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"PRODUCT LIABILITY" IN THE 21ST CENTURY
Author: Rod Freeman

Whilst product manufacturers increasingly seek to access global markets, the tendency has been to manage risks in a much more ad hoc, reactive, and localised manner - especially product liability and product safety risks. This is surprising, because it might be expected that an international product manufacturer would apply the same expansive thinking to the management of its risks as it does to the development of its business opportunities. Viewed logically, the approach to one concept ought to lead naturally to the other.

An analysis of this trend suggests that it often arises because the perspective of an international company on managing product liability risks is passed through two filters.

First there is the filter that assumes product liability risks are critical mainly in North American markets. To some degree, this is correct, and it is an appropriate assumption to help prioritize risk management strategies. But there is a fatal flaw in the reasoning in the modern world, which emerges from the discussion below.

Second, is the filter that treats regulatory risks simply as a compliance issue, rather than as a potential liability issue. This manifests itself not only in an approach that overlooks the broader implications of an international product manufacturer getting compliance wrong, but it also fails to properly make the critical connection between regulatory compliance and product liability risk.

The problem is not trivial, nor is it hypothetical. Recent history is filled with examples of major brand names suffering major losses and damaging public attention as a result of the cultural failure to apply expansive thinking to risk management that mirrors its expansive approach to exploiting global supply chains and global markets. These examples involving major brand names should each serve as wake-up calls for all international businesses.

As those examples become more frequent, and the implications more costly, we are starting to see those charged with responsibility for protecting the reputations of international brand names begin to recognize the need for a 21st century approach to "product liability".

A 21st Century View of "Product Liability"

Surprisingly, part of the cultural block within companies that prevents them from effectively managing risk is found simply in the narrow way that they view "product liability". For a modern company, operating in international markets, "product liability" needs to be recognised as relating to all aspects in which challenges to the quality or the safety of its products could impact on the company financially or reputationally.

 

Once a company recognises that its people who are responsible for "product liability" have responsibility to manage all risks to the business relating to the safety and quality of the products, then it is in a position start being truly effective in managing the business. Unless and until the different functions responsible for product issues are properly joined up and there is a recognition that they are complementary responsibilities aimed at achieving a common goal, the risks cannot be adequately managed.

This also means that can no longer be managed through "silos", and on a local or regional basis. Multinational companies exploiting international markets need to behave in a manner appropriate for such a company. That is simply the expectation of markets, and increasingly the expectation of regulators, and courts. Companies need to manage their risks through systems that have proper sensitivity to, and control of worldwide factors and with a clear understanding of the divergent risk factors that exist around the world, and the way in which those risk factors interplay.

It's a Different World Out There: The Convergence of RIsks

Whilst markets have become increasingly globalised, risk patterns have been slow to follow. However, that is changing. We are now starting to witness a rapid globalisation of risks. This is accompanied by a blurring of old distinctions, and a subsequent convergence of risks.

 

In order to effectively manage the risks both for now, and for the future, it is important to understand that the world has changed, and to anticipate the direction of future change. This "convergence of risks" manifests itself internationally in a number of ways:

 

Product Liability vs Product Safety

Traditionally, it has been considered that the greatest risk to the business in North America is litigation risk, whereas in Europe, litigation risks were relatively insignificant, whilst regulatory compliance issues created significant burdens and business risk.

 

That Distinction is No Longer So Meaningful

On the one hand, regulatory risks in North America have increased significantly for companies in all product sectors. One needs only to consider the major "product liability" issues over the past five years, compared with those over previous decades, to recognize that there has been a distinct shift in the source of product liability risk. The converse pattern is emerging elsewhere in the world, where litigation risks are also becoming an increasing feature of the risk profile.

 

This "convergence" between risks is complete when we also take into account the modern interplay between product liability litigation and regulatory challenges, where increasingly around the world product recalls or regulatory intervention can lead quickly to product liability claims. Conversely, as regulatory scrutiny increases around the world, litigation in which the quality or safety of products is challenged can easily, and often does, lead to regulatory investigation and enforcement.

In some countries including in France and Italy, and in parts of Asia, product liability challenges can (and often do) manifest themselves as criminal proceedings initiated by the authorities. In the case of Italy, consumers can pursue a claim for damages as part of the criminal proceedings.

Product "Safety" vs Product "Quality"

Traditionally, it was right to assume that issues of product safety were a proper subject for regulation, but issues of product quality were not. That is no longer a safe approach. Not only are quality issues with products just as liable to generate litigation against a company as safety issues (and perhaps more so since class certification may be easier when alleging a widespread quality issue rather than basing a claim on allegations of injury), they are also increasingly liable to attract regulatory attention.

 

Consumer Safety vs. Environmental Safety

Traditionally, management of consumer safety was a very different discipline to the management of environmental protection, and large companies have generally dealt with compliance of those areas through separate functions. However, that approach is no longer fit for purpose, as the regulatory approach to those issues has started to blur the distinction. Examples in Europe include the European "REACH" regulation of chemicals, and the Directive on Restriction of Hazardous Substances ("RoHS"), both of which have an express dual function.

 

Consumer Products vs. Professional Products

The traditional distinction between "consumer products" and "professional products", which has had significant regulatory implications, is becoming less important. Increasingly, the same regulatory approach is being applied to products for professional use as those for consumer use.

 

Consumer Safety vs.Consumer Security

As the use of technology develops, and new areas of regulation emerge, new risks are created. For all companies that interface with consumers at any level internationally, issues of data protection and privacy are a new source of significant risk. These risks, which are continuing to grow for product manufacturers across a broad range of sectors, should not be underestimated.

 

The Changing Nature of Regulatory Risks

The changing international regulatory environment has been characterized by two distinct trends over recent years.

 

First, we have witnessed over recent years the emergence of new regions of regulatory risk around the world. The existence of demanding regulatory requirements and supervision is increasingly the norm in countries around the world. These changes are happening rapidly, including in countries as diverse as Turkey, Brazil, China, UAE, Egypt, South Africa, South Korea, Vietnam, and New Zealand. Often, these developments are accompanied by significant increases in enforcement activities.

Second, the last few years have also witnessed a period of unprecedented reform in more "mature" regulatory regimes, some of those reforms still ongoing.

These changes are multiplied when we take into account the increasing levels of communication and co-operation that exist between product safety enforcement authorities around the world.

The Challenges of Innovation

The challenges of the changing international product liability landscape are felt most keenly by companies involved in the innovation of new products.

 

In many sectors, the innovative use of technology is moving with extraordinary pace. In these innovative areas, a common theme is that the commercialization of technology is outrunning the development of regulation by some margin. For product manufacturers, this is a source of significant risk, as regulation eventually "catches up" in an unhelpful way, and where benchmarks of safety are not available in the meantime.

A New Approach to Product Liability

Once these issues are properly understood, the keys to effective risk management quickly become apparent.

 

Product manufacturers exploiting international markets need to approach management of "product liability" risks with the following approach:

Risks Are Global, and Need To Be Managed at a Gobal Level

Product liability risk factors are not static around the world – the approach to risk management needs to be dynamic, and supported by a system that enables the company to understand and predict the direction of change.

 

Silos create risks in themselves. Traditional distinctions are becoming blurred, and product liability risks are converging internationally. Information flows within a company need to be tailored to address those factors, and the right risk management culture needs to be built around those systems.

Where companies innovate, the approach to managing product liability risks need to be taken to another level. Early and proactive management of such risks produces an exponential benefit to the company in minimizing future risk.

As a function with responsibility for minimizing risk, the Legal Department in most companies has a key role. They need to generate trust and confidence of other functions within the business. Constructive cooperation and active dialogue at all stages of the product cycle between the lawyers, the R&D personnel, the marketing teams and the compliance professionals is the key to effective risk management and, ultimately a company that enjoys ongoing growth and success.

Rod Freeman is a partner in the London office of the law firm Hogan Lovells International LLP, where he is head of the International Product Liability Practice. E-mail: Rod.Freeman@hoganlovells.com

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