The changing legislative landscape – Kennedys

This article was originally published in European Pharmaceutical Manufacturer, November 2023.

The legislative landscape across Europe is poised for a potentially seismic shift, the impact of which will be felt by manufacturers for years to come. 

In the EU, a decade of debate around the modernisation of products and consumer focused initiatives have culminated in far-reaching proposals for regulatory and legal reform, particularly in the realms of product safety and product liability. These aim to address the unique risks presented by digital technologies and the circular economy. Alongside these developments, the exponential growth and influence of artificial intelligence (AI) has led to proposals for an AI-specific regulation and civil liability regime. This is against a background, more broadly, of the European Green Deal, which first emerged in 2019, which has driven a raft of laws and regulation that aim to foster sustainable manufacturing. 

Whilst there is some overlap between these various proposals, there is one distinct common thread: the EU’s new class action law, known as the Representative Action Directive (RAD). The RAD, which became effective in June 2023, will enable EU consumers to bring cross-border collective (class) actions arising from alleged infringements of EU laws of which there are currently 66. Many of these laws impact businesses operating in the life sciences sector, including those relating to medical devices, medicinal products and product liability.

For product manufacturers operating across markets in EU member states, these changes present the risk of increased exposure to consumer-led class action litigation across a wide spectrum of areas. This exposure, however, is not confined to European jurisdictions. There is also a growing appetite for consumer-led class actions in the UK, fuelled by a new class action regime for competition claims which has become markedly active since the end of 2021. The presence of experienced US class action law firms in the UK working in combination with third party litigation funders plays a further, significant, role in this trend.

In a post-Brexit era, the UK continues to forge its own legislative path through the revocation and modification of retained EU laws as well as the introduction of new frameworks and policy guidance. Whilst there are some areas of commonality with the EU’s initiatives, including the modernisation of product safety laws, there are nevertheless other areas of clear divergence, particularly around the regulation of AI and corporate due diligence. In a challenging economic climate, and in stark contrast to the EU, the UK is aiming to reduce the hefty regulatory burden often imposed on business to promote innovation and economic growth.

Against this background, we highlight some of the key legislative developments that will impact manufacturers operating in the life sciences sector as they enter 2024.

Liability for defective products

The European Commission (EC)’s proposal to reform the EU Product Liability Directive (PLD), the legislation governing liability for defective products, is expected to make it much easier for claimants to bring product liability claims in EU Member States, including by way of a “class” action. The draft proposal is currently subject to negotiation by the EU institutions and is expected to come into force in 2024, at the earliest. If agreed in its current form, it is likely to transform the product liability landscape across Europe. 

A key feature of the proposal is the expanded definition of ‘product’, which will bring intangible elements, such as software, AI and digital manufacturing files, within scope of the new rules. Consequently, the litigation risk profile for certain products such as 3D printers, smart healthcare devices and AI-enabled applications, will be increased.

However, the most impactful proposed reforms are likely those aiming to alleviate the burden of proof. Although they continue to be subject to negotiation, they are likely to go ahead in some form. However, whether they go as far as reversing the burden of proof in some situations is currently unclear, although it remains a possibility, particularly so in cases of increasing technical and scientific complexity. 

Pharmaceutical and medical device manufacturers, who have often been at the forefront of product liability litigation globally, are particularly concerned about the impact of the proposed new rules; not only in terms of the increased risk of costly litigation but also the impact it could have on innovation and, therefore, ultimately, on the patients that they serve. A joint industry statement issued by several associations in October 2023, highlights concerns that the proposal, in its current form, will increase prices, undermine European competitiveness, and open the door to a litigation culture in Europe. As these industries increasingly develop products comprising digital and AI-enabled technologies, they could well be amongst the first to face major test cases once the new legislation comes into force.

In contrast, the position in the UK is less volatile – for now. In recent years, high profile group litigation concerning medical device products has seen the UK courts shape the laws on product liability in way that sought to balance the rights of consumers and manufacturers. That could change if the UK decides to follow in the EU’s footsteps and modernise its own product liability legislation (the Consumer Protection Act 1987), as indicated in a recent government consultation. Given the UK Government’s packed legislative agenda, any proposals to reform the CPA are, however, unlikely to come to fruition in the shorter term but there seems little doubt that this is on the agenda.

Artificial intelligence

Through its proposed landmark Artificial Intelligence Act, the EU will introduce the world’s first set of comprehensive rules to manage and regulate the risks posed by AI. These rules are likely to come into force in 2025 or 2026 and aim to fill some of the gaps left by existing sector specific regulation, such as the EU Medical Device Regulation. The proposed Act adopts a risk-based approach so that the ‘riskiest’ forms of AI, such as AI-enabled precision medicine tools, are subject to the most stringent obligations, including human oversight and continued maintenance.

The EU has sought to complement the AI Act with a fault-based civil liability regime, known as the AI Liability Directive. The Directive will allow consumers who are harmed by AI to sue providers for damages arising from AI failures or non-compliance with the AI Act. The pharmaceutical industry could be disproportionately impacted by this new regime considering its adoption of AI in products that will be classified as high risk.

Industry concerns that the EU’s legislative developments could hinder innovation and stall production timelines, thereby causing delays in AI technologies reaching the market, have influenced the pro-innovation approach taken by the UK Government. As set out in its White Paper published in March 2023, the UK proposes a regime based on five core principles, including safety, transparency, fairness, accountability and redress, to be issued on a non-statutory basis and implemented by existing regulators, such as the MHRA, who will be responsible for providing guidance on the development and use of AI in their respective sectors. 

This divergence could see products that are sold within the EU attract inflationary consumer prices to account for the risks posed.

Corporate sustainability 

The EC’s proposal for a Directive on Corporate Sustainability Due Diligence (CS3D), first published in February 2023, will impose obligations on large EU and non-EU companies, including those in the pharmaceutical sector, to implement due diligence procedures to enable them to identify, prevent, mitigate, and end adverse environmental and human rights impacts across their supply chains. SMEs would not be directly in scope although might be indirectly impacted due to their position in the supply chain.

Eligible businesses will be at risk of significant financial penalties and civil liability claims for damages where environmental or human rights harms across their supply chains are not adequately addressed. These risks will arise not only in relation to a business’s own operations, but also in relation to those of its subsidiaries and direct business relationships, creating a situation where businesses will be held liable for the actions of third parties within their supply chain, over which they have minimal control. Businesses must also be prepared for the extensive administrative burden of having to ensure that the sustainability obligations of their partners and subsidiaries are being met.

Although the UK is yet to propose equivalent legislation, businesses and their foreign parent companies face similar liability risks arising from breaches of environmental and human rights legislation, particularly as UK courts become increasingly open to hearing such actions.

What action is required?

As 2024 approaches, manufacturers should evaluate their portfolios and identify the products that are likely to be impacted by the above legislative proposals and seek independent advice as to how to provide for, and protect against, the potentially increased litigation risks. 

A thorough assessment of all third-party contractors and suppliers, as well as the implementation of appropriate risk management and governance frameworks, will be crucial to ensuring that businesses are able to mitigate any risks posed by new corporate governance rules.