The Year 2000 Crisis: Navigating the Legal Waters of the Millennium

As the year 2000 approaches, many of us are being bombarded with material on year 2000 computer issues, affectionately known as the Y2K problem or the Millennium Bug. Since the ramifications are expected to be widespread and many who are knowledgeable about the issues are estimating enormous litigation costs, paying attention to the related legal issues may be of substantial help in minimizing the impact.

What Is The Problem?
Simply put, the Y2K problem is the inability of computers or computer programs to distinguish between the 20th and 21st centuries, so that the day after December 31, 1999 could be interpreted as either 2000 or 1900. In the infancy of the computer industry, the high cost of storage capacity lead programmers to save space by using two digits rather than four to define years, so that, 62, for example, meant 1962. Computers may read 00 as 1900 and not 2000.

The resulting problem could be as simple as your spreadsheet program not being able to calculate and as complex as your electricity being shut off. Everyone may be affected. Maintenance schedules, lawn sprinklers, security systems, telephones, pagers, airplanes, autos, trains, mortgage payments, banking transactions, alarms, bank vaults, and the delivery of natural gas through pipelines are all computer driven, and their disruption may effect all aspects of your life and of your company. The costs of these computer failures may dwarf the $600 billion that is estimated to be needed to fix the bug, and when that much money is at stake, legal disputes over blame and responsibility are bound to follow.

Lawsuits Already Filed
The first Y2K lawsuits have already been filed. In one, a grocery chain could not process credit cards with expiration dates in 2000 and 2001. The result was a claim for loss of credit card income and damaged customer relations. Reportedly this suit has been settled after mediation for $260,000. Another suit, a class action against an accounting software company that sold a discontinued software package that was not Y2K capable, claims breach of warranty and misrepresentation.

To minimize your company's potential losses and problems, to plan for the future and understand what your rights are, you should call us now. Levy & Droney's Year 2000 Practice Group is prepared to help.

Contract Review
To start, we can review your company's present contracts to assess who is responsible for paying the costs of your remediation and evaluate your possible liability to others should you experience Y2K computer problems. Existing contracts may require amendments to provide for the effects of performance failures caused by a Y2K problem.

New contracts should be negotiated to appropriately and reasonably allocate responsibility for Y2K compliance and remediation. Contracts for goods and services that do not appear to be computer related may also have to be carefully reviewed.

A review of your insurance policies is also appropriate to determine whether or not they cover the cost of Y2K remediation and to assess the potential liability you may have to third parties for damages caused by your internal Y2K failures. Many insurance carriers are denying coverage in response to inquiries. Despite a recent report to the contrary, the Connecticut State Insurance Department did not rule that costs associated with Y2K problems are not covered by commercial property policies for business interruption unless it is specifically stated.

Copyright laws protect software. The fact that you have a license to use software does not mean that you have the right to modify the software. By making changes in the software you will probably void any existing warranty, and you may create legal defenses for a software vendor by modifying the software without its permission. Even worse, you may be liable for copyright infringement or trade secret theft, underscoring the need to evaluate your legal risks before acting.

Disclosure Obligations
If to fix the Y2K problem you expect to incur significant costs, or if your company expects significant Y2K losses due to any system failures, you may have disclosure obligations on financial statements to shareholders. Directors and officers may incur liability to shareholders for failure to act reasonably.

Remediation Agreements
Many companies are turning to computer software system consultants or outsourcing companies for a significant portion of their Y2K remediation work, entering into contracts that are inherently complex legal documents. The form contract the vendor will use will likely contain weak warranty provisions. These contracts should be reviewed thoroughly and more meaningful warranties should be negotiated.

Inquiries and Certification Requests
You may receive letters from your vendors and customers asking about your Y2K readiness or requesting certifications, warranties and indemnifications that the Y2K problem will not adversely affect your ability to perform your contractual obligations. Your responses to these inquiries and requests should be carefully considered so that you do not increase your liability unnecessarily.

If your company has started sending or intends to send out its own inquiry letters, often at the request of auditors, it needs to draft letters cautiously and plan appropriate follow-up.

It is not enough to fix your technical problems. Your company must deal with the legal side too. Levy & Droney, P.C. can be of real help in dealing with these complex issues. Call us to discuss how we can be of assistance.