Y2K Remediation: What to do When You Cannot Achieve 100% Success

Your company has been working on the Y2K problem for several years. You pride yourself on being among the first to have recognized the problem. Early on, your Board formed a high level committee with staff from all areas of your company to study the problem. You were able to put together - and keep together - a technical group that was knowledgeable in your systems. The committee had a substantial budget - all of which it spent - to make sure the problem was properly addressed. You overcame a lot of obstacles and solved a lot of problems. After you had a handle on your internal Y2K situation, you started to query the companies with whom you do business to find out where they stood in addressing the problem. You have read everything about Y2K you could get your hands on. In short, you have done everything right.

But next week, you have to report to your Board that your company's Y2K problem probably will not be 100% fixed. Furthermore, even to find out how much more must be done, the company will have to spend an enormous amount of money. What will you do?

Many companies will be faced with a situation something like the one outlined above. In fact, it is unlikely that any company will be able to confirm that it is 100% certain that its entire Y2K problem has been fixed. Indeed, in June 1997, the Securities and Exchange Commission wrote:

. . . it is important that one essential

principle be understood:

it is not, and will not, be possible for any single

entity or collective enterprise to represent that it has

achieved complete Year 2000 compliance and thus

to guarantee its remediation efforts. The problems are

best described as "risk mitigation." Success in the effort

will have been achieved if the number and seriousness of

any technical failures is minimized, and they are quickly

identified and repaired if they do occur.^*

So you can tell your Board that they will have plenty of company in not resolving the entire Y2K problem. Will "the misery loves company" argument satisfy your Board? Not likely and, indeed, it should not.

Your Board, based on advice from management, will have to consider a more precise allocation of resources - both time and money - to those areas that are more likely to cause problems than others. Decisions will have to be made about how the company will mitigate its risks and minimize the number and the seriousness of any technical failures. We cannot discuss specific problems here because every company will have different areas of concern. The point is that it is important to recognize the likelihood that your company may not be 100% successful in fixing its Y2K problem. That recognition will allow the planning process to begin on how to handle those shortcomings.

The Business Judgment Rule

Because there has not been enough litigation to develop a body of Y2K law, we must -- at least for the time being - seek guidance from the legal rules that we do have. One of the most important rules for directors and offices in the situation described here is the business judgment rule.

The business judgment rule will protect officers and directors from

liability when they have made good faith business judgments:

"...the business judgment rule prohibits judicial inquiry

into actions of corporate directors 'taken in good faith and

in the exercise of honest judgment in the lawful and legitimate

furtherance of corporate purposes.' (Auerbach v. Bennett,

47 NY2D 619, 629.) So long as the corporation's directors

have not breached their fiduciary obligation to the corporation

'the exercise of [their powers] for the common and general

interests of the corporation may not be questioned, although

the results show that what they did was unwise or inexpedient.'

(Pollitz v. Wabash R. R. Co., 207 NY 113, 124.)" Levandusky v.

One Fifth Avenue, 75 NY2d 530, 537-38 (1990).

There has to be a judgment made, however, before the rule can be applied. Even though you have been working hard and effectively and even though the frustration level may be running high, you cannot simply say it is impossible to get 100% remediation and leave it at that. When the recognition has come, therefore, that not everything can be fixed, that there is a legitimate limit on the number of people, the time and the money that can be committed to the Y2K remediation, business judgments will have to be made on what part of the problem will not be fixed and why; how, where and when to cap your efforts; where best to expend the available resources; and what alternatives to full remediation can be implemented.

For example, is the embedded chip problem too daunting to even approach? Some experts are saying that 5% - 20% of embedded chips will not process dates as they were designed to do. Of that percentage, only 2% will fail completely. The rest will continue to process data inaccurately and/or unpredictably - but you won't know that until something goes wrong. Is there anything you can do? Yes. You can do an analysis of what embedded systems you have; which of them are most likely to be affected; what the cost of finding them and fixing them is; and what the risks are in not finding them and fixing them. Let's suppose you can reach some responsible idea of which embedded systems are most likely to be affected and that the cost to fix those embedded systems is determined to be prohibitive after a careful analysis of the impact of the expenditure on the long-term viability of the company. Suppose further that you come to the conclusion that the likelihood of finding and fixing all the embedded chips that will fail is small enough that you can deal with or minimize the risks if and when they do fail. Do you nevertheless have to forge ahead, spending every penny on fixing the embedded chip problem? No. Will you be protected by the business judgment rule if you do not? Yes, you should be, if you do the proper analyses and have previously made a good faith effort to fix the problem.

Decisions within decisions will have to be made. How much analysis must be done; what is the long-term viability of the company; what is acceptable mitigation or minimization of risk? These types of decisions are not unusual. Boards do risk/benefit analysis all the time: does the anticipated benefit justify the anticipated expenditure? If the conclusion is no, after the Board has made a good faith exercise of honest judgment in the legitimate furtherance of the corporate purposes, the expenditure may not have to be made. There is no reason why the business judgment rule should not apply to Y2K business judgments. That does not mean that your business judgment is necessarily correct or that the company will ultimately be better off by the exercise of this judgment. It will not mean that the company could not be sued for breach of contract or negligence or on some other theory. It simply means that your officers and directors will have a defense to any lawsuits brought against them in which their business judgment is challenged.

The Balance Between Human Injury and Business Judgment

The above analysis seems to work well if the business judgment is simply one of present known costs versus possible future costs. Where, however, the analysis involves a present known cost versus a risk to human life or human injury, you need to be more sensitive in your balancing. Although the business judgment rule should apply, negligence cases against the company are always a possibility. Once again, however, decisions like this are made in contexts other than Y2K. Those same decision-making processes can be brought to bear on this problem.

Documenting The Basis For Your Business Judgment Is Crucial

The law will probably develop so that companies will not be held to a standard of spending every conceivable dollar regardless of the likelihood of success. But, companies will have to justify not spending the money - just as they had to justify spending huge amounts of money to fix the problem. A key issue in all of this, therefore, is how you document your business judgments. Your business judgments may be tested in future Y2K litigations. Indeed, the record of what you do not fix may be more important than the record of what you do fix. Presumably, if you fixed it, no problem will arise. Therefore, documenting why you are not fixing some aspect of the "bug" is critical. And, therefore, it is critical also that the record of your decision-making process adequately sets forth your good faith, the honesty of the decision-making process, the consideration of the risks, the consideration of the corporate interests and other aspects of the business judgment rule.

Keeping the records substantively in a manner that will demonstrate your prudence, good faith and honest judgment is essential should litigation arise. How you keep this record also will raise questions of attorney-client privilege and business confidentiality.

Questions of substance, privilege and the context in which Y2K litigation might arise are issues that are best addressed by litigators. Litigation is a separate expertise from knowledge of the substantive law. Knowledge of legal procedure and of the dynamics of litigation along with an ability to deal with the uncertainty and amorphousness of litigation is crucial. There are basic legal doctrines or statutes that define the business judgment rule, the duties of officers and directors, warranties, fraud in the inducement, etc. Courts will apply these rules and others to Y2K litigation when that litigation comes. How these "old" rules will be applied in Y2K litigation, however, can best be predicted those who are familiar with the litigation process, i.e., litigators. Y2K litigation will require technical computer knowledge - no question about it -- but if you approach your litigation too narrowly - thinking it is only a technical computer problem - you will be making a mistake. Chances are small that the judge or jury who will decide your litigation will have a substantial computer background. The litigation and trial processes require communication skills that are not related to any substantive area of the law. In short, to be a good advocate, especially in an emerging area of the law like Y2K, one has to have actual knowledge of the context in which that advocacy will take place in order to best position your company for Y2K litigation.

CONCLUSION