Introduction
As is now well known, for years computer programmers inputted only the last two digits of the calendar year using 1900 as the base. On January 1, 2000, computers with such programming may recognize "00" as the year 1900. This could lead to a multitude of "Y2K Failures." On July 20, 1999, President Clinton signed The Y2K Act "[t]o establish certain procedures for civil actions brought for damages relating to the failure of any device or system to process or otherwise deal with the transition from the year 1999 to the year 2000...." The Y2K Act defines Y2K Failure to mean:
failure by any device or system ... to process, ... to display, to store, to transmit, or to receive date-related data, including failures to deal with or account for transitions or comparisons from, into, and between the years 1999 and 2000 accurately; to recognize or accurately process any specific date in 1999, 2000, or 2001; or accurately to account for the year 2000's status as a leap year, including recognition and processing of the correct date on February 29, 2000. (Section 3(2)).
Executive Summary
The Y2K Act establishes procedures for civil actions arising out of Y2K failures. The Act does not include personal injury and wrongful death actions or claims arising under the federal securities laws (except that the Y2K Act's § 13(b) Bystander provisions apply to claims under the securities laws). The Act provides for a ninety day notice period before a Y2K action may be commenced; limits the ability to bring Y2K class actions; limits punitive damages for individuals and small businesses to "the lesser of three times the amount awarded for compensatory damages or $250,000" if there is not clear and convincing evidence that the defendant acted with specific intent to injure the plaintiff and provides for damages based on the proportionate liability of the defendant.
This memorandum is intended to inform you generally of the key provisions of the Y2K Act. A careful investigation of how the Act impacts you in a particular situation will always have to be done.
Findings And Purposes Of The Act
The Act is intended to encourage businesses to approach Y2K problems and disputes responsibly; "to avoid unnecessary, time-consuming, and costly litigation about Y2K failures...;" to "establish uniform legal standards to give ... reasonable incentives to solve year 2000 computer date-change problems before they develop;" to "encourage continued remediation and testing efforts to solve such problems...;" to encourage
alternative dispute resolution of Y2K disputes; and to discourage "insubstantial lawsuits while preserving the ability of individuals and businesses that have suffered real injury to obtain complete relief." (Section 2(a)(8) and 2(b)).
Application Of Act
The Act applies to "Y2K actions" brought after "January 1, 1999, for a Y2K failure occurring before January 1, 2003, or for a potential Y2K failure that could occur or has allegedly caused harm or injury before January 1, 2003." (Section 4(a)). A Y2K action is a civil action where the alleged harm, alleged injury, claim or defense "arises from or is related to an actual or potential Y2K failure" or a civil action brought "by a government entity when acting in a commercial or contracting capacity."
A Y2K action does not include an action brought by a government entity "acting in a regulatory, supervisory, or enforcement capacity." (Section 3(1)). Claims for personal injury or for wrongful death are excluded from the Act. Actions in which the underlying claim arises under the securities laws also are excluded from the Act except that the Act's § 13(b) Bystander provisions apply. (Section 4(c) and (i)). The Act prohibits foreclosures on residential mortgages for a four week grace period when "an actual Y2K failure ... results in an inability to accurately or timely process any mortgage payment transaction." (Section 4(h)(1)-(5)).
The Act "supersedes State law to the extent that it [the Act] establishes a rule of law applicable to a Y2K action that is inconsistent with State law..." (Section 4(e)) but does not supersede any provision of the Year 2000 Information and Readiness Disclosure Act. (Section 4(f)).
Contractual Terms Are To Be Strictly Enforced
The Act requires that any written contract terms, including limitations of liability and disclaimer of warranties, be "strictly enforced, unless the enforcement of that term would manifestly and directly contravene applicable State law embodied in any statute in effect on January 1, 1999, specifically addressing that term." (Section 4(d)(1)). Applicable contract law shall determine the interpretation of contracts, when they are silent as to particular issues, and the enforcement of unconscionability, impossibility and commercial impracticability doctrines. (Section 4(d)(3); Section 10)).
Punitive Damages Limitations
Punitive damages may be awarded as permitted by applicable law but only if proved by "clear and convincing evidence that the applicable standard for awarding damages has been met." (Section 5(a) and (b)(1)). The Act limits punitive damages to "the lesser of three times the amount awarded for compensatory damages or $250,000" when the defendant is "(i) sued in his or her capacity as an individual; and (ii) whose net worth does not exceed $500,000; or (B)... is an unincorporated business, a partnership, corporation, association, or organization, with fewer than 50 full-time employees." (Section 5(b)(2)). There is no cap on punitive damages if the plaintiff "established by clear and convincing evidence that the defendant acted with specific intent to injure the plaintiff." (Section 5(b)(3)).
Proportionate Liability
A defendant in a Y2K action, other than a contract action, is "liable solely for the portion of the judgment that corresponds to the relative and proportionate responsibility of that person." (Section 6(a)). Proportionate liability is determined by the trier of fact finding the "percentage of responsibility, if any, of each defendant, measured as a percentage of the total fault of all persons who caused or contributed to the loss incurred by the plaintiff and if alleged by the plaintiff, whether the defendant ... acted with specific intent to injure the plaintiff or knowingly committed fraud." (Section 6(b)(1)). If the trier of fact finds that defendants acted with specific intent to injure the plaintiff or knowingly committed fraud, then the liability of the defendant shall be joint and several. (Section 6(c)(1)). Defendants may also be held jointly and severally liable if "the plaintiff is a consumer whose suit alleges or arises out of a defect in a consumer product and the plaintiff is suing as an individual and not part of a class action." (Section 6(d)(1)(D)). Recklessness by the defendant does not subject him to joint and several liability. (Section 6(c)(2)(B)).
If the court determines that any part of a defendant's share of liability for compensatory damages is "not collectible," the other defendants are liable for that share but the "total payments required [by this provision] may not exceed the amount of the uncollectible share." (Section 6(d)(1)(A) and (B)).
Settlement Of A Y2K Action And Contribution
"A defendant who settles a Y2K action that is not a contract action at any time before final verdict or judgment shall be discharged from all claims for contribution brought by other persons." (Section 6(e)). A defendant found jointly and severally liable in a Y2K action that is not a contract action may "recover contribution from any other person who, if joined in the original action, would have been liable for the same damages." (Section 6(f)(1)). The amount of contribution will be determined based on the percentages of responsibility. (Section 6(f)(1)). A claim for contribution must be brought "not later than 6 months after the entry of a final, nonappealable judgment in the Y2K action." (Section 6(f)(2)). Any state law which "limits the liability of a defendant ... to a lesser amount ... or otherwise affords a greater deal of protection from joint or several liability," is not superseded by the Act. (Section 6(g); Section 16)).
Prelitigation Notice
In order to commence an action, except an action seeking injunctive relief only, the prospective plaintiff must serve each prospective defendant with written notice by certified mail, return receipt requested, stating:
the manifestation of any material defect alleged to have caused harm or loss; the harm or loss allegedly suffered by the prospective plaintiff; how the prospective plaintiff would like the prospective defendant to remedy the problem; the basis upon which the prospective plaintiff seeks that remedy; and the name, title, address, and telephone number of any individual who has authority to negotiate a resolution of the dispute on behalf of the prospective plaintiff. (Section 7(a)).
In a class action, these requirements apply only to the named plaintiffs. (Section 7(j)). Each prospective defendant is required to respond to each prospective plaintiff within 30 days after receipt of the notice, by sending certified mail, return receipt requested, "a written statement acknowledging receipt of the notice, and describing the actions it has taken or will take to address the problem identified by the prospective plaintiff." (Section 7(c)(1)). The statement must also include "whether the prospective defendant is willing to engage in alternative dispute resolution." (Section 7(c)(2)). If the defendant fails to respond within the 30 days or fails to describe its action to remedy the prospective plaintiff's Y2K problem, "the prospective plaintiff may immediately commence a legal action against that prospective defendant." (Section 7)(d)).
If the defendant proposes the "remedial action it will take, or offers to engage in alternative dispute resolution, then the prospective plaintiff shall allow the prospective defendant an additional 60 days from the end of the 30-day notice period to complete the proposed remedial action or alternative dispute resolution before commencing a legal action against the prospective defendant." (Section 7(e)(1)). No extensions are allowed past the 90 days and "any applicable statute of limitations or doctrine of laches ... shall be tolled during the notice and remediation period...." (Section 7(e)(4)).
If the plaintiff files a Y2K action without notifying the defendant, "the defendant may treat the plaintiff's complaint as such a notice by so informing the court and the plaintiff in its initial response to the plaintiff.... The court shall stay all discovery and all other proceedings in the action for the appropriate period after filing of the complaint...." (Section 7(f)). If a "contract or statute enacted before January 1, 1999 requires notice of nonperformance and provides for a period of delay ... the period of delay provided by contract or the statute is controlling over the waiting period...." (Section 7(g)).
Pleading Requirements
In Y2K actions "there shall be filed with the complaint a statement of specific information as to the nature and amount of each element of damages and the factual basis for the damages calculation." (Section 8(b)). Where a "material defect in a product or service" is alleged, plaintiff must file "a statement of specific information regarding the manifestations of the material defects and the facts supporting a conclusion that the defects are material." (Section 8(c)). "A statement of the facts giving rise to a strong inference that the defendant acted with the required state of mind" is required in actions where proof of that state of mind is necessary for the plaintiff to prevail. (Section 8(d)).
Duty To Mitigate
The plaintiff may not recover for damages which he could have "reasonably avoided in light of any disclosure or other information of which the plaintiff was, or reasonably could have been, aware." (Section 9(a)). This does not apply where the plaintiff justifiably relied "upon an affirmative material misrepresentation by the defendant, made by the defendant with actual knowledge of its falsity." (Section 9(c)).
Damages Limitation By Contract
"In any Y2K action for breach or repudiation of contract, no party may claim, or be awarded, any category of damages unless such damages are allowed by the express terms of the contract or if the contract is silent on such damages, by operation of State law at the time the contract was effective or by operation of Federal law." (Section 11).
Damages In Tort Claims And Economic Loss
In tort actions, "other than a claim of intentional tort arising independent of a contract," recovery for economic loss is limited to those losses "provided for in a contract to which the party seeking to recover such losses is a party" or losses directly resulting from "damage to tangible personal or real property caused by the Y2K failure involved in the action ..., and such damages are permitted under applicable Federal or State law." (Section 12(a)). Economic loss is defined as the "amounts awarded to compensate an injured party for any loss...." (Section 12(b)).
State Of Mind; Bystander Liability; Control
Where the "defendant's actual or constructive awareness of an actual or potential Y2K failure is an element of the claim [other than a contract claim], the defendant is not liable unless the plaintiff establishes that element of the claim by the standard of evidence under applicable State law in effect on the day before January 1, 1999." (Section 13(a)). The plaintiff must prove under the same applicable law that the "defendant knew, or recklessly disregarded a known and substantial risk, that such failure would occur" in order to hold defendant liable for money damages where the defendant "is not the manufacturer, seller, or distributor of a product, or the provider of a service, that suffers or causes the Y2K failure at issue; the plaintiff is not in substantial privity with the defendant; and the defendant's actual or constructive awareness of an actual or potential Y2K failure is an element of the claim under applicable law." (Section 13(b)(1)).
"The fact that a Y2K failure occurred in an entity, facility, system, product, or component that was sold, leased, or otherwise within the control of the party against whom a claim is asserted in a Y2K action shall not constitute the sole basis for recovery of damages in that action. A claim in a Y2K action for breach or repudiation of contract for such a failure is governed by the terms of the contract." (Section 13(c)).
Y2K Actions As Class Actions
A Y2K action claiming that a product or service is defective may be brought in a class action suit in Federal or State court if "the claim satisfies all other prerequisites established by applicable Federal or State law, including applicable rules of civil procedure and the court finds that the defect in a product or service as alleged would be a material defect for the majority of the members of the class." (Section 15(a)). In order to maintain the action, notice of the action must be sent to each member of the class which includes a "concise and clear description of the nature of the action; the jurisdiction where the case is pending" and describes the fee arrangement of class counsel. (Section 15(b)). United States District Courts have original jurisdiction of any Y2K action except where "a substantial majority of the proposed plaintiff class are citizens of a single State; the primary defendants are citizens of that State; and the claims asserted will be governed by the laws of that State; ...the plaintiff class does not seek an award of punitive damages, and the amount in controversy is less than the sum of $10,000,000 (exclusive of interest and costs) ...; and there are less than 100 members of the proposed plaintiff class." (Section 15(c)(1) and (2)).
Suspension Of Penalties For Certain Year 2000 Failures By Small Business Concerns
Under the Act, "no agency shall impose any civil money penalty on a small business concern for a first-time violation" where the small business concern made good faith efforts to avoid and remedy Y2K failure, it was an unavoidable first-time violation due to Y2K failure, and notice was given to the appropriate agency within 5 days of becoming aware of the first-time violation. (Section 18(c) and (d)). The penalties may be imposed for first-time violations if the "failure to comply with the Federal rules or regulations resulted in actual harm, or constitutes an imminent threat to public health, safety, or the environment or the small business concern fails to correct the violation not later than 1 month after initial notification to the agency." (Section 18(e)).
The Act defines small business concerns to be "an unincorporated business, a partnership, corporation, association, or organization, with fewer that 50 full-time employees." (Section 18(a)(3); 5(b)(2)(B)). Agencies are defined as "any executive agency ... that has the authority to impose civil penalties on small business concerns." (Section 18(a)(1)). The Act requires each agency to establish liaisons between the agency and small business concerns "with respect to problems arising out of Y2K failures and compliance with Federal rules or regulations" within 30 days after enactment of the Act, which is August 19, 1999. (Section 18 (b)). The small business concern provisions do not apply to "first-time violations caused by a Y2K failure occurring after December 31, 2000." (Section 18(f)).