We've all heard about it. Some people fear it and others dismiss it, but almost every citizen of a modern country will be affected by it in some way or another. The year 2000 computer glitch, sometimes referred to as the "Millennium Bug" or simply the "Y2K problem," threatens global chaos at its worst and innumerable inconveniences at the least. But while most have heard the doomsday predictions associated with the Y2K problem, the real consequence may not be a societal meltdown but a litigation free-for-all.
"It is not going to be as huge as people anticipate, but I think there are going to be a significant number of law suits," says Chuck Jireuch, director of the intellectual property and technology group for Streich Lang. "There have already been approximately 50 cases filed nationwide and we are bound to see more."
Unless you've lived under a rock for the past year, you know the Y2K problem is scheduled to come about due to a glitch in older computers which recognize only two digits instead of four when describing the year. Come January 1, 2000, these computers may interpret 00 as 1900 rather than 2000, causing them to either produce faulty information or stop working altogether. And unfortunately, the Y2K problem isn't limited just to computers. The microchips contained in everything from calculators to elevators to almost any electronic device are also at risk.
The pervasiveness and potential impact of the Y2K problem is ominous, especially for the business community, and its efforts to bring essential equipment into year 2000 compliance have been costly. According to the GartnerGroup, a leading information technology consulting firm, the cost of correcting the Y2K problem in software alone will reach approximately $400 billion to $600 billion worldwide. Even with all those resources being put toward the problem, The GartnerGroup estimates that as many as 50 percent of companies that have a Y2K problem with their computer systems will not be able to meet the Jan. 1, 2000 deadline.
This estimate is particularly troubling to company legal departments since any company that fails to fix a Y2K problem with its equipment which results in an inability to service a client company, who in turn suffers economically as a result, would be open to litigation. According to Lloyd's of London, litigation stemming from Y2K computer failure could reach $1 trillion.
"When you talk about numbers like those, it's almost worse than the impact of Y2K itself," says Jireuch. "It certainly gets lawyers attention."
The first line of potential litigation, says Laura Janzik, a partner with Gallagher & Kennedy, may come in the form of class action suits brought against technology vendors and consultants. Software giants such as Microsoft, IBM, AT&T, Lucent Technologies, Symantec and Intuit have already faced or are facing Y2K lawsuits.
"Unless specific litigation limiting class action suits is passed, I think everyone sees those kinds of suits as the most likely scenario," says Janzik. "We are not going to have pockets of problems, but are going to have across-the-board problems because software manufacturers stay in business by supplying lots of people and businesses with the same product."
Presently, several bills at the federal level have been proposed to limit the possibility of class action suits. For example, the proposed Y2K Act is intended to provide incentives for businesses to solve year-2000-related issues before failures happen. In addition, the bill would require consumers to notify technology vendors when year-2000 failures occur, after which the vendor would have 90 days to correct the problem. The bill also encourages mediation, limits punitive damages when companies take responsible action and establishes notice requirements for class action lawsuits.
"The concept of notice requirements counters the idea of class action," says Joseph Mott, a partner with Jennings, Strouss & Salmon. "But if those legislative actions don't go into place, then there will be some class action activity. That is more likely to get into the big ticket kinds of damage demands."
Exposure doesn't end with class actions against technology vendors. Breach of contract suits are also a real possibility, says Janzik. She says any company that relies on technology is vulnerable to such lawsuits. For example, a food distributor that doesn't meet its contractual obligations to deliver an order because its computer systems are down may be liable to the supermarkets it serves. And, adds Jireuch, the food distributor may not be able to find recourse from the company that sold them the faulty computers/software.
"I think suing the original suppliers of the equipment or software is going to be too late," says Jireuch. "The statute of limitations tends to run anywhere from four to six years from the time of sale so the company caught in the middle is going to have problems."
This fact highlights the issue of external compliance in that responsible businesses may still be affected by a business partner that hasn't come into compliance. "One of the effects of Y2K is that companies are all asking each other for guarantees or assurances that their inputs are Y2K compliant," says Mott. "If you are a hospital, you not only have to be Y2K compliant but your blood, pharmaceutical and food suppliers have to be compliant as well. That is one of the uncertainties that everybody faces. A company can guarantee they've done everything required but the question is: What about the people who are supplying them? All they can do is get assurances."
According to Mott, another source of damage awards could come from stockholders. Companies are required by the Securities and Exchange Commission's Year 2000 Information and Readiness Disclosure Act to include statements about their year-2000 remediation efforts in their official financial reports. But, says Mott, many companies have been reluctant to make full disclosure.
"The SEC is starting to get antsy about that," says Mott. "They want companies to provide a contingency plan in the event of a worst case scenario, but companies aren't typically doing this. They feel it would be the same as saying, 'We think we have it under control, but we can't completely assure that we won't shut down and go bankrupt, so don't buy our stock.' Of course, they can't do that, but if it turns out they do have a Y2K problem and it arguably wasn't disclosed, then their shareholders are going to come after them."
To protect against possible litigation, performing tests on critical systems and making sure contingency plans are in place in case of Y2K failure are the most important preparations companies can perform.
"Prepare in every aspect of your business," says Janzik. "That means not only being in contact with vendors to seek assurance of Y2K compliance but also making sure that in every corner of the business, there are steps being taken to be prepared and have back up steps in place. That could include everything from payroll and delivery systems to HVAC and elevator systems. Ask the question: How are you assured that on January 3, 2000, your business is going to function?"
Mott agrees adding that contingency plans are especially important for those companies relying on foreign entities. "There is not much else you can do," he says. "No matter how many times you insist that your Hong Kong supplier guarantees they are going to be 2000 compliant, they are or they aren't. If they aren't, then you need to make sure you have some kind of contingency plan. Companies dependent on foreign companies particularly in the third world or second level economies need to be concerned."
In addition, Mott advises that companies don't give potential litigants any ammunition while performing Y2K remediation. He says companies need to be careful as they go through their Y2K planning and implantation to make sure they don't generate smoking guns by virtue of their internal communications.
"Learn from what happened to Bill Gates," says Mott, referring to internal e-mails that hurt Microsoft in its anti-trust case. "The worst thing that could happen is that a company starts up its remediation program and someone in the MIS department sends an e-mail saying, 'It's about time. I've been telling these guys to do this for two years. Now we'll never get it done.' If that comes out in a lawsuit, that company would be in big trouble."
Above all, getting a professional trained in Y2K issues to sprinkle their "holy water" over any Year 2000 plans, efforts and contracts is the main defense against future litigation.
"Right now is the time for the transactional lawyers to help draft language to try to protect their clients against year 2000 liability if they can't avoid it even through reasonable measures," says Mott. "Starting in January, it will be the litigators who take over the work."
Reprinted with permission of Arizona Business Magazine.