Rod Freeman, Phoebe Wilkinson, Markus Burckhardt, Christine Gateau and Eugene Chen of Hogan Lovells take an in-depth look at global developments in product liability defence:
"The interplay of regulatory regimes and liability regimes cannot be ignored in a world where authorities are increasingly adopting an interventionist approach to product risks, and consumers are linked up through internet-based communications. "
Product liability is being redefined worldwide. No longer is it meaningful to think of the concept simply in reference to personal injury claims against product manufacturers. “Product liability” risks are much more complex in the modern world, and are changing rapidly.
The expanding scope of liability risks for product manufacturers does not suggest that products are becoming more dangerous in any sector. The contrary is likely to be the case. Rather, the increase in high-profile product liability litigation and of regulatory issues arising out of product safety and product integrity concerns reflects changing cultural attitudes towards risk internationally, and corresponding changes in how regulators and consumers across the world respond to problems with product safety.
This article tracks trends in product liability in various parts of the world – from the United States, to the United Kingdom, France and Germany, and across to China, drawing out common themes of how regulatory scrutiny, consumer appetite for litigation, social media and globalisation are increasing liability risks for businesses.
The key message is that product manufacturers seeking to successfully market their products across international markets need to take a joined-up approach when managing their product liability and regulatory risks.
The growing importance of regulatory regimes
Product manufacturers and suppliers need to keep on top of a constantly evolving regulatory landscape internationally, a challenge magnified for multinational businesses grappling with different local legal regimes. The changes are widespread, and at times go to the core of the way in which product safety and related issues are regulated.
In Europe, the European Commission has recently adopted proposals for a revision of the EU-wide regulations governing general consumer product safety, which imposes important additional obligations on manufacturers, importers and suppliers. While aspects of the legislation should bring some benefit for businesses to the extent that they introduce greater predictability and uniformity across EU member states, the proposals are also indicative of the enhanced focus on the responsibilities of each economic operator along the supply chain, and the emphasis on active surveillance and intervention of authorities.
The existence of EU-wide legislation in this area does not necessarily simplify compliance for businesses in Europe, as they need to take into account differences in national implementation, interpretation and enforcement. By way of illustration, United Kingdom lawmakers are taking the opportunity presented by the need to implement the new EU Consumer Rights Directive (2011/83/EU) to overhaul domestic consumer protection legislation. The rules on supply of goods and services are currently spread over eight separate pieces of legislation in the United Kingdom, while the powers of consumer law enforcers are contained in 60 different pieces of legislation. The Consumer Rights Bill seeks to consolidate, clarify and update these provisions in a single Act, expected to enter into force in June 2014.
Even in jurisdictions where regulators have traditionally relied on hindsight rather than anticipating product safety risks, regulatory scrutiny of these issues is growing. In China, a major amendment of the Law on Protection of Consumer Rights and Interests entered into effect in March 2014 – the first major development in the product liability regime since the implementation of the Law in 1994. The Law puts in place new consumer-friendly provisions, reversing the burden on the consumer to prove non-conformity with quality warranties where such non-conformity is discovered within six months of receipt of the goods or services, and conferring a right of return within seven days on consumers buying goods at a distance.
Compliance with proliferating product regulation is costly, but lack of compliance is likely to heighten exposure to liability. Similarly, a proper approach to defending product liability claims needs to be based on a clear understanding of the applicable regulatory regime, and the additional layer of risk that it brings around the world.
The rise of consumer class actions
Potential liability where problems with the product have not been proven
The law on product liability class actions continues to develop. Recent cases in the United States and Germany point to an increased willingness on the part of courts to expand the scope of liability for product manufacturers in a way that opens the door for mass claims. In these countries we have seen the courts reach findings that there may be liability on the part of manufacturers, even if actual problems with the product in question have not been proven in all or in specific cases.
In the United States, surprising judgments in two related product liability cases established that a product defect case could proceed as a class action even if a majority of purchasers has not experienced any problem with the product. The plaintiffs alleged that washing machines they had purchased were deceptively designed and were susceptible to having mould and mildew accumulate in the machine during the normal course of use. Two circuit courts held that lawsuits asserting claims on behalf of all purchasers of the washing machines could proceed on a class-wide basis, even though it was undisputed that most of the washing machines never developed any mould problem.
In Germany, the Federal Court of Justice has referred a question to the European Court of Justice as to whether the mere suspicion that a product may be defective establishes claims under the German Product Liability Act. The underlying actions concerned cardiac pacemakers and defibrillators that had not themselves been proven to be defective, but that did belong to a series of products that had shown a significantly higher risk of failure than usual. The reference to the European Court follows rulings by the German courts in these actions that deemed that a defect was established if a product belongs to a defective series: even though there had been no actual failure in the products in question, the potential for the product to be defective was sufficient to constitute a defect. The European Court’s answer is likely to have significant impact on product liability proceedings.
This trend is also reflected in France, where there have been recent decisions in the field of asbestos liability, which give rise to liability for the effects of anxiety in certain circumstances, even in the absence of proof of physical injury.
New routes for “collective” litigation
Even in jurisdictions where class actions are not strictly available, new routes are being used to bring what is effectively collective litigation. In Germany the sickness funds that provide public health insurance bring claims together to raise the pressure on defendant manufacturers, particularly in pharmaceutical cases and cases relating to medical devices, where the sickness funds have access to patient data and are able to make use of it.
In France, consumer legislation adopted by the French parliament in February 2014 will enable consumer protection associations to bring actions before the civil courts to obtain compensation for individual losses sustained by a group of consumers.
In China, amendments to the Civil Procedure Law have introduced the possibility of public interest litigation. “Relevant bodies and organisations prescribed by the law” may bring suits against tortious acts such as environmental pollution, harm of consumers’ legitimate interests and rights, and other acts injuring the public interest. These “relevant bodies” may include the China Consumer Association and consumer societies, potentially enabling consumer class actions of a kind to be brought in respect of allegedly defective products.
The rise of plaintiff law firms
While there is not a “plaintiffs’ bar” of comparable size and presence in the countries covered other than the United States, some lawyers in such as France and Germany are becoming increasingly specialised in claims against product manufacturers. In the United Kingdom, procedural changes including significant changes to litigation funding are threatening the viability of some plaintiffs’ firms. However, the market is also witnessing the entrance of sophisticated plaintiffs’ law firms from the United States and Australia on an unprecedented level, which is likely to have a long-term impact on product liability litigation in the United Kingdom.
Increased enforcement powers for regulators and penalties for businesses
A wider range of enforcement powers, and more severe penalties, are becoming available to authorities around the world.
Traditionally, in the United States, the greatest risks of non-compliance with product regulations were found in the litigation system. To a large degree, that remains the case, with companies exposed to threats such as treble damages, obtained through consumer fraud claims, punitive damages and claims for attorneys’ fees. However, risks through the regulatory regime itself are increasing rapidly in the United States, and ongoing changes under the Consumer Product Safety Improvement Act are a prime example.
German authorities are increasingly making use of criminal law powers to investigate and prosecute directors and officers of companies in relation to product safety offences. In a general trend (not exclusive to product liability and product safety issues), fines are also being imposed on companies for the acts or omissions of directors and officers.
In France, new consumer legislation has increased the penalties for deceit to up to 10 per cent of the turnover of a company. The type of losses that can be recovered by plaintiffs is widening to include damages for anxiety or disruption in living conditions (eg, in asbestos-related claims).
The amended Chinese Law on Protection of Consumer Rights and Interests has raised the amount of punitive damages that a plaintiff can claim for defective products. Punitive damages may be up to three times the contract price if the sale of the products was fraudulent, or up to two times the losses incurred, if the economic operator knowingly provided defective goods and services, and as a result the plaintiff suffered serious damage to health, or death.
In the United Kingdom, the Consumer Rights Bill will introduce new powers for enforcement authorities to seek redress for consumers for breaches of consumer law through the civil courts. The government’s stated aim is for businesses found in breach to propose appropriate measures that they would agree with the enforcer. Where a business is unwilling to propose such measures, however, the enforcer could seek an order from the court to implement measures that would give consumers more information and improve the market.
Internationalisation of risk
In a globalised world, national authorities are increasingly watching developments in other countries, and will take leads on product safety issues arising outside their borders.
In the United States, seven pelvic mesh federal multidistrict proceedings are pending in the District Court for West Virginia, comprising tens of thousands of personal injury suits against makers of meshes used to treat pelvic organ prolapse or stress urinary incontinence in women. Plaintiffs allege the mesh degrades over time, is incompatible with human tissue, and cannot always be removed because it becomes embedded in the body, causing various health complications. In a sign of international attention and interest, the European Union’s executive branch asked its Scientific Committee on Emerging and Newly Identified Health Risks (SCENIHR) to assess whether the usefulness of surgical mesh in treating these health problems outweighs the injury risks that have exposed manufacturers to litigation in the United States. SCENIHR’s response is expected in 2015.
Manufacturers and distributors should also be aware that regulators in different countries communicate with each other in respect of product safety and quality issues. A concrete example of this is the OECD GlobalRecalls portal launched in 2012, which collects information on product recalls being conducted around the world in a public online database. The portal is a
product of the collaboration of product safety regulators in the United States, the European Union, Canada, Brazil, Mexico and Australia.
The impact of social media
The global penetration of the internet and social media means that information spreads between consumers and other stakeholders more quickly than ever. This poses significant risks to businesses that do not put in place a clear and consistent worldwide approach towards managing product liability claims and product safety issues, such as recalls.
German plaintiffs have been known to publish on social media websites alleged communications between their legal counsel and the legal counsel of the opposing party. With social media usage becoming increasingly ingrained in the lives of consumers across the world, this risk is not limited to Germany, and such actions are likely to prejudice the defence of product liability claims and the conduct of settlement negotiations.
Regulators are also paying attention to social media, some going to the extent of monitoring what companies say about themselves and their products on these sites. The United States Food and Drug Administration (FDA) recently criticised a manufacturer’s Facebook page for including a logo for a certain medicine and advising potential customers to talk to their doctor about it, without disclosing possible side effects. The FDA is expected to issue guidance on the use of social media this year.
In China, the regulators are traditionally reactive rather than proactive in relation to product safety issues. However, media activity is likely to attract their attention – such as the “315 Gala” produced and broadcast by China Central Television (CCTV) every year to mark World Consumer Rights Day. The gala identifies two or three major businesses whose products are said to be defective, potentially leading to a public outcry if the response from the relevant businesses is deemed unsatisfactory. The gala is often accompanied by notice of administrative or criminal investigation into the products identified.
Product liability risks, in the broadest sense, now need to be anticipated and managed by businesses participating at every level of the supply chain. The interplay of regulatory regimes and liability regimes cannot be ignored in a world where authorities are increasingly adopting an interventionist approach to product risks, and consumers are linked up through internet-based communications. With authorities in regular communication across national borders, and consumers ever more alert to product safety issues in other countries as well as their own, businesses operating in the global arena need to ensure they are properly advised and coordinated in managing and responding to these issues.
*The authors acknowledge the assistance of Zen Cho (Hogan Lovells, London) in the preparation of this article.