Introduction
Strict liability and defence
Possible statutory defences
Burden of proof
Remedies
Liability in tort
Possible defences in tort
Supreme Court definition of 'product defect'
Introduction
Like many countries, Germany has a long tradition of holding the manufacturer of a product responsible for damages caused by product defects. Germany, as an EU member state, transposed the EU Product Liability Directive (85/374/EEC) into national law in the form of the Product Liability Act. The act took effect on January 1 1990 and imposes strict liability on the manufacturer of a defective product. However, Germany's product liability regime is also still governed by traditional liability in tort according to Section 823 of the Civil Code. This update considers the most significant principles underpinning these two liability regimes and examines the definition of a 'defect' in the eyes of the Supreme Court.
Strict liability and defence
According to Section 1(1) of the Product Liability Act, the manufacturer of a defective product is liable for the resulting damage if a person is killed, or suffers bodily injury or harm to his or her health, or if goods are damaged. In case of damage to goods, the manufacturer is liable only if a good which is materially different from the defective product has been damaged – so-called 'liability for creeping damage' – but is not liable for damage to the product itself.
According to Section 4(1) of the act, a so-called 'quasi-manufacturer' is treated as a manufacturer. A 'quasi-manufacturer' is any party which attaches its trademarks, signs, symbols or name to the product of a third party, thus creating the appearance that it was the actual manufacturer. According to Section 4(2) of the act, importers of goods into the EU market from third countries are also liable as manufacturers.
According to Section 1(2) of the act, a manufacturer is not liable for damages suffered by a consumer if it can prove that:
- it did not put the product into circulation;
- the product was not defective when it was put into circulation;
- it did not manufacture the product for sale or another form of distribution with an economic intent;
- it did not manufacture or distribute the product in the context of its professional activities;
- the defect was caused by the fact that the product complied with mandatory legal requirements at the time it was put into circulation; or
- the defect could not be detected by state-of-the-art means at the time the manufacturer put the product into circulation.
In addition, according to Section 1(1) of the act, if in cases of damage to goods the product was intended ordinarily for private use and primarily used as such by the claimant, the manufacturer is not liable. Further, according to Section 1(3) of the act, liability does not exist for the manufacturer of a component part if a defect was caused by the design of the product into which the part was integrated. Similarly, a component part manufacturer will not be held liable if a defect was caused by instructions issued by the manufacturer of the product.
Burden of proof
Under the strict liability regime of the act, the claimant must prove the damage, the defect and the causal connection between damage and defect, as per Section 1(4).
Remedies
As is the case in most civil law countries, damages to be paid by the manufacturer are compensatory in nature – a person harmed by a defective product must be put in the same position as he or she was before the damaging event. All forms of punitive damages are alien to the German legal system. In addition to the general principles of the civil code regarding possible items to be remedied by a tortfeasor, the Product Liability Act addresses the following specific issues regarding damages:
- According to Section 7, where a person is killed as the result of a defective product, the manufacturer must compensate the costs of the deceased's (reasonable) medical treatment, and compensate for the negative impact on the deceased person's financial assets arising due to the fact that during the time of his or her ailment, he or she was unable to earn any income, this ability was limited or his or her personal needs increased. The party responsible must also carry the cost of the funeral. Where the deceased was responsible for the financial support of a third party at the time of the injury, the party responsible for the damage must pay compensation for the loss of this third party's financial support for as long as the harmed person would presumably otherwise have lived.
- According to Section 8, a manufacturer is liable for the costs of medical treatment as well as the negative impact on the financial assets of a person who suffered bodily injury or harm to his or her health.
- According to Section 10(1), maximum liability for damage caused by a product or products with the same defect is €85 million.
- According to Section 11, in the case of damage to goods, the person harmed must carry the amount of €500 as a 'deductible' – that is, the manufacturer is liable for damages to goods only over and above the amount of €500.
Liability in tort
The more traditional approach to German product liability is liability in tort according to Section 823 of the Civil Code, codified for the first time in 1900. Here, too, a claimant must prove that:
- the defective product was put into circulation by the manufacturer;
- damage was incurred; and
- a causal connection between the defect and the damage exists.
As is the case under the terms of the Product Liability Act, in cases of damage to goods, the manufacturer is liable only if a good that is materially different from the defective product has been damaged – so-called 'liability for creeping defects'. This principle is usually applicable in cases of defective component parts.
Unlike the strict liability regime, a claimant can demand compensation for damages under Section 823 of the code even if the product was used primarily for business purposes.
In contrast to other liabilities in tort, in the case of product liability a claimant need not prove that the manufacturer was at fault in putting a defective product into circulation. Currently, if a claimant can prove the existence of the three elements listed above, it is presumed that the defect of the product originated from the sphere of the manufacturer. It is then up to the manufacturer to prove either that the defect did not originate from its sphere or that it did not put the defective product into circulation. This effectively shifts the burden of proof to the manufacturer.
Possible defences in tort
A manufacturer can produce exculpatory evidence to establish that it was not at fault in manufacturing and putting on the market a defective product by showing, for example, that it:
- ensured that its products complied with the governing technical standards, laws and regulations;
- selected, trained and supervised its employees carefully and diligently;
- used state-of-the-art machinery and tools to produce products free of defects;
- established adequate quality control measures, regularly checked the production process and eliminated defects during this process; or
- carefully selected suppliers and controlled the products regularly using a state-of-the-art process.
If a manufacturer can prove that it carried out due diligence and show that a state-of-the-art production process was used, it will not be held liable for damages caused by a defective product under the theory that the individual defect was a so-called 'outlier'.
Supreme Court definition of 'product defect'
Common to the strict product liability regime and the corresponding liability in tort is the definition of the term 'product defect'. Unlike Section 823 of the code, Section 3 of the Product Liability Act provides a statutory definition of the term 'product liability'. The provision states that a product is defective if it does not ensure safety, which can justly be expected, taking into account all factors, especially the product's presentation, its use (that can be reasonably expected) and the date on which it was put into circulation.
This justified consumer safety expectation is the key element that a product must meet when a court is deciding whether a product is defective. Four categories of defect are recognised: design defect, manufacturing defect, instruction defect (or failure to warn) and failure to monitor the market.
In a landmark decision(1) regarding an alleged design defect, the Supreme Court once more pointed out that the subjective safety expectation of the harmed consumer is not decisive, but rather that liability is based objectively on the question of whether the product meets the safety expectations that the customary usage in the respective industry deems necessary. A product has a design defect if, at its conception, it does not meet the "necessary" safety level. Thus, as early as the designing and planning stages of a product, the manufacturer must take into consideration all measures that are objectively necessary and objectively reasonable to avoid possible danger originating from the product.
'Necessary' measures are those safety measures that are constructively possible according to the state-of-the-art science and technology available at the time that the product is placed on the market, which are sufficient and able to prevent damage. The court pointed out that the applicable "state-of-the-art science and technology" standards must not considered to be those which are customary in the respective trade, as the safety measures applied in the industry can lag behind technical developments and thus fall below the legally required measures.
The possibility to avoid danger exists if, according to the trusted specialist knowledge of the respective expert groups, practically operational solutions are available. However, this cannot be assumed before a superior alternative safety-related construction is operational. A manufacturer is not obliged to implement safety concepts that are still on the drawing board or still in the experimental stage.
If certain risks associated with the use of the product cannot be avoided notwithstanding the implementation of the respective state-of-the-art science and technology, the manufacturer must evaluate whether the potentially dangerous product can be put on the market at all, taking into consideration the quality of the risks, the probability of their realisation, as well as the advantages and benefits associated with the product and its sale and use.
The question of whether a specific safety measure is "reasonable" can be assessed only by taking into account all elements of each individual case. Especially decisive is the extent of the danger emanating from the product. The more severe the danger, the higher the standards that must be met to avoid liability. In case of significant dangers to life and limb, more stringent measures must be implemented by the manufacturer than would be the case for dangers to property or insignificant risk of impairment to one's personal physical integrity. Whether a measure is reasonable also depends on the economic implications of the safety measure, in which case the customs of the consumer, the production costs, the chances of sale of a correspondingly altered product, and the related risk-utility test for the product are the most important aspects to take into consideration.
Although this Supreme Court decision describes in detail the characteristics of a product (design) defect, thus creating legal certainty, its implications seem astonishing. The Supreme Court's ruling, intended to create better and safer products for consumers, puts enormous pressure on manufacturers. Common safety levels long practised among manufacturers in the same industry now easily come under the suspicion of possibly lagging behind the legally required safety level, thus making them 'defective'. Manufacturers could easily feel compelled to settle product liability cases for fear of obtaining a negative court ruling attesting to a product defect. This once more shows that it is of paramount importance for manufacturers to seek adequate legal advice starting from the drawing board up to the defence of the case in court if they wish to avoid unnecessary rulings or unfair settlement agreements against them.
For further information on this topic please contact Mark Schönmetzler at Carroll Burdick & McDonough by telephone (+49 7031 439 9600), fax (+49 7031 439 9602) or email ([email protected]).
Endnotes
(1) Supreme Court Decision VI ZR 107/ 08, June 16 2009, with further citations.