Immediately before recessing for the 1999 Fourth of July holiday weekend, President Clinton and Congress agreed on a Federal Year 2000 legislative package--known as the Y2K Act--that provides some important additional protections for prospective defendants. The President signed the bill into law on Tuesday, July 21, 1999. Pub. L. No. 106-37; 113 Stat. 185 (20 July 1999); 15 USC 6601 et seq.. Even in signing the legislation, the President, who had threatened to veto Y2K legislation limiting plaintiff's rights, expressed some misgivings: "I hope that we find that the Y2K Act succeeds in helping to screen out frivolous claims without blocking or unduly burdening legitimate suits," Clinton said. "We will be watching to see whether the bill's provisions are misused by parties who did little or nothing to remediate in order to defeat claims brought by those harmed by irresponsible conduct."
The compromise bill applies to actual and potential Year 2000 (or "Y2K") failures, and to most business and personal claims, but not to claims for personal injury. The bill may be found on the web at http://www.senate.gov/~commerce/issues/y2k.htm or http://www.senate.gov/~commerce/legis/0630h775.pdf.
The key provisions include:
- A mandatory 30-day notice period before a lawsuit is filed unless only injunctive relief is sought. If a target defendant agrees to attempt a fix, an additional 60-day no-suit period is provided; otherwise, the plaintiff may file on the 31st day. (A notice period expressly in a contract supplants this requirement.)
- Application to claims brought in state or federal court.
- Limits on damages awarded in contract cases to category of damages allowed by the contract or by operation of law (no enhanced contract damages).
- Limits in tort cases on damages for economic loss, such as lost profits or business interruption, unless there is an intentional tort.
- Punitive damages limited in cases against certain individuals or companies with fewer than 50 full-time employees to the lesser of $250,000 or three times compensatory damages, and barred absent proof by clear and convincing evidence.
- Proportionate liability, rather than joint and several liability, in most circumstances, and express provisions for contribution and discharge of a settling defendant.
- Application to any Y2K action brought after January 1, 1999 for a failure occurring before January 1, 2003, but excluding claims for personal injury or wrongful death.
- More specific pleading requirements concerning damages, the manifestations of alleged material defect and the necessary state of mind.
- Limits on "bystander" liability, that is, damages awarded against a defendant who is not the manufacturer or provider of the product or service that causes the Y2K failure.
- Confirmation that a plaintiff must mitigate its claimed damages.
- Limits on federal class actions to cases where an alleged defect would be material for the majority of class members.
The bill also pays homage to alternative dispute resolution and contains strong precatory language as to how "attention and energy in the time remaining before January 1, 2000" should be spent fixing problems rather than on preparing to initiate "a significant volume of litigation, much of it insubstantial." Thus, the bill states:
"Congress encourages businesses to approach their disputes relating to year 2000 computer date-change problems responsibly, and to avoid unnecessary, time-consuming and costly litigation about Y2K failures, particularly those that are not material. Congress supports good faith negotiations between parties when there is such a dispute, and, if necessary, urges the parties to enter into voluntary, non-binding mediation rather than litigation."
The bill specifically does not apply to claims under the federal Securities laws, except that, where "bystander liability" is alleged, plaintiff must plead and prove that the defendant either had actual knowledge or recklessly disregarded a known and substantial risk.
Likely effects of the legislation
In the immediate term, the bill should slow down the threat and filing of Y2K litigation. Already, several scores of lawsuits have been filed, many of them putative class actions. In some of those, the complaints have been thrown out--as many as three times--on technical grounds at considerable expense to the defendants. Under the new legislation, a plaintiff will have to give notice of intent to file; the defendant will have an opportunity of up to three months to cure the problem; and, if a lawsuit is commenced, the complaint will have to provide more details than past suits have included.
The bill also reduces the risk of extraordinary damages in many circumstances. This too may have a chilling effect on the filing of suits.
The bill reaffirms the 1998 Information Readiness and Disclosure Act. In combination, this federal legislation provides a substantial umbrella under which businesses may and should strive to put their Y2K houses in order in the approximately five months remaining before the end of the year.
Thus, as a practical matter, the bill endorses the course of action most business counselors have been urging: complete the process of assessing, testing and certifying internal systems; assess the mission-critical business partners with which you interrelate electronically for the exchange of money or date-related information; and develop as comprehensive a contingency plan as the time remaining permits.
But, the bill does not come close to exempting suppliers of computer or other date-processing equipment, which may be subject to the Y2K problem. Indeed, the bill recognizes that it is likely that there likely will be some Y2K-related "events," and litigation will inevitably follow.
The bill also recognizes that some companies who do not manufacture or supply date-processing equipment will be sued for so-called "bystander" liability. But the bill does seek to rationalize some of the complex issues that will likely follow by, for example, setting forth rules for proportionate liability and contribution among defendants, and establishing thresholds and limits for bystander liability.
In short, like all worthwhile compromises, all sides can claim victory, and no side should be overly ecstatic.
Detailed analysis
The remainder of this article reviews the specific provisions of the compromise bill ("the Act"):
Section 3. Definitions
The Act defines a "Y2K action" as any civil action commenced in federal or state court alleging injury or a defense related to an actual or potential Y2K failure. In turn, a "Y2K failure" is defined as a failure by any device or ware to process, calculate, compare, sequence, display, store, transmit, or receive year-2000 date-related data. The definition includes three specific, potentially problematic situations: (1) transitions or comparisons from, into, and between the years 1999 and 2000; (2) the failure to recognize or process any specific date in 1999, 2000, or 2001; and (3) the failure to account for the year 2000's status as a leap year, including recognition and processing of the correct date on February 29, 2000.
By including both actual and potential failures in the definition, Congress demonstrated its intent to encompass those cases involving disputes over the responsibility for remediation costs even when no actual Y2K failure or event occurs.
"Y2K action" also includes actions by government entities when acting in a commercial or contracting capacity, but expressly excludes actions brought by government entities acting in a regulatory, supervisory, or enforcement capacity.
"Material defect" is defined as a defect in any item--tangible or intangible--or in the provision of service that substantially prevents the item or service from operating or functioning as designed. The term does not include a defect that has an insignificant or de minimis effect on the operation or functioning of an item or computer program, or one that affects only a part of some thing or service which substantially works as designed or achieves its purpose.
Section 4. Application of the Act
The Act applies to any Y2K action brought after January 1, 1999. It also includes an express sunset provision, so that it will apply only to alleged year 2000 failures that either have occurred, or could occur or cause harm before January 1, 2003.
The Act does not create any new cause of action, expand otherwise imposed liability or limit any otherwise available defense. More important, the Act does not apply to personal injury or wrongful death claims or, with one exception (See Section 13(b) of the Act), claims arising under the securities laws.
Under the Act, written contractual terms, including those limiting or excluding liability or disclaiming warranties, will be recognized and enforced as written, unless such terms contravene state law in effect on January 1, 1999. The clear intent of this section is to preserve the benefits of bargains struck by contracting parties' and to discourage Y2K suits that attempt to undermine an established contractual relationship.
The Act pre-empts any inconsistent state law, except a state's defenses based upon sovereign immunity. Since the Act also expressly grants to states the right to place even stricter limits on Y2K damages and defendant's liability (see Sections 6 and 16), the Act actually supersedes those state laws that would allow a plaintiff to pursue or collect an amount in damages or liabilities above that provided for in the Act and grants deference to those that cap damages and liabilities at a lower amount than provided for in the Act.
While the Act does not apply to a government entity acting in its regulatory, supervisory, or enforcement capacity, it does contain provisions recognizing that Y2K failures may occur that indirectly cause temporary non-compliance with regulations. As an example, these provisions would likely be invoked if a Y2K failure or event at a utility knocked out environmental monitoring equipment at a company's plant, such that it could not accurately gauge its chemical discharges. The Act bars the imposition of a penalty for noncompliance with federally enforceable measurement, monitoring, or reporting requirements due to a Y2K failure, so long as defendant has not violated the underlying substantive federally enforceable regulation. To obtain protection, the defendant must establish that, despite its good faith efforts to anticipate and prevent a potential Y2K failure, one occurred which unavoidably caused defendant's temporary noncompliance with federally enforceable measurement, monitoring, or reporting requirements. Defendant must also establish that it commenced immediate actions to correct the violation and promptly notified the appropriate Federal regulatory authority of its noncompliance within 72 hours from the time that the defendant became aware that it could not comply. This defense sunsets after June 30, 2000.
Thus, if an unavoidable Y2K failure prevents defendant facility merely from reporting emissions, but emissions are otherwise within applicable emission standards, the facility can obtain relief under this section. The section does not apply to situations that would create an imminent threat to public health, safety or the environment.
The Act also protects residential homeowners, albeit briefly, from foreclosure actions resulting from Y2K failures. The Act delays for four weeks the enforcement of residential mortgage obligations by prohibiting anyone who transacts business relating to residential mortgages from foreclosing on any residential mortgage if the consumer/mortgagor notifies the mortgagee that the consumer can not meet his/her obligation to pay due to an actual Y2K failure. The consumer must notify the mortgagee in writing within 7 business days from the time that the consumer becomes aware of the Y2K failure and inability to pay. Thereafter, absent payment or a written extension, the mortgagee must wait until the later of 4 weeks from January 1, 2000 or 4 weeks from notification before commencing foreclosure proceedings. This section is applicable only to transactions occurring between December 16, 1999, and March 15, 2000. Moreover, it is limited to protecting residential mortgages; it offers no similar protection for other consumer financial transactions or commercial mortgage holders.
Section 5. Punitive Damages Limitations
In those jurisdictions and instances where punitive damages are permitted, the Act standardizes the burden of proof. A plaintiff must prove by clear and convincing evidence that the applicable standard for awarding damages has been met.
Moreover, where defendant is an individual whose net worth is less than $500,000 or an organization with fewer than 50 full-time employees, the Acts caps the defendant's punitive damage liability at the lesser of 3 times compensatory damages or $250,000. No cap exists however for any defendant found to have acted with specific intent to injure the plaintiff.
The Act exempts government entities from liability for punitive damages.
Section 6. Proportionate Liability
This provision supersedes existing laws imposing joint and several liability on defendants. Under the Act, each defendant in a Y2K tort (non-contract) action is liable solely for that portion of the judgment that corresponds to that defendant's percentage of fault relative to total fault of all others, including the plaintiff, who caused or contributed to plaintiff's total loss. The Act establishes the procedure the trier of fact must use to determine everyone's relative fault. Thus, either the jury or the court shall make specific findings as to the fault of each contributing cause, and, when alleged by the plaintiff, whether each defendant is guilty of fraud or specific intent to injure the plaintiff.
The Act creates two exceptions to its proportionate liability rule. First, any defendant found to have acted with specific intent to injure the plaintiff or to have knowingly committed fraud would remain jointly and severally liable for the entire judgment. The Act defines the circumstance under which a defendant commits knowing fraud for purposes of this section and makes clear that simply reckless conduct by the defendant is not enough to trigger the knowing fraud definition of this section.
In addition, the Act contains complex provisions governing the collection of damages from among defendants if one or more is unable to pay. The Act requires defendants to share all or a part of the compensatory damage judgment that was to or would have been borne by a defendant who can not pay its share. Generally, each remaining defendant is liable for the uncollectible share in proportion to the percentage of responsibility of that defendant. If a defendant acted with reckless disregard for the likelihood of causing injury, that defendant may be held liable for an additional 50 percent of its share of the uncollectible portion of the judgment.
Moreover, where plaintiff is an individual and the damage award exceeds 10 percent of plaintiff's net worth, which must be less than $200,000, the Court may hold the remaining defendants jointly and severally liable for all of the uncollectible share of another defendant.
Similarly, where a plaintiff consumer sues as an individual and not part of a class for a defect in a consumer product, the remaining defendants are jointly and severally liable for any uncollectible share of the judgment.
A defendant who can not satisfy its share of the judgment remains subject to contribution and to any continuing liability to the plaintiff on the judgment. Further, a defendant required to make an additional payment to cover an uncollectible share may recover contribution either from the defendant originally liable to make the payment, any other jointly and severally liable defendant, any other defendant held proportionately liable who is liable to make the same payment and has paid less than that other defendant's proportionate share of that payment, or any other person responsible for the conduct giving rise to the payment that would have been liable to make the same payment.
A defendant in a Y2K tort action found jointly and severally liable for damages may recover contribution from any other person who, if joined in the original action, would have been liable for the same damages. The Acts sets a six-month statute of limitations for contribution claims.
A defendant who settles a Y2K tort action (non-contract action) before verdict or judgment is discharged from all claims for contribution and is barred from proceeding against any person for contribution other than a person whose liability was extinguished by the settlement. The verdict or judgment will be reduced by the greater of the amount that corresponds to the percentage of responsibility of a settling defendant or the amount paid to the plaintiff by that defendant.
Finally, the Act neither preempts nor supersedes any state law that limits the liability of a defendant in a Y2K action to a lesser amount or otherwise affords a greater degree of protection from joint or several liability.
Section 7. Prelitigation Notice
Before commencing a Y2K action for other than solely injunctive relief, an intended plaintiff must send written notice to the prospective defendant detailing:
- the alleged defect,
- the harm or loss allegedly suffered,
- how the prospective plaintiff would like the prospective defendant to remedy the problem,
- the basis upon which the prospective plaintiff seeks that remedy, and
- the name, title, address, and telephone number of any individual who has authority to negotiate a resolution of the dispute on behalf of the prospective plaintiff.
If, within 30 days of receipt, defendant provides written response describing the actions it has taken or will take to address the problem, and stating whether defendant will engage in alternative dispute resolution, plaintiff must afford defendant an additional 60 days from the end of the 30-day notice period in which to complete the proposed remedial action or alternative dispute resolution. In short, such a statement from a prospective defendant will delay for up to 90 days the commencement of legal action.
If the prospective defendant fails to respond within 30 days, the prospective plaintiff may commence legal action on the 31st day. Conversely, if a plaintiff sues without first providing notice, at defendant's request the Court must stay all proceeding for the appropriate period. The notice, response and stay periods do not interfere with any litigant's otherwise available right to provisional remedies, such as emergency injunctive relief.
The prospective parties are free to change the length of the 60-day remediation period by written agreement. Moreover, the Act expressly provides that a contractual or a statutory notice and cure period will take precedence over the period specified in the Act
The Notice and response are inadmissible in any proceeding to prove liability for, or the invalidity of, a claim or its amount, or otherwise as evidence of conduct or statements made in compromise negotiations.
Section 8. Pleading Requirements
A Y2K plaintiff's complaint must include specific information as to
- the nature, amount of and factual basis for the plaintiff's claimed damages;
- the manifestations of the material defects and the facts supporting a conclusion that the defects are material; and,
- where plaintiff must prove defendant's state of mind, facts giving rise to a strong inference that the defendant acted with the required state of mind.
These requirements are a clear benefit for defendants as they raise the pleading bar. They also raise the possibility that the plaintiff will be required to allege evidentiary facts that may in some particular cases be solely within the control of the defendant.
Section 9. Duty to Mitigate
In addition to any existing laws relating to mitigation of damages (e.g., Uniform Commercial Code section 2-712, duty to cover), a Y2K plaintiff can not recover those damages the plaintiff could reasonably have avoided in light of any disclosure or other information of which the plaintiff was, or reasonably should have been, aware. According to House and Senate conferees, this section extends the concept of mitigation in Y2K actions to events occurring prior to the actual tort or contractual breach.
The Act excepts from this provision damage suffered by reason of the plaintiff's justifiable reliance upon defendant's intentionally fraudulent statements.
Section 10. Application of Existing Defenses
The Act does not limit any otherwise existing defenses. Specifically, any defense based on the doctrines of impossibility or commercial impracticability shall be determined by the law in existence on January 1, 1999.
Section 11. Damages Limitation by Contract
The Act expressly states that damages for breach or repudiation of contract are limited to those damages allowed by the express terms of the contract or, if the contract is silent on the issue, to those damages permitted by operation of law.
Section 12. Damages in Tort Claims
The Act also limits recovery of otherwise recoverable economic damages (e.g., lost profits, business interruption and the like). In tort cases, except those alleging an intentional tort arising independent of a contract, the plaintiff is limited to recovering such losses provided for in a contract to which plaintiff is a party, or to such losses derived directly from damage to tangible personal or real property caused by the Y2K failure, other than damage caused to the property that experienced the Y2K failure.
Thus, a Y2K plaintiff who has suffered only economic damages will recover those damages under contract, not tort, law. The Act removes an incentive to plead a contractual dispute as an intentional tort claim, without limiting a plaintiff's ability to recover economic losses for an intentional tort that is separate from the underlying contract claim.
Section 13. State of Mind; Bystander Liability; Control
The Act prevents states from adopting new laws impacting the level of proof necessary to establish defendant's prior knowledge about a potential Y2K failure. In a Y2K tort (non-contract) action in which the defendant's knowledge of an actual or potential Y2K failure is an element of the claim, the defendant is not liable unless the plaintiff establishes that element by the standard of evidence under applicable state law in effect on the day before January 1, 1999.
The Act also establishes limits on "bystander liability," which is fairly narrowly defined. In actions for money damages against "bystanders," the plaintiff must prove that the defendant actually knew or recklessly disregarded a known and substantial risk that Y2K failure would occur by the standard of evidence required under applicable law on December 31, 1998. A claim for "bystander liability" is defined as one in which
- the defendant is not the manufacturer, seller, or distributor of a product, or the provider of a service, that suffers or causes the Y2K failure;
- the plaintiff is not in substantial privity with the defendant (defined further to mean one in direct contractual relations with, or specifically intended to be benefited by, defendant); and
- the defendant's actual or constructive awareness of an actual or potential Y2K claim is an element of the claim under applicable law.
The Act also bars liability based solely upon defendant's control of the instrumentality that suffered a Y2K failure. It expressly provides that the fact that a Y2K failure occurred in an entity, facility, system, product, or component that defendant sold, leased, rented, or otherwise controlled is not, in and of itself, sufficient basis for recovery of damages.
These fairly cumbersome provisions appear to have been included in the legislation to reduce the prospect of the kind of extensive second-generation litigation that occurred in the case of asbestos exposure. Whether they will succeed in reducing costs on "bystanders" remains to be seen.
Section 14. Appointment of Special Masters or Magistrate Judges
Rule 53, Federal Rules of Civil Procedure states a reference to a master shall be the exception and not the rule; further, under existing law, parties must consent before a matter can be tried by a federal Magistrate Judge. The Act modifies these rules for Y2K actions, and expressly grants to the federal district courts the power to appoint a special master or magistrate judge to hear a Y2K matter and make findings of fact and conclusions of law consistent with Rule 53.
Section 15. Y2K Actions as Class Actions
The Acts adds to the standard requirements for class certification, whether in state or federal court, the additional requirement that the alleged defect must be "material" (as defined in Section 3) as to a majority of the class members. Moreover, the Acts also adds to the standard notice requirements a blanket requirement that notice be given to each member of the class stating (1) a concise and clear description of the nature of the action; (2) the jurisdiction where the case is pending; and (3) the fee arrangements with class counsel, including the hourly fee being charged, or, if it is a contingency fee, the percentage of the final award which will be paid, including an estimate of the total amount that would be paid if the requested damages were to be granted.
This class notice provision may add to the already significant burden plaintiffs face in federal court, where plaintiffs must, at least in theory, bear the burden of the cost of providing notice. (In some states like California, the court has discretion to order plaintiffs or defendants to bear the costs of notice.)
The Acts also excludes from federal district court original jurisdiction Y2K class actions in which
- there are less than 100 class members,
- the amount claimed is less than $10,000,000, or
- a majority of the proposed class members are from a single state, in which the primary defendants are citizens and the claims asserted will be governed primarily by the laws of that state.
Under the Act, the federal district court must dismiss a Y2K class action without prejudice, or, if after removal, strike the class allegations and remand the action, if the sole basis for jurisdiction in the federal court is the class action section of the Act and plaintiff otherwise fails to satisfy the conditions of Rule 23 of the Federal Rules of Civil Procedure.
Section 16. Applicability of State Law
The Act does not affect the applicability of any state law that provides stricter limits on damages and liabilities (thereby affording Y2K action defendants greater protection) than are provided in the Act.
Section 17. Admissible Evidence Ultimate Issue in State Courts
Any party to a Y2K action in a state court may introduce evidence that would be admissible if Rule 704, Federal Rules of Evidence applied in that jurisdiction. Rule 704 permits the introduction of otherwise admissible opinion testimony on an ultimate issue that is to be decided by the trier of fact.
Section 18. Suspension of Penalties for Certain Year 2000 Failures by Small Business Concerns
The Act offers protections to small businesses regulated by federal agencies. Not later than 30 days after the date of enactment of this Act, each agency of the government is required to establish a point of contact to communicate with small businesses concerning problems arising out of Y2K failures and compliance with Federal rules or regulations.
With exceptions for health and safety violations, federal agencies are prohibited from imposing any civil penalty on a small business for a first-time violation caused by a Y2K failure occurring prior to December 31, 2000, provided the small business demonstrates, chiefly, that it made a reasonable good faith effort to anticipate, prevent, and effectively remediate the Y2K failure but the violation was unavoidable in the face of a Y2K failure.
* D. Kirk Jamieson, Esq., also made substantial contribution to the early research and drafting of this article.