Product Liability in the 21st Century

Amid the evolving product liability landscape, Rod Freeman of Hogan Lovells outlines how a variety of 21st century trends is affecting product manufacturers and advises how the market should mitigate new risk. 

Rod Freeman

While product manufacturers increasingly seek to access global markets, and develop their brands and reputations consistently around the world, the tendency has been to manage risks in a much more ad hoc, reactive, and localised manner – especially product liability risks. In circumstances where a synchronised and comprehensive approach is adopted for the development of business opportunities around the world, it is surprising that international product manufacturers do not apply the same expansive thinking to the management of its risks. Viewed logically, the approach to one concept ought to lead naturally to the other, as risks surely will follow the direction a business takes.

This ad hoc approach to risk management often arises because an international business primarily assumes that product liability risks are critical mainly in North American markets. While this is correct to some degree and provides a basis for prioritising risk management strategies, this reasoning is flawed in the modern world, as discussed further in this article. International businesses also tend to treat regulatory risks simply as compliance issues, rather than as potential liability issues. This approach not only overlooks the broader implications of an international product manufacturer getting compliance wrong, but it also fails to properly make the critical connection between regulatory compliance and product liability risk.

The problem is not trivial, nor is it hypothetical. Recent history has shown major brand names suffering significant losses as a result of the cultural failure to apply expansive thinking to risk management that mirrors its expansive approach to exploiting global supply chains and global markets. High-profile examples involving major brand names in the automotive industry, the toys industry and the consumer electronics industry over recent years should each serve as wake-up calls for any business operating internationally.

As those examples become more frequent, and the implications more costly, those charged with protecting the reputations of international brand names are increasingly recognising the need for a 21st century approach to “product liability”.

A 21st century view of “product liability”

Surprisingly, the impediment to effectively managing risk may be found simply in the narrow way that many companies view “product liability”. This is especially true, and not uncommon, for companies in industries that are exposed to significant litigation risk.

For a modern company, operating internationally, “product liability” needs to be recognised as relating to all aspects concerning the quality or the safety of its products which could make an impact financially or reputationally. A narrow view of “product liability” as referring, for example, only to consumer injury claims, creates gaps in the risk management net, which exposes the business to additional risk.

Only once a company recognises that those people responsible for “product liability” have a responsibility to manage all risks relating to the safety and quality of products, will the company start being truly effective in managing the business. Of course, within that broader “product liability” function, there will be pockets of speciality (eg, those responsible for regulatory compliance on the one hand, and those responsible for consumer claims/litigation on the other). But only when those areas are properly joined up and there is a recognition that their functions are complementary and aimed at achieving a common goal, will those risks be adequately managed.

This analysis highlights the inadequacy of managing product liability risks through “silos”, and on a localised basis. To take one example, for many multinational companies, the historical approach to post-market surveillance has been characterised by a “localised” bias. In some cases, this has been motivated by the desire to limit exposure to discovery obligations in US litigation. That approach, which has always had its dangers, is no longer appropriate, although it is still reflected in the risk management strategies of many companies. Multinational companies exploiting international markets must behave in a manner reflecting their international presence. That is simply the expectation of markets, and increasingly the expectation of regulatory regimes, enforcement authorities and courts. Such companies must manage their risks through systems that have sensitivity to, and control of, worldwide factors and with a clear understanding of the divergent risk factors existing around the world, and the way those risk factors interplay.

It’s a different world out there: the convergence of risks

Companies are increasingly seeking and reaping the rewards of the globalisation of markets. The world is shrinking – and those companies with the ambition and the resources to exploit the opportunities can profit where others can’t, and survive when others don’t.

With an increasingly globalised market, we are now witnessing the rapid and inevitable globalisation of risks. This is accompanied by a blurring of traditional distinctions, and a subsequent convergence of risks. In order to effectively manage the risks both now and in the future, it is important to understand that the world has changed, and to anticipate the direction of future change.

This “convergence of risks” manifests itself internationally in a number of ways.

Product liability v product safety

Traditionally, a prioritisation of risk management strategies from a product perspective would assume that the greatest risk to the business in North America is litigation risk, whereas in Europe, litigation risks were relatively insignificant, and regulatory compliance issues created significant burdens and risk. However, recent developments demonstrate a clear convergence in product liability risks and in product safety compliance risks internationally.

While litigation risks continue to loom large in North America, the regulatory angle is becoming increasingly significant in determining the nature and extent of the losses suffered by companies involved in product safety issues internationally.

The converse pattern is emerging elsewhere in the world. While regulatory risks continue to increase and threaten companies, litigation risks are also becoming an increasing feature of the risk profile outside the United States.

This “convergence” between risks is complete when the modern interplay between product liability litigation and regulatory challenges is taken into account. It is well understood that a product recall or regulatory intervention will almost certainly lead to the rapid commencement of product liability litigation in the United States. But this pattern is also emerging in other parts of the world, including Europe.

Conversely, as regulatory scrutiny increases around the world, litigation in which the quality or safety of products is challenged can easily, and often does, lead to regulatory investigation and enforcement.

Product safety v product quality

Traditionally, it has been assumed that issues of product safety were properly the subject of regulation, but issues of product quality were not – quality issues were seen as simply a matter for the company, based on its assessment of its market. Such an approach is not sustainable in the 21st century. Quality issues with products are just as liable to generate litigation against a company as safety issues and are increasingly liable to attract regulatory attention.

For regulators and policymakers, especially in Europe, problems in product quality can reflect misleading conduct towards consumers, and warrant regulatory intervention from a consumer protection perspective.

Consumer safety v environmental safety

Traditionally, management of consumer safety was considered distinct from the management of environmental protection issues, and large companies have generally dealt with compliance of those areas separately. However, the regulatory approach to those issues is becoming increasingly blurred and companies must now follow the regulators’ lead, adopting a much more joined-up approach to these issues.

The changing regulatory approach is most evident in Europe, where there is a clear trend towards “dual” function regulation – the protection of persons and the protection of the environment. Examples include the European REACH regulation of chemicals, and the Directive on Restriction of Hazardous Substances (RoHS), both of which expressly have this dual purpose. The same trend is also evident in the approach to the Directive on Energy-using Products (EuP), which extends the application of the CE mark to matters of environmental protection rather than exclusively safety-related matters.

Consumer products v professional products

In the past, the distinction between “consumer products” and “professional products” has had significant regulatory implications. However, increasingly, the same regulatory approach is being applied to both types of products.

The European Commission’s New Legislative Framework for product regulation has started to adopt the same regulatory requirements for all regulated products irrespective of whether those products are for consumer or professional use.

Consumer safety v consumer security

For all companies that interface with consumers at any level internationally, issues of data protection and privacy are a new source of significant risk and should not be underestimated.

Experience is showing that a company, at least in Europe, is more likely to become the subject of regulatory intervention, prosecution and sanctions for breaches of privacy laws than it is for breaches of product safety regulations. While this balance is expected to shift as enforcement of product safety laws in Europe increases over the coming years, it highlights that sources of risk for product manufacturers are not static internationally, and approaches to risk management need to adjust accordingly.

The changing nature of litigation risks

Outside the United States, the increase in litigation risks is not necessarily driven by enterprising plaintiffs’ lawyers in the same way as in the United States. Other factors exist which are equally significant in driving increased litigation risk – these include the government-led push to educate consumers about their rights and to promote “consumer redress”, as well as consumers around the world increasingly having access to information about trends in the United States, and the ability of consumers around the world to communicate with each other.

For example, while recent tort reforms in the United Kingdom may be assumed to result in fewer product liability claims, as they disincentivise plaintiff lawyers from bringing all but the higher-value claims, the ultimate result may actually be increased liability risks for product manufacturers. Instead of pursuing litigation, an aggrieved consumer will likely seek alternate means to hold the company accountable. In all likelihood, they will contact regulatory authorities, potentially resulting in a significant regulatory issue with potential international implications for the company, including reputational damage.

Elsewhere in the world, litigation risks for product manufacturers are increasingly varied. In countries such as France and Italy, and parts of Asia, product liability challenges can (and often do) manifest themselves as criminal proceedings initiated by the authorities.

The changing nature of regulatory risks

The international regulatory environment has been characterised by two distinct trends over recent years.

First, new regions of regulatory risk have started to emerge. The existence of demanding regulatory requirements and supervision is increasingly the norm around the world. The last few years have seen an explosion in the development of regulatory regimes for products where previously there had been little cause for concern – for example, Turkey, Brazil, China, the UAE, Egypt, South Africa, South Korea, Vietnam and New Zealand. These developments are often accompanied by increased enforcement activities.

Second, more “mature” regulatory regimes, such as the US, Canada, the EU and Australia have seen unprecedented reform. The changes in each of these jurisdictions introduce fundamental changes to the way in which product safety is regulated in those markets, and significantly change the risk profile for product manufacturers.

These changes are multiplied when taking into account the increased communication and cooperation that exists among enforcement authorities globally.

The challenges of innovation

The challenges of the evolving product liability landscape are felt most keenly by companies involved in the innovation of new products.

In many sectors, innovative use of technology is moving with extraordinary pace, whether in connection with information technology, communication platforms and software-based solutions, or materials and physical design innovation (ie, the commercialisation of various forms of nanotechnology).

Increasingly, the commercialisation of technology is outrunning the development of regulation by some margin.

This poses a significant risk – for a start, as regulation “catches up” with industry, the ability to exploit the technology may become restricted, with companies losing the benefit (and expense) of years of research and development. The current development of regulatory policy concerning the use of nanotechnology is an excellent example, as has been the European experience with genetically modified foods. This highlights that companies must approach the management of “product liability” risks expansively, ensuring they are in the best possible position to predict, and influence (if necessary), the development of regulatory policy.

This issue also creates more fundamental risks. Product regulation provides a rational guide for product designers, and significantly limits product risk where the specified regulatory requirements are met. Where technology has moved ahead of regulation, no such benchmark is available, and the management of safety becomes more subjective – and therefore vulnerable to criticism and challenge. In a worst-case scenario, as regulators catch up, it may mean that that technology that has been marketed for some time is declared unsafe or unsuitable, exposing the company to substantial risk around the world in respect of its prior marketing activities.

A new approach to product liability   

At a superficial level, these issues illustrate that a product manufacturer exploiting international markets must acknowledge that “product liability” risks are global, and ultimately must be managed globally. Product liability risks are not static around the world and risk management approaches must be dynamic and supported by systems that enable companies to understand and predict change on an ongoing basis.

As traditional distinctions blur, and product liability risks converge internationally, information flows must be appropriately tailored, and the risk management culture formed around those systems. Early and proactive management of new sources of risk will exponentially benefit a company by minimising future risk and facilitating innovation.

For the legal profession, these changes mean that more is now expected of product liability lawyers who represent international companies. Those lawyers need a proper and up-to-date view of the global trends, the flexibility to adapt to the changes in the businesses of their clients, and a deeper knowledge of the industries and markets in which companies operate.

One of the keys to minimising risk is for those responsible for legal compliance and product liability management to generate trust and confidence with the other business functions in the company. It is important to foster a reputation for facilitating and supporting, not restricting and stifling, business development. Constructive cooperation and active dialogue between the internal and external lawyers, the R&D personnel, the marketing teams and the compliance professionals, at all product lifecycle stages, is the key to effective risk management and, ultimately, ongoing growth and success.

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