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Last October, President Clinton signed the Year 2000 Information and Readiness Disclosure Act (IRDA), [FOOTNOTE 1] which encourages the disclosure and exchange of information about computer processing problems, solutions, test practices and results, and related matters in connection with the transition to the year 2000. In February, a bipartisan group of House members introduced legislation that would limit litigation, attorneys’ fees and damages from breakdowns related to the Y2K problem. How these and other measures will affect the nature and success of Y2K litigation is unclear, although it is highly unlikely that these or other measures realistically will prevent the flood of Y2K litigation expected in the near future. The House proposal is significant because it would exclude most Y2K claims from Federal courts unless the plaintiff provided notice to sue within 30 days of a breakdown and gave the defendant up to 90 days to fix the problem. Although lawsuits for personal injuries would not be affected, punitive damages could be sought only if there was clear and convincing evidence that the defendant specifically intended to cause the injury. Damages in these actions would be capped at $250,000, and attorneys’ fees would be limited to $1,000 an hour. In addition, the House proposal attempts to protect large companies from responsibility for the actions of less wealthy co-defendants by limiting each defendant’s liability to a direct proportion of its responsibility for the harm. The proposal limits the liability of officers and directors, encourages mediation and arbitration over lawsuits, and establishes a Federal loan program for small businesses that need help fixing their Y2K computer failures. The recent House proposal represents a significant step beyond the protections afforded businesses by IRDA. IRDA’s stated purposes are to promote the free disclosure and exchange of information related to year 2000 readiness; to assist consumers, small businesses, and local governments in effectively and rapidly responding to year 2000 problems; and to lessen burdens on interstate commerce by establishing certain uniform legal principles in connection with the disclosure and exchange of information related to year 2000 readiness. [FOOTNOTE 2] IRDA focuses its protections on two general areas. To encourage candid disclosures regarding Y2K issues to shareholders, customers, consumers and others, IRDA limits how such statements can be used against the maker in certain legal proceedings. [FOOTNOTE 3] To encourage the dissemination of Y2K information between companies so that solutions to the impending problems may be reached, IRDA provides a temporary exemption of such information-sharing from the scope of antitrust laws. [FOOTNOTE 4] IRDA implements its disclosure protections by creating two categories of protected disclosure. One is termed “Year 2000 Statements,” which include any communication (in any form or medium) concerning (1) an assessment of Y2K processing capabilities; (2) plans, objectives, or timetables for implementing or verifying Y2K processing capabilities; (3) Y2K test plans, test dates, test results, or operational problems and solutions; or (4) comments that directly or indirectly relate to Y2K processing capabilities. [FOOTNOTE 5] A Year 2000 Statement is a protected communication under IRDA, but it does not benefit from an evidentiary exclusion, [FOOTNOTE 6] as does its counterpart, the Year 2000 Readiness Disclosure. Evidentiary Rule IRDA protects the maker of allegedly incorrect Year 2000 Statements by deeming such statements inadmissible in court against the maker unless it can be proven by clear and convincing evidence that a statement was (1) knowingly false when made, or (2) made with a reckless disregard for its truth or falsity. [FOOTNOTE 7] The second category of disclosure — the Year 2000 Readiness Disclosure — is a written statement concerning Y2K computer compliance information clearly identified on its face as a Year 2000 Readiness Disclosure, inscribed on a tangible medium (print or electronic), and issued or published by or with the approval of a person or entity with respect to Y2K processing of that person or entity or of products or services offered by that person or entity. Under IRDA, a Year 2000 Readiness Disclosure enjoys all of the protections afforded to Year 2000 Statements, as well as an additional evidentiary exclusion. [FOOTNOTE 8] A Year 2000 Readiness Disclosure will not be admissible in any civil action arising under state or federal law against the maker of the disclosure to prove the accuracy or truth of any Year 2000 Statement in the disclosure, [FOOTNOTE 9] except (1) as the basis for a claim for anticipatory breach or repudiation against the maker, [FOOTNOTE 10] or (2) when the court determines that the maker’s use of the Year 2000 Readiness Disclosure amounts to bad faith or fraud, or is otherwise beyond what is reasonable to achieve IRDA’s purposes. [FOOTNOTE 11] There are two significant distinctions between the two disclosure devices. Notably, a Year 2000 Statement can be any form of communication or any medium whereas a Year 2000 Readiness Disclosure must be in written form transcribed in some tangible medium, clearly designated as such a disclosure. Further, Year 2000 Statements have a broader scope than Year 2000 Readiness Disclosures. Year 2000 Statements can pertain to the plans and readiness status of other entities upon which the company relied in its own operations, whereas Year 2000 Readiness Disclosures only relate to the maker’s own Y2K processing, products and services. Despite the protections offered to companies by IRDA, the threat of lawsuits stemming from Y2K problems have most companies deeply concerned. Y2K lawsuits seek recovery for personal or economic injuries allegedly resulting from a Y2K failure. IRDA itself does not address these lawsuits, many of which have already been commenced, and many more of which are looming on the horizon. IRDA also fails to extend protection to Year 2000 Statements or readiness disclosures made in documents or materials filed with the SEC or with federal banking regulators or to disclosures that accompany the solicitation of an offer or sale of securities. [FOOTNOTE 12] Another pitfall of IRDA is the discretion given to Courts to determine the admissibility of Year 2000 Readiness Disclosures. Since a large portion of Y2K litigation will hinge on the underlying veracity of the disclosure, Courts will be charged with the responsibility of determining whether the disclosure constituted fraud, thereby making such disclosures admissible in a court of law. The most flawed aspect of IRDA remains its inability to offer any real incentives to companies for Y2K-related disclosure. As companies remain fearful of their exposure to Y2K lawsuits, they may choose only to comply with the SEC’s disclosure requirements, which are excluded from the protections offered by IRDA. Litigation Although Jan. 1, 2000 is still many months away, litigation has not waited patiently. Estimates are that approximately 50 Y2K lawsuits have been commenced in the United States. Year 2000 litigation is expected to affect individuals and companies throughout the world, both as plaintiffs and defendants. Potential litigation includes breach of contract actions, tort and fraud claims, statutory violations including the Uniform Commercial Code, whistleblower, religious discrimination, and medical leave laws, shareholders’ suits, insurance coverage suits, class actions, and suits by the United States government and its agencies. An action commenced on Dec. 4, 1998, Cincinnati Insurance Co. v. Source Data Systems Inc. and Pineville Community Hospital, [FOOTNOTE 13] is representative of much of the anticipated Y2K litigation. That case involves an insurance company’s policy obligations regarding a hospital’s faulty computer system. The hospital claimed that a $570,000 computer system, installed in 1995 and 1996 by Source Data Systems was represented as Y2K compliant, but that it will fail to function properly in 2000. As a result, the hospital seeks coverage from its insurance company to install a new system. The insurance company is seeking a declaratory judgment that it is not responsible for covering the $750,000 to $1.25 million cost of the new system. Like Source Data Systems, many Y2K commercial disputes will likely be based on contract theories, such as insurance policy coverage, rather than on technological concepts. In light of some recently decided class actions, however, the leading obstacle to current Y2K litigation may be the ripeness of the plaintiff’s claim. In three related consumer putative class actions brought in New York state court, [FOOTNOTE 14] Justice Ira Gammerman addressed several causes of action based upon the potential impact of a Y2K defect in older versions of Quicken software, a personal finance program. In those cases, it was undisputed that certain older versions of the program sold by Intuit Inc. would be unable to recognize and process dates starting in 2000. As a result, plaintiffs who purchased the older versions alleged that to remedy the Y2K defect, they would incur the economic loss of purchasing the new version of Intuit’s Quicken program. Plaintiffs, individually and on behalf of purchasers of products that may be affected by Y2K computer problems, alleged violations of the Magnuson-Moss Consumer Product Warranty Act, 15 U.S.C. �2301, New York’s General Business Law �349, and breach of implied warranties of merchantability and fitness for a particular purpose. The court dismissed, on several grounds, all three class actions holding, inter alia, that because the plaintiffs had not yet alleged that they bought the new versions of Quicken or that the old version had failed to function as intended, the plaintiffs had yet to incur any economic damage. Furthermore, based upon the evidence submitted, the court found that by the time the defect manifests itself, a free solution will have been made available to consumers, thereby curing any economic damage. In a recent case brought by a retail clothier, J. Baker, seeking damages for economic losses for Y2K glitches in a system implemented in 1991, a Massachusetts court dismissed the case against the New York-based systems integrator Andersen Consulting. The court ruled that the plaintiff had failed to state a cause of action because the 1991 contract made no mention of Y2K remediation. Although companies such as Intuit and Andersen Consulting have been successful thus far in defending Y2K lawsuits, most companies realize that litigation can destroy valuable business relationships and waste significant resources and time. As a result, there have already been some notable settlements of Y2K disputes. For example, Tec America Inc. reached a $250,000 settlement with a Michigan grocer whose checkout equipment could not recognize dates after 1999. In another settlement, Medical Manager Corporation settled a class action lawsuit, brought on behalf of medical groups who had purchased Y2K flawed software from the company, by agreeing to provide free repairs. Alternative dispute resolution devices such as mediation and arbitration are also being used to resolve Y2K disputes. In early December 1998, 15 multinational corporations, including Aetna U.S. Healthcare and Philip Morris, signed a broad commitment to mediate rather than to litigate their Y2K matters. Since its inception, this pledge to mediate has spread rapidly. One of the first Y2K-related arbitrations was recently decided by a federal court-appointed arbitrator in Pittsburgh who found that the software manufacturer, ASE Ltd., was not obligated under its contract to remedy a customer’s Y2K computer problems. Implications Dire predictions have been made about the magnitude of losses that may result from the Y2K problem and the resulting multitude of lawsuits aimed at recouping those losses. Attempts to fix the problem have already cost individual companies hundreds of millions of dollars, and many Y2K lawsuits have already been filed months and even years ahead of 2000. The Year 2000 Information and Readiness Disclosure Act passed in October 1998, and the recent House proposal to limit businesses’ liability for Y2K problems, represent the federal government’s increased concern over the immeasurable extent of potential liability to this nation’s businesses. But as difficult as it is to predict the extent of the losses, litigation and ultimate liability to businesses, so too it is difficult to predict the particular nature of the lawsuits resulting from Y2K, making legislative efforts at limiting liability for businesses likely to actually increase Y2K litigation. Regardless, businesses concerned with limiting their Y2K liability should be well into implementing their Y2K action plans, and businesses concerned with recouping their losses caused by others’ Y2K non-compliance should be identifying their potential losses well in advance of 2000 to chart a sensible and cost-effective litigation strategy. Louis G. Santangelo and Elliot D. Bernak are associates with Sapir & Frumkin LLP in White Plains. They specialize in Y2K litigation. FOOTNOTES: FN1 Public Law 105-271 (October 19, 1998). FN2 IRDA, ��2(b)(1)-(3) FN3 See generally, IRDA �4. FN4 See generally, IRDA �5. FN5 See IRDA �3(11)(A) FN6 See generally, IRDA �4. FN7 See generally, IRDA �4(b). FN8 See generally, IRDA �9. FN9 IRDA, �4(a). FN10 Id. �4(a)(1). FN11 Id. �4(a)(2). FN12 Id. �3(11)(B). FN13 No. C-98-0144 (N.D.Iowa 1998). FN14 Faegenburg v. Intuit Inc., Index No. 602587/98, Stein v. Intuit Inc., Index No. 603134/98, Chilelli v. Intuit Inc., Index No. 402582/98, (Sup. Ct. N.Y. Cty. Dec. 1, 1998)

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