Product liability and recalls in Germany

Out-Law Guide | 10 Jan 2019 | 2:21 pm | 16 min. read

The discovery of defects in products is not unusual and the implications of a defect can be significant. Failing or unsafe products can affect a company's reputation and rectification can cost billions, if it is even possible. It can mire a company in litigation and result in criminal charges. Some companies do not survive such incidents and in some scenarios individual managers face legal action.

This guide was last updated in January 2019

German product liability law is based on two main statutes, the Civil Code (Bürgerliches Gesetzbuch) and the Product Liability Act (Produkthaftungsgesetz):

Until 1989 the basis of German product liability law was tort law, embodied in the general provision of Sec. 823(1) of the Civil Code which essentially provides that anyone 'who, intentionally or negligently, unlawfully injures the life, body, health, freedom, property or another right of another person is liable' in damages.

1989's Product Liability Act is based on the European Product Liability Directive of 1985 and provides for strict liability.

A manufacturer may also be held liable for product defects if they constitute a breach of warranty under section 437 of the Civil Code in case of a defect. This remedy, however, requires a contractual relationship between the customer and the manufacturer. In this brochure, we are not dealing with contractual claims.

What products are included?

According to section two of the Product Liability Act 'product' means any movable object, even if it is part of another movable or immovable object, as well as electricity. This definition applies similarly to product liability claims under the German Civil Code and contract law.

Who is affected?

The Product Liability Act liability applies to a manufacturer's suppliers as well as the manufacturer, to 'quasi-manufacturers' and importers into the EU.  A 'quasi-manufacturer' is a business that attaches its name, trademark or other denotation to a product, its packaging or its instructions. The Product Liability Act treats a quasi-manufacturer like a manufacturer. Similarly, the importer of a product into the EU for the commercial purposes of sale, hire, lease or any form of distribution in the course of business is deemed to be a manufacturer. The term 'manufacturer' is used in a similar manner in the German Civil Code.

What is a product defect?

According to the Products Liability Act a product is defective if it does not provide the safety which a person is entitled to expect, taking all circumstances into account, including:

- the presentation of the product,

- the use to which it could reasonably be expected that the product would be put, and

- the time when the product was put into circulation.

All product defects fall into one of three recognized categories: design defects; manufacturing defects, and

instruction and monitoring defects.

Design defect (Konstruktionsfehler)

A design defect occurs where the manufacturer fails to design a product to meet 'state-of-the-art' safety standards. Product safety is measured against the reasonable expectations of a target group of consumers for whom the product is intended and how this target group would reasonably use the product.

Known or inherent risks are excluded from this category. For example the inherent risk that a rifle is used to shoot does not constitute a defect. Similarly, the risks associated with smoking do not constitute a defect in a cigarette. A manufacturer cannot be held liable for defects which were unavoidable even when adhering to the highest standards of science and technology available at the time the product was brought into circulation.

Manufacturing defect (Herstellungsfehler)

A manufacturing defect occurs where the manufacturer fails to manufacture a product in accordance with the relevant design. A manufacturing defect is established by comparing the defective product with a reference product that is in compliance with the manufacturer's blueprint. A manufacturer is liable for every single manufacturing defect, even if the manufacturing process is state-of-the-art and the defect occurs in less than one per thousand cases.

Instruction and monitoring defects (Instruktions- und Überwachungsfehler)

An instruction defect occurs where the manufacturer fails to issue proper instructions for products, in particular to notify users of potential risks inherent in a product. However, in comparison to other jurisdictions, particularly the US, German case law places emphasis on the consumer's responsibility to apply common sense. Obvious and apparent risks do not require specific instructions, such as 'caution, coffee is hot'.

A monitoring defect occurs where the manufacturer fails to react to emerging defects.

Burden of proof

The burden of proof for the injured person differs depending on the legal basis for the claim.

Under the Product Liability Act the onus is upon the injured party to prove that a product was defective and that it caused injury. The manufacturer must then prove any defence it puts forward.

Under the German Civil Code the injured party must demonstrate that there was a product defect, an injury and a causal link between the two. Unless the product has been modified after being put into circulation it is presumed that the defect resulted from the manufacturer's negligence and thus results in the manufacturer's liability for the defect.

This reversed burden of proof is intended to support the injured party in its claim, as it would otherwise be difficult for the injured party to prove the cause of the apparent defect. The manufacturer, however, can be expected to be able to prove, if true, that the defect cannot be attributed to its negligence.

Exemptions to the strict liability rule

There are exemptions under the Product Liability Act which release a manufacturer from liability. A manufacturer is not liable:

- if it did not put the product into circulation;

- if it is probable that the defect which caused the damage did not exist at the time when the product was put into circulation;

- if the product was neither manufactured for sale or any form of distribution for economic purpose nor manufactured or distributed by it in the course of its business;

- if the defect results from compliance with mandatory legal requirements at the time it was put into circulation;

- if the state of scientific and technical knowledge at the time when it was put into circulation was not such as to enable the existence of the defect to be discovered; or

- for damages not exceeding €500, though there are exceptions to this.

Product liability resulting from negligence

While the Product Liability Act provides for strict liability, i.e. a liability irrespective of the manufacturer's negligence, liability under Sec. 823 of the German Civil Code requires proof of negligence but the onus of proof is reversed as stated immediately above.

There are four main categories of negligence:

Organisational duty of care

A manufacturer must be organised in a way that prevents distribution of defective products. Note, however, that if the organisational process is 'state-of-the-art', a manufacturer is not liable for 'rogue products' - products that have a manufacturing defect despite the manufacturer meeting its organisational duty of care.

Duty to instruct

This is similar to instruction defects -  a manufacturer is negligent if it fails to provide for adequate instructions with its products.

Product-monitoring duty

A manufacturer must monitor the products it produces and react appropriately if defects are detected. Failure to do so is likely to be considered negligent.

Duty to avert danger

Once a defect has been detected, a manufacturer must inform its customers or others that may be affected by the defect. The scope of this duty depends on the extent and impact of the defect. Where a warning is not sufficient the duty to avert danger may necessitate a complete recall of the defective product line. Failure to do so may equally be considered negligence.

Damages

According to the German Civil Code's principle of restitution in kind (Naturalrestitution) an injured party may claim compensation for the material damages incurred, meaning the amount required to restore the injured party to the position it would have been in if the defect had not occurred.

Apart from physical damage to individuals or property, intangible damage, such as mental distress, can also be claimed under the Product Liability Act and the German Civil Code. If more than one manufacturer is found liable, then both manufacturers will be jointly and severally liable.

The Product Liability Act places a cap of €85 million in damages for each single product, or several products, with the same defect, even if more than one individual is injured. This cap under the Product Liability Act does not apply to section 823 of the German Civil Code.

Mere financial losses are non-recoverable under German law, nor can the claimant ask for punitive, exemplary, moral or other non-compensatory damages.

How does product liability and product recall law differ between Germany and other EU countries?

Due to the strong influence of European Union legislation, product liability and product recall laws are very similar across Europe.

As indicated, the Product Liability Act, the main piece of product liability legislation in Germany, implements the European Product Liability Directive (85/374/EC), which has been adapted by all member states of the European Union.

Also, in respect of product safety law, the central piece of legislation, the German Product Safety Act (Produktsicherheitsgesetz) implements the European General Product Safety Directive (2001/95/EC). It was first implemented in Germany through the Product Safety Act in 2004 and has been revised several times since then.

How to minimise the legal impact in case of an actual defect

While a manufacturer cannot avoid liability for actual damage caused by individual defective products, it can nonetheless try to reduce the resultant impact on its business.

What post-sale duties exist?

A manufacturer has a duty to monitor its products' performance on the market. It must implement adequate measures, including customer complaint procedures, that ensure that a product does not pose unforeseen risks. If a mere warning is not sufficient to control a known risk, a manufacturer must consider a recall of the affected product.

Steps to take in case of a defect

Depending on the kind of product, the distribution of defective products can result in criminal liability. For instance, the German Medicinal Products Act (Arzneimittelgesetz) renders the sale and distribution of unsafe drugs or medical devices a criminal offence. Also, a breach of certain provisions of the Product Safety Act can trigger criminal liability.

However, the bigger risk of incurring criminal liability results from the ordinary provisions of the German Criminal Code (Strafgesetzbuch). In particular, there is a risk of liability for negligent personal injury or damage to property which arises where a manufacturer is aware that its product is defective but does not instigate the necessary safety measures.

Requirements to notify government authorities of defects discovered in products, or known incidents of personal injury or property damage

There are specific regulations for certain areas, such as medical devices, pharmaceuticals and food, which provide for express notification obligations.

In addition, the general statute for product safety, the Product Safety Act, applies to consumer products and imposes an obligation on the manufacturer, importer and retailer to notify the right market surveillance authority. For example, a notification must be made immediately, and without delay, if a manufacturer, importer or retailer becomes aware of a defect or even a potential risk. The notification has to be made to the competent state authorities in Germany.

The notification must also include the actions that have been taken to avoid or minimise the risk in the future.

In order to encourage manufacturers to notify authorities, such a notification cannot be the basis for an administrative fine or for a penal prosecution.

Notification is not a substitute or alternative to recall, where that is required, as it only serves the purpose of informing public authorities. Usually those authorities will not themselves take action, as long as the manufacturer's actions are sufficient.

When is a notification to the authorities necessary?

The point at which notification becomes necessary depends on the category of the product.

As a general rule, it can be said that the higher the risk that a defect poses to property or physical integrity, the more important it is to notify government authorities without undue delay. For example with pharmaceuticals even a possible product defect can result in a notification duty, whereas with other products there is normally no notification requirement until the actual manifestation of a product defect.

Once a manufacturer has knowledge of a defect it must act accordingly and without undue delay.

Which authority should be notified?

Even though the Product Safety Act mentions a 'market surveillance agency', there actually is no such agency in Germany. Instead, product monitoring under German law is decentralised and there is no federal product monitoring authority. For the majority of products, the notification must be sent to the competent state agency where the defective product is located. Due to Germany's federal structure, the determination of the competent authority usually depends on individual state law. If a defective product has been sold in more than one state the notification must either be sent to all authorities in all states affected or to the Federal Institute for Occupational Safety and Health (Bundesanstalt für Arbeitsschutz und Arbeitsmedizin) in Dortmund.

The competent state agency or the Federal Institute for Occupational Safety and Health will also make the decision whether information on a defect is put into the RAPEX system. RAPEX is the EU's rapid alert system for product liability issues. It was launched in 2004 and is designed to facilitate the exchange of information between EU member states and the European Commission about non-food products posing a serious risk to the health and safety of consumers. RAPEX is best for notification of products sold and distributed across EU borders. If the product is sold and distributed only in one country, RAPEX may not be required unless the producer/distributer and national authority believes such cross-border notification is necessary.

For cases of product liability involving drugs and medical devices, the Federal Institute for Drugs and Medical Devices (Bundesinstitut für Arzneimittel und Medizinprodukte) may be addressed in case the relevant state authority cannot be determined. The Federal Institute for Drugs and Medical Devices will also put the information into the RAPEX system.

What information must a notification to the authorities contain?

A notification should include information on the following items:

  • brand,
  • product class,
  • product name,
  • model description,
  • EAN code,
  • product description,
  • production period,
  • description of the hazard,
  • description of the risks to health and security,
  • description of already known harms and accidents, and
  • text of recall.

What are the penalties for failure to comply with reporting obligations?

The fines for non-compliance with the notification obligations are considerably low. The level of the fine depends on the applicable regulation. Generally, the fine ranges between €10,000 and €25,000.

However, if the authorities come to the conclusion that the manufacturer poses a persistent threat to the market, they can take further steps, extending to closure of the business.

What determines whether a product recall is needed?

There is no specific law on product recalls. However, the German Federal Court of Justice (Bundesgerichtshof) said, in a 2008 decision, that a recall must be conducted if a mere warning is not sufficient to control the risk, in particular where there is a risk that consumers fail to act on the warning or the safety or health of the user or bystanders is compromised.

How is a recall organised?

Typically a product recall is organised by the manufacturer. If the manufacturer fails to meet its obligations the authorities may step in and recall the product.

For manufacturers, there is no legal regulation on how a product recall is organised. The guiding principle is 'safety'. The recall and the recall notice must be designed in a way that the average citizen can understand the content and importance of the recall notice, and the notice itself must inform about the danger of the product on the one hand, and about the circumstances of its recall on the other. The goal is to minimise the risk and to inform all potentially concerned people of the recall.

Who bears the cost of a product recall or repair?

Unless there is a direct contractual relationship between the manufacturer and the end user and the defect can be attributed to the manufacturer, several considerations have a bearing on the allocation of costs more complex. Among other factors, the distribution is determined by:

  • the parties : are consumers involved or only businesses?
  • the contractual relationship: is there a supply chain?
  • the allocation of liability for the product recall or repair: can liability be pinned to one company or several in the supply chain?
  • the impact of the product defect: is it 'only' a defect that impairs the quality of the product itself or does it pose a physical or financial harm to its users or third parties?
  • When applied, the criteria above provide for a nuanced and detailed cost allocation between the parties. However, in most cases, the exact allocation of costs will not be based on these criteria, but follow the negotiations between the parties involved and their agreement with respect to a just allocation of costs.

As a general rule, consumers usually never bear any of the costs, even where parts of the recall or repair procedure could be passed on to the end user.

What powers does the government have if the manufacturer does not take sufficient action?

Generally, the authorities see themselves as a controlling, as opposed to an acting, authority.

However, by law authorities do have the power to intervene where a manufacturer fails to comply with its product liability and recall obligations. The authorities can take all measures required and even impose the costs arising out of actions taken on the manufacturer.

An intervention by public authorities is a last resort, though, and we are not aware of any recent case where this has happened.

The decisions of the public authorities can be challenged, but the criteria for challenging such decisions depend on the respective state.

What is to be expected in a product liability court proceeding?

What are the distinctions of German courts a manufacturer should consider?

German civil procedural law generally provides for disclosure only of those documents on which a party has relied in its submissions to the court. Therefore, a company's internal information is better protected than, for example, in some common law jurisdictions. Instead, the parties are responsible for presenting the facts that they intend to rely upon. The court is not to go behind the case as presented: if the parties choose to keep confidential a set of facts that might be relevant to the case, they can. The court's decision will only be based on the facts as presented by the parties.

There is no trial by jury. Civil cases are heard and decided by professional judges. Commercial matters in regional courts are normally assigned to a special chamber consisting of a presiding professional judge and two lay judges.

German civil procedure law never provided for any form of class or group action, but since November 2018 class actions are possible but only for declaratory judgments

Experts are appointed by the court and take the role of an impartial adviser to the court. If the parties agree on a specific expert, the court will normally try to instruct that expert, however, it is not obliged to do so.

Contingency and conditional fee arrangements are, in principle, not permissible under German law.

Costs follow the event. The losing party must bear the costs of the court proceedings and the cost of counsel to the successful party, limited however to counsel fees and expenses limited by statute. Often the actual counsel fees will be higher as they are based on hourly rates, but these will not be recoverable.

Is there a risk that a product recall or defect notification is regarded as an admission of liability?

For the reasons presented above, there is no prejudicial effect on a legal dispute. The guiding principle of the German product liability law is end-user safety and therefore it is designed to encourage manufacturers to address possible defects openly, without later liability risks.

In principle, none of the information of which the authorities are notified in respect of a product defect may be used in subsequent criminal proceedings.

However, it is mandatory for the prosecution to investigate potential breaches of duty that might pose a threat to public safety. Thus, when a recall is conducted publicly, the prosecution could investigate the case.

What information has to be disclosed in a court proceeding?

Although in general German law does not recognise discovery proceedings, in criminal proceedings prosecutors are entitled to force the disclosure of internal information from the manufacturer. This is the reason injured parties sometimes initiate criminal investigations against potential defendants before suing them in civil litigation, as the German law of civil proceedings recognises a right to access records of the prosecution as long as a legal interest exists. Also, it is possible under German law to combine criminal and civil proceedings in an adhesion procedure with the court deciding over criminal sanctions as well as a compensation for the victim within one and the same proceeding.

What are the penalties for failure to recall a product? Are there criminal sanctions against the management?

If a product recall is required but the manufacturer fails to undertake a recall, or another corrective action, both the manufacturer and the management can be subject to tangible and intangible damages claims. For a company, failing from undertaking a product recall can result in additional penalties up to €100,000.

The strictest consequences for a company’s board arise under criminal law, with imprisonment being a possible sanction. However, imprisonment will only be imposed if the management acted at least negligently in producing or marketing the defective product. In most cases, however, authorities regard it as sufficient to impose a penalty.

Nonetheless, if board members or executive employees acted with gross negligence or intent in producing dangerous products and this behaviour resulted in a personal injury, such as in the case of faulty silicone breast implants or in marketing food as in the EHEC crisis, sentences of up to 15 years may be imposed. The exact penalty will vary, depending on the circumstances of the case.

Management's failure to meet the company's reporting requirements can carry criminal sanctions, including imprisonment, under criminal law. The sentence for failure to report a defect is imprisonment for one to five years. Further consequences under criminal law, as well as indemnifications under civil law, require causal personal injury that could have been prevented by means of notification.

Recommendations

There are some steps you can take to prevent and deal with a product defect.

Each manufacturer should have proper compliance procedures governing product design, manufacturing, writing instructions for use and product monitoring. In particular, each manufacturer should monitor product safety constantly, for both new and old products. This applies to all kinds of goods, those that are inherently dangerous, those with issues in the past, and even those that are not ordinarily associated with product liability risks. It is of advantage for a company to always be on top of the facts and the situation.

Once a manufacturer becomes aware of a potential product liability risk, particularly a risk that could be a threat to the health of individuals, it is of critical importance to act swiftly and systematically. This does not mean rushing into a product recall, but gathering, processing and evaluating all available information without delay, including information from markets outside Germany, where different duties may apply, and ultimately coming to an informed decision.

If internal investigations confirm the initial suspicion of a product defect the manufacturer should seek legal advice and coordinate all efforts with a law firm specialised in product liability and product recalls in all relevant markets. Working with experts will help to avoid legal pitfalls, claims and potential reputational damage associated with a product liability case. It also shows the authorities that the product liability case is taken seriously and dealt with in a professional and transparent manner.