The New Product Liability Directive: Software as a Product

Almost 40 years after it came into force, the European Union is undertaking a major revision of the Product Liability Directive (Directive 85/374/EEC). The aim of this reform is to adapt the standards to the conditions and needs of the digital single market. To this end, software will in future be considered as a product within the meaning of the Product Liability Directive. This article explains the background and implications of this change.

Previous legal situation

Whether software falls within the definition of a product in Art. 2 of the Directive has been controversial. Originally, a "product" could only be a movable and physical object. However, the European standardisation body clarified at an early stage in the above-mentioned provision that electricity is also to be regarded as a "product" within the meaning of the Directive. Also, based on this special provision, it could be assumed that, conversely, all other intangible objects were excluded from the scope of the Directive. For software, this meant that it was only recognised as a product if it had some form of tangible substance, for example by being embodied on a data carrier (e.g. a CD). In the vast majority of cases, software was therefore not subject to the provisions of the Directive.

New legal situation

Due to the increasing digitalisation, the European Commission has recently received more and more calls to amend the Product Liability Directive. The Commission responded to these calls by presenting a draft for a fundamentally revised Product Liability Directive in 2022. In December 2023, negotiators from the Council, Commission and Parliament finally agreed on the details of the content of the new Directive. The agreement has been incorporated into an adapted text of the draft Directive, which has already been approved in principle by the European Parliament and the relevant Council Committee. Before final adoption by the Parliament and the Council, the text will be subject to a final review, which may take until after the summer of 2024. As a result, the legislative text may not be published until the autumn. However, significant changes are no longer expected. This means that the text adopted on 13 March, to which the following quotes refer, can already be used to estimate which provisions companies will have to adapt to in the future.

1. Extension of the product definition to software - exemption for open-source software

With the new Product Liability Directive, the European Union is significantly extending the definition of a product. According to Art. 4 No. 1 of the draft directive, software, digital production documents (e.g., CAD design drawings) and raw materials are now considered to be products. Open-source software remains excluded from the material scope of the Directive (Art. 2 para. 2). As a result, the legal definition of a product is increasingly moving away from the definition in common parlance. Companies should therefore not prematurely assume that the goods and services they place on the market fall outside the scope of product liability law.

2. Product defects in software

According to Art. 7 para. 1 of the draft Directive, a product is defective if it either (a) does not fulfil the safety expectations that an average person may have in relation to the product, or (b) does not fulfil the safety requirements under European or national law. According to Art. 7(2) of the draft directive, the characteristics of a product, its technical functionality, but also its packaging and labelling are considered when assessing whether a product is defective. Software may also be defective due to a lack of security updates or a lack of usability of associated services.

The latter correlates with the warranty provisions that have already been incorporated into German law in the transposition of the Directive on the Sale of Goods and the Directive on Digital Content and Services (e.g., Sections 475b, 475c, 327f BGB). In this respect, the European Union is now creating a parallelism between warranty and product liability law. However, the adjustment requirements for the companies concerned should remain manageable, as the updating obligation has long been relevant for most of them.

3. Expansion of the concept of damage

It is also worth noting that, in addition to the product concept, the European standard-setter has also extended the definition of damage. According to Art. 6 of the draft directive, immaterial damage and damage resulting from the destruction of or damage to certain data will also be eligible for compensation in the future. At the same time, the opening clause, which previously limited product liability in Germany to a maximum amount of EUR 85 million, has been removed without replacement. As a result, affected companies may have to pay higher compensation in the event of a product defect.

4. Impact on distribution and supply chains

The Product Liability Directive primarily obliges producers. So far, this has included final and component manufacturers, as well as importers and supplier. In addition, the personal scope of the New Product Liability Directive will in future be extended to include authorised representatives, fulfilment service providers, remanufacturers, distributors – formerly known as “suppliers”, and operators of online marketplaces in accordance with Art. 8 of the draft directive. The EU is thus significantly expanding the group of obligated parties. However, it remains the case that individual distributors can exculpate themselves by disclosing to the injured party the identity of the upstream link in the distribution and supply chain located in the Union or its representative.

Practical implications

As a result of the amended Directive, many companies will have to prepare for the fact that the goods and services they place on the market will now be subject to product liability law. In concrete terms, this means that companies are liable for damage caused by defective products, regardless of fault. This liability comes on top of the law on guarantees. The new rules are set out in a directive, which means that they are not directly applicable but must be transposed into national law. Member States will have to implement the provisions within 24 months of the directive coming into force, i.e. probably by Q3 2026, allowing a transitional period for businesses to adapt to the new rules.