I. Definition Of Year 2000 Disclosure Problem
The Year 2000 ("Y2K") conversion problem,3 caused by a two rather than a four digit date designation in software programs, hardware and embedded chips, is a major concern for businesses as the world approaches the new millennium. While businesses have recognized that they may encounter business loss and liability if they do not properly resolve their Y2K conversion problem, there is a growing awareness that they may also be subject to liability for the manner in which they share information about the problem. Specifically, liability could emanate from statements made to others about remediation suggestions, as well as the issuance of Y2K compliance or assessment statements to suppliers, customers and/or shareholders. Different types of claimants might pursue their claims via a multitude of legal theories, including negligence, breach of contract, breach of warranty, breach of fiduciary duty, and defamation. According to the witnesses who testified before the Senate Special Committee on the Year 2000 Technology Problem and other congressional committees, this concern over liability is real and continues to hinder the sharing of compliance and remediation information.
II. Brief History Of Legislation
Various legislative remedies were proposed in the second session of the 105th Congress to address the Y2K problem.4 While some bills envisioned broad, comprehensive reforms, such as the "Y2K Liability and Antitrust Reform Act," H.R. 4240, legislation that ultimately passed had a more modest goal: protection of certain Y2K statements in the hope of encouraging the dissemination of useful information. The "Year 2000 Information and Readiness Disclosure Act," S. 2392, was borne from two competing predecessor House bills. The first bill, "Year 2000 Information Disclosure Act" (H.R. 4355), was designed to be the consensus product of a working group led by the Administration and included various interests. It was offered by Congressman Burton (R-Ind.) on July 30, 1998, two weeks after President Clinton's speech addressing this issue. It had 27 cosponsors and the support of the Association of Trial Lawyers of America. However, Congressman Dreier (R-Ca.) and Congresswoman Eshoo (D-Ca.), at the behest of various industry groups displeased with the Administration's bill, offered a bipartisan alternative on August 6, 1998, entitled "Year 2000 Readiness Disclosure Act" (H.R. 4455). Dreier's bill had 10 cosponsors and the support of fifty-five industry groups, including: the National Association of Manufacturers, the Semiconductor Industry Association, the American Bankers Association, the Information Technology Industry Council, and the Alliance of American Insurers. Both bills were referred to the Committee on the Judiciary.
On September 16, 1998 the Senate Judiciary Committee marked up S 2392. It was reported to the full Senate on September 17, 1998. By unanimous consent, it passed the full Senate on September 28, 1998. In a race against the clock, the House of Representatives shelved its Y2K legislative alternatives in favor of the Senate bill. On October 1, 1998, by unanimous consent, the House took up S. 2392. The measure passed by voice vote. The legislation was presented to the President on October 8, 1998 for his signature. The President said that he will sign S. 2392 into law. Despite bipartisan support, press reports indicate that Association of Trial Lawyers of America will oppose it because the group believes that the bill's protections go too far.
III. Overview Of The Legislation
The bill has a very focused objective. It is not intended to limit liability for Y2K failures or cap damages resulting from such failures, both of which may be addressed by the next Congress. Rather, the purpose is to encourage businesses to issue candid statements describing their Y2K readiness as well as the success and/or failure of remediation efforts in an environment of reduced litigation risk. This candid exchange will, it is hoped by the legislation's proponents, allow for more efficient and accurate remediation and contingency planning by the business and government communities. Additionally, the bill does not apply to consumer transactions, alter rights in a contract or warranty, affect intellectual property rights, apply to the federal or a state authority acting in a regulatory, supervisory or enforcement capacity, or preclude application for injunctive relief.
The legislation provides limited liability protection for allegedly false, misleading or inaccurate year 2000 statements, unless it can be proven, by clear and convincing evidence, that a material statement was made with actual knowledge of, or a reckless disregard for, its falsity, or with an intent to deceive. Republications ("any repetition, in whole or in part, of a year 2000 statement originally made by another") are insulated from liability, unless it is shown, by clear and convincing evidence, that the maker made the statement with actual knowledge of its falsity, with an intent to deceive or without adequate notice requirements about the source and verifiability of the information. For republications and other year 2000 statements, a plaintiff must also prove the requisite elements of its cause of action.
Year 2000 readiness disclosures are not admissible into evidence to prove the accuracy or truth of the statement, except to buttress claims for anticipatory breach and similar claims. The court is granted discretion to limit the evidentiary exclusion in cases of fraud, bad faith and where use of the statement is unreasonable to achieve the purposes of the legislation.
A plaintiff may not base a defamation, trade disparagement or similar claim on allegedly false, inaccurate or misleading year 2000 statements, unless it is established, by clear and convincing evidence, that the year 2000 statement was made with knowledge that it was false or with reckless disregard as to its truth or falsity. Additionally, a plaintiff must prove the requisite elements of its cause of action.
In order to facilitate disclosures, the legislation includes a temporary anti-trust provision. The Justice Department issued a business review letter to the Securities Industry Association on July 1, 1998 stating that sharing Y2K information was not a violation of anti-trust laws. However, some felt that legislation was required to sufficiently allay businesses' concerns. The antitrust laws will not apply to conduct, including entering agreements, for the purposes of Y2K remediation. The exemption, which terminates on July 14, 2001, does not apply to conduct that involves or results in an agreement to boycott any person, to allocate a market or fix prices or output.
IV. Analysis The mantle of the legislation's protection is broadly spread. The legislation protects makers of year 2000 statements from civil actions arising under both Federal and State law. Sec. 3(4). Additionally, a "maker" is defined to encompass both public and private entities. Those who assist in the development of the statement are also protected. The definition of a "maker" includes any person or entity that issues or publishes any year 2000 statement; develops or prepares any year 2000 statement; or assists in, contributes to, or reviews, reports or comments on during, or approves, or otherwise takes part in the preparing, developing, issuing, approving, or publishing of any year 2000 statement. Sec. 3(5).
The legislation distinguishes between a "year 2000 readiness disclosure" and a "year 2000 statement." While both may include any statement about year 2000 processing,5 the former must be in writing, properly labeled, and related to one's own processing, products or services. This distinction is relevant to the different protections offered by the legislation. Both year 2000 statements and year 2000 readiness disclosures receive limited liability protection. However, only year 2000 readiness disclosures may receive the extraordinary benefit of being excluded from evidence. Congressman Henry Hyde, chairman of the House Judiciary Committee, drew the distinction in the following way: "Year 2000 statements other than year 2000 readiness disclosures can be brought into evidence for any purpose. However, they may not be the basis for any finding of liability against the maker, except where the maker knew the statement was false, made it with intent to deceive, or made it with reckless disregard as to its truth or falsity."6
A "year 2000 statement" may be defined in four different ways. It is any communication or other conveyance of information by a party to another or to the public (i) concerning an assessment, projection, or estimate of year 2000 capabilities of any entity, product, services or set of products and services; (ii) concerning plans, objectives, or timetables for implementing or verifying the year 2000 processing capabilities of an entity, a product, or service, or a set of products or services; (iii) concerning test plans, test dates, test results, or operational problems or solutions related to year 2000 processing by products or services that incorporate or utilize products; or (iv) reviewing, commenting on, or otherwise directly or indirectly relating to year 2000 processing capabilities. The legislation carves out an S.E.C. exception -- specifically excluded from this definition are documents or materials filed with the S.E.C. or federal banking regulators or accompanied the solicitation of an offer or sale of securities Sec. 3(11).
A "year 2000 readiness disclosure" means any written year 2000 statement that is a) clearly identified on its face as a year 2000 readiness disclosure, b) inscribed on a tangible medium or stored in an electronic or other medium and retrievable in perceivable form, and c) issued or published by or with the approval of an entity with respect to year 2000 processing of that entity or of products or services offered by that entity. Sec. 3(9).
a. The Evidentiary Exclusion
One of the protections offered by the legislation takes the form of an evidentiary exclusion for year 2000 readiness disclosures, a concept borrowed from the Dreier bill. As stated above, the exclusion applies only to year 2000 readiness disclosures. The legislation provides that: no year 2000 readiness disclosure, in whole or in part, shall be admissible against the maker of the disclosure to prove the accuracy or truth of any year 2000 statement set forth in that disclosure. However, a disclosure may serve as the basis for a claim for anticipatory breach, repudiation or similar claim. Additionally, the court shall have discretion to limit application of this subsection in any case which the use of the statement amounts to bad faith, fraud or is otherwise beyond what is reasonable to achieve the purposes of the Act. Sec. (4)(a). Of course, the evidentiary exclusion affords no protection for these statements in the discovery process.
The legislation states that "no year 2000 readiness disclosure, in whole or in part, shall be admissible . . . ." Sec. 4(a) (emphasis supplied). It is not clear whether a business may bundle certain year 2000 statements not directly related to its year 2000 processing, products or services into its year 2000 readiness disclosure in order to bring it within the protections found in this provision. For example, a statement that a company's suppliers are not Y2K compliant would not qualify, standing alone, as a year 2000 readiness disclosure, and thus not receive the evidentiary exclusion benefit. Nevertheless, a company would have an incentive to protect this statement because it could be used in litigation to show that the company was aware of its supplier's compliance status. However, if this statement were issued in the year 2000 readiness disclosure as a logical predicate to, and part of, its year 2000 processing, it might be protected.
Dreier's original evidentiary exclusion was diluted by the drafters of S.2392 in three ways: a) it is limited to truthful/accurate statements, b) it allows exceptions for judicial discretion and c) claims of anticipatory breach/repudiation. These dilutionary modifications weaken the efficacy of the evidentiary exclusion. Perhaps more importantly, they enhance the uncertainty in the mind of the business community as to the admissibility vel non of year 2000 readiness disclosures. Such uncertainty may lead to fewer, less candid year disclosures.
The exclusion in its original form was not limited to statements that are proffered for the truth or accuracy of the statement. Year 2000 readiness disclosures, which are offered at trial not to prove their accuracy, are admissible and may be quite useful to a plaintiff's case in a variety of ways. These disclosures could be used to demonstrate a company's awareness or knowledge. For example, statements as to the status of one's own Y2K compliance efforts, especially its problem areas, may buttress claims of an unreasonably slow remediation pace. The statements could be offered at trial to show what management knew about the status of its Y2K compliance. Other company documents or Rule 30(b)(6) depositions could provide the evidence as to the company's compliance progress. Another example may involve admission of the statement to prove control. A broadly worded readiness disclosure may inadvertently imply the maker's control over certain processes which the maker may wish to dispute in litigation.
The addition of the limiting phrase "to prove the accuracy or truth of any year 2000 statement" is somewhat vague. It is unclear whether this phrase would exclude statements that are introduced to prove their accuracy/truthfulness only or to prove the degree of accuracy/truthfulness. Senator Bennett, chairman of the United States Senate Special Committee on the Year 2000 Technology Problem, characterized the evidentiary exclusion as "not permitting these statements to be admitted into evidence as actual proof that the statement was untrue or incorrect."7 However, Chairman Hyde stated that the "Act prevents the use as evidence against the maker of . . . year 2000 readiness disclosures -- to prove the truth of the disclosure."8 It would certainly have been easy enough for Congress to insert clarifying language. See, Fed. R. Evid. 608. Thus, where the year 2000 readiness disclosure claims that the company is fully compliant, a plaintiff who wants to introduce the statement to show its falsity, may argue that the evidentiary exclusion does not apply.
The legislation grants the court discretion to disregard the evidentiary exclusion if there is evidence of fraud, bad faith or "is otherwise beyond what is reasonable to achieve the purposes of the Act." The "bad faith" exception is problematic since "bad faith" is not defined. The amorphous boundaries of this exception may serve as a justification to prod more deeply into corporate decision-making. Addition of this exception to the exclusion creates uncertainty at two levels, where none existed under the Dreier bill. First, before a year 2000 readiness disclosure is made, the vagueness of this exception may give the maker pause. Such hesitancy does not further the legislation's purposes of candid, helpful disclosures. Second, after suit has been filed, the uncertainty over admissibility of critical statements, which may not be resolved until trial, will only complicate trial and settlement strategy. This result is also inconsistent with the purposes of the legislation.
If the "bad faith" exception was vague, the last exception relating to judicial discretion is so overly broad that it threatens to swallow the exclusion whole. Precisely what constitutes a use of a statement that "is otherwise beyond what is reasonable to achieve the purposes of the Act" is certainly beyond what is reasonable for a company to predict in deciding whether to issue a readiness disclosure. After the House passed the legislation, Chairman Hyde argued that the judicial discretion provision means that a "judge can limit (but not totally abrogate) this protection in order to prevent an abusive or bad-faith use of the disclosure contrary to the purposes of the Act."9 Chairman Hyde's parenthetical conclusion is not necessarily supported by the text of the legislation. Application of these ambiguous provisions may become especially problematic in light of the enormity of the stakes (some predict that Y2K litigation will dwarf asbestos, environmental and breast implant litigation, combined).
b. Limited Liability
Generally speaking, the legislation insulates from liability those who unknowingly make false, misleading or inaccurate year 2000 statements, with major caveats. In a suit involving defendant's allegedly false, inaccurate or misleading year 2000 statements, no liability shall attach to the maker of a year 2000 statement for that statement unless the claimant can establish, in addition to all other requisite elements of the action, by clear and convincing evidence, that the statement was material and that there is indicia of statutorily established bad faith. If the statement was not a republication, such indicia is defined as: making the year 2000 statement (i) with actual knowledge that the year 2000 statement was false, inaccurate, or misleading; (ii) with intent to deceive or mislead; or (iii) with a reckless disregard as to the accuracy of the year 2000 statement. Sec. 4(b). This limitation of liability applies to year 2000 statements, whether or not they are part of a year 2000 readiness disclosure.
The Dreier bill included a similar provision, except that it had carved out more narrow exceptions. The Dreier bill included only portions of the first two exceptions, did not include the third exception and was crafted in the conjunctive. However, since S. 2392 is crafted in the disjunctive, a claimant may avoid the statutory obstacle by proving any one of three factors. Accordingly, there is no need to prove actual knowledge or intent, if the claimant establishes that the year 2000 statement was made with a reckless disregard as to its accuracy. This provision is quite useful to a claimant, since, as a practical matter, it is often difficult to prove a defendant's actual knowledge or intent. Determining whether the statement meets this threshold, arguably creates more room for a judge to allow the claim to proceed to the jury. Once the jury has the claim, it is more likely to prevail under this more generous provision. Conversely, claims lacking clear evidence of actual knowledge or intent, as required by the Dreier bill, would more likely be summarily disposed of by courts. Similarly, success at trial would be more limited. The "reckless disregard" provision creates more room for argument, debate and litigation than the standard under the Dreier bill.
Where the year 2000 statement was a republication, the claimant must establish the following statutorily-defined indicia of "bad faith" on the part of the maker: the statement was made (i) with actual knowledge that the year 2000 statement was false, inaccurate, or misleading; (ii) with intent to deceive or mislead; or (iii) without notice in that year 2000 statement that (I) the maker has not verified the contents of the republication; or (II) the maker is not the source of the republication and the republication is based on information supplied by another person or entity identified in that year 2000 statement or republication. Sec. 4(b).
It should be noted that certain protections found in this provision were enhanced over their legislative predecessors. First, the term "knowledge" is modified by the insertion of "actual" so as to prevent imposition of liability based upon constructive knowledge. Secondly, the bar was raised for those seeking to overcome the protections found in this provision. A claimant must establish the statutory requirements by clear and convincing evidence.
c. Defamation
The legislation provides for protection against defamation, trade disparagement or similar claims. Specifically, in a covered action arising under any Federal or State law of defamation, trade disparagement, or a similar claim, to the extent such action is based on an allegedly false, inaccurate, or misleading year 2000 statement, the maker of that year 2000 statement shall not be liable with respect to that year 2000 statement, unless the claimant establishes by clear and convincing evidence, in addition to all other requisite elements of the applicable action, that the year 2000 statement was made with knowledge that the year 2000 statement was false or made with reckless disregard as to its truth or falsity. Sec. 4(c).
This provision is designed to encourage entities to publish information about the readiness of products or services offered by other entities. This could occur through republication of that entity's year 2000 statements. For example, a distributor of microprocessors may republish year 2000 statements made by various manufacturers. Additionally, individual assessments would be protected. For example, an accounting firm's good faith assessment of various time-keeping software would be encompassed within this provision.
V. Applicability
While the legislation protects both year 2000 statements and year 2000 readiness disclosures, the statements are given different applicability dates. The legislation applies to year 2000 statements made on July 14, 1998, the date of President Clinton's speech announcing the policy, through July 14, 2001. Year 2000 readiness disclosures receive the legislation's protection from the date of the Act's enactment through July 14, 2001. However, the legislation has a backward looking provision which has the effect of allowing the conversion of certain previously made year 2000 statements into year 2000 readiness disclosures. Those desiring to take advantage of this provision must act quickly. The window of opportunity closes 45 days from the date of the legislation's enactment. A form of this retroactive provision was originally found in the Dreier bill, but modified down from the 90-day period. The Act expressly does not affect or apply to any lawsuit pending on July 14, 1998.
The legislation provides that a person or entity that issued or published a year 2000 statement after January 1, 1996, and before the date of enactment of this Act, may designate that year 2000 statement as a year 2000 readiness disclosure if (A) the year 2000 statement complied with the requirements of section 3(9) when made, other than being clearly designated on its face as a disclosure; and (B) within 45 days after the date of enactment of this Act, the person or entity seeking the designation (i) provides individual notice that meets the requirements of paragraph (2) to all recipients of the applicable year 2000 statement; or (ii) prominently posts notice that meets the requirements of paragraph (2) on its year 2000 Internet website, commencing prior to the end of the 45-day period under this subparagraph and extending for a minimum of 45 consecutive days and also by using the same method of notification used to originally provide the applicable year 2000 statement. Sec. 7(b)(1). These converted year 2000 readiness disclosures must be properly labeled as such.
However, the legislation provides two broad exceptions. If a claimant proves by clear and convincing evidence that it relied on the year 2000 statement prior to the notice described above and that it would be prejudiced by the redesignation, then such retroactive redesignation as a year 2000 readiness disclosure will fail. Alternatively, upon receiving notice of the redesignation, the recipient may object. This latter provision is problematic in that it does not set out reasonable grounds for objection. Consequently, one can expect that most if not all recipients will, as a matter of course, tender objections to all redesignations received. The time frame for noting an objection is 45 days from date of notice, if the claimant received individual notice, or 180 days from enactment, if notice was provided on an Internet web page.
VI. Conclusion
Some of the protections offered by the Dreier bill, which will expire along with the 105th Congress, were much broader than those offered by this final version of the legislation. The Dreier bill appears to have been better positioned to induce the desired response from the business community than S. 2392. Even some of the latter's proponents admit that it was impacted by temporal limitations and compromise. Senate Judiciary Committee Chairman, Orrin Hatch (R-UT) said, "[t]his bill is not perfect, but it's the best we could come up with under the circumstances . . . ."10 The business community is made safer by the presence of these protections than by their absence. Whether the environment is sufficiently safe to engage in voluntary disclosures is a serious issue to be resolved by each business contemplating such a disclosure. The effort expended by the legislators, the Administration and participating industry groups should be recognized and applauded. However, before issuing a purportedly protected year 2000 statement or readiness disclosure, business entities should carefully examine the ramifications.
ENDNOTES
1. President Clinton signed S 2392 on Oct. 19, 1998, subsequent to the submission of this article.
2. S. 2392, 105th Congress, 2nd Session, §2(b)(1) & (2).
3. This problem is more accurately referred to as a date conversion problem since errors are predicted to occur before and after January 1, 2000. However for ease of discussion, the term "year 2000 problem" will be employed.
4. These bills include: S.2372, "The Small Business Year 2000 Readiness Act"; S. 2384, "Year 2000 Enhancement Cooperation Solution"; H.R. 4240, "Year 2000 Liability and Antitrust Reform Act"; and H.R. 3968, "National Year 2000 Readiness Act."
5. The term "year 2000 processing" means the "processing (including calculating, comparing, sequencing, displaying, or storing), transmitting, or receiving of date data from, into, and between the 20th and 21st centuries, and during the years 1999 and 2000, and leap year calculations." Sec. 3 (8).
6. Congressional Record, E2017, Extension of Remarks, October 10, 1998.
7. Press Release issued by the United States Senate Special Committee on the Year 2000 Technology Problem, October 1, 1998.
8. Congressional Record, E2017, Extension of Remarks, October 10, 1998.
9. Congressional Record, E2017, Extension of Remarks, October 10, 1998.
10. Business Insurance, "Time Running Out for Y2K Bill: Senate Committee Approves S. 2392 Without Amendment," Monday September 21, 1998.