Increased liability risks for quasi-producers

Based on a recent ruling by the ECJ, trademark owners, especially those in white label, private label and store brand business, are potentially facing higher liability risks in future. This will be the case when a product bearing the trademark is defective and results in damage to property or personal injury. The ECJ has lately rejected the protection mechanisms previously used by quasi-producers to avoid liability, creating a need for legal action by many companies.


Product liability in white label/store brand business

White label, private label and store brand business is widespread. In this form of business, branded goods manufacturers have products manufactured by external suppliers and then affix their own established and well-known trademarks to them and sell the products under them. The information indicating that the goods were made by an external producer is usually displayed far less prominently and conspicuously than the branded goods manufacturer’s trademark.

At least in the case of consumer products, but also in the case of certain products in regulated sectors (e.g. products subject to the Machinery Directive), the relevant product safety provisions require that the party that manufactured the product and assumes manufacturer responsibility vis-à-vis the product safety authorities must be identified. In practice, the trademark of the branded goods manufacturer often features prominently on the product in large format, while the producer information is printed far less prominently, whether with the producer being named as producer or simply by the words “produced for” followed by the name of the trademark owner. Contact details are occasionally provided, but without further comment.

Pursuant to German product liability law, any person who by putting his trademark on a product presents himself as its producer (“quasi-producers”, section 4(1), sentence 2 Product Liability Act (Gesetz über die Haftung für fehlerhafte Produkte, “ProdHaftG”) is also liable for product defects within the meaning of the ProdHaftG. In the event of property damage or personal injury due to product defects (section 3 ProdHaftG), the trademark owner is then liable in addition to the actual producer. This can be problematic if it is easier for injured parties to make a claim against the trademark owner rather than against the actual producer, for example because the latter is located abroad, which is frequently the case – and often outside Europe – , or because the trademark owner is more solvent than the producer.

This liability risk has led to various avoidance strategies in practice. What they all have in common is the attempt, by identifying the actual producer, to counteract the legal impression given by the use of the trademark, namely that the trademark owner is also the producer. The thinking behind this is that quasi-producers are not liable if the name of the actual producer is explicitly indicated. In practice, therefore, it is common to find the two identifiers, namely the actual manufacturer and the trademark owner, often linked by the words “produced for”, as mentioned above. In those few instances where, for reasons of marketing or product design, it is not considered opportune to clearly identify the actual producer on the product itself, it is named only in accompanying documents such as operating instructions, package inserts, declarations of conformity or the like.


The ECJ’s decision: avoidance strategies no longer possible – trademark owner liable as quasi-producer

These everyday practices will now no longer work due to the ECJ’s ruling of 7 July 2022 – C-264/21 – Koninklijke Philips NV. The ECJ’s decision is relevant to the interpretation of the ProdHaftG because the Act implements Product Liability Directive 85/374/EEC and the statutory definition of quasi-producer in section 4(1), sentence 2 ProdHaftG is taken verbatim from Article 3(1) Product Liability Directive.

The case before the ECJ concerned a coffee machine bearing two very well-known trademarks, one the name of a Dutch company, the other the name of a coffee machine company. The machine was manufactured in Romania by a subsidiary of the company that owned both brands. In addition to the trademark of the well-known company for coffee machines, the machine bore an address in Italy and the words “Made in Romania”. There were no specific indications, other than the name of the Dutch company, that this entity might be the producer of the coffee machine. The coffee machine having caught fire and caused property damage to the home of a Finnish consumer, the consumer’s insurer took the Dutch company to court in Finland for compensation. The Supreme Court of Finland was primarily interested in whether the mere fact that a company affixes its trademark to a product suffices to make it a quasi-producer, or whether other criteria also apply in order for the trademark owner to be classified as producer. Connected to this, the Finnish court also wanted the ECJ’s view on whether an indication on a product that the actual producer is a company other than the trademark owner is capable of discharging the trademark owner of liability and removing its status as quasi-producer.

The ECJ said no. Pointing to the wording of Article 3(1) Product Liability Directive, the Court held that status as producer (i.e., as quasi-producer) was established by the mere fact of a trademark being affixed to a product. The wording did not allow for alternatives or qualifications based on circumstances other than the affixing of the trademark. Referring to the meaning and purpose of the provision, the ECJ further stated that the affixing of the trademark gave the impression that the trademark owner was involved in the production process or even assumed responsibility for it. By using the trademark, the trademark owner was effectively using its reputation to make the product more attractive in the eyes of consumers. Therefore, the trademark owner had to accept – as a quid pro quo or the other side of the coin, so to speak – that it could also be held liable in respect of that use.

The ECJ also used consumer protection as an argument. Consumers could not be expected to grapple with the internal arrangements between the quasi-producer and the actual producer. The idea was specifically to relieve consumers of the burden of having to determine identity of the actual producer. Quasi-producers and actual producers were equally liable, it argued. The quasi-producer therefore remained fully liable towards the consumer.


Conclusion and outlook

It is hard to overestimate the implications of this ruling for white label, private label and store brand business since it means that trademark owners must in future expect to be fully liable vis-à-vis consumers. Based on the ECJ’s unambiguous position, a trademark owner can no longer argue in its defence that it provided other information on the product or accompanying materials to indicate that it is not the actual producer. This ECJ ruling is therefore in contrast to the earlier prevailing view as regards the definition of a quasi-producer in section 4 ProdHaftG, which considered it possible to override the legal impression created by the trademark’s use by indicating the actual producer.

Consequently, many types of product design that were previously considered permissible will no longer have the function of removing liability in future. A trademark owner must expect to be held responsible and liable for product defects solely on the basis of use of its trademark.

This is problematic in a number of respects:

Firstly, a trade mark owner must now ensure – by using the proper contract wording – that it can take full recourse against the actual producer, not only in law but also in fact. This can be problematic in practical terms, especially (but not only) with suppliers from the Far East. The trademark owner bears the claim enforcement and insolvency risks in this respect. Furthermore, drafting legally watertight standardised clauses is a complex matter.

Secondly, trademark owners often do not have the operational set up to defend claims as quasi-producers and obtain redress from suppliers in this regard since trademarks are frequently held within specialist holding structures by companies that are not operationally active. This liability issue aside, other legal interests, such as tax incentives, also play a decisive role in the relevant corporate structures.

The ruling also raises issues relating to the adjustment of insurance cover.

With our team of around 20 experts in our Product Compliance Hub and the full-service approach practised at Gleiss Lutz, we are ideally positioned to work with you to develop a tailored risk mitigation strategy and support you in implementing it. Should you be interested, please contact us for a non-binding initial discussion.