Beware: Year 2000 Lawsuits Ahead!

Y2K. No, this is not the latest Calvin Klein scent. This shorthand for the Year 2000 has been haunting corporate headquarters worldwide as businesses continue to prepare for their possible liability with regard to potential Y2K problems. Affectionately termed the "millennium bug," the Y2K problem actually refers to three distinct problems: (1) the "Year 1999" problem (entering the date September 9, 1999 may cause those computer programs programmed to read the code "999999" as the end of a project or record to shut down); (2) the "Leap Year" problem (the inability of many computer programs to adjust for leap year calculations); and (3) the "Year 2000" problem (the inability of hundreds of thousands of computers and microchips to distinguish between the year 1900 and the year 2000 and the risk that these computers and other devices will fail on or about January 1, 2000). Microchips embedded with program codes to perform timing or date-related functions are found in many automated devices and electronic controls. These devices and controls run everything from pacemakers to air traffic control systems to telecommunication systems, traffic lights and ATM machines. The majority of computer programs use only two digits to identify the year with the software assuming that the year begins with "19." Data sensitive programs, such as medical devices, thermostats, elevators, avionics and industry assembly lines will read "00" to mean 1900 not 2000, resulting in at best minor inconveniences to at worst the crashing of entire computer systems.

What kinds of claims can you expect due to the Y2K problem? Any business or public entity that provides service to the public on a time sensitive basis, or engages in almost any sale or transaction, now risks liability due to its failure to be "Y2K compliant," that is, for failing to make provisions to prevent the computer malfunctions associated with the two digit date code. The Information Technology Association of America ("ITAA") has defined the phrase "Year 2000 compliant" as:

when used in accordance with its associated documentation, [the product] will be capable upon installation of accurately processing, providing and/or receiving date data from, into, and between the twentieth and twenty-first centuries, including the years 1999 and 2000, and leap year calculations, provided that all other products (e.g. hardware, software and firmware) used in combination with the Product(s) properly exchange date data with it.

As a business owner or manager in today's litigatious society, you must be prepared for an onslaught of possible legal claims, particulary in the form of class action suits, resulting from the Y2K problem. Below is a list of some of the kinds of claims you should be thinking about and preparing for as the millennium approaches.

"Who Created This Mess Anyway?"

Claims against manufacturers and sellers of non-compliant Y2K software, hardware or firmware.

First in the chain of likely defendants are the manufacturers and sellers of software, hardware or firmware which are plagued with non-compliant Y2K microchips and processors. These manufacturers and sellers face suits which will be seeking anything from free "upgrades" to fix the problem to compensation for property and bodily injury damage resulting from failed computer systems. Indeed, suits against these manufacturers have already begun.

"Should Have Known Better." Negligence Claims.

Consumers who are adversely affected by Y2K glitches will likely bring negligence claims for failure of the businesses to foresee and guard against this problem. The actual software designer faces claims for negligent design of the computer systems. Additional negligence claims may include failure to properly monitor or supervise corrective efforts, and the failure to warn consumers of the depth of the Y2K problem.

"It Wasn't Me, It Was The Hardware." Products Liability Claims.

Under a theory of strict product liability, the manufacturers and suppliers of defective software, hardware or computer chips risk claims for property and personal injury damage. Imagine the possibility of consequential damages related to faulty traffic lights, elevators, medical devices, weapon systems and other date-coding processes and products.

"But You Promised." Breach of Warranty Claims.

Purchasers of Y2K defective products are expected to bring a variety of breach of warranty claims, as most software is licensed with some type of warranty that the product will perform in accordance to specification for a specific period of time. Failure to perform to specifications, including failure to be Y2K compliant, may lead to both breach of implied and express warranty claims. For example, under the Uniform Commercial Code and the Magnuson-Moss Consumer Product Warranty Act (as well as under various state consumer warranty acts) every contract pertaining to the sale of goods contains an implied warranty of merchantability that the product will, among other things, be "fit for ordinary purposes" which may be broadened to include being Y2K compliant.

"The Ad Speaks for Itself." Fraud, Misrepresentation and Claims Under State Deceptive Trade Practices Laws.

Has your product marketing or sales promotions contained promises that your product has a "lifetime" guarantee? If so, be prepared for claims of fraud and misrepresentation as your clients and customers bring claims that noncompliant software and products fail to live up to that statement. Similarly, claims that business misrepresented or failed to make disclosures concerning the Y2K problem may appear in the context of federal securities disclosures laws in connection with mergers, acquisitions and various stock offerings.

"65 In 2000?" ERISA Liability Claims.

Large employers may face a unique Y2K liability risk in the area of benefits administration. Miscalculations in retirement benefits resulting from defective software and hardware may lead to failure to comply with provisions of various federal statutes, in particular ERISA laws.

"But I'm A Professional." Professional Liability Claims.

Expect to see an increase in malpractice claims brought against professionals who "negligently" fail to use Y2K compliant software. A look at just a few of the professional fields demonstrates the potential Y2K impact in this area. Accountants face claims for breach of contract, misrepresentation, negligent design, fraud, and breach of fiduciary duty. Architects and engineers will be potentially liable for malpractice/breach of contract related to malfunctioning computerized building functions such as security systems, elevators, heating, ventilation, air conditioning

Shareholder Riots. D & O Liability Claims.

Expect a new breed of shareholder derivative suits as shareholders bring more and more claims against directors and officers of corporations that fail to adequately address and remedy Y2K problems which allegedly result in damage to the corporation and for failing to disclose such problems on a timely basis.

Fraud: Claims of Unfair Business Practices and Breach of the Duty of Good Faith.

Software companies which currently are offering up-grades of their software in order to be Y2K compliant, at a cost to the consumer, face suits based on the manufacturer's alleged "improper" forcing of customers to pay to fix a problem which is the manufacturer's, and not the consumer's, fault.

When the solution is part of the problem. Claims against Y2K Consultants.

Y2K consultants who provide software "fixes" to Y2K problems face liability if such solutions fail to remedy the problem. Software manufacturers, computer consultants and program designers who promise to make businesses Y2K compliant will be the first on the firing line in the post Y2K litigation if the solutions fail to work as flawlessly as promoted.