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Year 2000 Information and Readiness Disclosure Act

Y2K Resources

On October 19, 1998 President Clinton signed the Year 2000 Information and Readiness Disclosure Act ("the Act").The principal purpose of the Act is to encourage companies to share information about the status of their Year 2000 ("Y2K") compliance efforts. In order to reach this goal, the Act limits certain potential liabilities of companies with respect to disclosures about their Year 2000 program. However, the liability limitation is far from absolute, and the disclosures must meet the standards specified in the Act described in more detail below. There is an opportunity for a limited safe-harbor for certain Y2K statements made prior to passage of the Act, if the maker of the statements provides required notices within 45 days of the Act.s effective date. Even if the safe harbor conditions are met, the recipients of those prior Y2K notices can void the safe harbor if they timely object within narrow deadlines noted below.

The Act does not insulate companies from liability for Year 2000 processing failures in their products or services. Indeed, rather than providing comprehensive immunity, the Act is more of a technical tinkering with the legal standards and evidence rules that will apply in any future Y2K lawsuits. As a consequence, many potential defendants will be disappointed that they still face expensive lawsuits, although the "rules of engagement" in those disputes may now be more favorable for the defendants. The National Association of Manufacturers is expected to lead an effort in the next session of Congress to address the broader issues of the nature and extent of companies. exposure to damages in Y2K suits, as well as to resolve "loopholes" and ambiguities in the Act.

Action Items
As a result of the Act, all communications about Y2K now require tactical decisions regarding what posture the communicator should adopt with respect to the Act. Companies will be faced with the following action items:

  • Whether the company.s can and should take action to qualify its Y2K communications for the enhanced protections provided to "Year 2000 Readiness Disclosures."
  • Whether the company.s goods or services call for giving the special notice applicable to Y2K remediation providers.
  • Whether to dedicate a portion of the company.s World Wide Web site, or a separate site, to Y2K in order to take advantage of certain protections provided by the Act.
  • Whether to provide a "catch-up" notice to bring Y2K statements made prior to enactment of the Act within the coverage of the Act.
  • If the company receives a catch-up notice from its suppliers and vendors, whether to take action to attempt to disqualify that notice from the benefits of the Act.

The remainder of this document will describe in more detail the specific provisions of the Act that give rise to these action items.

Scope of Coverage of the Act
The Act applies to "covered actions," i.e., civil actions arising under federal or state law, except for actions brought by a federal, state or other public entity, agency or authority acting in a regulatory, supervisory or enforcement capacity. However, the Act does not apply to lawsuits pending on July 14, 1998. The Act does not cover most consumer transactions, as there is no liability limitation for statements expressly made by a seller, manufacturer or provider of a consumer product in a solicitation to a consumer. A "consumer product" is defined to include a good or service which is normally used for personal, family or household purposes.

To the extent the maker of a statement or disclosure is a "fiduciary" (undefined), the Act leaves "unaltered" the legal standards and duty of care otherwise applicable to the fiduciary. Because some state and Federal laws or court decisions characterize legal obligations of a variety of persons besides trustees as "fiduciary" obligations (e.g., certain agency or consulting relationships, certain professional services relationships, partners, controlling shareholders, etc.), such exposed parties who are not technically trustees may wish to negotiate specific language in their contracts in order to be able to claim the benefits of the Act by attempting to disclaim fiduciary obligations for such purposes.

In addition, the Act does not apply to a statement concerning a Y2K remediation product or service (defined as a software program or service licensed, sold or rendered by a person or entity and designed to detect or correct Y2K processing problems with respect to systems, products or other services manufactured or rendered by another person or entity), unless during the course of the offer the party making the offer provides a specified notice which clearly indicates to the buyer that statements are subject to the Act. Because many remediation consultants and providers desire greater protection, many of their customers can expect to confront form agreements that elect the application of the Act by including this notice. Moreover, because many software or other product upgrades or enhancements have the effect or intent of correcting or enhancing Y2K processing, many manufacturers, sellers and providers of goods or services with continuing warranty exposure will add to their contracts the statutory notice, especially where one entity provides hardware or software that is integrated with systems, products or services provided by others.

Distinction between "Year 2000 Statements" and "Year 2000 Readiness Disclosures"
The Act limits liability for two kinds of Year 2000 information: a broad category called "Year 2000 statements" and a narrower subcategory of "Year 2000 Readiness Disclosures." Year 2000 statements ("Statements") include all communications regarding Year 2000 processing capabilities except that, with respect to claims under the securities laws, statements contained in filings with the SEC or federal banking regulators or in securities offering documents are not covered and therefore do not get the benefit of liability limitation. Year 2000 Readiness Disclosures ("Disclosures") cover only Year 2000 statements that are clearly identified as readiness disclosures, are in writing (including electronic records that are retrievable in perceivable form), and concern one.s own products and services.

Companies with significant Y2K exposure must decide how and when their advertising, responses to customer inquiries and other communications should be designated for the purpose of these two categories. "Statements" only become elevated to the status of "Disclosures" by conscious decision and affirmative labeling by the communicator. Thus all communications about Y2K now involve tactical decisions, and recipients of Y2K communications now must confront reciprocal tactical decisions about how to respond to Y2K communications that qualify for the protections of the Act.

Scope of "Makers" of Protected Statements
The Act provides protection for "makers" of Y2K Statements. Such makers include more than the company issuing or publishing the Statements. "Makers" also include the persons (e.g., employees, consultants, attorneys, accountants, etc.) who participate in or make contributions to the development, issuance, approval or publishing of the Y2K Statements. For example, if a distributor publishes a commentary based upon advice from the manufacturer, both the distributor and the manufacturer may be "makers." While the Act intends this broad definition to expand protections, many plaintiffs can be expected to argue that the Act implicitly confirms their expansive theories of the scope of the duty of care underlying negligence and other claims, e.g., that a manufacturer is responsible for the statements and actions of its distributors. For this and other reasons, manufacturers and other sources of information for Y2K Statements may need to focus strategically on what has been communicated by the other parties in the chain of transactions, especially before the Act became effective.

Procedures for Making Act Applicable to Pre-enactment Disclosures
The Act generally applies only to Y2K "Statements" made on or after July 14, 1998 through July 14, 2001, and Y2K "Disclosures" made after the date of enactment of the Act (October 19, 1998) through July 14, 2001. Where a party has issued or published a Statement between January 1, 1996 and October 19, 1998, that party may designate the Statement as a Disclosure covered by the Act if (1) the Statement met the requirements of the Act when made (other than being clearly designated as a Disclosure), and (2) within 45 days after enactment 1/ the party provides a notice that the Statement is a Y2K Disclosure, and includes a copy of the Statement with a legend labeling the statement as a "Year 2000 Readiness Disclosure." This notice must be provided either by (a) individual notice to prior recipients of the Statement, or (b) prominent posting on the party.s Y2K Web site for a minimum of 45 consecutive days and dissemination through the same method used originally to distribute the applicable Statement.

Even if notice is properly provided, however, this retroactive coverage of the Act will not apply to any person or entity that: (1) proves, by clear and convincing evidence, that it relied on the Statement prior to receipt of the 45-day catch-up notice described above and would be prejudiced by the retroactive designation of the prior Statement as a protected Disclosure; and (2) provides a written notice objecting to the retroactive designation within 45 days after receipt of individual notice or, in the case of notice received through a Web site, within 180 days after enactment of the Act 2/.

Thus, each company must decide (whether consciously or by inaction) whether to convert prior eligible statements into protected "Disclosures," and whether to object to other companies. notices seeking such protection for their prior statements.

Liability Limitations
The Act provides four principal mechanisms for limiting liability: (A) an evidence exclusion; (B) heightened standards for maintaining a claim based on inaccurate statements; (C) heightened standards for defamation claims; and (D) special rules of contract interpretation. As a practical matter, notwithstanding the exceptions and loopholes, companies with Y2K exposures will regard the protections to be useful, while, conversely, customers will regard those protections as obstacles to be finessed (if possible) in their contract or, as to prior Statements, by timely objection in accordance with the Act.

A. Evidence Exclusion The evidence exclusion applies only to Disclosures: a Disclosure is not admissible in a covered action against the maker of the statement to prove the accuracy or truth of any Year 2000 statement ("Statement") made in that Disclosure. Exceptions to that rule include using the statement: (1) as the basis for a claim for anticipatory breach or repudiation of a contract or a similar claim against the maker; and (2) when a court determines that the maker's use of the Disclosure amounts to bad faith or fraud, or is otherwise unreasonable. These exceptions may provide ample means for a determined adversary to maneuver in Y2K litigation. For example, anticipatory repudiation claims regularly arise based upon failure to provide adequate assurance of future performance under the contract. A lack of Y2K readiness in a product today is a compelling basis for such demands for adequate assurances, and litigation of that exceptional claim can undermine the defenses under the Act of the maker of the Disclosures.

B. Heightened Standard for Inaccurate Statements. The heightened standard for inaccurate "Statements" provides that, in any "covered action" based on an allegedly false, inaccurate or misleading Statement, the maker will not be liable unless the claimant establishes by clear and convincing evidence that the Statement was material and, if the Statement was not a republication (as explained below), it was made: (1) with actual knowledge that it was false, inaccurate or misleading; (2) with an intent to deceive or mislead; or (3) with reckless disregard of its accuracy. The claimant must also establish all other elements of the applicable cause of action that would normally apply to non-Year 2000 claims.

If the Statement was a republication (i.e., a repetition, in whole or in part, of a Statement originally made by another party), the claimant must show that the Statement was republished: (1) with the actual knowledge that the Statement was false, inaccurate or misleading; (2) with the intent to deceive or mislead; or (3) without notice in such Statement that (a) the original maker had not verified the contents of the republication, or (b) that the maker was not the source of the Statement and that the Statement was based on information supplied by another person or entity identified in the Statement.

C. Defamation. The Act exempts the maker of a Statement from liability in a covered action for defamation or trade disparagement, or any similar claim, to the extent that the action is based on an allegedly false, inaccurate or misleading statement, unless the claimant, in addition to all other required showings, establishes by clear and convincing evidence that the Statement was made with knowledge that it was false or made with reckless disregard as to its truth or falsity.

D. Contract Interpretation. The contract interpretation provisions of the Act provide some protection for parties who are concerned that statements about Y2K readiness to their contract counterparties or business partners may be deemed in hindsight by a court to have become part of the parties. contractual relationship. The Act provides that in any covered action a Statement shall not be interpreted or construed as amending or altering a contract or warranty. Although there are substantial exceptions described below, this protection could be extremely important in many disputes, including, for example, those foreseeable between suppliers of software or chips to manufacturers, system integrators, or value added resellers.

The Act.s rule of contract interpretation does not apply (1) to the extent the parties have agreed in writing to amend the contract or warranty in accordance with the Statement, (2) to a Statement made in conjunction with the formation of the contract or warranty, or (3) if the contract or warranty specifically provides that it may be amended or altered through the making of a Statement. Thus customers may bargain for express assurances that the Act does not impair their right to rely on Y2K Statements (e.g., formally amending the contract to add a Y2K warranty). Moreover, the Act also contains ambiguous language which could be interpreted to greatly reduce the scope of its general contract interpretation rule: the Act provides that it is not intended to affect existing federal or state law with respect to determining the extent to which a Statement affects a contract or warranty. These exceptions may cause the Act to be an unreliable safe harbor for companies making aggressive Y2K statements (e.g., incautious marketing communications), even in subjective good faith. In addition tort claims (e.g., intentional or negligent misrepresentation) and statutory claims (e.g., California Business & Professions Code ' 17200 allowing suits for unfair business practices) are not affected by the contract interpretation provisions of the Act.

Many older, long-term supply contracts and licenses are either silent or far less explicit regarding Y2K issues than more recent contract forms. As a result, many commercial customers are seeking more explicit Y2K protections, either by specific amendments to their existing contracts, or by using their business leverage to require a Y2K dialogue which is orchestrated by their lawyers to improve the customers. litigation position. In particular, companies are seeking to shift the burden of "downstream" chain of distribution claims (e.g., claims by the end-user) further upstream (e.g., from the retailer back to its suppliers, including the ultimate supplier of the software or chips). The Act complicates further the tactics applicable in these risk shifting maneuvers, which are reminiscent of the old buyer vs. seller "battle of the forms" that inspired Article 2-207 of the Uniform Commercial Code.

Internet Website Notices
The Act seeks to encourage companies to post Y2K information on their World Wide Web sites by providing that, in most cases, such posting will constitute adequate notice of the material contained on the site. The Act states that in any covered action (other than an action involving personal injury or serious physical damage to property) in which the adequacy of notice about Y2K processing is at issue, the posting of a notice on a "Y2K Internet website" in a commercially reasonable manner and time will generally be considered adequate notice. The Act defines "Y2K Internet website" as an Internet website or other similar electronically accessible service, clearly designated by the person or entity controlling the content as an area where Statements concerning that person or entity are posted or otherwise made accessible to the general public. Even apart from the Act, many potential defendants are using websites and other customer communications as a means of improving their defenses (e.g., warnings that trigger a duty by the recipient to mitigate its damages, as where a seller of hardware may warn of potential Y2K problems with third party software or chips).

This form of notice will not be sufficient if it (a) is contrary to express prior representations between the parties regarding notice, (b) is materially inconsistent with the regular course of dealing between the parties, or (c) occurs where there have been no prior representations regarding the method of giving notice, no regular course of dealing exists between the parties, and actual notice is clearly the most commercially reasonable means of providing notice. The Act also does not (1) alter any federal or state law or regulation requiring a Y2K related notice by a different means; (2) create a duty to provide a Y2K processing notice; (3) preclude or suggest the use of another means of posting notice or require the use of an Internet website; or (4) mandate the content or timing of Y2K processing notices. Consistent with the prior discussion of risk-shifting communication maneuvers, these exceptions will become the focus of intense offensive and defensive tactics. For example, potential plaintiffs will begin sending self-serving communications to evidence the applicability of the exceptions (e.g., reminders of contractual notification requirements and the prior course of dealing). Potential defendants will respond to many inquiries by referring the customer to the website.

Pre-January 1, 2000 Date Processing Problems
Most parties with Y2K exposures now realize the date processing problems which can arise before January 1, 2000, including, for example, on 9/9/99. The Act defines "Year 2000 Processing" broadly to include processing, transmitting or receiving of date data during the year 1999, thereby covering these pre-Year 2000 problems. Many of the pre-Act Statements in need of protection under the Act are those which relate to these pre-2000 problems.

Antitrust Exemption
In order to facilitate Y2K information sharing among industry participants who are also actual or potential competitors, the Act provides certain temporary exemptions from certain federal and state antitrust laws. Specifically, the Act exempts from the coverage of those laws conduct engaged in solely for the purpose of and limited to: (1) facilitating responses intended to correct or avoid a Y2K failure; or (2) communicating or disclosing information to help correct or avoid the effects of a Y2K processing failure. The exemption applies during the period from the enactment of the Act (October 19, 1998) until July 14, 2001. The exemption is to be narrowly construed, and it does not apply to conduct that involves or results in an agreement to boycott any person, to allocate a market or to fix prices or output. Some companies and trade associations are already maintaining a Web site with information on Statements made by numerous vendors; see, e.g., the EDS Vendor 2000 database and the National Association of Manufacturers. site.

National Information Clearinghouse and Website
The Act directs the Administrator of General Services to create, maintain and promote a national Y2K website to help consumers, small businesses and local governments obtain information about Y2K processing capabilities of computers, systems, products and services. The GSA already maintains a Web site with a wealth of information on Y2K.

Concluding Comments
The Act may succeed in increasing the amount of communication about Y2K issues. While many benefits of the Act are subtle and require great care and maneuvering to avoid the counter-arguments created by exceptions, loopholes and ambiguities, many exposed companies will make the effort. Those maneuvers will cause the potential customer-plaintiffs to seek to blunt the effect of the Act on their transactions. As a result, what the Act may often achieve in practice is to bring more into the open the subtle, risk-shifting maneuvering which has been going on for the past several years as buyers and sellers (and other transaction parties) came to appreciate what was potentially at stake and what could be done now to improve their position in the "end-game" when Y2K problems actually begin to cause damages and litigation.

1 The Act does not provide guidance as to whether the 45-day period should be counted starting on the day of enactment or the following day. Under the more conservative approach, the deadline would be December 2, 1998.

2 Under the same conservative approach described in footnote 1, the 180-day period would end on April 16,. 1999

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