EUROPEAN COMMISSION Brussels, 28.9.2022 SWD(2022) 316 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT REPORT

Accompanying the document Proposal for a Directive of the European Parliament and of the Council on liability for defective products

















{COM(2022) 495 final} - {SEC(2022) 343 final} - {SWD(2022) 315 final} - {SWD(2022) 317 final}



Table of contents 1.Introduction 1.1.Political context 1.2.Legal context (see annex 7 for more details) 1.2.1. Main features of the PLD 1.2.2. Interplay of PLD with other liability regimes 1.2.3. Interplay of PLD with other EU legislation 1.2.4. Interplay with ongoing initiatives 1.2.5. Specific interplay with the Artificial Intelligence Act and the impact assessment on AI liability 2.Problem definition 2.1.What are the problems? 2.2.What are the problem drivers? 2.2.1. Problem 1: Certain products, economic actors and damage in the digital and circular economy escape no-fault liability 2.2.2. Problem 2: Consumers face obstacles to getting compensation 2.3.How will the problems evolve? 3.Why should the EU act? 3.1.Legal basis 3.2.Subsidiarity: Necessity of EU action 3.3.Subsidiarity: Added value of EU action

4.Objectives: What is to be achieved? 4.1.General objectives 4.2.Specific objectives In order to adapt product liability rules to the digital age and circular economy: In order to reduce disproportionate obstacles to getting compensation: 5.What are the available policy options? 5.1.What is the baseline from which options are assessed? 5.2.Description of the policy options 5.2.1. Policy options to adapt liability rules to the digital age and circular economy 5.2.2. Policy options to reduce disproportionate obstacles to getting compensation 5.3.Options discarded at an early stage 6.What are the impacts of the policy options? 6.1.Policy option 1a – Adaptations for products with digital elements and circular economy 6.2.Policy option 1b – Inclusion of safety-relevant software in its own right and adaptations for circular economy 6.3.Policy option 1c – Inclusion of software in its own right, new types of damage and adaptations for circular economy 6.4.Policy option 2.a – Easing the burden of proof and reducing disproportionate restrictions to make claims 6.5.Policy option 2b – Reversing the burden of proof 7.How do the options compare? 7.1.Effectiveness of the proposed policy options 7.2.Impacts of policy options

7.3.Summary of policy options assessment 8.Preferred option 8.1.REFIT (simplification and improved efficiency) 9.How will actual impacts be monitored and evaluated? Annex 1: Procedural information 1.Lead DG, Decide Planning/CWP references 2.Organisation and timing 3.Consultation of the RSB 4.Evidence, sources and quality Annex 2: Stakeholder consultation 1.Consultation strategy 2.Inception Impact Assessment (IIA) 3.Stakeholder Workshops 4.Public Consultation 4.1.Respondents by Stakeholder category 4.2.Respondents by country of origin 4.3.The Directive and the problems this initiative aims to address 4.4.Adapting the Directive to the digital age and circular economy 4.5.Reducing obstacles to making claims and getting compensation 5.Targeted Consultation

6.Interviews conducted by external contractor Annex 3: Who is affected and how? 1.Practical implications of the initiative 2.Summary of costs and benefits 3.Relevant sustainable development goals Annex 4: Analytical methods 1.Data gaps and limitations 2.Gross value added of industries under the scope of the PLD 3.Number of legal cases and compensation claims 4.Cost and Benefit Analysis 4.1.Assessment of the Benefits attributable to strict liability under the PLD 4.2.Assessment of the costs attributable to strict liability under the PLD 4.2.1.Product liability insurance costs 4.2.2.legal costs Annex 5 – Matters to be clarified in the context of revising the Product Liability Directive Annex 6: Viability of non-binding guidance Annex 7: Further details of legal context Interplay of PLD with other liability regimes 1.1.1. Interplay of PLD with other EU legislation 1.1.2. Interplay with ongoing initiatives

Annex 8: Products that may carry risks but are not defective Annex 9 – Indicators for monitoring impacts of preferred option Annex 10 – SME Test – summary of results Glossary Term or acronym Meaning or definition ADR Alternative dispute resolution AI Artificial intelligence AI Act Proposal for an AI Act (COM(2021)206) BaU Business as Usual costs (costs that would be incurred anyway by business regardless of whether there is new legislation). DSA Proposal for a Digital Services Act (COM(2020) 825) EU AR Authorised Representative serving as a legally-authorised person within the EU FSP Fulfilment service provider GDPR General Data Protection Regulation (EU) 2016/679 GPSD General Product Safety Directive (Directive 2001/95/EC) GPSR Proposal for a General Product Safety Regulation (COM(2021)346) IA Impact Assessment IIA Inception Impact Assessment IoT Internet of Things PLD Product Liability Directive: Council Directive 85/374/EEC PO Policy option(s)



1.Introduction 1.1.Political context The Product Liability Directive (PLD) provides a system at European level for compensating people who suffer physical injury or damage to consumer property due to defective products. Since the adoption of the Directive in 1985, there have been significant changes in the way products are produced, distributed and operated, and key transformations to Europe’s economy are underway. The President of the Commission stressed in her political guidelines the need for Europe to lead the transition to a healthy planet and a new digital world. This twin challenge of a green and digital transformation must go hand in hand. It requires, as set out in the European Green Deal, more sustainable solutions that are resource-efficient, circular and climate-neutral, such as extending the life of materials and the possibility to upgrade and repair products and components. It also requires, as set out in the Communication on Shaping Europe’s Digital Future, that everyone have a fair chance to reap the benefits of our increasingly digitised society, such as those offered by innovative products using artificial intelligence and the internet of things. But these benefits do not come entirely without risks. When it comes to digital technologies, in order to minimise these risks and improve the safety of products that are placed on the market, the EU is in the process of modernising rules on machinery, radio equipment and general product safety, as well as creating new rules on safe and trustworthy artificial intelligence systems. This initiative complements this modernisation drive by ensuring that when products do cause harm, consumers can be confident that their right to compensation will be respected and that businesses have legal certainty about the liability risks they face in the course of doing business. Taken together, these modernisation efforts should better enable Europe to pursue its own path towards a digital transformation that works for the benefit of people. They should contribute to a fair and competitive economy and a frictionless single market, where companies of all sizes and in any sector can compete on equal terms, and can develop, market and use digital technologies, products and services at a scale that boosts their productivity and global competitiveness. The European Parliament has also highlighted the need to ensure that liability rules are adapted to the digital world, in order to ensure a high level of effective consumer protection, and a level playing field with legal certainty for all businesses, while avoiding high costs and risks for SMEs and start-ups. When it comes to the circular economy, business models in which products are repaired, refurbished or upgraded are increasingly common and central to the EU’s efforts to achieve sustainability and waste-reduction goals. This initiative aims to reinforce such efforts as the Sustainable Products Initiative by ensuring consumers have just as clear rights to compensation for harm caused by defective refurbished products as they do for entirely new products and creating the legal clarity about liability risks that industry needs to embrace circular business models. Due to the PLD’s very broad scope, covering potentially thousands of product types, it has relevance beyond the Digital Age and Green Deal. Pharmaceuticals are a product type that has generated considerable case law, and this initiative takes into account the objectives of the Commission’s Pharmaceutical Strategy and the upcoming evaluation of Union pharmaceutical legislation. The evaluation of the PLD in 2018 concluded that the Directive was on the whole an effective and relevant instrument, but had several shortcomings: it was legally unclear how to apply the PLD’s 35-year-old definitions to products in the modern digital and circular economy; the burden of proof was challenging in the case of complex products; and the rules excessively limited the possibility of making claims. Its shortcomings in the area of emerging digital technologies were further analysed in the White Paper on AI, the accompanying Report on Liability for AI, IoT and Robotics and the report of the Expert Group on Liability and New Technologies. Three Sustainable Development Goals (‘SDGs’) have been identified as relevant to the PLD and to this initiative: SDG 3 (healthy lives and well-being) linked to promoting safe products and compensating victims of harm, SDG 9 (fostering innovation) linked to giving businesses legal certainty and SDG 12 (responsible consumption and production) linked to circular economy, enhancing product safety when substantial modifications are made. 1.2.Legal context (see annex 7 for more details)

1.2.1.Main features of the PLD The PLD lays down common rules at EU level for strict liability (i.e. liability irrespective of fault or negligence) of producers for damage caused by defective products. It allows any person who has been injured by a defective product, whether the owner or a bystander, to claim financial compensation for death, personal injuries or for damage to consumer property where the property damage amounts to more than EUR 500. Product: A product is defined very broadly as “any movable, even though incorporated into another movable or into an immovable, including electricity”. The PLD does not cover the liability of service providers but it does apply to products used while providing services. Defect: A product is defective when it does not provide the safety a person is entitled to expect, taking all circumstances into account, including the presentation of the product, the reasonably expected use and the time when the product was put into circulation. The concept of “defect” is designed broadly since it has to apply to a huge range of products, and its interpretation dynamically adapts to changing levels of safety expectations, in particular as new product legislation brings in new safety rules. Producer: A producer means the manufacturer of a finished product, the producer of any raw material or the manufacturer of a component part and any person who puts their trade mark on the product, as well as importers. The term “producer” is deliberately broad so that an injured person can easily find a liable person. If the producer is not known, the supplier (e.g. seller) will be held liable unless he informs the injured person of the producer’s identity. Burden of proof: The claimant has the burden of proving the damage, the defect and the causal relationship between defect and damage in order to get compensation. The Court has endorsed national evidentiary rules intended to ease the burden of proof. Exemptions: Producers may be exempted from liability if they prove certain circumstances, for example, that they did not put the product into circulation, that the defect probably emerged after the product was put into circulation (“later-defect defence”, Art. 7(b)), or that the defect was undiscoverable based on the state of scientific and technical knowledge at the time the product was put into circulation (“development risk defence”, Art. 7(e)). Time-limits: Producers are also released from liability under the PLD 10 years after they put a product into circulation, and claimants have to start legal proceedings within three years of identifying the damage, the defect and the producer. 1.2.2.Interplay of PLD with other liability regimes National fault-based liability regimes The distinctive feature of the PLD regime is that claimants do not have to prove the producer’s fault to get compensation, because this proved to be very challenging for claimants as production became more technologically complex during the 20th century. Instead of proving fault, claimants have to prove the product was defective. The PLD does not exist in isolation and is embedded into Member States’ national liability regimes, where it is applied alongside national rules. These unharmonised regimes allow compensation claims against a broader range of liable persons for a broader range of damages, covering not only products but services, and for longer periods of time. But victims of harm have to prove the wrongdoer’s fault, which is more challenging to prove than defectiveness. The PLD does not affect these rights, so the PLD sits coherently within the broader national regimes. Whenever the PLD does not apply, for example because the cause of the harm was not a product but a service or the property damage was below the threshold, victims of harm will normally be able to make a fault-based liability claim at national level. Table 1. Difference between the PLD and national fault-based liability PLD National fault-based liability Scope Products Any human action or omissions, including manufacturing and using products and providing services Liable person Producer (manufacturer, importer) and, in some cases, supplier/seller Any wrongdoer: producer, service provider, users (both businesses and private persons), owner etc. Type of victim protected Private persons Any victim: private persons, businesses, public entities Type of damage Death, personal injury, damage to consumer property worth more than EUR 500 Death, personal injury, damage to consumer property also under EUR 500; damage also to business property; pure economic loss, discrimination, pain and suffering (in some Member States) What victim needs to prove Defect in product irrespective of fault Fault – wrongful behaviour of a person Period of liability 10 years after putting product into circulation Various periods, but generally much longer The Sale of Goods Act and Digital Content and Services Directive gives consumers the right to remedy, i.e. replacement, repair or reimbursement, when digital content or a digital service is not in conformity or does not work properly. That concerns contractual liability, whereas the PLD concerns extra-contractual liability of producers for injuries/damage caused by a lack of safety – a complementary tool. The General Data Protection Regulation (GDPR) concerns liability of data processors and controllers for material or non-material damage caused by data processing that infringes the GDPR, whereas the PLD provides compensation only for death, personal injury and damage to consumer property. The Environmental Liability Directive establishes a framework to prevent and remedy environmental damage. It deals with pure ecological damage such as damage to protected species and natural habitats as distinct from damage to privately owned property, which is covered by the PLD. 1.2.3.Interplay of PLD with other EU legislation Product safety framework: EU product safety legislation aims to ensure that only safe products are placed on the internal market. If they are covered by sectoral legislation (e.g. on machinery, pharmaceutical products, toys, radio equipment) they have to comply with essential health and safety requirements set out there. Otherwise they fall under the General Product Safety Directive and are required to be safe. Safety rules are enforced by market surveillance rules, which ensure consumer protection by stopping non-compliant products circulating or by bringing them into compliance. Product safety legislation does not contain specific provisions on liability of manufacturers, but make reference to the fact that the PLD applies when a defective product causes damage. Product safety and product liability are therefore complementary mechanisms for achieving a functioning single market for goods that ensures high levels of safety. Cybersecurity: The Cybersecurity Act and the recently adopted delegated act under the Radio Equipment Directive are intended to mitigate cybersecurity risks, but they do not regulate the liability of producers. In addition, the Commission is preparing a Cyber-resilience Act, which would build on existing rules to encourage manufacturers and software developers to mitigate cybersecurity risks, but is not expected to touch on liability. 1.2.4.Interplay with ongoing initiatives

The proposed Machinery Regulation and proposed General Product Safety Regulation (GPSR) aim, in their respective fields, to address the risks of digitalisation in the area of product safety, but not liability. The proposed Digital Services Act (DSA) sets out rules for online intermediary services, including online marketplaces. The proposal for a GPSR imposes additional obligations on them to tackle the sale of unsafe products online. None of these measures concern liability for defective products under the PLD. The Circular Economy Action Plan 2020 announced a sustainable products policy framework intended to provide high-quality, functional and safe products designed for reuse, repair, remanufacturing and high-quality recycling. The Action Plan does not contemplate measures on liability for defective products. 1.2.5.Specific interplay with the Artificial Intelligence Act and the impact assessment on AI liability The proposed Artificial Intelligence Act aims to ensure that high-risk AI-systems comply with safety and fundamental rights requirements (e.g. data governance, transparency, human oversight) before being placed on the market or put into service within the EU. However, there is no corresponding liability of the AI-system provider under the PLD when an AI system is defective and causes harm, because they do not fall clearly under definition of “producer” in the PLD. This is because AI systems themselves do not fall clearly within the outdated definition of “product” in the PLD, which is true of other software too, not only AI systems. And, while products that make use of AI systems, such as robots, are obviously products within the meaning of the PLD, the PLD is not well adapted to dealing with such products, nor other products in the digital age (see Problem 1 below). The Commission is taking a holistic approach to liability through the revision of the PLD on the one hand (the subject of this impact assessment), and AI-specific measures concerning national liability rules on the other (the subject of the AI liability impact assessment). The interplay between the two impact assessments is depicted in the table below and the rationale is explained in section 1.2 of the AI liability impact assessment. Table 2. Interplay between PLD impact assessment and AI impact assessment PLD IA: horizontal (i.e. not AI-specific) problems & measures AI IA: AI specific problems & measures Scope All products (including AI-enabled products and AI systems themselves) AI-enabled products and AI-systems themselves, and actions or omissions linked to AI, including AI-enabled services Liable person Producer (manufacturer, importer) Any wrongdoer: producer, service provider, user (both businesses and private persons), owner, etc. Current type of liability (see table 1 above) Harmonised no-fault liability based on defect Non-harmonised national liability based on fault and, in some cases (e.g. for dangerous things like vehicles or drones) strict liability The current PLD applies to a vast range of products from raw materials to cancer medicines. It also applies to AI-enabled products, like robots, but the PLD is not well adapted to dealing with them. The revised PLD will adapt the rules for such products and ensure people injured by defective software, including AI software, can get compensation from software producers. The AI liability initiative also covers AI-enabled products and AI software, so the product scope of two impact assessments overlap. However, the two initiatives apply in different legal situations: The PLD, which is the EU’s harmonised no-fault liability regime, exists in parallel to Member States’ fault-based liability regimes. The AI liability initiative creates no new route to compensation, it only facilitates the existing national route based on fault, and hence does not introduce any overlap with claims under the PLD. The two impact assessments address measures to ensure legal certainty and effectiveness of all routes to compensation: both under the PLD and under national liability rules. Cross-references are made throughout the impact assessments where necessary to explain the interplay. 2.Problem definition 2.1.What are the problems? The evaluation of the PLD found that, while the Directive was on the whole effective, its effectiveness was hampered by outdated concepts that are unclear when applied to the modern economy and by an unfair balance of interests between producers and consumers in some respects. The PLD reinforces the EU’s product safety rules by providing an additional incentive for producers to place only safe products on the market in order to avoid liability (product liability law’s “deterrent effect”). If, despite all the precautionary safety rules, a product is not safe and causes damage, the PLD helps injured parties to get compensation. The PLD has a wide scope, potentially affecting the entire manufacturing sector as defined in the NACE classification. However, according to the 2018 evaluation study, in the reporting period (2000-2016), there were only 798 court cases based on product liability rules in EU27, with 50-60 cases per year. Around 60% (476 out of 798) of claims for defective products were successful for injured parties from 2000 to 2016. The other cases were decided in favour of producers. The evaluation study acknowledged that this was likely an underestimate. This is due to the difficulty of obtaining comprehensive data on the use of the PLD: out-of-court settlements are often on confidential terms, arbitration or mediation cases and many lower-court cases are often not published at all, and there is no monitoring at national level. This impact assessment and the accompanying study confirmed the lack of data on the number of cases of harm caused by defective products as well as the lack of a common injury database with meaningful information. More information and estimates are provided in section 5.1 and in annex 4. The evaluation study found that 52% of cases relate to products in the categories of raw materials, pharmaceutical products and vehicles. In general, the parties settle product liability-related claims through direct negotiation in 46% of cases, whereas 32% are resolved in court and 15% through mechanisms for alternative dispute resolution. Only a small share (7%) of claims under the Directive is decided through other means, such as settlements with the insurer of the responsible party. The 2018 evaluation found that, in total, 79% of producers overall have product liability insurance. This means that if a producer is found liable for a defective product and has to compensate a victim, the compensation pay-out will be covered by product liability insurance for c.a. 80% of all producers. Based on the evaluation findings, two main problems have been identified. They are summarised in the below table with respective drivers and consequences of the problems. Drivers - regulatory failures Problems Consequences 1.Liability rules unclear for products in the digital age - no liability for defects that emerge after product is marketed, including defective updates and cybersecurity vulnerabilities - unclear application to software and ancillary digital services - new types of damages such as damage to digital property are not covered 1. Certain products, economic actors and damage in the digital and circular economy escape no-fault liability FOR INTERNAL MARKET 1.Less incentive to market safe products for economic actors who impact safety but are not covered by regime. (Driver 1) 2.Unequal levels of consumer protection across EU (D1) 3.Consumers who are unsure of rights may not adopt innovative or “circular” products. (D1, 2) FOR BUSINESSES 4.Businesses unable to assess risk of liability due to uncertainty and different interpretations in every MS (D1,2) 5.Businesses face unfair competition from 3rd-country producers who are beyond the reach of the PLD (D3) FOR CONSUMERS 6.Consumers less able to get compensation for defective products using digital technologies or “circular” products. (D1, 2) 7.Consumers left without compensation when purchasing from a 3rdcountry directly (D3) ENVIRONMENT Uncertainty may have negative impact on growth of circular economy (D2) 2.Liability rules unclear for refurbished/remanufactured products 3.No liable person under PLD when consumer purchases product from a 3rd country directly 4.Proving defectiveness and causal link with damage is very difficult and costly for complex products: - No right for victims to access necessary technical information held by producer - No explicit possibility to ease the burden of proof under the PLD - Liability for undiscoverable defects is uncertain (e.g. machine learning) 2. Consumers face obstacles to getting compensation FOR INTERNAL MARKET 1.Unequal levels of consumer protection across EU (including divergent national implementation) (Drivers 4,6+D1) FOR BUSINESSES 2.Uncertainty due to fragmentation could chill willingness to place innovative products on the market (D4+D1,2) FOR CONSUMERS 3. Difficult and costly to get compensation for harm caused by complex products (D4) 4.Invidual victims may unfairly bear risk of damage from undiscoverable defects (D4) 5.Victims of harm that emerges after 10 years get no compensation. (D5) 6.Victims of harm who miss 3-year deadline to start legal proceedings get no compensation. (D5) 7.Consumers who suffer property damage less than EUR 500 get no compensation. (D6) Liability claims are subject to a number of restrictions: 5.Liability ends after 10 years; need to start legal proceedings 3 years after damage 6.No liability for property damage worth less than EUR 500

1. Products, economic actors and damage escaping no-fault liability in the digital and circular economy No-fault liability of producers was introduced as a necessary response to the risks inherent in technological production in the 20th century. Products and technologies have continued to develop since the PLD was enacted in 1985 but the rules have not. The safety of products, be they robotic lawnmowers, connected or autonomous vehicles or smart home systems, is determined more and more by software and digital services that may be supplied once a product is already on the market. As the evaluation has shown, the PLD is no longer adapted for products in the digital age in a number of respects. In the digital age, the features of a product are not set in stone when it is put into circulation, but are determined by software and digital services after that moment, which may be provided by economic operators other than the producer of the “finished product”. Clarity on how liability rules apply to software is all the more important considering the software industry is a growth sector: the industry in Germany was expected to grow from EUR 18 billion to EUR 20 billion between 2018 and 2021. The safety of products with digital elements also depends on cybersecurity: lack of adequate cybersecurity is one of the barriers that limits the uptake of new technological developments. According to Eurostat, one person out of ten in the EU-27 does not use IoT devices due to cybersecurity concerns, while in Austria, Germany, Finland and Portugal the percentage is over 20%. The PLD’s ill-adaptedness to new technologies is in part evidenced by the fact that the evaluation found only one case relating to new technological developments in the reporting period. As these developments gather pace, the lack of future-proof rules is likely to further undermine the effectiveness of the PLD (see section 2.3). In the circular economy too, products may be modified by refurbishers and remanufacturers and placed back on the market, but the PLD is silent on whether such economic operators are subject to no-fault liability. Uncertainty makes it difficult for businesses to assess their liability exposure and may have negative effects on the growth of the circular economy. And new global supply chains that make it possible for consumers to purchase products directly from non-EU producers have led to a situation where no EU-based economic operator is subject to no-fault liability in the event of defective products causing harm. This leaves consumers with no one to get compensation from under the PLD and creates an uneven playing field between EU producers and non-EU producers who are beyond the reach of the PLD. The consequences of all the above economic operators escaping no-fault liability are various: the deterrence function of the PLD, designed to encourage producers to do their best to make products safe, is missing; no-fault liability is shouldered instead by other economic operators (principally hardware manufacturers) who may not be best placed to minimise software-related safety risks; competition between market operators is distorted, since producers of hardware products and components are subject to no-fault liability; levels of consumer protection across the EU are unequal, since some Member States do impose no-fault liability outside of the PLD regime for digital services necessary for products to operate; and consumers face uncertainty about how to get compensation for harm caused by digital and refurbished or remanufactured products and from whom. Nevertheless, it is worth mentioning that the effect of certain products, economic actors and damage falling outside of the PLD’s no-fault liability regime does not mean a complete absence of compensation for victims of harm: national regimes provide for extra-contractual liability for fault or negligence. But the difficulties involved in proving fault were precisely the rationale for introducing no-fault liability for producers in the first place by the PLD (see section 1.2 for more details). The existence of alternative routes to compensation makes consumer protection more comprehensive, but it makes it very difficult to quantify the added value of no-fault liability. At the same time, economic operators usually have an insurance policy covering all type of potential liability claims. (The impact assessment on AI liability looks at challenges in proving fault specifically when certain AI systems are involved.) 1.Consumers face obstacles to getting compensation The PLD seeks to achieve a fair balance of interests between consumers and producers, and the importance of this balance has been stressed in every application report since 2001. Whereas producers shoulder liability irrespective of fault, claimants shoulder the burden of proof and face time limits and thresholds. The 2018 evaluation found that the balance struck in the current PLD was not always fair to consumers, due to the difficulties in proving liability when complex products cause harm, and due to the time limits and thresholds that disproportionately restrict the number of claims. Stakeholders have deeply conflicting views, with a sharp divide between consumer and industry positions. Industry stakeholders, exemplified by Business Europe, consider the current balance to be just right. They acknowledge that complex products may present challenges for consumers, but argue that national courts have the possibility to ease the burden of proof where necessary, although the pharmaceuticals industry organisation EFPIA considers some national courts have gone too far, thus undermining the balance. Consumer organisations, on the other hand, argue it is difficult and costly to get compensation for harm caused by complex products; that individual victims unfairly bear the risk of damage from new technologies whose defects are undiscoverable when the product is put into circulation; and that time limits and thresholds prevent access to justice. They also argue that the challenges for consumers will only get worse as products become ever more complex.. 2.2.What are the problem drivers? 2.2.1.Problem 1: Certain products, economic actors and damage in the digital and circular economy escape no-fault liability 1.1.1.1. Liability rules not adapted for products in the digital age 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’ (the “later-defect defence”), because it is traditionally at that moment that the product leaves the producer’s control. 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 . While providing defective updates can compromise product safety, so too can failure to provide them, especially when it comes evolving cybersecurity threats. For example, a cyber-attack may target a vulnerability in a machinery product’s software that makes the machinery malfunction and injure the user. Lack of adequate cybersecurity is one of the barriers that limits the uptake of new technological developments. In recognition of this, economic operators are now required to provide software and security updates to ensure the ongoing safety of products after they are placed on the market. So software updates are not only necessary to keep products safe, they are also required by legislation, yet the later-defect defence exonerates producers from liability under the PLD. The digital security industry (Eurosmart) has argued that the “later-defect defence” makes the concept of no-fault liability meaningless when applied to smart/connected products and AI systems that could let vulnerabilities emerge only after the placement of a product on the market. But who is liable for harm caused by defective software, software updates and digital services that make products work? BEUC, the consumer organisation, considers the uncertainty around this question most problematic when it comes to 3rd-party software downloaded separately and added to hardware, for example a software upgrade or an entirely new software module in a domestic robot. The hardware manufacturer could invoke the later-defect defence, and the software manufacturer could argue that software is not a product and that no-fault liability therefore does not apply to him. This crucial question of whether software is a product is ambiguously answered by the PLD, which defines products simply as “movables”. This led two Member States (Austria and Belgium) to interpret the PLD as applying only to tangible items: “tout bien meuble corporel”. And this question around tangibility has generated decades of intense academic debate. Economic operators too argue variously that only software physically embedded at the time the tangible product is put into circulation is covered, but not any subsequently downloaded software (e.g. updates/upgrades); some insist that software, even if provided separately from a tangible product, is already covered; some insist software developers themselves currently qualify as producers; some argue the opposite. This lack of clear liability for software providers undermines the original intention of the PLD to make “all producers involved in the production process liable, and is inconsistent with recent EU legislation and proposals which place obligations on software providers to ensure the safety of products. For example, there are requirements for placing on the market software that is a medical device, separately marketed safety components for machinery and AI systems. (See also section 1.2). Manufacturers of finished products and of hardware components have argued that subjecting only hardware producers to no-fault liability is unfair, given that today’s products operate in an ecosystem composed of hardware, software and ancillary services, which are difficult to distinguish one from another. They argue that the safety of 3rd-party software updates or of a control app downloaded to a user’s smartphone is outside of their control and they point to the key principle of product liability: that liability should be imposed on the party best able to minimise safety risks. Industry associations in the automotive industry have noted that services and data can be crucial to the operation of a vehicle and its safety, such as geolocation data and its supply on a continuous basis in an autonomous vehicle. Legal experts have pointed out that excluding software providers from no-fault liability is especially incongruous when the digital component is more important for the overall functioning of the product than the physical part itself. This might be the case in IoT ecosystems, for example a smart home system, where software and digital services have a greater role in determining how safely the system works than the individual hardware components. It essentially leads to a narrowing the scope of the PLD as more and more products on the market are of a type that can be influenced by software or that relies on updates or digital services to operate. This may explain why the evaluation identified only one court case in the period 2000-2018 in which a consumer sought compensation under the PLD for software-related harm. Representatives of the software industry, however, have argued that shielding software providers from no-fault liability is justified since software providers cannot control how their software will be used. It seems the same could be said of any component, however. They have also argued that a hardware manufacturer who has paid out compensation can claim that back from software providers through contractual agreements, if the software was to blame for the harm. Hardware manufacturers, however, have stressed that it can be difficult to pursue such claims under contract law since software producers may insist on liability being excluded by contract. While the focus above has been on software and digital services responsible for the safe operation of hardware, software itself may also cause personal injury or property damage. For example, a medically-approved smartwatch app intended to send an alarm notification to the user or doctor when it recognises irregular heartbeats could defectively fail to do so, leading to injury, or a defective app or computer programs could cause a computer battery to overheat or explode. In neither case could the software manufacturer currently be held liable under the PLD.

What about types of harm other than personal injury and property damage? The 2018 evaluation highlighted that products using digital technologies are capable of causing a broader range of harm than traditional products, in particular a) damage to a user’s digital property, and b) infringement of personality rights such as privacy or discrimination. Damage to digital property: The PLD covers damage to items of consumer property, but not all Member States’ legal systems treat intangible goods as property. For example, if an external hard-drive is defective and erases all digital content from the computer’s hard-disk without physically damaging the computer itself, in some Member States the consumer can seek compensation under the PLD for the resultant economic loss e.g. restoring the digital content or purchasing new software licences, but in others only if the hard-disk itself were physically damaged. In a case in Bulgaria, a defective hard-drive erased digital content from the claimant’s computer and the damage was in principle deemed recoverable by the court, although the claimant could not prove the digital content had been stored on the computer. The increasing prevalence of connected devices and cybersecurity risks may make this sort of damage to digital property more common, although EU rules on product safety and on cybersecurity should mitigate these risks through tougher cybersecurity requirements. It should be recalled, however, that the PLD acts as a safety net when, despite the safety rules, harm occurs. BEUC, the consumer organisation, considered the lack of common approach to compensating such losses problematic, because of the unequal protection of consumers across the Union. Losses due to infringement of fundamental rights: A novelty of products in the digital age, in particular wireless/IoT products, such as connected toys like the Cayla doll, or smart meters, is their use of personal data, which, if not protected, could cause harm such as mental suffering. The impact assessment study found that in almost all scenarios of data protection failings, a controller would be identifiable and the GDPR would provide a route to compensation. This might, however, not be the case if, say, a baby monitoring camera were operated by a natural person without personal data being processed by a responsible controller/processor. In such a situation, if a security vulnerability made it possible for other individuals to watch the live feed from this device, the processing of personal data might fall under the GDPR’s so-called household exemption, meaning no compensation under the GDPR. Manufacturers of IoT products – in that example the producer of the camera – will be obliged under a recently adopted delegated act to equip their devices with features to guarantee the protection of personal data and privacy. BEUC, the consumer organisation, has argued that the PLD should apply in such cases and whenever flaws in IoT products lead to privacy infringements. Industry stakeholders have pointed out that the victim would have a claim under national tort law or contract law against the camera manufacturer. Besides privacy, digital technologies can lead to infringements of other fundamental rights. The draft AI Act lays down rules to minimise the risk of AI systems taking erroneous or biased decisions in critical areas such as education, training or employment that could lead to economic loss or emotional harm, e.g. failure to get a job due to biased AI recruitment software or failure to get a loan due to biased credit-rating software. Several stakeholders considered it would be difficult to get compensation for software-induced discrimination, although they pointed to the significant role of the user of the software and not only the producer, and therefore questioned whether this was a problem to be addressed under the PLD. (The impact assessment on AI liability looks more closely at liability rules for discrimination caused by AI-systems.) Also concerning damages: See annex 5 concerning a clarification for psychological harm damages. 1.1.1.2.Liability rules unclear for refurbished/remanufactured products Circular business models in which products are refurbished or remanufactured are increasingly common and central to the EU’s efforts to achieve sustainability and waste-reduction goals. However, as explained in section 2.2.1.1, under the PLD the original manufacturer is not liable for defects that emerge after a product is put into circulation and the PLD is silent on whether economic operators who modify products and put them back on the market can themselves be treated as producers and therefore subject to no-fault liability. The aerospace, automotive and heavy-duty equipment sectors make up more than 80% of the European remanufacturing industry, and electrical and electronic as well as medical equipment have witnessed an expansion in demand. In the medical devices sector alone, the market for refurbished and remanufactured products is estimated to be EUR 600 million/annum in the EU, and is divided roughly equally between original equipment manufacturers and 3rd-party refurbishers. Remanufacturing and refurbishing are industrial practices in which a product is returned to at least its original performance to match the original manufacturers’ specifications, and involves various steps such as disassembly, cleaning, repair/replacement of components, reassembly and testing, before the product is put back into circulation. Stakeholder feedback confirmed that both original manufacturers and refurbishers/remanufacturers face legal uncertainty as to the extent of their liability exposure. The home appliance industry noted that clearer rules would give original manufacturers confidence to allow independent third-party operators to carry out refurbishments. The question of who is responsible for the safety of modified products has been addressed in the Commission’s “Blue Guide” on the implementation of EU product safety legislation: an economic operator who makes important changes to or who overhauls a product should be seen as putting a new product into circulation and should be responsible for safety compliance . This concept of “substantial modification” has been integrated into legislation and legislative proposals in recent years and the Medical Devices Regulation explicitly includes economic operators who fully refurbish devices in its definition of manufacturer. While there is no evidence of victims currently going uncompensated for damage caused by substantially modified products, the existing liability rules are not future proof or coherent with this legislation, as the notion of substantial modification is absent from the PLD. In contrast to situations of substantial modification, the mere repair of products does not create uncertainty for the application of liability rules. A repair is rather an individualised service, in which a product is returned to working order and then typically given back to the owner. There is no new product and there is no new distribution, so no grounds for product liability to be triggered. Repairers can of course be found liable under national fault-based rules, however, for undertaking a faulty repair. 1.1.1.3. No liable person under the PLD when consumer purchases product from a 3rd country directly Alongside the producer, which includes own-branders, importers are also liable for product defects under the PLD. The rationale for this is that enforcing a compensation claim against a producer in a third country would present consumers with insurmountable difficulties. The emergence of e-commerce is a major global development of the last few decades, but for the most part buying online is analogous with buying offline and the PLD applies equally well: producers and importers are treated the same whether a purchase was made online or offline. However, 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. 64% of respondents in the public consultation agreed there was a need to adapt liability rules where there is no EU importer. Such “direct imports” have increased in recent years: around 150 million small consignments are imported free of VAT into the EU each year and it has been reported that in 2017 there were 150 000 private consignments coming from China to individual consumers per day. The problem is expected to be mitigated by upcoming legislation. To better ensure the safety of “directly imported” products, the draft Digital Services Act requires online marketplaces that intermediate sales between sellers and consumers to collect information on sellers using their marketplace and suspend services to the seller if they fail to disclose requested information. The already in force Market Surveillance Regulation requires an responsible person (either a manufacturer, importer, authorised representative or fulfilment service provider) to be established in the EU in order for certain products within its scope to be placed on the market, and the proposal for General Product Safety Regulation proposes to extend this requirement to all products. These measures can be expected to reduce the risk of dangerous products reaching the internal market. However, if harm does occur, compensation would not be available under the PLD as authorised representatives and fulfilment service providers are not among the liable persons covered by the PLD. Other means of compensation could be available under national liability rules, but only on grounds of fault or negligence. See Annex 5 for details of clarifications needed on the role of online marketplaces. 2.2.2.Problem 2: Consumers face obstacles to getting compensation 1.1.1.4.Proving defectiveness and causal link with damage is very difficult and costly for complex products The most significant condition for an injured person to get compensation under the PLD is proving that the product was defective and that this defectiveness caused the damage suffered. Failure to discharge this burden of proof is the most frequent reason for a claim to be rejected (accounting for 53% of total rejections) . There is by and large consensus among stakeholders that the more complex a product is, the greater the asymmetry of information between the producer and consumer. This can make it harder for claimants to produce the evidence needed to prove the producer’s liability: whereas proving a collapsed garden chair is defective might be straightforward, proving a pharmaceutical is defective may require considerable expertise, which the producer has at its disposal but the claimant does not. Stakeholders disagree on the extent of the problem: 98% of consumer and NGO respondents and members of the public consider that technically complex products present, to a large or very large extent, difficulties for proving liability, whereas as only 45% of business respondents do. Difficulties getting information. Claimants have no right under the PLD to get technical information from producers in court. However, the ECJ has noted that access to information makes it easier for a claimant to produce the necessary evidence to prove the producer’s liability, and has endorsed national rules that give claimants this right. Based on data from 24 Member States, the support study for this impact assessment found that all but one (CZ) had some rules in place for disclosure of documents in court. The rules vary, however, in terms of what can be requested: in SE any document can be requested, whereas in DE, EL, IT, NL and PL the specific document has to be named; failure to disclose information can result in a penalty in FR and PL, whereas in DE the element the claimant was seeking to prove can be presumed by the court. The level of consumer protection in terms of information rights is therefore divergent across the EU. Difficulties proving liability. Even if a claimant gets the information, proving liability can still be difficult. This is demonstrated by the fact that national courts make use of various mechanisms to make it easier for claimants to come up with the proof. National courts have, for example, held that products that do not comply with safety requirements can be presumed to be defective , and claimants do not need to show how a defect was caused or what specific defect led to the lack of safety. National courts have referred questions on how to apply the PLD’s burden-of-proof rules three times in the last 10 years. In response, the ECJ has endorsed national rules that allow courts to presume the existence of a causal link even if there is no conclusive evidence, so long as the factual evidence available was sufficiently robust. It has also ruled that a pacemaker could be considered defective without proof of actual defect by virtue of being from the same production series as another pacemaker already proven to be defective. The ECJ has therefore endorsed efforts of national courts to make it easier for claimants to produce the evidence needed to prove the producer’s liability.

Industry stakeholders such as Business Europe argue that national courts have shown they have the tools they need to ease the burden of proof where necessary. EFPIA argues that some national courts have already gone too far in easing the burden of proof and the inconsistency of approaches is negative. Consumer organisations argue that while the ECJ judgments on information obligations and easing the burden of proof are to be welcomed, they do not go far enough in helping consumers to prove liability, especially in complex cases – consumer protection is therefore insufficient and uneven across the internal market. The European Group on Tort Law consider the fact that courts take divergent approaches makes future court decisions unpredictable, which is a problem for legal certainty. See also Annex 8 concerning products that carry risks but are not defective. Development risk defence: The development risk defence allows the producer to escape liability when the product was defective when put into circulation but the ‘state of scientific and technical knowledge’ at that time did not allow for the particular defect to be discovered. The PLD allows Member States to derogate from applying the defence: Finland and Luxembourg derogate entirely, while Spain, France and Hungary derogate in respect of certain categories of product. Consumer organisations have, over many years, argued that the defence should be removed, since producers are always better placed than individual consumers to mitigate and insure against risks caused by their products, even if they were undiscoverable at the time the product was put into circulation. Industry stakeholders have argued equally strongly in support of the defence designed to encourage innovation. The defence itself has rarely been used in practice though – successful use of the defence accounted for 4% of rejected claims. The 2018 evaluation found that the development risk defence was an important factor for guaranteeing the relative stability of product liability insurance costs within the internal market while avoiding significant increases in litigation levels. It also found that whether or not a Member State had a derogation had little impact on the number of product liability cases in that country. However, the Expert Group pointed out that assessing the state of scientific knowledge at the moment of putting into circulation fails to take account of the fact that producers retain control over digital products beyond that moment and therefore have the means to address defects that become discoverable. This is true of many digital products, including IoT and AI-enabled products, as discussed in section 2.1.1.1. 1.1.1.5. Liability ends after 10 years; need to start legal proceedings 3 years after damage Producers are released from liability under the PLD 10 years after putting the product into circulation: an unlimited period would be unreasonable, given that products age and higher safety standards are developed over time. In addition, victims are required to start legal proceedings within three years of the day on which they became aware, or should reasonably have become aware, of the damage, the defect and the identity of the producer. The length of the periods, 10 years and three years respectively, represents an effort to balance the interests of producers and consumers. In respect of most products, the time limits does not seem to hamper the effectiveness of the PLD. The percentage of claims rejected once proceedings were started is low: in respect of the 3-year time limit, 4%, and in respect of the 10-year time limit, residual. However, this will certainly be an underestimate, since a claim would not be admissible in the first place if it could be shown that the 10-year period had expired. In the public consultation 69% of non-business respondents argued the 10-year time limit presented obstacles to compensation to a moderate, large or very large extent, while 49% said the same of the 3-year time limit. For business respondents the figures were 14% and 11% respectively. BEUC and a French patient organisationargue that the 10-year time limit is too short in respect of products capable of damage to health that becomes evident only after a long time, such as pharmaceuticals, chemicals, foodstuffs or construction materials like asbestos, and that this disproportionately limits access to justice. Pharmaceuticals, chemicals and foodstuffs account for 26.3% of product liability cases, or an average 12 cases per year, but long latency periods are very rare. One example that representatives of pharmaceutical victims have pointed to is Sodium Valproate (Depakine), a medicine prescribed to pregnant women until 1971, has severe adverse effects, including for subsequent generations, which emerge after expiry of the 10-year period. In such cases it is not possible to make a compensation claim under the PLD and a claimant would have to rely on fault-based national rules to seek compensation. The European Court on Human Rights too has ruled that time limits have consequences for access to justice. In respect of a Swiss law that set a 10-year limit for claiming compensation for diseases caused by asbestos, the Court ruled that applying the time limit “to persons suffering from diseases which could not be diagnosed until many years after the triggering events, was liable to deprive those persons of the opportunity to assert their claims before the courts”. In respect of the three-year time limit to start legal proceedings, personal-injury lawyers and a French patient organisation argued it can be too short in the case of personal injuries, since gathering evidence before starting proceedings takes considerable time, and victims may be recovering from injuries during that period. However, the extent of this problem is mitigated by the fact that the PLD permits Member States to suspend or interrupt the three-year period according to their national rules, for example in the case of disability or where it is otherwise equitable to do so. No such possibility exists to extend the 10-year time limit. 1.1.1.6. No liability for property damage worth less than EUR 500 Producers do not have to provide compensation under the PLD for damage to consumer property amounting to less than EUR 500. The purpose of the threshold was to avoid excessive litigation and was conceived as part of the balance of producers’ and consumers’ interests. The 2018 evaluation found that the threshold overly limited claims for property damage, which undermined the effectiveness of the PLD in protecting consumer property. BEUC, the consumer organisation, has argued that the threshold denies victims of property damage an effective remedy, a right enshrined in Article 47 of the Charter of Fundamental rights. The threshold also appears to be at odds with the objectives of the Directive on representative actions, which seeks to ensure an effective remedy for infringements that harm the collective interests of consumers, especially where individual claims might be considered small in isolation. That Directive explicitly lists PLD claims as falling within its scope, and yet the EUR 500 threshold excludes smaller claims from the outset. In the public consultation, 78% of non-business respondents considered the threshold an obstacle to getting compensation to a moderate, large or very large extent, compared to only 16% of businesses respondents. Indeed industry stakeholders have argued that consumers have other routes to effective remedies, such as under national tort law or contract law. This suggests, however, that the threshold has not achieved its aim of reducing overall litigation, but has merely displaced it away from the PLD. In terms of consequences for the internal market, Romanian authorities have raised the concern that the impacts on consumer protection of a single fixed threshold across the EU vary widely depending on price levels for consumer goods in each Member State, because more consumer property falls below the threshold in cheaper Member States. In 2020 prices levels of consumer goods were almost three times higher in the most expensive Member State compared to the cheapest. Besides objections to the threshold per se, the provision has been transposed divergently at national level. Most Member States allow the total amount of damages to be recovered once the claim exceeds EUR 500. Other Member States (AT, DE, DK, ES, FI, FR, IT) reduce all damages awarded by EUR 500. On the former interpretation, a claimant who has suffered EUR 800 worth of damage would be compensated for the full amount; on the latter interpretation only EUR 300. The different interpretations of this threshold evidently create differing levels of consumer protection within the internal market. Business stakeholders did not raise the different interpretations as a problem for them. 2.3.How will the problems evolve? The transition to a digital economy is still in its infancy. As automation and digitalisation continue to advance, the role of software and digital services in determining the safety of products will increase. For example, the global market for autonomous cars amounted to USD 508 billion in 2015 and has grown at a compound annual growth rate (CAGR) of 12.7% since then. The market is forecast to amount to USD 3195 billion by 2030. As automation increases in cars and numerous other products, an increasing proportion of accidents will be caused by defectiveness compared to the negligence or fault of a driver or user. The prominence of the producer for liability purposes will therefore increase, and with it the importance of a future-proof PLD. The lack of clarity on what products, producers and damage fall within the PLD would exacerbate the lack of a level playing field between economic operators who put hardware into circulation and those who put software into circulation. As the EU product safety framework continues to be modernised to address new digital risks, the PLD would be left behind, no longer coherently mirroring safety rules, and therefore no longer providing an effective safety net when harm involving digital technologies occurs. The growth of digital economy and the potential increase in the number of injuries related to these products could lead to greater divergence as courts adopt their own interpretations of outdated definitions or Member States or introduce parallel liability regimes to cover defects that occur after a product is put into circulation. The transition to a circular economy is also in its infancy. As it becomes increasingly possible to extend the life of materials through industrial processes, uncertainty about the liability of original manufacturers and remanufacturers could make it difficult for businesses to assess their liability exposure and get appropriate insurance. The growing trend of buying products directly from 3rd countries, especially through online marketplaces, will compound difficulties getting compensation for lack of an EU-based liable person for consumers to turn to under the PLD, As for the burden of proof, the divergent approaches to disclosure obligations and to easing the burden of proof in complex cases would continue to be taken by national courts. This would perpetuate an unequal level of consumer protection and undermine the predictability of court decisions. Importantly, consumer organisations and legal academics believe that emerging digital technologies will exacerbate existing difficulties. The Commission’s Report on safety and liability implications of Artificial Intelligence, the Internet of Things and robotics identified the same concerns . This may especially be the case in complex IoT environments and cyberphysical systems, such as smart home systems where many different connected devices and related services interact and AI-enabled products (see case study in section 2.2. of AI liability impact assessment). This view is not shared by industry stakeholders, who point to the absence of empirical evidence that new technologies will exacerbate evidentiary difficulties. More information on evidentiary difficulties due to features specific to AI technologies can be found in the parallel AI liability impact assessment. The effects of time limits and thresholds on limiting claims are not expected to evolve – these restrictions would simply continue.

3.Why should the EU act? 3.1.Legal basis The PLD fully harmonises the matters it explicitly covers and is based on Article 114 TFEU (ex-Article 95 TEC, ex-Article 100 EEC Treaty), the objective of which is the establishment and functioning of the internal market by approximating national rules. Any revision of the PLD would build on the current objectives of free movement of goods and creating a level playing field for companies in the internal market, while ensuring consumer protection, and so would have the same legal basis. 3.2.Subsidiarity: Necessity of EU action This initiative addresses the issues identified in the evaluation of the PLD, which was carried out as part of the Commission’s regulatory fitness and performance (REFIT) programme. The evaluation concluded that the PLD was on the whole relevant, effective, efficient, coherent and had EU added value, despite some shortcomings concerning ease of application in the digital and circular economy and the balance of producer-consumer interests in some cases. In the public consultation conducted for the evaluation, more than 85% of respondents considered the PLD was advantageous for consumers and producers, and stakeholders across the board considered the advantages could not be achieved with national legislation alone. This is because goods circulate freely within the internal market and are capable of being defective and causing harm irrespective of the Member State in which they were produced or used. Furthermore, the problems identified do not have any particular national or sub-national specificities. Since the PLD fully harmonises the matters it explicitly covers, Member States are not allowed to make changes to the scope, outdated definitions or rules of the PLD: they must be made at EU level. In the absence of a uniform set of rules on compensating victims harmed by defective products, manufacturers would be faced with 27 different sets of rules, leading to different levels of protection for consumers and distorted competition among market operators from different Member States. 3.3.Subsidiarity: Added value of EU action The evaluation concluded that the added value of having EU-level product liability rules to complement EU-level product safety rules was uncontested. Indeed rules on compensating victims harmed by defective products reinforce EU product safety rules, and both pursue the same policy goal of a functioning internal market for goods that ensures a high level of consumer protection. Regulatory action at EU level would ensure coherent implementation of product liability rules. It would provide legal certainty about what products, economic operators and types of harm fall within the PLD’s scope, and about the appropriate balance of interests between producers and consumers across the EU. This would in turn help ensure the free movement of goods, a level playing field for all market operators, and a high and consistent level of consumer protection. 4.Objectives: What is to be achieved? 4.1.General objectives The PLD fully harmonises the matters it explicitly covers and is based on Article 114 TFEU (ex-Article 95 TEC, ex-Article 100 EEC Treaty), the objective of which is the establishment and functioning of the internal market by approximating national rules. The revision of the PLD pursues two general objectives to address the problems identified, both of which build on those of the current PLD: 1)Continue to ensure the functioning of the internal market, free movement of goods and undistorted competition between market operators; 2)Continue to ensure a high level of protection of consumers’ health and property. 4.2.Specific objectives This initiative pursues five specific objectives (SOs). In order to adapt product liability rules to the digital age and circular economy: ØSO 1: Ensure liability rules reflect nature and risks of products in the digital age The aim here is to ensure that not only traditional products that were commonplace in the 1980s are adequately covered by product liability rules, but that digital products are too. Adapting or clarifying definitions will bring product liability rules into line with EU safety legislation already adapted to digital technologies, and will help reduce uncertainties in the implementation of the PLD.

The aim is also to reflect the reality that product safety is nowadays impacted after the formal production process, including through updates/upgrades or through evolving cybersecurity threats. The aim is also to ensure any new and relevant types of damage that products using digital technologies may cause are appropriately covered, with the goal of ensuring consistent interpretation (e.g. of digital property) and avoiding overlaps with other regimes (e.g. GDPR, non-discrimination legislation). ØSO 2: Ensure liability rules reflect nature of products in the circular economy The aim here is to ensure that products produced according to circular business models and placed on the market are adequately covered. ØSO 3: Ensure there is always an EU-based liable person for defective products bought from producers outside the EU The aim here is to ensure that when a consumer purchases a product directly from a non-EU producer, there is an economic operator based in the EU from whom to seek compensation if the product is defective and causes harm. The aim is also to ensure consumer protection no matter how a product is purchased and to guarantee a level playing field for EU and non-EU businesses alike. In order to reduce disproportionate obstacles to getting compensation: ØSO 4: Ease the burden of proof in the case of complex products and clarify liability for undiscoverable defects, while ensuring fair balance between producers and consumers The aim here is to alleviate difficulties that consumers face in proving producers’ liability in the case of complex products, and so achieve a fairer balance of interests. The aim is also to provide legal certainty regarding defects that were undiscoverable when the product was put into circulation. ØSO 5: Ease restrictions on making claims, while ensuring fair balance between producers and consumers The aim here is to ease restrictions that currently disproportionately limit consumers’ ability to make claims. Intervention logic 5.What are the available policy options? 5.1.What is the baseline from which options are assessed? The baseline – “policy option 0” – consists in no EU action, meaning no change to the current PLD. This would lead to the continuation of the shortcomings identified in the evaluation of the PLD, and the problems and consequences described in Section 2. It is assumed, however, that ongoing legislative proposals would be enacted and implemented. Proposals to make the product safety framework fit for the digital age (in particular the Machinery Regulation, GPSR and AI Act) principally by setting safety requirements for placing products on the market, are expected to improve product safety and therefore reduce product-related harm in real terms as well as avoiding a future rise in such harm due to novel risks brought about by digital technologies (see also section 1.2.4). These safety requirements will help courts decide whether a product is defective, i.e. whether it provided the level of safety the public was entitled to expect. But victims of harm would still need to rely on the outdated PLD to seek compensation or fall back on national fault-based liability rules if the product, producer or harm falls out of the PLD’s scope. With respect to products from 3rd countries, it is similarly assumed that the proposed DSA and GPSR will be enacted and implemented (see also section 1.2.5). Both proposals will set out due diligence obligations on online marketplaces and the GPSR will require there to be a responsible person for product safety purposes based in the EU. Neither proposal concerns the question of whether such economic operators should be treated as producers for product liability purposes.

The PLD potentially affects almost the entire manufacturing sector (see section 2.1). However, according to the evaluation study, there are only around 50-60 court cases based on product liability rules per year in EU27. As acknowledged by the study itself, this number is likely not complete, and more realistic figures have been extrapolated using information from selected Member States’ databases, pointing to a range between 209 and 452 for the annual number of court cases across the EU27. In extrapolating these figures, the expected modest reduction in product-related harm as a result of ongoing product safety-related legislative proposals has been taken into account by making conservative assumptions about the lower range, even if the reduction is not directly quantifiable and does not directly affect the size of the remaining problem (see more details in Annex 4). The evaluation found that most liability-related claims were settled out of court and interviews with industry associations and product liability lawyers as part of the IA study suggested that there might be as many as 6-7 times the number of cases settled out-of-court compared with cases that actually go to court. Thus, it is estimated a range between 1,255 and 3,165 for the annual number of out-of-court proceedings across the EU27. Evidence collected through stakeholder consultation confirms the 2018 evaluation’s finding that the financial size of compensations to victims varies widely depending on the product and sector, the nature and extent of the damage, and the circumstances of individual cases. For the purpose of the impact assessment, the compensation paid for deaths in the EU27 is estimated in the range of 20,000-1,500,000 EUR; the compensation paid for personal injuries is estimated in the range 1,500-700,000 EUR; and the compensation paid for property damages is estimated in the range 5,000-25,000 EUR. Economic operators covered by liability insurance would not have to directly compensate victims since their liability insurance would cover pay-outs to victims in case they are found liable for a defective product. The liability insurance premiums faced by these economic operators are, however, assumed to increase. The total value of product liability insurance premiums in the EU27 in 2021 is estimated to be equal to 33.38 billion EUR. Out of this, only a small share relates the risk of no-fault liability under the PLD (estimated around 1-2% of the total premiums). Finally, there is considerable variance in the costs of legal cases involving PLD compensation claims, depending on (1) the product and its complexity (2) the circumstances of the case and (3) the Member State concerned and the prevailing differences in legal costs. Legal costs for court proceedings across Europe is estimated in the range of 500 EUR – 40,000 EUR. Legal cost per out-of-court proceedings across Europe is estimated in the range of 500 EUR – 25,000 EUR (proxies for the average values have been used in the calculation, only for the purpose of an overall rough estimation). See annex 4 for details concerning baseline assumptions. 5.2.Description of the policy options Three policy options were identified to address problem 1 and two policy options to address problem 2. In order to address all problems that the initiative aims to tackle, option 1a, 1b or 1c (addressing problem 1 relating to the digital age and circular economy and concerning mainly the scope of the regime) would have to be combined with option 2a or 2b (addressing problem 2 related to obstacles in getting compensation and concerning mainly the internal balance within the regime). The combinations of measures in each policy option were developed based on stakeholder input during the impact assessment study and were also presented to stakeholders, notably at the Stakeholder Workshop in December 2021, with no calls for exploring alternative combinations. Each measure was analysed separately in the impact assessment study and this analysis informed the choice of combinations. Since each problem is independent from the other, the options for each problem are analysed separately. For greater transparency on the impact of different elements within each option, the costs and benefits (increase of insurance premiums and compensations for victims) related to each measure are shown separately in section 6 of the impact assessment. 5.2.1.Policy options to adapt liability rules to the digital age and circular economy Option 1a – Adaptations for products with digital elements and circular economy Digital: Under PO1a, manufacturers of products with digital elements would be liable, as now, for defects in the overall product, but this would include liability for updates to software and for digital services that are necessary for the product to operate. They would also be liable if harm results from an unreasonable failure to provide a security update. If the defect lay in the digital elements themselves, a victim of harm would also be able to seek compensation directly from the providers of such software or digital services – they would be treated as producers (like any other manufacturers of a tangible components today) – or from the manufacturer of the overall product. Applying joint and several liability would ensure a victim of harm does not have to seek compensation from both parties. There would be no change to the types of damage that are compensable: personal injury and damage to consumer property. The revised PLD would, however, in all policy options clarify that medically diagnosed psychological damage is included in the concept of personal injury (see annex 5 for details). Circular: The revised PLD would make explicit that economic operators that make a substantial modification to a product and place it back on the market, such as refurbishers and remanufacturers, fall within the concept of “producer”. The original producer would remain jointly and severally liable for its contribution, in the same way that component manufacturers are liable for flaws in their components that make a product defective. The option would bring the PLD into line with the trend in the product safety framework to take account of substantial modifications (see section 2.2.1.2). 3rd-country products: Under this option, when a defective product is bought from a 3rd country in the absence of an importer, and it causes harm, it would be possible to hold the producer’s “authorised representative” liable if one has been appointed. Authorised representatives are already subject to liability under the Medical Devices Regulation, and the Market Surveillance Regulation and proposed GSPR should ensure that when there is no importer an authorised representative is appointed in a majority of cases. The revised PLD would in all policy options clarify that while providers of online marketplaces are subject to a liability exemption when they merely intermediate sales, if they play the role of producer, importer or seller for a given product, they may be liable under the PLD (see annex 5 for details). Option 1b – Inclusion of safety-relevant software in its own right and adaptations for circular economy This option includes measures envisaged under option 1a. Digital: This option builds on option 1a and would mean a broader scope of the PLD. Whereas option 1a would cover only component software necessary for a tangible product to operate, option 1b would recognise safety-relevant software as a product in its own right. This would include 3rd-party add-on software that is not necessary for, but nevertheless influences, the operation of a tangible product (such as a downloaded 3rd-party software module for a service robot) and standalone software that itself may cause harm (such as medical device software). While a producer of add-on software and the manufacturer of the overall tangible product would be jointly and severally liable for harm caused by defective software, the manufacturer of the overall product would, unlike under PO1a, be able to use the later-defect defence by showing that that add-on software was outside of its control. The types of damage that are compensable would remain limited to personal injury and damage to consumer property, but the text would clarify that material loss resulting from damage to digital property (such as digital content wiped from a hard drive) is also compensable. Circular: Same as option 1a. 3rd-country products: Under this option, in the absence of an EU-based producer or importer, and where a non-EU producer has not appointed an authorised representative, a victim of harm would be able to seek compensation from a fulfilment service provider. Although there is no precedent for holding fulfilment service providers liable for defective products, this option would provide an extra safeguard compared to option 1a, justified by the fact that the Market Surveillance Regulation and proposed GPSR do envisage responsibilities for fulfilment service providers in those cases where an authorised representative has not been appointed.

Option 1c – Inclusion of software in its own right, new types of damage and adaptations for circular economy This option includes measures envisaged under option 1b. Digital: This option would build on option 1b and would involve a more significant expansion in the types of damage covered. Not only safety-relevant software would be recognised as a product in its own right, but also software with fundamental rights implications, which would in particular be relevant for AI systems (such as discriminatory recruitment software). The types of damage that are compensable would be expanded to include material and non-material damage flowing from fundamental rights infringements: data protection breaches, privacy infringements or discrimination. Circular: Same as option 1a. 3rd-country products: Same as option 1b. 5.2.2.Policy options to reduce disproportionate obstacles to getting compensation In policy options 2a and 2b, measures to ease the burden of proof have been packaged together with measures to reduce restrictions on making claims according to the level of ambition of the potential intervention. However, for full transparency of the assessment, the specific impacts related to measures restricting on making claims are spelled out separately in section 6. Option 2a –Easing the burden of proof and reducing disproportionate restrictions to making claims, while ensuring a fair balance of interests Easing the burden of proof: Under this option, a) the revised PLD would harmonise rules on when producers are obliged to disclose necessary technical information to the injured person in court (e.g. clinical trials data concerning a drug or data logs from an autonomous vehicle). The obligation would be limited to proportionate disclosure and would protect confidential information. In addition, b) the revised PLD would harmonise rules on easing the burden of proof: defectiveness/causality would be presumed by courts on certain conditions (e.g. the product did not comply with safety standards, if it clearly malfunctioned or if it is disproportionately difficult to prove liability due to technical complexity). The producer would have the opportunity to rebut any presumption. In addition, c) the development risk defence, which exempts producers from liability when a product’s defective nature was not discoverable according to state-of-the-art knowledge at the moment it was put into circulation, would be adapted to take account of producer control beyond that moment: for example, if a producer has provided a software update for an AI-enabled robot, then that should be the moment taken into account when applying the defence. Restrictions on making claims: The EUR 500 threshold for property damage would be removed. The 10-year period of producer liability would be extended to 15 years, but only for latent personal injury, meaning injury that existed but did not become apparent in the first 10 years. The 3-year limit for starting legal proceedings would not be changed. Option 2b – Reversing the burden of proof Reversing the burden of proof: Under this option, a) in the event of harm caused by a product, it would be for the producer to prove the product was not defective and did not cause the harm. In addition b) the development risk defence would be removed, meaning that producers would be liable when a product was defective, even if the defectiveness was not discoverable according to state-of-the-art knowledge. Elements a) and b) were combined as a coherent higher-intervention alternative to option 2a, in light of the fact that both stakeholders in favour of the option and those against saw the two elements as interconnected. Restrictions on making claims: As in option 2a, the EUR 500 threshold would be removed. But the time limits would be extended more generously than under option 2a: the 10-year period of producer liability would be extended for all personal injury, not only latent personal injury; and the 3-year limit would be extended to 5 years to give victims of harm more time to start legal proceedings. 5.3.Options discarded at an early stage Several other potential policy options were discarded at an early stage. Guidance only: Although an overall majority of all respondents to the public consultation were in favour of legislative change to adapt the PLD to the digital and circular economy, 65% of businesses or business associations were opposed. A number of them called for guidance instead. Guidance would, however, require consensus by all stakeholders and would therefore be limited to minimum changes. In 2018 the Commission set up the Expert Group on liability and new technologies (PLD formation) to develop such guidance. However, experts had conflicting interpretations of the current text of the PLD, particularly on the extent to which software and digital elements are within scope, how to deal updates or other product changes and the extent to which presumptions could be used to ease the burden of proof. As a result, no consensus could be reached and the guidance was not completed. Substantive changes, such as recognising software as a product in its own right, changes to time limits and the EUR 500 threshold, would in any event not be possible through guidance. Despite being discarded, given there was stakeholder support for guidance, the assessment of this option is presented in Annex 6. Repeal of the PLD: The Evaluation of the PLD concluded that the PLD provides EU added value and no stakeholder suggested repealing it. Repeal would mean that each Member State would design their own national rules on producers’ liability for harm caused by defective products. A majority of businesses agree that the level playing field achieved would not be possible with individual Member State action. In addition, almost all consumer associations considered that the protection of consumers achieved would not be feasible with only national action. The vast majority of public authorities and civil society representatives deem that the Directive added value to the EU legal framework and policies. Converting the PLD into a regulation: Given that the PLD’s liability rules interact closely with national civil codes and are deeply embedded into diverse national legal systems, the option of converting the PLD into a regulation was discarded. A directive allows more flexibility to seamlessly embed the PLD’s rules into national systems. Neither the evaluation nor the impact assessment study identified additional benefits of a regulation. There is also no stakeholder support for converting the PLD into a regulation. Sector- or technology-specific approach to easing the burden of proof: The measures on easing the burden of proof (PO2a and PO2b) could have been applied only to certain specific product types identified as creating difficulties to prove liability. The PLD evaluation identified pharmaceuticals as such a product type, and the expert group on liability and new technologies identified AI-enabled products and other emerging digital technologies like IoT products as problematic . Indeed, a French patients’ association called for stricter rules for pharmaceuticals products and several NGOs called for stricter rules for harm caused by AI systems . However, most stakeholders expressed support for a product liability regime that applies neutrally to all product types. This was reflected in the public consultation: while very clear majorities of respondents did identify AI-enabled products, IoT products and pharmaceuticals as examples of products for which it is difficult to prove liability, 77% of respondents also replied that it was (to a moderate, large or very large extent) technical complexity, as a product characteristic in general, that made it difficult to prove liability. Focussing on pre-defined sectors or technologies would be too rigid an approach, leading to over-inclusion, since not all products in a given category are highly complex (e.g. an AI-enabled toothbrush) and under-inclusion, since technical complexity can be a feature of many other different products types (e.g. chemicals, machinery). It risks not being future proof and unfairly benefitting some victims of harm and not others. Lowering the EUR 500 threshold: Stakeholders were either in favour of keeping the threshold for damage to consumer property unchanged or removing it altogether, although one industry association asked for the option of lowering the threshold to be examined. That option was discarded, because the same internal market objections would apply: any other fixed EU-wide threshold would impact consumers more significantly in Member States where consumer goods are cheaper (i.e. where more consumer property falls below the threshold).

Extending the 10-year limit to 20 years: Holding producers liable for up to 20 years after they put a product into circulation was considered. BEUC, the consumer organisation, called for this, while a French patient organisation called for the limit to be removed altogether. However, industry stakeholders and insurers were opposed to any change. This longer extension was discarded in favour of a shorter extension with a view to striking a fair balance between all stakeholders. 6.What are the impacts of the policy options? The following assessment provides a qualitative analysis of the impacts generated by each policy option, based on the evidence gathered from multiple sources. Whenever possible, it also provides a quantitative analysis of benefits and costs relating to the main economic and social impacts. The cost/benefits analysis, however, is not fully comprehensive due to significant data gaps and limitations. The quantification of costs and benefits is based on a number of assumptions coming from stakeholder feedback and expert knowledge of the contractor. The aim of this assessment is to provide ranges of the magnitude of potential impacts generated by each policy option, rather than exact monetisation. Policy options mainly involve a re-attribution of costs between stakeholders, either from victims to the producers whose defective products caused the costs, or between economic operators by enlarging the notion of “producer”. The main measurable benefit for consumers is the amount of compensation to be paid to injured parties. The analysis assesses the impacts of the policy options on the annual number of in-court cases (estimated between 209 and 452 across the EU27) and out–of-court cases (1,255 and 3,165) based on product liability rules In line with the 2018 PLD evaluation, the share of successful cases (for injured parties) over total cases is estimated to be 60%, for both in-court and out-of-court cases. The measures proposed by each policy option might affect the proportion of cases brought under the PLD and/or the success rate of claims. This increase, multiplied by the average compensation pay-outs, will provide ranges for the estimates on the benefits for consumers. The main indirect costs generated by the PLD are liability insurance costs attributable to strict liability under the PLD as well as legal costs that producers and consumers have to bear in the case of a product liability claim, whether in-court or out-of-court. The large majority of economic operators that faces any additional claims as a result of a policy option would not face increased compensation costs vis-à-vis victims, but would rather face a marginal increase in their insurance premiums. The minority of economic operators without product liability insurance and that face any additional claims would, on the other hand, face increased compensation costs vis-à-vis victims. In the analysis, the cost of liability insurance is assessed and quantified as a cost for producers, whereas compensation costs are assessed as a benefit for victims. Compensation costs are not assessed as costs for producers, because adding them to the increased cost of liability insurance premiums would have led to double counting and no data was available to make estimates about which producers have insurance and which do not. To assume that the 21% of producers without insurance are spread across all manufacturing sectors would entail a high risk of overestimating costs for producers, since interviews with the insurance industry suggest that the 21% represents mainly producers of lower-risk products that are rarely subject to compensation claims. In contrast, producers of the sorts of products covered by options 1a, 1b and 1c (e.g. autonomous vehicles, robots) or for which the burden of proof is currently challenging (e.g. complex products like pharmaceuticals or Internet of Things devices) are more likely to have liability insurance at present, since there is a higher risk of those products being subject to compensation claims. It is acknowledged that not assessing compensation costs as a cost for producers may lead to a small underestimation of costs. There are no relevant administrative costs under the PLD in contrast to much product safety legislation, as there are no specific obligations or information requirements for economic operators. There will be one-off familiarisation costs for economic operators not previously covered as producers under the PLD, which are minimal. The estimates were developed on the basis of interviews with experts. They were validated during the Stakeholder workshop in December 2021. 6.1.Policy option 1a – Adaptations for products with digital elements and circular economy Economic impacts a.Impacts on economic operators Under PO1a, the liability exposure of manufacturers of products with digital elements would increase. Explicitly making providers of software, updates and digital services “producers” would also slightly increase their liability exposure, although victims are likely to seek compensation from the manufacturer of the overall product. Because PO1a could create an incentive to provide security updates to avoid liability, this could indirectly generate software development costs. Stakeholders most impacted are manufacturers of IoT or AI-enabled products, such as robots, connected and autonomous vehicles, machinery and domestic appliances. 78% (122 out of 155) of respondents to the public consultation, excluding citizens, agreed or strongly agreed that software controlling how a product works should be included in the scope of the PLD. Another 66% (102 out of 154) agreed or strongly agreed that software upgrades and updates should be included. EU and non-EU citizens showed even stronger agreement, with over 90% (117 out of 122) replying that consumers should get compensation if damaged is caused by defective software or digital services that control how a product works and software upgrades/updates. See annex 2 for details. Explicitly clarifying that economic operators who make substantial modifications to a product and place it back on the market are also “producers” would slightly increase their liability exposure. Sectors likely to be impacted are electrical and electronic as well as medical equipment and machinery sectors.As is the case today, if a victim sought compensation from the original manufacturer, the latter would be able to escape liability by proving the defect emerged after he put the product into circulation. Equally, if a remanufacturer or refurbisher were held liable, but the original manufacturer were ultimately responsible for the defect, they could make a recourse claim against the original manufacturer to recoup the costs of compensating the victim. Business associations, including representatives from the refurbishment and remanufacturing industries, supported extending liability only to cases where a "substantial modification" was undertaken. This would be in line with recent legislation and legislative proposals, according to which an economic operator making the modification places a new product on the market, and therefore assumes responsibility for the safety of the product or part of a product. Finally, under PO1a, “authorised representatives” would be exposed to product liability in cases where there is no EU-based importer. In terms of indirect costs, annual product liability insurance costs are assumed to increase by 3% for producers of products with digital elements, producers of digital elements themselves as well as for refurbishers and remanufacturers. Authorised representatives would have an incentive to take out product liability insurance, in case they do not already, to cover their liability exposure. Product liability insurance costs are assumed to increase by 15%. As is the case for importers, it is expected that this cost would be passed on to the non-EU producers they represent, as part of the cost of their service. Taking all this into account, under PO1a the total annual product liability insurance costs are assessed to increase incrementally compared to the baseline, with an increase ranging between 1.21 and 2.41 EUR million. These increases in product liability insurance costs are extra revenues for the insurance companies.

b.Impacts on SMEs The views of SMEs expressed in the course of consultation activities did not particularly diverge from the overall views of business respondents. The impact assessment study did, however, conclude that clearer lia