There are less than 400 days left to the new millennium and already we have the first buzz word, Y2K. We have been avoiding that issue in our practice until we recently realized that the issue is not going away and, if anything, there seems to be greater intensity as time marches on. Although we have seen the media blitz and many consultants have been sending us articles or other promotional materials, it seemed that the issue was not a problem for us as a small business owner because in our minds we have been updating our computer systems continually. We assumed that our new computers and software would not have any problems. For those of you who have not seen anything on this topic yet (and you must exist in a closet or throw everything away, including this newsletter), Y2K is the name of the computer bug that will not allow computers to go from December 31, 1999 to January 1, 2000. Various sources say that 90% of the computer applications have problems and that 20% of the systems will fail on that date. The problem is greater than computers. It can exist on your fax machine, cell phone, credit card processing equipment, voice mail, and security systems. The list is an evolving one.
The focus in this article is not how to fix your hardware and software. That is a topic beyond our domain. It is to look and see how this problem is going to affect the small business owner.
We start by looking at the litigation, as all lawyers do. It appears that the first legal decision recently was decided in Pennsylvania. It was a contract issue where a custom software company was sued by its client for not meeting a time schedule. The arbitrator determined that there was no implied obligation by vendors in contracts to meet Y2K deadlines. If not expressed in the contract, then there was no obligation by the software provider to fix the problem. In Massachusetts, the only case we know that has been filed so far involves J. Baker of Canton. In this case, it is the software consultant, Arthur Anderson, that is seeking a determination that Anderson met its contractual obligations in designing a third-party retail computer system in 1990. Arthur Anderson is arguing that in 1990, when it did the work, it was common for only two digits to be used to represent the date and if J. Baker had asked Anderson in 1990 to design a custom software to fix the date problem, it would have cost more than it is costing J. Baker to fix the Y2K problem today. Anderson said it brought the suit to protect its reputation. It is interesting that J. Baker did not initiate the suit, although it demanded a refund of monies paid to implement the deficient system. Cases in other jurisdictions involve whether a software manufacturer is required to provide free upgrades, such as Norton Anti-Virus, Medical Manager, Quicken, Quarterdeck, etc. Other cases revolve around cash register, inventory, and accounting software that will not process beyond 1999. Thus, the issue seems to be whether there is an obligation, expressed or implied, by software providers to make their software compliant and, if so, should that compliance be provided free of charge. There are a lot of legal contract issues if you are in the software business. Remember, if you take the matter into your own hands because you are getting nowhere with the vendor, then the issue becomes whether you run afoul of copyright problems by fixing the problem on your own.
It also now appears that various manufacturers or other third-party organizations are distributing compliance questionnaires to their partners to verify that they are in compliance. They want to verify that you are doing your job in being compliant so it will not interfere with the commerce stream. They want to add you to the legal loop. Once you decide that you have to respond for whatever reason, then liability exists. The potential issue is if a problem later develops, what was your responsibility for inaccurate or inappropriate responses. The obvious issues will be fraud in the extreme case and negligent misrepresentation in lesser cases. In fact, there is new legislation that was signed into law on October 19 dealing with this issue. The law is called the Year 2000 Information and Readiness Disclosure Act. It is highly technical, but the intent is to hold a maker of a Year 2000 statement not liable in a civil action based on an allegedly false, inaccurate, or misleading Year 2000 statement unless the statement was (1) material, and (2) made with actual knowledge of its falsity, its intent to deceive, or with reckless disregard. There are exceptions and a methodology to cover prior written statements if certain steps were taken by December 3, 1998. We therefore urge you to be careful in your responses and to seek help when in doubt.
If you are thinking about selling your company (and who does not), then the typical question in any due diligence review will be the extent of your Y2K compliance. If the acquiring company cannot get comfortable in that regard or if it feels that it will inherit the problem (even if it is not a problem in your mind), then the acquiring company may chill the deal. Obviously, the same is applicable if you are the acquirer.
Failure to comply or not being able to demonstrate that you are Y2K compliant may be deemed to be material in various contexts. For example, if you are not compliant or cannot demonstrate that you are compliant, do you lose your ability to do business with the government or other agencies? Do accounting standards require auditors to express an opinion on compliance in reviewing your financial statements? Must the cost and timetable of compliance be disclosed in a footnote in your financial statements? Do bank auditors require banks to verify that lenders are making loans to customers who can demonstrate compliance? Do banks call loans for customers that they believe have a problem? Many clients have 401(k) profit-sharing plans, etc. Many of you are the trustees of those plans. Is there a fiduciary obligation, as the trustee, to verify that the plan assets are invested in or through entities that are Y2K compliant? What is the deductibility of costs associated with Y2K?
For those of you who think that your insurance coverage will be a solution to the problems in this area, think again. Similar to the M.G.L. 21E issues, your insurance policy, whether it is business interruption or third-party insurance, does not cover the exposure in this area. Thus, if you want this type of endorsement, it is up to you to contact your insurance agent and determine what your coverage is and whether to add an endorsement.
Our recommendations are that you should immediately start focusing, if you have not already, on Y2K. There are going to be many ways that Y2K will affect your business, some direct and others indirect. You should appoint someone as the coordinator, and that person should establish a notebook of all the activities that he or she has done to assure compliance. You should periodically review the notebook. You should respond to some of the questionnaires that are floating around and, if necessary, bring in a consultant to help you through the process. You must be able to establish compliance even if it is not an issue in your business. If you hire a consultant, make sure that your agreement spells out carefully the obligations of the consultant. Start early, as consultants are in high demand. We cannot stick our heads in the sand about this problem. As a recent "60 Minutes" TV show pointed out, even if the United States aggressively attacks the problem, there are other countries in Europe and the Far East which are not putting as much emphasis on it, resulting in global implications. Y2K will not go away. Time marches on quickly.