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Y2K: What you should know about the legal playing field

No one knows how much Y2K litigation will eventually make it into the courtroom. The lines of legal battle are just now being drawn. Attorney Michael Losavio explains.

As a practical matter, Y2K date awareness faults are the same as any other business disruption problem. Y2K litigation should be no different from any other business litigation that seeks to assign fault and recover for damages done. But in the ever-changing world of business liability, nothing is what it should be. The time-honored American legal principle that anyone can sue anywhere over anything creates risks that you should prepare for, even if it’s only getting your counsel’s home telephone number.

This is particularly true with Y2K legal issues. Computer law issues developed through litigation over large, expensive projects and long, complicated system development contracts. The pervasiveness of possible Y2K failures has greatly expanded litigation possibilities while reducing the public’s tolerance for computer system fallibility.

On one hand, consumer-level system problems that might have been ignored 10 years ago may now be subjected to lawsuits for consumer law liabilities. Combined with the court mechanism of the class-action, death from a thousand cuts becomes a possibility.

On the other hand, the broad use of computer control systems in so many different products creates a risk of product liability if a person or property is injured. Medical services that rely on date aware systems may carry a risk of serious, possibly fatal injury if there is a system malfunction. Control systems for building or machine functions may similarly put property or lives at risk with a system failure.

In the middle lies the possibility of personal liability, including liability for business directors and officers who may or may not have acted with “due diligence” in addressing Y2K risks. That “due diligence” obligation applies to repairing problems with the products you provide or mitigating the risk of damage to the business from products you use.

But cheer up. Worst-case speculation is what the law schools teach their students. What will actually happen, in practical terms, is anyone’s guess.

Many Y2K lawsuits claim anticipated damage. Because of this, many have been dismissed as being too speculative and premature. Others have been settled, often by agreement to provide a free upgrade patch to remedy any problem. This year saw the first Y2K class action to be permitted by a trial judge rather than dismissed. With the Y2K changeover here, litigation may begin to take a more definite and nastier turn. The injuries, if any, will be real and the courts ready to address them.

Happy Y2K! See you in court!
If the Y2K “problem” is a demon that threatens operations, Y2K litigation might be the troll under the bridge, waiting to savage the survivors crossing into the next millennium. After pundits have used the specter of “trillion dollar” Y2K litigation to prod people to take the problem seriously, what will happen now that Y2K day is here?

To approach the matter as a business decision, look to three things: the possible damage, your system contracts and new Y2K legislation. A review of law-related Y2K and computer matters in the past year gives a sense of what to expect. Of some 80 Y2K cases filed, most are still pending. Of the cases resolved, most were dismissed; and the courts noted some of those cases were premature as Y2K problems had not yet occurred. Some were settled with the provision of Y2K patches. But, for the first time, a trial court certified a class action Y2K lawsuit to go forward rather than dismissing the case. Whether you’re worried about systems you’ve provided to your customers or the systems you rely on to provide for your customers, these principles will be useful.

Look to the damages
If a system fails, what will the damage be? If it’s purely economic and unrelated to injury to person or property, then you can better assess liability and how to proceed (see the discussion of contracts, below). But if other damages are possible, the risk of personal injury and punitive damages is increased. Tort and product liability become significant risks. Courts tend to let lawsuits proceed where there is a direct connection to local personal or property damage.

This will be true regarding both liability and the willingness of judges to let local plaintiffs haul a computer system defendant into their courts. In a case where a claimed computer failure allegedly caused a fire, an Italian computer manufacturer who sold to a Delaware company who sold to a systems integrator who sold to the plaintiff was required to defend itself in an Illinois court. The Italian company had no other connection to Illinois, but must now bear the burden of defending itself in a distant forum on the plaintiff’s home turf. The court found that Illinois had a “weighty interest” that justified this.

Any failure risk in computers to control other systems should be carefully reviewed.

Look to the contracts
Read your contracts. A great deal of Y2K litigation will be decided based on what contract, license, and warranty agreements apply. First and foremost, the damages will be limited, as punitive damages are rarely available. Further, the fine print often governs what damages may be recovered, deadlines to claim them, and how long a warranty will be good for (or if there even is a warranty at all!).

An Ohio state court ruled this year that, under the software agreement at issue, there were no warranties outside the license agreement and that it superseded any other claims made by the software vendor. The license warranty was for a period of only 90 days, which had long since passed. The statements of the vendor about the product’s performance were made outside the written agreement, which took precedence.

This court treated Y2K problems as any other product defect; the parties were bound by the contract. This principle will probably apply to “shrinkwrap” licenses found in product documentation, as well; courts have held that your “remedy” is to return the product and get your money back.

A kicker here is fraud and misrepresentation. Putting aside all that torts entail, do you recall sending or receiving any requests from suppliers or customers asking you to “verify” that you would have no Y2K problems? Those “verifications” could become independent grounds for claims of fraud or negligent misrepresentation if problems develop. Legal exposure, even from gratuitous representations, may be an issue.

Look to Y2K legislation
The federal Y2K Act was enacted in July to “establish certain procedures for civil actions brought for damages relating to the failure of any device or system to process or otherwise deal with the transition from the year 1999 to the year 2000.” This act provides powerful defenses against some claims and increases the level of proof needed for others. The enforceability of liability limitation clauses in contracts was strengthened. There is a Y2K upset defense for a defendant who has made a “good faith” effort to prevent a potential Y2K failure and meets certain other requirements. A limit is placed on punitive damages in certain circumstances and a defendant may only be responsible for damage in proportion to his or her liability. And a plaintiff cannot recover for damages the plaintiff could have reasonably avoided by acting on information concerning potential Y2K problems

The Y2K Act sets out special procedures for beginning Y2K litigation. This procedure is designed to promote problem solving and avoidance before litigation ensues. Even with litigation, there are special requirements that should make lawsuits less burdensome and promote negotiation and settlement, including in class-action lawsuits.

Although the Y2K Act does not cover injuries to people, it can significantly affect liability and litigation decisions with Y2K problems. As with any lengthy federal law, you should talk with your lawyer about how it might or might not benefit you.

Further, a majority of the states have enacted Y2K legislation. The federal Y2K Act encourages the states to limit Y2K liability. What your particular state has done may affect you. What the particular state of someone with whom you do business has done may also affect liability, particularly for defendants in California and Texas. The more successful your business, and the more interstate business you do, the more complicated it becomes. One advantage of the Y2K Act is that it is national in scope and gives some consistency to your legal options.

Other federal legislation that might help includes the Small Business Year 2000 Readiness Act, to help small businesses caught with Y2K distress, and the Year 2000 Information and Readiness Disclosure Act, which offers some protections for doing the right thing and trying to solve Y2K problems before they erupt.

Happy New Year!
This certainly does not cover the many different angles from which liability might be claimed. In another Microsoft case in federal court in Illinois, the trial judge dismissed a claim of Y2K defect made against Microsoft. The claim was that the user was not expressly told to turn on the four-digit year date feature (two-digits being the default) and that this was a Y2K flaw. The judge, in dismissing, noted the plaintiff could have returned the product and received her money back. Legal experimentation with Y2K liability will continue as long as someone can argue a claim.

In the end, remember to talk to your lawyer if you have concerns. If you didn’t send him or her that Y2K holiday card in time, then consider a bottle of Y2K-preparatory bourbon. No one should have to celebrate the New Year without benefit of counsel.
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