Defining the Year 2000 Computer Problem
- At the "dawn" of the computer age computer memory was ten thousand times more expensive than it is today
- To save computer memory, programmers used two, rather than four, digits to represent years
- The result:
- After the Year 2000 computers and other date sensitive equipment may not correctly process date data
- Most popular leap year algorithm will not work for 2/29/00
- September 9, 1999 may be incorrectly processed because 9999 was used to "flag" special operations
Scope of the Year 2000 Computer Problem
- Legacy software--especially financial industry applications
- Computer hardware--especially hardware manufactured before 1995
- Non-information technology equipment containing embedded chips--e.g., elevators, phone systems, medical devices
- Some hardware and software being sold today
- Third party systems and equipment that you cannot control
How will the Year 2000 computer problem be fixed?
- Reprogram existing systems
- Phase-out noncompliant systems and transfer affected business processes to new system
- Estimated cost--$1 trillion, and growing
- Fixed deadline: 1/1/2000--sooner for some systems, e.g., those affected by 9/9/99
What are the obstacles to surviving Y2K?
- Not enough money
- Not enough skilled resources--e.g., COBOL programmers
- Not enough attention paid by management
- Not enough attention paid to interfaces with vendors and customers
- Third parties on whom you depend are not ready
- Not enough time
What are some of the legal issues presented by the Year 2000 computer problem?
- Sending and responding to Y2K surveys
- Y2K supply chain issues
- Contract issues
- SEC, Accounting, and Financial Disclosure
- Insurance coverage issues
- Litigation
Not Enough Time? Strategies for surviving Y2K with 345 days to go:
- Augment contingency planning efforts while continuing remediation efforts as necessary
- Understand the legal issues presented by the Year 2000 problem
- Recognize that not all systems will be fixed on time
- Develop a contingency plan--and test it
Contingency Planning Versus Remediation --Contingency Planning: What were the challenges one year ago?
- Awareness--putting corporate awareness and education initiatives into place
- Project Plan--developing plan and securing sign-off of senior management
- Assessment strategy (internal and external/systems and business)--implementing and completing assessment strategy
- Risk management strategy--developing strategy and securing sign-off of senior management
- Remediation--implementing remediation plan
- Preliminary testing--completing testing
- Testing fixes--ongoing
Contingency Planning Versus Remediation --Elements of a Contingency Plan: What are the challenges today?
- Beyond remediation means seeing Y2K as a combination of business, financial and legal issues
- Assemble a multi-disciplinary team of business, legal, financial and risk management experts
- Responding to surveys--observing disclosure requirements--creating realistic expectations
- Securing the supply chain
- Planning for litigation--legal and financial planning
Responding to Surveys
- Optimize litigation position by carefully documenting all responses
- Respond thoroughly but conservatively to surveys
- Bank lenders--Y2K addenda to loan agreements
- Balance tension between potential business losses and exposure to litigation
- Take advantage of "safe harbors"--limited antitrust and evidentiary protections created by the Year 2000 Information and Readiness Disclosure Act
SEC Disclosure Requirements: When is a company required to disclose?
- When a company's assessment of its Y2K issues is not complete or
- Management determines that consequences would have a material adverse effect on the company's business, results of operations, or financial condition, without taking into account the company's efforts to avoid those consequences
SEC Disclosure Requirements: What is a company required to disclose?
- State of readiness
- Costs to address Y2K issues
- Risks of company's Y2K issues
- Company's contingency plan
- Additional information
Securing the Supply Chain
- Avoid disruption of long-term supplier and customer relationships
- Conduct due diligence (surveys) to determine the Year 2000 compliance status of critical and sole source suppliers
- Positively induce suppliers to reduce Y2K risks
- Discourage risk shifting by suppliers and customers
- Identify alternate or backup supplier
Planning for Litigation
- Remediation Cases
- Damages Case
- Insurance Coverage Cases
- Shareholder Actions
- Evaluate risk as plaintiff and defendant for each type of claim
- Budgeting for Y2K litigation should be part of long term financial plan
Year 2000 Litigation--What will the future bring?
- Wave 1: Remediation Cases
- Wave 2: Damages Cases
- Wave 3: Insurance Coverage Cases
- Wave 4: Shareholder Actions
Year 2000 Litigation--Wave 1: Remediation Cases
- Warranties
- Fraud
- Unfair Trade Practices
Year 2000 Litigation--Wave 2: Damages Cases
- Professional malpractice
- Strict liability / product liability
- Bad faith
- Post sale duty to warn
Potential Defendants
- Software developers and distributors?
- Hardware manufacturers and distributors?
- Any company that fails to take remedial or contingent action?
Some Potential Defenses
- Disclaimer of warranties
- Statute of limitations
- Limitation on damages
- Scope and measure of damages
Year 2000 Litigation--Wave 3: Insurance Coverage
- Insurers not likely easily to conclude coverage exists
- Attachment of Y2K-specific exclusions
- Availability of coverage will depend on language of the policy and on the facts and circumstances of the case--even with respect to policies without exclusions
Year 2000 Litigation--Wave 4: Shareholder Actions--Types of Claims
- Securities Fraud
- Shareholder Derivative Actions
Year 2000 Litigation--Wave 4: Shareholder Actions--Issues
- Business Judgment Rule
- Indemnification (probably not in derivative claims)
- Defensible paper trail
Year 2000 Litigation--Other Claims
- Employment issues
- Age discrimination
- Wage and hour claims
- ERISA
- Trade Secrets