After several months of hard-fought legislative battles, Congress passed the far-reaching Y2K Act on July 1, 1999, and the President signed it days later.
Last year's major piece of federal Y2K legislation, the Year 2000 Information and Readiness Disclosure Act of 1998 (IRDA), had the limited purpose of protecting statements about Year 2000 problems and remedial efforts. In contrast, the new Y2K Act dramatically reshapes rights, liabilities, and litigation options in the Year 2000 setting. The Act applies to any lawsuit brought after January 1, 1999 for a Y2K failure (or threatened failure) occurring before January 1, 2003. Despite the Act's uncharacteristically simple name, intense lobbying by stakeholders on all sides created a bill much more complex than the version originally introduced, with a patchwork of exceptions and special provisions.
The avowed goal of the Y2K Act is to squelch litigation, which it warns will otherwise tie up courts with "costly and time-consuming" lawsuits over "insubstantial" and "frivolous" matters, waste resources, and poison business relationships [§ 2]. To this end, the statute erects numerous barriers to Y2K litigation in both state and federal courts - with the notable exceptions of personal injury lawsuits, carved out by Section 4(c), and securities lawsuits, carved out by Section 4(i). Section 16 permits states to provide even greater protections to defendants under state law [§16].
Procedural Barriers
Key procedural hurdles created by the new Y2K Act include the following:
- 30 days before filing suit, a plaintiff must provide a detailed advance notice to each prospective defendant describing the problem and why and how defendants should remedy it. If within those 30 days a defendant proposes to fix the problem or to participate in "alternative dispute resolution" (ADR) such as mediation, 60 more days are added to allow remediation or ADR to be completed. All statutes of limitation are tolled during this waiting period [§ 7].
- Every filed Y2K complaint must be accompanied by detailed statements of the "material defects" at issue and all claimed damages. If defendant's state of mind is relevant (e.g., fraudulent intent), another statement must set forth "facts giving rise to a strong inference that the defendant acted with the required state of mind." [§ 8] This provision seems likely to generate early motion practice similar to that seen in securities and RICO actions, where a rule of civil procedure requires fraud to be pleaded "with particularity."
- Y2K class actions face huge additional barriers [§ 15]. A Y2K class action claiming that a product or service was defective must meet all the usual tests, plus a preliminary finding by the court that the defect as alleged "would be a material defect for the majority of the members of the class." Certain Y2K class actions may not even be maintained in federal court, including suits with an aggregate amount in controversy less than $10 million (and no claim for punitive damages); suits brought on behalf of fewer than 100 class members; suits against state governments; and suits under state law where most of the class members and defendants are citizens of that state. Notices to the class must include full disclosure of the proposed fees for plaintiffs' lawyers.
Substantive Hurdles
New substantive obstacles to Y2K litigation include the following:
- Section 12 of the Act establishes a stringent version of the "economic loss" doctrine, which bars recovery in many types of tort actions for such big-dollar items as lost profits, business interruption, "losses that arise because of the claims of third parties," and special or consequential damages. This restriction does not apply if the recovery of such losses is provided for in the parties' contract (unlikely in most cases) or if the alleged tort is intentional. It can also be avoided where the "losses result directly from damage to tangible personal or real property caused by the Y2K failure involved in the action" (other than damage caused only to the property that experienced the failure). This section will undoubtedly be invoked fiercely against negligence and malpractice claims alleging simply that a computer system failed with dire business consequences for the user. It should not apply where a Y2K failure causes a physical casualty, for instance a fire which spreads because of a sprinkler control failure, or coagulation of molten metal because of a temperature control failure.
- A plaintiff must mitigate damages, and cannot recover for "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, including information made available by the defendant to purchasers or users of the defendant's product or services concerning means of remedying or avoiding the Y2K failure involved in the action." [§ 9]. This provision will, among other things, bring additional scrutiny to bear on plaintiffs' contingency planning efforts.
- Defendants' liability for certain Y2K claims is apportioned, rather than "joint and several", exposing a defendant to only its proportionate share of the total damages, not shared liability with all other defendants. However, in the final version of the Act, this controversial provision has become riddled with exceptions. Apportionment is not mandated in contract actions or individual product liability actions by consumers (it may apply in consumer class actions). It also does not apply where a defendant has acted fraudulently or with "specific intent to injure the plaintiff." Finally, deep-pocket defendants may be required to pick up other parties' "uncollectible shares" if the plaintiff has a net worth under $200,000 and other conditions are met [§ 6].
- Punitive damages must be proven by "clear and convincing evidence"; are capped in actions against small businesses (
- An opaque section on "bystander liability" [§ 13] provides that if the defendant did not make or sell the product or service that failed or caused the failure, and plaintiff is not in "substantial privity" with the defendant, and if defendant's state of mind is relevant under applicable law, then plaintiff must prove that "defendant actually knew, or recklessly disregarded a known and substantial risk, that such failure would occur." This provision appears to be designed in part to protect building landlords and tenants, a reading confirmed by § 13(c), which adds that liability may not be based only on the fact that a failure occurred in a facility owned, leased or controlled by a defendant. The provision should also benefit some providers of Y2K remediation services, but its full import may not become clear for a while.
- The same § 13(c) undermines plaintiffs' ability to assert "res ipsa loquitur," "the thing speaks for itself," often used in tort actions to establish a presumption of liability based on a defendant's control of an instrumentality which causes harm.
Miscellaneous Provisions
The Y2K Act also includes a grab bag of miscellaneous provisions.
- Companies may assert a "Y2K Upset" as a full defense against governmentally-imposed penalties for "exceptional temporary noncompliance" with federally enforceable monitoring or reporting requirements during the first half of the year 2000. This provision appears to be primarily targeted at EPA permit enforcement. However, a "Y2K Upset" does not excuse a substantive violation, e.g. an actual discharge of pollutants in excess of permit limits [§ 4(g)]. Interestingly, this provision does not expressly apply to citizens' suits, raising the paradoxical possibility that citizens could sue under environmental or other laws to enforce requirements and collect penalties which the government itself may not collect.
- Agencies are required to waive penalties for first-time violations of federal regulations by small businesses as the result of Y2K failures, provided that various preconditions are met [§ 18].
- Residential mortgage holders cannot foreclose during early 2000 where nonpayment relates to a Y2K failure [§ 4(h)].
- All provisions of last year's Year 2000 Information and Readiness Disclosure Act, which limited liability for statements about Year 2000 compliance and compliance efforts, are preserved [§ 4(f)].
Despite all of these obstacles, no one should underestimate the ingenuity of the plaintiffs' bar, assume that Y2K litigation has been laid to rest, or assume that it is now safe to relax Y2K remediation efforts. If widespread Y2K failures do occur despite the world's efforts, widespread litigation remains a certainty, perhaps not at the trillion-dollar level forecast last year by some commentators, but with many zeroes behind the dollar signs nonetheless. The Y2K Act notwithstanding, there is also still considerable life left in conventional breach of warranty and breach of contract claims. Product liability actions for bodily injury are completely exempt from the strictures of the Act. Suits for property damage still pose the potential of massive consequential damages for lost profits and business interruption. Securities plaintiffs can still pursue public companies and their officers and directors for mismanagement or misrepresentation of Y2K efforts. As GTE's filing last month of a $400 million insurance coverage action showed, insurance claims represent another huge battleground which has only begun to reveal itself.
There are less than six months left until January 1, 2000. If the Y2K Act encourages companies to "concentrate their attention and resources in the time remaining . . . on assessing, fixing, testing, and developing contingency plans . . ." [§ 2(a)(2)], it will have succeeded in its goals. On the other hand, if it paradoxically encourages companies to relent in their efforts to attain compliance, it may very well contribute to the failures and resulting litigation that it was designed to deter.
This Update was prepared by Scott D. Patterson, Chair of Saul Ewing's Y2K Group and its Technology Committee, and managing partner of its Berwyn, Pennsylvania office. For further information, Mr. Patterson can be reached at 610-251-5050 or spatterson@saul.com.