The Year 2000 Problem ("Y2K") or, as some call it, the Millennium Bug, has been widely publicized. While there is a broad spectrum of opinion about the severity of the problem itself, from the survivalists expecting Armageddon to those who dismiss the problem as overblown fear-mongering, there can be little doubt that Y2K is indeed real and presents technical, business and legal issues with which the business and legal communities continue to grapple. Respected sources estimate that $1 trillion will be spent on litigation over problems created by Y2K. While at this writing there are less than 450 days to the year 2000, it is not too late to address the problem and to limit risk exposure if your business starts now.
The Y2K problem arises as the result of the decision of computer programmers made decades ago, in an effort to conserve expensive memory and increase processing speeds, to program computers to recognize years by their last two digits only. As a result, on January 1, 2000, many computer systems may incorrectly read the year "2000" as "1900," causing erroneous calculations and possibly widespread computer malfunctions. In fact, many information specialists warn of a worldwide "crash" of computers processing date sensitive information, which are found in almost every industry and at all levels of government.
Moreover, the problem extends beyond traditional software to embedded chip technology programmed with the same 2-digit limitation. Millions of such chips, found in telecommunications equipment, medical devices, automated machinery, gas pipeline valves, traffic signaling equipment and the like, may be affected. Even those businesses which are either Y2K compliant or do not directly rely on date sensitive systems or embedded chip technology may suffer the effects of Y2K as a result of the failures of suppliers, vendors, customers and other dependent third parties.
Aside from the business implications, Y2K raises significant legal issues and litigation risks. Firms should not only be careful to limit their own risk, but should also position themselves to seek recovery against those causing them injury by noncompliance. The legal issues which pose pitfalls include the drafting of contracts and warranty provisions; the wording of promotional materials as Y2K compliance becomes a more important marketing tool; making public and regulatory Y2K compliance disclosures; meeting the fiduciary obligations of directors and officers and other fiduciaries, such as benefit plan administrators, to formulate and implement Y2K assessment and remediation plans; performing Y2K due diligence regarding mergers and acquisitions; and reviewing insurance coverage. Those who ignore these issues risk suits for breach of contract and fiduciary duty, product liability, fraud, and negligence, as well as class action suits by shareholders, customers, plan participants and the like.
Aside from compelled regulatory disclosure requirements of Y2K compliance efforts, the critical need for voluntary disclosure by vendors, suppliers and other third party dependents has resulted in a paper blizzard of compliance surveys among companies. While a company's failure or refusal to give assurance of some level of compliance likely will cause it to be dropped as a supplier or vendor, imprudent companies which do provide assurances which later prove inaccurate or misleading may buy themselves a lawsuit for fraud, constructive fraud, or some other theory.
Recognizing the need for disclosure, Congress has begun to take steps to limit liability for Y2K disclosures. For example, it has passed The Year 2000 Information and Readiness Disclosure Act, which at this writing awaits President Clinton's signature. The Act is intended, in part, to provide companies limited immunity from liability for disclosures that are believed to be correct at the time they are made, but that later turn out to be inaccurate.
While the Act may provide some degree of immunity for disclosures themselves, it would not otherwise limit the liability of noncompliant businesses. Therefore, prudent businesses should take steps now to limit their Y2K liability by fully developing and aggressively managing a strategy to:
- assess the problem and develop a remediation plan
- meticulously document all compliance efforts
- audit contracts with suppliers, vendors and other third parties for warranty language and review promotional language
- confirm dependent third party compliance
- disclose material Y2K compliance status as required by regulatory agencies
- review insurance policies for coverage and provide timely notice of potential claims
- consider statutory limitations periods for filing claims (some of which may expire prior to the year 2000)
Although in some cases it may be too late to become fully Y2K ready, there is still time to address the legal issues of the Year 2000 problem and to take the steps necessary to limit the risks that it poses to your business.
Copyright © 1999 Woods, Rogers & Hazlegrove, P.L.C.
All rights reserved.