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Changing regulations challenge the consumer electronics industry

15 December 2022

As the COVID-19 pandemic accelerated changes in consumer shopping by creating a surge in online sales, the regulators have found such platforms can also create a route for non-compliant and unsafe products. 

The COVID-19 pandemic accelerated changes in consumer shopping by creating a surge in online sales. In parallel, the number of online marketplaces grew quickly, allowing consumers access to a wide variety of brands and gave them the ability to compare shop products and prices on one site and retailers new revenue channels. But, along with these benefits, regulators have found these platforms also create an easy route for non-compliant and unsafe products to reach consumers.

Another factor impacting the consumer electronics sector and product safety is that devices are becoming smarter. Myriad forms of artificial intelligence (AI) are beginning to permeate all aspects of our lives. Legal and regulatory systems have been unable to keep pace with these advances. Product safety and liability law, whether under specific electrical safety regulations or general product safety, requires updating. There are several proposals in the UK and EU to address these concerns.

Rise of the regulation

Increased consumer appetite for sustainability, and a wide range of eco-design regulation is driving business to design products that are more eco-friendly, such as energy-efficient home appliances. It is also helping consumers live their lives more sustainably by using electronic tools such as smart energy meters.

Reduction of electronic waste is also a priority. Waste electrical and electronic equipment (WEEE) and battery takeback obligations have been around for some time. However, the focus has now shifted. In October 2022, the EU passed legislation that requires all mobile phones, tablets and cameras sold in the EU to be equipped with a USB Type-C charging port by the end of 2024. Regulators stated that one issue driving this new law was a desire to reduce the number of chargers consumers needed and thus reduce waste.

Consumer advocates and lawmakers are increasingly demanding that manufacturers create products that last longer, avoid built-in obsolescence and are recyclable or reusable. These changes bring a host of new challenges in product design, safety and liability.

A new General Product Safety Regulation

In June 2021, the European Commission adopted a proposal for a General Product Safety Regulation (the Regulation) to replace the current General Product Safety Directive. The proposed Regulation, which is working its way through the EU legislative process, makes several very significant changes that will impact how and by whom product safety compliance is undertaken.

The first big revision is that, unlike the existing Directive that requires local member state implementation, this will be a Regulation – so the rules will be consistent across the EU. Other key changes include amending the definition of “product” to include items “interconnected or not to other items” and the Regulation’s application to software is clarified. Evolving, learning and predictive functionalities and cybersecurity were added as factors for assessing product safety. These amendments will have significant consequences, particularly as AI and smart technologies develop further.

The proposal also upgrades the obligations for distributors and retailers. They are required to “verify that the manufacturer has complied” with certain duties. It also creates the specific obligation to not “jeopardize [a product’s] conformity with the general safety requirement.” Both obligations go well beyond the existing duty and will add cost and compliance complexity for retailers and producers alike.

For some time, observers have suggested that online marketplaces be regulated under the product safety regime. This has always been unworkable. It would be a bit like a shopping centre owner being responsible for product liability for products sold in the stores. Nevertheless, the proposed Regulation requires online marketplaces to establish a single point of contact in charge of product safety. They also must remove listings for, or disable access to, dangerous products or display an explicit warning “without undue delay.” This could be as quickly as within two working days if ordered to do so by market surveillance authorities.

It is at least reassuring that the proposed Regulation makes clear that this obligation does not mean that online marketplaces have a general obligation to monitor the information they transmit or store. It also does not require the platforms to actively seek facts or circumstances indicating illegal activity, such as the sale of dangerous products online. Given the massive growth of online marketplaces across the retail sector, these new rules may cause many to reconsider their business model.

Rules regarding recalls were also updated. The proposed Regulation sets out how a recall notice should look and requires economic operators to avoid expressions that could decrease consumers’ perception of risk. Economic operators must also inform all consumers they can identify about a recall and offer them the right to at least repair, replacement or refund consistent with their consumer rights.

Negotiations on the proposed Regulation between European Council Presidency and the European Parliament were scheduled to start in mid-September 2022. Once concluded, the proposal will be submitted to plenary and voted on before being formally adopted. Businesses should stay abreast of progress so that they are prepared if and when it comes into force.

A revised Product Liability Directive and a Directive on AI liability all on horizon

On 28 September 2022, the EU adopted two proposals to modernise the strict liability regime for defective products and create liability for damage caused by AI. While the proposals are at the early stages, both include significant changes for the sector.

The proposal to update the Product Liability Directive will expressly address a broader range of product types. There will be strict liability for AI systems, software updates or upgrades and defective software systems that result in damage to property, person, or data loss from unsafe products. This means that electronic products could become unsafe not just from a physical malfunction but also from a software-related issue. Companies may also be liable for damages that result from cybersecurity failures.

These product liability directives will dovetail with the above proposals for general product safety and the Market Surveillance Regulation that requires companies to install an EU-based representative who is liable for damages in cases like these. This will extend from the current requirement that only applies to importers.

The new AI Directive works in conjunction with these rules.

While AI will be under the new Product Liability Directive, the specific AI Directive will be the first legislation to set out a cause of action for damages claims for AI-enabled products and services. The new rules need to be read in accordance with the AI Act being proposed. If passed, they will ensure that any victim, whether individuals or businesses, can seek compensation if they are harmed by the fault or omission of a provider, developer or user of AI.

The rules will apply to all uses of AI, in any context. The definition, which is found in the AI Act, and is still being approved, covers “software developed with one or more of the techniques and approaches listed in Annex I and can, for a given set of human-defined objectives, generate outputs such as content, predictions, recommendations, or decisions influencing the environments they interact with.” This is a broad scope.

The proposed directive will alleviate a victim’s burden of proof by introducing the “presumption of causality.” This means that if someone can be shown to be at fault in relation to the harm caused and the causal link to AI is reasonably likely then the court can presume fault. While this is subject to a rebuttable presumption it could be a game-changer in liability as business rush to adopt AI and it becomes more prevalent.

The proposed AI regulations also put in place disclosure obligations that will allow victims to access information about high-risk systems. The examples given in the guidance include operators of delivery drones not following instructions of use.

AI change also coming in the UK

In May 2022, the Office for Product Safety and Standards (OPSS) and Centre for Strategy and Evaluation Services (CSES) published a study on the impact of AI and smart technologies on product safety. Since current UK product safety laws are derived from EU regulations, it isn’t surprising that the study highlighted similar challenges to those identified by the European Commission. These include a lack of clarity on the extent to which AI and other smart technologies fall within definition of “product,” and how best to ensure the law effectively applies to technologies whose safety implications can change over their lifetime. There is also a similar appetite for an increase in accountability of online marketplaces.

The UK’s proposals for renewed product safety laws are due to be published by the end of 2022 but may be delayed due to the political turmoil that has plagued the UK government in recent months.

More significantly, the recently published Retained EU Law (Revocation and Reform) Bill has the potential to rock the UK’s product safety landscape. If passed as introduced, Members of Parliament must take steps to codify all retained direct EU legislation into UK law.

This applies to all retained direct EU legislation and EU derived subordinate legislation that was made under or for a purpose in s2(2) of the European Communities Act 1972. If the laws aren’t codified, they will be revoked on 31 December 2023. There is the potential for a later date prior to 23 June 2026 if a consensus to delay is reached.

The impact of such a delay could be significant. Many key product safety provisions, such as the General Product Safety Regulations 2005 and product-specific regulations including those covering consumer electronics, fall within the scope of the bill and risk being revoked if they are not codified. There is also the possibility that they could be replaced with hastily drafted alternatives.

Businesses operating in the UK market now face a period of significant uncertainty, both political and legal. Despite the instability of the landscape, or perhaps because of it, it is more important than ever for businesses to keep abreast of potential changes in the UK and their consequences.

What’s next?

While there is a clear convergence between the priorities of the EU and UK when it comes to future-proofing product safety, their means and processes are likely to differ significantly. The resulting uncertainty and potential divergence between laws in the two jurisdictions will prove challenging for consumer electronics businesses wishing to serve both markets. All of this comes at a time when both markets are exploring new regulatory regimes.

Changes are on the horizon. Businesses have only a limited time to make their voices heard if they want to shape those changes before having no option but to comply without having a say in how they are regulated.

This article was originally published by Sedgwick Brand Protection as part of the Recall Index 2022 Report – Edition 3.

Further Reading