New Product Liability Directive – online platforms and fulfilment services providers in the firing line?

On 28 September 2022, the European Commission (“EC”) adopted a revised Product Liability Directive proposal (“PLD Proposal”) which builds upon the strict liability of manufacturers for unsafe products, whilst modernising its scope to cater for digital products and also global supply chain models. For further details, see our articles here:

• European Commission proposes new ground-breaking rules on product liability and AI civil liability.
• Rebuttable presumptions of fact under the EU Commission's recent product liability directive proposal.
• Proposed new disclosure obligations on alleged product defects for defendants in product litigation.
• EU Council's position on the proposed revision of EU product liability law.

The PLD Proposal may come as a surprise to online platforms and fulfilment services providers who (subject to conditions) may find themselves for the first time potentially liable for defective products which cause harm to consumers in their supply chain. As further outlined below, the broader regulatory framework for defective products proposed by the PLD Proposal has been criticised of both falling short of protecting consumers from defective products being sold online as well as going too-far and risking stifling European innovation and competitiveness.

New definitions

The EC notes that current global supply chains may involve new business models and economic operators who, given their “novel form”, do not easily fit into the traditional definitions of supply chain players under the existing legal framework of the current Product Liability Directive (which dates back to 1985).

With this in mind, the PLD Proposal brings product liability terminology in line with the current EU product safety framework by basing definitions such as “manufacturer”, “importer”, distributor” and “placing on the market” on the definitions in Decision 768/2008/EC¹. The PLD Proposal also goes further in some respects by defining both “fulfilment service provider” and “online platform” as follows:

• fulfilment service provider means any natural or legal person offering, in the course of commercial activity, at least two of the following services: warehousing, packaging, addressing and dispatching of a product, without having ownership of the product (with the exception of certain postal and parcel delivery services outlined in the PLD Proposal); and

• online platform, defined by reference to the Digital Services Act, means a hosting service that, at the request of a recipient of the service, stores and disseminates information to the public, unless that activity is a minor and purely ancillary feature of another service and, for objective and technical reasons, cannot be used without that other service, and the integration of the feature or functionality into the other service is not a means to circumvent the applicability of the Digital Services Act. The Council’s amendments to the PLD Proposal define “online platform” by reference to the conditional liability exemption of ‘mere conduit’ of the Digital Services Act.

The revision also adapts the PLD to the digital age by expanding the definition of a "product" as follows:

a “product” means all movables, even if integrated into another movable or into an immovable.

This definition would include digital manufacturing files and software, as outlined in the Council’s amendments to the PLD Proposal, where an additional sentence was specifically added to the definition to state that “‘Product’ includes raw materials, electricity, digital manufacturing files and software”.

In its 2022 impact assessment report, the EC states that one of the current issues with the existing PLD is that certain products, economic actors and damage in the digital economy escape strict liability: “the PLD allows a producer to escape liability if the producer can prove that a defect that causes damage probably came into being after the product was put into circulation […]. This logic no longer reflects the reality of products in the digital age. Producers of such products often retain control of them after they are put into circulation, either by providing updates, delivering new functionalities through upgrades, or supplying digital services in the form of continuous updates in order to make, say, an autonomous vehicle or smart domestic appliance function. Software updates themselves can be defective, and have been identified by the EU Agency for Cybersecurity as the main causes of non-malicious security threats to IT systems and applications”.

The PLD Proposal’s expansion in the definition of a “product" is welcomed by some academics who consider that the current approach of differentiating between tangible (e.g. hardware) and intangible (e.g. software) products does not make sense in the digital age. However, other academics point out that the current PLD already protects consumers against products with digital content (for instance, when operating software is installed on a physical item).

Some stakeholders have also expressed their concerns regarding the changes proposed by the PLD Proposal:

• BusinessEurope has stated that including software or data within the scope of a “product” “would broaden the scope of the Directive and change its logic.” BusinessEurope also noted that this would bring a “greater legal exposure for software developers” in the context of a “growing number of unregulated, profit-motivated, third-party claims taking advantage of consumer claims to launch class actions”.

• Similarly, the Computer & Communications Industry Association has noted that "software inherently continues to be further developed over time and has never done any physical harm in itself".

• DigitalEurope has also warned that "any expansion of scope beyond finished tangible products must be clear and proportionate […]. Measures should be taken to prevent unintended consequences, including potentially holding software developers liable for damage caused".

It remains to be seen whether any further revisions will be made to the definition of “product” before the final legal text of the PLD Proposal is agreed.

Liability for defective products

The PLD Proposal goes on to establish that, where a defective product placed in the EU market has caused damage to a person, certain economic operators can be held liable, including (among manufacturers, importers and distributors of a defective product):

• a fulfilment service provider, where none of the manufacturer of the defective product, its authorised representative or the importer of the product are established in the EU; and

• a provider of an online platform that allows consumers to conclude distance contracts with traders in circumstances where the online platform presents the defective product or otherwise enables the specific transaction in question in a way that would lead an average consumer to believe that the defective product is provided either by the online platform itself or by a trader acting under its authority or control.

In its 2022 impact assessment report, the EC justifies its choice to include online platforms within the scope of the PLD. Among its reasons, the EC outlines that "online marketplaces now also make it possible for consumers to purchase products directly from non-EU producers without the involvement of an EU-based importer. In such cases, if a product is defective and causes harm, there is no EU-based liable person from whom to seek compensation under the PLD".

Despite this, the PLD Proposal is keen to ensure that economic operators are only held liable in a proportionate manner to their role in the supply chain. As such, to the extent that fulfilment service providers and online platforms only have a subsidiary role in the supply chain, their liability should be limited so as to reflect such circumstances.

Too far or not far enough?

The EC’s efforts to both broaden the definition of a “product” in the PLD Proposal and introduce liability for further actors in the supply chain – including online platforms - have been responsive to a number of requests made by consumer organisations across Europe, as well as recent studies showing that a large number of products sold on online platforms do not comply with European safety standards:

• For example, a British consumer organisation, Which?, published a policy paper in 2019 calling for online marketplaces to be given greater responsibility for the products sold on their sites, given that a large number of unsafe products are being sold via these platforms. According to Which?, "people value the lower prices and wide choice that these marketplaces can offer, but consumer protections have failed to keep pace and fall short of more traditional retailers […]. The voluntary nature of current checks by marketplaces fails to recognise their role as the primary interface for consumers with the technical, as well as commercial, ability to hold their suppliers to account for consumer safety".
• In a similar vein, the European Consumer Organisation (BEUC) recently published a position paper on the PLD Proposal,  advocating for online marketplaces to be regulated as economic operators and to be given an importer-like status so as to be held liable for unsafe products sold through their websites. According to BEUC, the PLD Proposal’s provisions are “far too narrow” and “consumers should be able to hold online marketplaces liable if the manufacturer or third-party vendor is based outside the EU, or if the online marketplace fails to identify the manufacturer or third party vendor”. As such, the BEUC calls for the EC to go further in this respect.
• The association Euroconsumers also considers that the provisions of the PLD Proposal concerning liability for online platforms are too limited, and are introduced as “a very last resort” in circumstances where “all of the other possible liable persons are unavailable, and only if they present the product in a way that may lead consumers to believe that the product is provided by the online platform itself or by a trader acting under its authority or control.” Euroconsumers argues that "a strong liability regime to underpin the system is still lacking".

On the other hand, many industry organisations believe the EC is going too far with the PLD Proposal. Several actors consider that online platforms should not be held liable for products they have no control over, and claim that existing EU regulation is sufficient to protect consumers against defective products sold online:

• The Computer & Communications Industry Association (CCIA) published an article claiming that the changes in liability brought by the PLD Proposal may hamper innovation and digitalisation in Europe. According to the CCIA, "the changes proposed by the Commission do not accurately reflect the challenges faced by consumers today, but rather isolated cases". The CCIA also highlights that "recent EU legislation explicitly recognised that marketplaces do not have to vet all products listed by traders, so they cannot be held liable for products they have never seen".
• A position paper published by BusinessEurope, an advocate for European companies, also raises concerns that "holding online marketplaces strictly liable for products of which they are not the producer, seller or importer would make them liable for products which are not under their control". BusinessEurope also points out that recent European regulation and proposals, such as the Digital Services Act , the General Product Safety Regulation, and the Market Surveillance Regulation, are sufficient to protect consumers in relation to products purchased on online marketplaces. According to BusinessEurope, due diligence and traceability obligations "are completed by the new obligation for economic operators to appoint an EU representative for high-risk products sold in the EU where there is no EU-based producer or importer, recently applicable in the framework of the Market Surveillance Regulation, which is sufficient to ensure the same level of protection for the purchases of products online".
• This position is shared by other organisations such as DOT Europe, an advocate for European internet companies, which expressed its concern that "imposing liability on marketplaces would put EU-based marketplaces at a disadvantage compared to other sales channels".

It is clear that there is no consensus on how far reaching the PLD Proposal ought to be, and there will continue to be close scrutiny as the draft legislation makes its way through the ordinary legislative procedure. 

Will the UK follow?

It is not clear at the time being if the UK government will follow the EU and adopt similar measures to update its product liability rules. However, the increased responsibility of online marketplaces is at the forefront of the agenda for the Office for Product Safety and Standards (“OPSS”).

The OPSS recently hosted a Round Table with a number of leading online marketplaces where it reiterated its goal to ensure that online marketplaces are taking action to keep unsafe products off their platforms.

OPSS identified certain controls which, if adopted, could stop the supply of unsafe products. These included:

• Controlling the relationship with third party suppliers;
• Ensuring the safety of products before they are placed on the market;
• Improving the response to new safety information; and
• Giving consumers better information about products and third-party suppliers.

This Round Table event preceded the government’s recently published Product Safety Review which includes policy proposals relating to Online Marketplaces.

Next steps

The review of the PLD Proposal is underway, and the draft will need to be negotiated and adopted by the European Parliament and the Council before it becomes law. Hogan Lovells is actively monitoring developments in this space - keep an eye out for our future updates.