Update for liability law: When the algorithm causes damage

Anyone in Germany who suffers damage due to a defective product can rely on a tried-and-tested principle: The Product Liability Act ensures that manufacturers must be liable for defects in their goods – regardless of individual fault. However, what works smoothly for a defective iron or a faulty braking system in the analog world is reaching its limits in the digital age. There is often a legal gray area, especially with software and artificial intelligence (AI). The Federal Cabinet therefore initiated a bill on Wednesday to modernize product liability law, which is intended to close these gaps and make the rules fit for the 21st century.

The core of the reform is the far-reaching equalization of software with conventional tangible goods. The federal government is thus reacting to the reality of networked systems.

If faulty software in an autonomous vehicle leads to an accident, or if an AI-controlled assistance system makes a wrong decision causing property damage or personal injury, product liability law will apply directly in the future. This strengthens the position of consumers: it will no longer matter whether the damage was caused by a physical component or a faulty line of code.

An important exception: Open-source software developed and provided outside of commercial business activities remains exempt from strict product liability. This is intended to prevent innovations in the community from being stifled by incalculable liability risks.

The amendment follows the requirements of the revised EU Product Liability Directive, which must be transposed into national law by the end of 2026. According to the government draft, the German legislator is to largely adopt the requirements. This is intended to ensure uniform standards across Europe, but also presents companies with challenges.

Operators of online marketplaces covered

In addition to pure software liability, the bill focuses on the modern circular economy and global supply chains. Anyone who significantly modifies products through "upcycling" or major alterations will in future be considered a manufacturer themselves and thus assume full liability responsibility.

At the same time, the initiative is intended to close a loophole in online trading: If the actual producer is based outside the EU, importers, fulfillment service providers, and online platforms such as Amazon can in future be held liable. The latter applies particularly if the marketplace appears to the customer to be the actual provider. This is intended to prevent those who have suffered damage from being left empty-handed with products from third countries.

The planned easing of the burden of proof is particularly relevant in practice. Given the complexity of modern IT systems, it is often impossible for individuals to prove the exact technical defect and its causality. This is set to change: If a defect is established and damage typically results from it, the causal connection will be presumed in the future. In addition, courts can oblige companies to disclose evidence, while respecting the protection of trade secrets.

The goal of the reform is clear: legal certainty must keep pace with technological development. Manufacturers of high-risk AI and complex software solutions in particular will likely have to tighten their quality assurance once again.

Concerns from associations and lawyers

There was a lot of criticism from the business community regarding the draft bill from the Ministry of Justice. The ZVEI and VDMA associations saw the new disclosure obligation for evidence as a risk to sensitive processes and technical know-how, as source code and design data would have to be revealed.

The DIHK and the German Bar Association (DAV) criticized the de facto reversal of the burden of proof for complex products, which deviates from established civil procedure law and exposes companies to incalculable risks. Medical technology manufacturers warned of a wave of lawsuits, and Bitkom criticized unclear liability periods for software updates.

In general, observers fear rising insurance premiums and additional bureaucratic effort that goes beyond a mere EU implementation and could stifle the experimental spirit of German companies, especially with AI applications.

Justice Minister Stefanie Hubig (SPD) counters: "We are reacting to the fact that products are becoming increasingly complex: we want to make it easier for affected parties to prove damage from faulty products." The cabinet's decision clears the way for the parliamentary procedure so that the new rules can enter into force in time within the EU deadline.

(vbr)