) Indeed, there is much to support the view that insurance costs will remain stable. European legal rules and procedures and the social and political environment(69) operate to keep both litigation costs and damage awards substantially lower, holding down insurance costs.

One argument against the adoption of strict liability is its alleged negative impact on innovation. Conventional wisdom says that the greater the exposure to liability, the less willing the manufacturer will be to bring a product to market.(70) Companies assert that the protection afforded by a state of the art defense encourages innovation. Of those countries that have passed harmonizing legislation, only one — Luxembourg — has rejected the development risks (state of the art) defense and only one more — France — may follow suit. The protection provided by the defense should promote innovation by U.S. firms marketing products in EC countries. Manufacturers will not be second-guessed on design decisions, warnings, and instructions as long as their decisions incorporate the current state of scientific and technological knowledge. This will support innovation by assuring that improvements in the product will not be used to establish that earlier products were defective.(71) Even without the defense, harmonizing legislation must include a provision that a product is not to be considered defective simply because a better product is later marketed.(72) The language can be viewed as an invitation to innovate without fear of retribution.

Being summoned into a lawsuit in a foreign country poses hazards that domestic litigation does not. Unfamiliar court procedures, language barriers, different laws, and being treated as an outsider may suggest that the decision to export is too risky. However, the European legal system is neither exotic nor uncharted. The Directive brings the law of product liability into familiar focus — it is strict liability, plain and simple. The consumer expectation test for defect is familiar, as are liability along the chain of distribution, joint and several liability, and the inability to exclude or limit liability. Although the court procedures differ from U.S. procedure, they are, if anything, more advantageous to a defendant manufacturer: Discovery is limited, noneconomic damages are rare or non-existent, and losers pay winners’ costs and attorney’s fees. Naturally there is a cost associated with defending a lawsuit in a faraway place

There are a number of business decisions, practices, and procedures that can smooth the transition into the EC’s strict liability environment. Some of these are driven primarily by the formal legal requirements of the Directive and Member States’ national laws

Apart from liability and quality issues, before the export decision is undertaken, an evaluation of the structure of the firm must be made in order to determine how exporting will be undertaken. A manufacturer can utilize its existing structure and simply ship its product to markets in Europe. Another option is to set up a subsidiary either to produce or to import the products destined for the EC. The subsidiary may be a domestic corporation or could be domiciled in a European country. The product may be distributed through an independent exporter, leaving the questions of tariffs and currency exchange to that entity rather than the manufacturer. Partnership opportunities exist for U.S. firms to join with European firms in joint ventures and other associations. There is no formula to apply to the decision. It requires a review of the legal and business climates here and abroad and an analysis of the costs and benefits of each option for a particular company. The choice of structure will not affect liability. Even if a European court is not able to exercise jurisdiction over a U.S. manufacturer that has no contact with the host country other than the presence of goods imported by an intermediary, the importer will be liable under the terms of the Directive(73) and undoubtedly will have contractual recourse to the non-resident manufacturer.

Contractual arrangements should be reviewed with an eye to their relevance to product liability. While it is not permissible under the Directive to contract away liability to a consumer of the product,(74) nothing limits the contractual relationship between a manufacturer and its suppliers or distributors. Depending on the bargaining power of the parties involved, the manufacturer may be able to distribute the risk of loss forward or backward along the distribution chain through indemnification agreements. The use of contractual provisions to distribute risk must be approached with caution when the other party to the contract is not a domestic firm. The business culture of a foreign supplier or distributor may not embrace such provisions with enthusiasm.

The decision to export a product into Europe also requires a review and analysis of insurance coverage. Premiums for product liability insurance are lower in Europe and apparently will not be significantly affected by the Directive.(75) Cost comparisons must be made in order to determine where to purchase insurance and what coverage should be obtained. Liability limits, as permitted by the Directive,(76) along with claims history, risk associated with the product, and deductibles affect the insurance decision. Insurance companies have broad experience with claims and products. They become a resource for the manufacturer in establishing its loss prevention program.

Naturally, products imported into the EC must comply with all mandatory standards. One goal of unification is to normalize all Member States’ product specifications to permit the free movement of goods throughout the Community. When the process of unification is complete, compliance will assure that the goods may be imported into all EC countries. The task of discovering what the mandatory standards are and complying with them will be easier because they will be the same. As previously discussed, however, compliance with mandatory regulations provides a defense to a product liability claim only if the regulation itself caused the defect.(77)

Procedures already in place to assure a product’s safety will be equally suitable for the product destined for Europe. Good manufacturing practice is sound on any continent

Companies can and should take steps to insure the quality of their products during every phase of a product’s life cycle — from research and development to design, testing, manufacture, and marketing. Such steps should include quality control and safety audits, preferably performed by multi-disciplinary teams that can bring a variety of perspectives to the review. The teams will necessarily be comprised of members from all countries involved in the distribution of the product. Consequently, sensitivity to language differences is crucial.

A product does not stand in isolation. It is packaged, marketed, advertised, often contains instructions or user information, and may include warnings. None of these functions can be ignored and must be evaluated for their safety aspects, as well as their appeal. With respect to instructions and warnings, two reviews must be made. Considering the experience of the user and the use and misuse to which the product may be subjected, taking cultural differences into account, do instructions and warnings need to be included in order to make the product safe? If so, does the content adequately communicate in the language of the user the information to be given or the hazard it is intended to address?

Manufacturers have legal responsibility for a product throughout the product’s life. It is therefore incumbent on manufacturers to be able to track products in the field. The communication channels to distributors and users alert the producer to potential hazards. Utilizing the team concept, the producer must investigate hazard complaints to determine the severity of the hazard, whether a pattern of defect is emerging, and the significance of the risk. A response must be formulated

Record-keeping takes on a particularly significant role when product safety is at issue. Records assist in tracking suppliers, distributors, and end-users. They also provide archival data about design decisions, materials used in manufacturing, inspection and test data, and prior history with the product. If records are kept in different facilities and different countries, the information systems must be compatible.

The firm must have a system for keeping up to date with technological, engineering, and scientific advances in the field. In those European jurisdictions with a development risks defense, the design of a product must incorporate those standards at the time the product is put into circulation.(78) In the absence of a development risks defense or when a newly discovered hazard poses a significant danger, new technology may demand that older products be retrofitted or taken out of circulation. It is preferable for the manufacturer to make that decision on its own, rather than be compelled by court decision or regulatory authority.

When a product-related incident occurs, additional considerations come into play. Procedures must be in place to investigate and evaluate the event in order to minimize its consequences. The occurrence may be an isolated event, but it also may be an early warning of a defect. Open-minded, careful analysis, in conjunction with reference to documents, audits, reviews, and prior complaints, is imperative. A response must be formulated that takes into account the injuries suffered by the particular complainant, along with the potential for future similar occurrences. Prevention should receive the highest priority.

Notwithstanding the generally less litigious nature of Europeans, a claim may result in litigation. All the procedures a firm would undertake to investigate and prepare for litigation in the United States are applicable in Europe, with one caveat. The legal culture of Europe is vastly different from that of the United States and American participants must be sensitive to the differences. It would be a serious mistake to expect that European plaintiffs and court personnel view litigation and one’s day in court from an American perspective. Similarly, European court procedures vary from the American experience. However, local counsel can offer guidance through the local procedural thickets.

As in the United States, Europe is embracing alternative dispute resolution as a means of avoiding the time and expense associated with litigation.(79) Attention should be paid to the opportunities to arbitrate disputes in lieu of litigation. This applies with equal force to disputes between U.S. firms and injured consumers and between U.S. firms and their foreign suppliers, distributors, or joint-venturers.

The recommended procedures and options should not prove difficult to implement. Many should be in place, inasmuch as strict liability is a well-known concept in United States law, and they need only be extended or modified to account for the European market. The U.S. manufacturer that has an existing, well-developed quality control and loss prevention program can concentrate on other variables unrelated to liability issues when considering the decision to export.

CONCLUSION

European product liability law has been harmonized around the doctrine of strict liability, following the evolutionary trend experienced in the United States. The movement extends beyond the European Community: Austria(80) and Norway(81) have passed strict liability legislation and Japan is considering a similar Move.(82) The international momentum is decidedly in favor of holding manufacturers strictly liable for defects in consumer goods and that redounds to the benefit of American businesses. They have vast experience with producing and marketing products in an environment that imposes liability for product defects regardless of fault. It is an opportune time for manufacturers who have not already done so to consider exporting their goods to Europe.

A reasoned response to the new European product liability regime should not be difficult for American businesses that have succeeded in the domestic legal environment. Good business practice in the American strict liability environment is good business practice in its European counterpart. Moreover, crafting a reasoned response pays great dividends to those companies that make the effort. American firms can transfer the knowledge gained domestically to compete effectively in the European market. The experience accumulated over the three decades that strict liability has been the law in the United States enables business to view the European Community as a marketing opportunity and not as Fortress Europe. (1) See, e.g., Karen Tumulty, Commerce: A Debate Rages Over Buther the Formation of Rival Groups Will End in Global Disaster or Merely Simplify the Rules Among Natural Trading Partners, L.A. Times, Oct. 20, 1991, at D1

Approximation of the laws of the Member States concerning the liability of
the producer for damage caused by the defectiveness of his products is
necessary because the existing divergences may distort competition and affect
the movement of goods within the common market and entail a differing
degree of protection of the consumer against damage caused by a defective
product to his health or property

Article 100 of the Treaty of Rome, the treaty creating the European Economic Community states: “The Council … shall issue directives for the approximation of such provisions laid down by law, regulation or administrative action in Member States as directly affect the establishment or functioning of the common market.” Treaty Establishing the European Economic Community, March 25, 1957, 298 U.N.T.S. 4 [hereinafter Treaty of Rome]. Directives are first proposed by the Commission of the European Community, the principal policy initiator, and approved by the Council of Ministers. Nugent, supra note 5, at 43. Once a directive is passed, it is binding on the Member States, but only as to the result to be achieved. The selection of “form and methods” is left to the individual Member States, which then must pass implementing national legislation that conforms to the directive. Treaty of Rome, supra, at art. 189. (7) See generally Ferdinando Albanese & Louis F. Del Duca, Developments in European Product Liability, 5 Dickinson J. Int’l L. 193 (1987)