Y2K and State Unfair Practice Statutes

By Robert E. Crotty^*

Robert S. Friedman

Introduction

The Year 2000 Problem (Y2K) is well-documented in the computer, business and legal communities. By now, all business entities should be well on their way analyzing and attempting to correct any problems in their computer systems which may result from their software's inability to process date data after December 31, 1999. Some commentators believe that problems may begin to arise as early as January 1, 1999. Y2K compliance programs are expensive, running into the millions of dollars for mid-size companies and significantly more for large banks and corporations. While the goal of the Y2K program should be to remedy any problem well in advance of the year 2000, even the best laid plans may result in issues of liability leading to litigation or alternate dispute resolution. Companies are generally looking to their computer vendors or outside consultants to perform the compliance work.

Two areas where questions of liability are likely to arise or have already arisen are: 1) responsibility for Y2K remedial efforts; i.e. who pays to fix the problem;

and 2) responsibility for errors in the remediation efforts. In these areas, counsel will look to traditional sources such as state contract and tort law, including the Uniform Commercial Code and common law fraud. In addition, counsel is well-advised to determine whether the state whose law controls has an unfair business practices statute which may be applicable to these areas of Y2K responsibility

This article provides an overview of four such statutes in a Y2K context. The first part examines the unfair practice statutes in California and Connecticut. The second part analyzes the statutes in Massachusetts and New York and concludes by outlining relevant factors that Courts are likely to look to. These four statutes, as with most similar laws, were executed mainly to protect consumers and the general public, but may extend their reach to business entities in varying degrees as will be explained below.

California

The California Unfair Competition Act (UCA) permits a private cause of action arising out of "...any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising...." In one of the first Y2K lawsuits filed between a vendor and corporate customers, the plaintiff-customers in a class action have alleged a violation of UCA and are seeking restitution and disgorgement of profits.

Business entities have standing to sue but remedies are limited to injunctive relief, restitution and unjust enrichment. This remedy limitation may severely restrict the utility of UCA in Y2K cases brought after the year 2000.

This statute has been interpreted broadly and reaches conduct that is "unfair" without being otherwise unlawful. The statute imposes strict liability and thus does not require proof of intent by the defendant. Moreover, a "violation can be shown even if no one was actually deceived, relied upon the fraudulent practice, or sustained any damage. Instead, it is only necessary to show that members of the public are likely to be deceived."

In determining whether conduct is actionable under the California statute, courts have looked to the so-called "cigarette rule" adopted by the Federal Trade Commission. The cigarette rule outlines the factors that the FTC considers in determining whether a trade practice is unfair:

In addition to these factors from the FTC's cigarette rule, California courts have set forth further guidelines for determining unfairness under UCA:

Although this language seems to allow expansive theories of recovery, courts also generally require evidence of some type of pattern or repeated conduct by the defendant. This is consistent with the overall goal of the statute, which is to protect the general public.

Connecticut

The Connecticut Unfair Trade Practices Act (CUTPA) provides:

Connecticut courts have applied the criteria in the FTC's cigarette rule to interpret CUTPA. As with California's UCA, CUTPA does not require proof of intent to deceive, defraud or mislead. A "simple contract breach is not sufficient to establish a violation of CUTPA," however, without evidence that the defendant's conduct is "either immoral, unethical, unscrupulous or offensive to public policy."

The major difference between the Connecticut and California statutes is the availability of damages. As discussed above, UCA limits recovery by a private plaintiff to disgorgement of profits, restitution and injunctive relief. CUTPA provides for compensatory and punitive damages:

Under CUTPA, a damage determination should focus on the private harm, not the public interest or injury. CUTPA also allows a court to award costs and attorneys fees to a plaintiff.

The more expansive damage provisions in CUTPA are important in a Y2K analysis because much of the litigation about Y2K remediation will occur after the year 2000 when customers sue vendors for their compliance costs or customers sue compliance consultants for errors made that are not apparent until the year 2000. Injunctive relief is only useful for a preemptive strike by a customer who wishes to force action by a vendor or consultant prior to the year 2000. Seeking injunctive relief is dangerous because it may delay or distract from compliance efforts. Similarly, restitution and/or disgorgement of profits from vendors are likely to be inadequate when compared with the remedial costs and the potential catastrophic loss and business interruption that may result if the system is not properly converted. Accordingly, CUTPA appears to provide a more friendly environment for plaintiff-customers than California's UCA for post-Year 2000 Y2K litigation against vendors and consultants.

Next: Massachusetts and New York

PART II

This is the second and final part of an article examining Y2K and certain state unfair practice statutes. The first part, which appeared in the __ issue of MCC, examined California and Connecticut. This part looks at the statutes in Massachusetts and New York in a Y2K context.

Massachusetts

The Massachusetts unfair practices statute, known as chapter 93A, states:

Chapter 93A is similar to CUTPA in looking to FTC interpretations and federal law for guidance. Chapter 93A is designed to provide more comprehensive protection to victims of dishonesty than is available at common law. Chapter 93A does not require proof of intent to establish liability and an act may be unfair without being deceptive or fraudulent. As with UCA and CUTPA, 93A looks to the FTC's "cigarette rule." More than a mere breach of contract, however, is required for liability under Chapter 93A. Some decisions have adopted a "rascality standard" for determining liability under 93A as they relate to disputes between businesses. That is,

"objectionable conduct must attain a level of rascality that would raise an eyebrow of someone inured to the rough and tumble of the world of commerce."

The most distinctive features of 93A are the damages and attorney's fees provisions. Section 11 mandates that a court impose double or treble damages for willful or knowing violations of Section 2:

A "willful" violation and entitlement to double or treble damages may be established by proof that a defendant made a representation with reckless disregard to its truth. A defendant may limit its exposure to single damages by including a written offer of settlement with its answer to the complaint that a court determines is reasonable when compared to the actual damages suffered.

In contrast to Connecticut's CUTPA which defers to the court's discretion, 93A mandates that a plaintiff be awarded reasonable attorney's fees and costs for any violation of §2.

The Supreme Judicial Court of Massachusetts has addressed the effect of contractual limitations of liability on a 93A claim. This is a significant issue in the Y2K context because the typical computer vendor and service contracts will contain disclaimers and liability limitations. In Canal Elec. Co. v. Westinghouse Elec. Corp., the United States District Court in Massachusetts certified the following question to the Massachusetts Supreme Judicial Court: "Is [the Limitation of Liability] . . . provision enforceable so as to bar remedies against Westinghouse under Mass.G.L. c. 93A?" The contract limited remedies to repair or replacement and limited total liability to the price of the goods and services so that the defendant would not be otherwise liable under any theory of recovery whether contract or tort. The Supreme Judicial Court held that these provisions waived plaintiff's claim under 93A. The Court distinguished a consumer plaintiff whose claim may implicate the public interest from a corporate plaintiff who is maintaining a private, commercial claim:

Accordingly, a Y2K defendant confronted with a 93A claim in Massachusetts should first look at the disclaimer and liability limitation provisions in its contract. A plaintiff should develop a theory as why the disclaimers are not operative. For example, a plaintiff might argue that the defendant's violation of 93A implicates the public policy of Massachusetts because of the magnitude of theY2K problem. Counsel is well-advised to buttress such an argument with facts which demonstrate that other customers of the defendant have Y2K problems.

New York

New York's statute prohibits "[d]eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state." Although the statute does not specifically proscribe "unfair" acts as UCA, CUTPA and 93A do, the practical reach is the same because the plaintiff is not required to establish intent or reliance. The law permits a court to award attorney's fees to a successful plaintiff.

Of the four statutes examined in this article, New York's is the most restrictive in allowing a claim involving disputes between businesses. The law is intended to be a true consumer protection statute. Businesses may recover under the statute only when they are acting in the role of consumer and where the other party is more sophisticated in the particular transaction. While most Y2K corporate plaintiffs will meet these requirements, some courts will also look to the size and circumstances of the transaction at issue. If the contract involves a large sum of money, was executed after detailed negotiations, and the dispute is not part of a pattern which can affect the public interest, relief under Gen. Bus. L. § 349 may not be available. New York courts are reluctant to give § 349 an expansive interpretation because of the fee-shifting provision.

A corporate plaintiff prosecuting a Y2K claim under New York's statute will have to convince a court that the defendant has engaged in a pattern of wrongful conduct that is likely to harm the public interest. This is similar to the argument that the plaintiff should make in a Massachusetts Chapter 93A claim, discussed supra in Part IV, to combat the operation of contractual disclaimers and liability limitations.

Conclusion

Disclaimers and other limitations in computer vendor agreements will be obstacles to plaintiff-customers in breach of contract and breach of warranty claims. In addition, plaintiffs will have to establish scienter and reliance for common law fraud in Y2K cases. Unfair business practices statutes, however, are largely undefined and broadly interpreted, and may prove useful for plaintiff-customers. The possibility of multiplied damages and the recovery of attorney's fees and costs are also significant benefits of some of these statutes.

It is difficult to predict how courts will view the equities and public interest concerns in Y2K cases. Indeed, in some of the states with active computer industries, courts may be hesitant to interpret their unfair practice statutes in a manner which will result in expansive liability for computer companies. Courts will have to look at the following factors, however, in applying the state statutes in Y2K cases: 1) the contract terms; 2) the contract negotiations, including the role of counsel; 3) the parties' relative bargaining positions (this should be a significant factor for litigation involving Y2K remediation because customers must focus on getting the remediation done on time

and are under pressure to commence work. This is especially true where the vendor is doing the work because of their familiarity with the system); 4) the computer sophistication of the customer; 5) the expectations of the parties regarding the useful life of the computer system; 6) the date of the contract and when computer companies had knowledge of the Y2K problem; 7) misrepresentations by the vendor; 8) the vendor or consultant's track record with other customers; 9) any other public interest involved; 10) the course of conduct between the parties; and 11) an overall balance of the equities.

As with most issues involving the Year 2000 Problem, no one knows what is going to happen technologically and legally when the clock strikes 12:01 a.m. on January 1, 2000 or in 1999 when problems might start to arise. Counsel for customers, vendors and remedial consultants should be preparing for all eventualities in both the compliance and dispute resolution areas. Analysis of the applicable state's unfair practice law should be part of the Y2K menu.