Year 2000: Should Companies Make Disclosures?

Until now, most companies have hesitated to make disclosures about their Year 2000 readiness, remediation, and testing efforts for fear that these disclosures would be used against them or be construed as a 'warranty'. In an effort to promote the disclosure and exchange of information related to Year 2000 readiness, Congress enacted The Year 2000 Information and Readiness Disclosure Act (Public Law 105-271), which provides limited liability protections for Year 2000 statements.

As President Clinton stated when he signed the legislation, "Many organizations have been reluctant to share valuable information about their experiences in dealing with the Y2K problem or the status of their Y2K efforts for fear of lawsuits. The Act's limited liability protections will promote and encourage greater information sharing about both experiences and solutions, which will significantly enhance public and private sector efforts to prepare the Nation's computer systems for the new millennium." Significantly, however, the Act is only designed to provide protection for good faith information sharing.

The Act is very legally technical, and it requires careful review under the specific circumstances for every company. The following summary reviews some of the key provisions of the Act, but for a complete copy of the Act, go to the Legislative Web site, and search for "S. 2392", or an Adobe Acrobat "pdf" version can be downloaded at 2000.

Year 2000 Statements vs. Year 2000 Readiness Disclosures

The Act makes a distinction between "year 2000 statements" and "year 2000 readiness disclosures." A statement is any oral or written communication regarding Year 2000 processing capabilities, plans, and testing. The Act specifically states that statements made in any documents filed with the Securities and Exchange Commission or with Federal banking regulators and any statements made in connection with the sale of securities are not to be considered as "year 2000 statements" under the Act.

A year 2000 readiness disclosure, on the other hand, is a specific year 2000 statement "clearly identified on its face as a year 2000 readiness disclosure," "inscribed in a tangible medium or stored in an electronic or other medium retrievable in a perceivable form," and provided by an entity regarding its Year 2000 processing or its products and services.

In both cases, the term "year 2000 processing" is defined very broadly to include a wide variety of date-related data processing functions, not simply problems related to January 1, 2000.

The reason for the distinction between "year 2000 statements" and "year 2000 readiness disclosures" largely relates to the protections afforded by the Act.

Protections for Year 2000 Statements

Act provides a limitation from liability for year 2000 statements that allegedly are false, inaccurate, or misleading, unless it can be established that the statement was material and made with: (1) actual knowledge that the statement was false, inaccurate, or misleading; (2) an intent to deceive or mislead; or (3) reckless disregard to the accuracy of the statement. The Act states that liability must be established by "clear and convincing evidence" -- a tougher standard than the "preponderance of the evidence" standard usually applicable in civil cases.

ome cases liability can be established if a company issues a statement that is a republication of another party's year 2000 statements. When republishing such statements, companies must include a notice if they have not verified the contents of the republished statements, or provide a notice that the republished statements are based on information supplied by another entity identified in the statement.

Act also provides that a year 2000 statement will not be interpreted as an amendment or alteration of a contract or warranty. In reviewing these liability protections, it is also important to note that the new law does not oblige entities to make Year 2000 statements.

Year 2000 Readiness Disclosures

The Act provides additional protection for the "subset" of Year 2000 statements termed "year 2000 readiness disclosures." These year 2000 readiness disclosures may not be "admissible against the maker of that disclosure to prove the accuracy or truth of any year 2000 statement set forth in that disclosure." In other words, subject to certain exemptions set forth in the Act, Year 2000 readiness disclosures may not be introduced into evidence in a trial.

In certain cases, however, even a year 2000 readiness disclosure may become evidence. Year 2000 readiness disclosures may be admissible to prove a claim for "anticipatory breach" or "repudiation of a contract," to the extent permitted by applicable law. Therefore, year 2000 readiness disclosures can be introduced to prove that a company will breach a contract in the future, or to prove that a company is refusing to perform as required by a contract. For example, a statement that a product will not be able to be used beyond December 31, 1999, or a statement that the company will not support and update a product covered by a maintenance contract beyond December 31, 1999, would be admissible as legal evidence.

The evidence exclusion for a year 2000 readiness disclosure also may be limited if a court determines that the disclosure was made in bad faith or fraudulently. Similarly, courts can decide that it is unreasonable to exclude a year 2000 readiness disclosure from evidence in light of the purpose of the Act.

Year 2000 Websites

The new law specifically recognizes that many companies are posting their year 2000 statements and year 2000 readiness disclosures on the Internet. The Act defines a "year 2000 Internet website" as "an Internet website or other similar electronically accessible service, clearly designated on the an area where year 2000 statements concerning that person or entity are posted...." Posting notices on a year 2000 Internet website is reasonable commercially unless prior representations have been made in a manner contrary to posting on a website, or if a company's regular course of dealing is inconsistent with website notices. The Act does indicate that website notice is not sufficient if actual notice clearly is the most commercially reasonable form of notice.

When Does It All Begin?

All year 2000 statements made between July 14, 1998, and July 14, 2001, and all year 2000 readiness disclosures made between October 19, 1998 and July 14, 2001, are covered by the new law. Additionally, statements made between January 1, 1996, and October 19, 1998, can be "grandfathered" under the Act by providing notice, within forty-five days after the law's date of enactment, to all recipients of the prior statement indicating that the specific year 2000 statement is being designated as a "Year 2000 Readiness Disclosure." The initial statement also must be redistributed with a legend labeling the statement as a "Year 2000 Readiness Disclosure."

It also is possible to grandfather previous year 2000 statements as year 2000 readiness disclosures by posting the notice on an Internet website for a minimum of forty-five consecutive days, as long as the same method of notification is used as was used to deliver the original year 2000 statement. For example, if a company originally published the statement on its website but did not send the statement in a notice by mail, subsequent website notice will be sufficient. However, if a company published its original year 2000 statement on its website and also sent the statement by mail, the subsequent notice on the website also must be followed by mail in order to qualify the earlier year 2000 statements as year 2000 readiness disclosures.

Provisions in the Act enable parties to object to a statement's being grandfathered under the law. Specifically, if someone relied on a year 2000 statement prior to receiving the grandfather notice and provides notice of that fact to the reissuing entity -- within forty-five days of receiving a written "grandfather" notice or 180 days after enactment of the Act with respect to Internet website notices -- the previously made year 2000 statement will not be covered as a year 2000 readiness disclosure under the Act.

Other Exclusions

Specific provisions of the Act address statements made in connection with year 2000 remediation products and services. The law requires that entities issuing statements about such products and services include additional notices indicating that the Act may limit a person's rights to use the statements. The Act also excludes statements made with respect to solicitations, advertisements, or offers to sell products or services to consumers. The Act does not affect a party's intellectual property rights or contractual rights and obligations, nor does it preclude injunctive relief.

The Year 2000 Information and Readiness Disclosure Act, the first major Year 2000 legislation to be passed by the United States, clearly shows that the U.S. government is attempting to promote honest and useful disclosures regarding the Year 2000. This information helps to provide businesses, governmental bodies, and other organizations with the necessary tools to handle the millennium bug. Due to the complex nature of the Year 2000 problem, the Act is not a cure-all and does not provide blanket immunity for all disclosures and statements. However, if carefully applied and followed, the Act can provide important protections, while at the same time promoting a meaningful sharing of information. Whether or not the Act accomplishes these goals remains to be seen.