Liability for Software under the current Product Liability Directive

Whether software (including apps) qualifies as a product under the Product Liability Directive has always been controversial. The issue is less controversial where the software forms part of a physical product from the same manufacturer. However, with the increasing availability of applications that are not tied to a specific product, the discussion has gained momentum. A recent decision by the European Court of Justice gives reason to revisit the status quo and further underlines the need for (legislative) clarification.

Background

Based on the wording of Art. 2 of the Product Liability Directive 85/374/EEC, the definition of a “product” requires a movable object. Against this backround, there is a general consensus that the Product Liability Directive applies to software that is distributed in connection with a data carrier or installed on a mechanical control unit. What is disputed more controversially, however, is the qualification of standalone software and applications. In this context, commentators particularly disagree on how literal the definition in Art. 2 of the Directive should be taken. Some argue that the wording is clear and the explicit inclusion of electricity (although it qualifies as an intangible in some member states) in the definition is a singular exception, rather than an indication that other comparable intangibles should also be included. The other side takes a broader look at the context of the Product Liability Directive which was introduced in the 1980ies. At this time, no other intangible products were industrially produced and made available to a large number of end users. They propose that, were the Directive rewritten today, it would surely include software as well. The practical problem with this discussion is obvious: The Directive is what it is, and while the modernisation of the Directive is underway, significant uncertainties remain as to the current status.

The ECJ’s decision in the Krone case

The reactions to the ECJ’s decision in the matter C-65/20 (Krone) show how much clarifications in this area are needed. The case concerns the question whether incorrect advice (as such intangible) contained in a tangible newspaper (which clearly qualifies as a product under the Product Liability Directive) can give rise to a product liability claim. The ECJ had to decide two questions: Firstly, whether a health advice in itself constitutes a product within the meaning of the Product Liability Directive and, secondly, whether a defective health advice printed in a newspaper renders the newspaper defective, so that the newspaper can be considered a defective product within the meaning of the Directive. Both questions were answered in the negative.

With regard to the question of whether the health advice itself was a defective product, the Court argues in particular on the basis of the explicit wording of Art. 2 of the Directive, which defines products as “movables”. From this wording, the court concludes that services do not come within the scope of the Directive. Since the ECJ found that health advice qualifies as a service, the advice itself could not be considered a defective product.

Regarding the question whether a defective health advice printed in a newspaper leads to the newspaper being defective, the ECJ states that the defectiveness of a product must be determined on the basis of certain factors inherent in the product itself and, in particular, related to its presentation, its use and the time at which it was placed on the market. However, since the service – i.e. the defective health advice – in the specific case concerned neither the presentation nor the use of the newspaper, this service was not one of the factors inherent in the printed newspaper. Consequently, the Court ruled that the defective service could not lead to a defectiveness of its carrier product – the newspaper.

Even though marked by a rather singular set of facts that, as such, is unlikely to repeat itself and give rise to similar claims, the decision has been extensively commented on and there is no shortage of opinions on what can be derived from the judgement for other intangibles, such as software and apps. The ECJ’s reference to the explicit wording of Art. 2 of the Directive appears to favour the more literal approach, according to which software does not qualify as a product. However, the judgement also considers the historical context of the Directive and the question of what the legislators meant to include, which leaves a possibility that the ECJ might take a different position were it to decide on the qualification of software as a product. The sense and purpose of the Product Liability Directive, which lies in particular in the fair allocation of the risks associated with modern technical production, also speak against the classification of software as a service. Whereas this sense and purpose easily suggests a non-application of the Directive to a newspaper publisher who prints incorrect information, the same cannot be said with respect to the developers of software.

In such event, the Court’s answer to the second question gives rise to further question. What exactly is meant with factors inherent in the product itself, its presentation, etc.? If applied strictly, the decision could be interpreted – contrary to the hitherto almost unanimous view – to exclude claims for defective software contained on a data carrier, as the data carrier’s integrity and functioning would not be affected by the software. The same can be argued for a defective app on an otherwise safe and functioning smart phone, whereas a defective autopilot application in a car would likely be found to be a factor inherent to the product. The examples show that the strict application of the ECJ’s principles to software may well lead to arbitrary results that are based on the degree of connection between the software in question and the product on which it is used.

Plans of the European Commission to modernize product liability law

The above shows that significant uncertainties regarding the applicability of the Product Liability Directive to software remain. As these uncertainties also affect the assessment of (liability) risks connected with products that already form part of our everyday life, a clarification is needed. It is thus to be welcomed that the European Commission is striving for an adaption of the European product liability law to eliminate this uncertainty. The Commission in particular plans to extend strict liability rules to cover intangible products (e.g. digital content/software) that cause physical/material damage (see here for an overview).

Following the presentation of initial proposals on this topic in an inception impact assessment in the summer of 2021 and a subsequent public consultation, the Commission is now working on a new proposal that takes into account the input received. The Commission intends to adopt such a proposal in the third quarter of 2022 and then forward it to the European Parliament and the Council for discussion and decision. While it may be some time still until the Product Liability Directive receives its much needed update, there is some hope that further clarity on the treatment of software will emerge before the end of the year.