[Senate Hearing 106-97]
[From the U.S. Government Publishing Office]
S. Hrg. 106-97
Y2K IN THE COURTS:
WILL WE BE CAPSIZED BY A WAVE OF LITIGATION?
=======================================================================
HEARING
before the
SPECIAL COMMITTEE ON THE
YEAR 2000 TECHNOLOGY PROBLEM
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
on
THE SPECIFIC LIABILITY BILLS CIRCULATING IN THE SENATE AND POTENTIAL
FOR COURT OVERLOAD, AND THE EFFECTS THAT Y2K LITIGATION MAY HAVE ON THE
OPERATION OF BUSINESSES EITHER FACED WITH LAWSUITS OR FORCED TO SEEK
LEGAL RECOURSE THROUGH THE COURT SYSTEM
__________
MARCH 11, 1999
__________
Printed for the use of the Committee
Available via the World Wide Web: http://www.access.gpo.gov/congress/
senate
-------
U.S. GOVERNMENT PRINTING OFFICE
56-954 CC WASHINGTON : 1999
_______________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing
Office
Washington, DC 20402
SPECIAL COMMITTEE ON THE
YEAR 2000 TECHNOLOGY PROBLEM
[Created by S. Res. 208, 105th Cong., 2d Sess. (1998)]
ROBERT F. BENNETT, Utah, Chairman
JON KYL, Arizona CHRISTOPHER J. DODD, Connecticut,
GORDON SMITH, Oregon Vice Chairman
SUSAN M. COLLINS, Maine JOHN EDWARDS, North Carolina
TED STEVENS, Alaska, Ex Officio DANIEL PATRICK MOYNIHAN, New York
ROBERT C. BYRD, West Virginia, Ex
Officio
Robert Cresanti, Staff Director
T.M. (Wilke) Green, Minority Staff Director
(ii)
C O N T E N T S
------
STATEMENT BY COMMITTEE MEMBERS
Robert F. Bennett, a U.S. Senator from Utah, Chairman, Special
Committee on the Year 2000 Technology Problem.................. 1
Christopher J. Dodd, a U.S. Senator from Connecticut, Vice
Chairman, Special Committee on the Year 2000 Technology Problem 7
John Edwards, a U.S. Senator from North Carolina................. 12
Jon Kyl, a U.S. Senator from Arizona............................. 2
Gordon Smith, a U.S. Senator from Oregon......................... 2
CHRONOLOGICAL ORDER OF WITNESSES
Orrin G. Hatch, a U.S. Senator from Utah, and Chairman, Committee
on the Judiciary, United States Senate, Washington, DC......... 2
Michael C. Spencer, Milburg Weiss Bershad Hynes and Lerach, LLP,
New York, New York............................................. 15
Charles Rothfeld, Mayer, Brown and Platt, Washington, DC......... 17
Mark Yarsike, Co-Owner, Produce Palace International, Warren,
Michigan....................................................... 19
Howard L. Nations, Houston, Texas................................ 28
Hon. William Steele Sessions, Board Member, FedNet, Inc.......... 30
William Frederick Lewis, President and Chief Executive Officer,
Prospect Technologies, Washington, DC.......................... 37
John H. McGuckin, Jr., Executive Vice President and General
Counsel, Union Bank of California, San Francisco, California,
on behalf of the American Bankers Association.................. 40
George Scalise, President, Semiconductor Industry Association,
San Jose, California........................................... 41
ALPHABETICAL LISTING AND MATERIAL SUBMITTED
Bennett, Hon. Robert F.:
Opening statement............................................ 1
Prepared statement........................................... 53
Dodd, Hon. Christopher J.:
Statement.................................................... 7
Prepared statement........................................... 54
Hatch, Hon. Orrin G.:
Statement.................................................... 2
Prepared statement........................................... 55
Responses to questions submitted by Chairman Bennett......... 58
Kyl, Hon. Jon:
Statement.................................................... 2
Prepared statement........................................... 59
Lewis, Dr. William Frederick:
Statement.................................................... 37
Prepared statement........................................... 60
Responses to questions submitted by Chairman Bennett......... 62
McGuckin, Jr. John H.:
Statement.................................................... 40
Prepared statement........................................... 63
Responses to questions submitted by Chairman Bennett......... 72
American Bankers Association News............................ 73
Nations, Howard L.:
Statement.................................................... 28
Prepared statement........................................... 74
Rothfeld, Charles:
Statement.................................................... 17
Prepared statement........................................... 80
Responses to questions submitted by Chairman Bennett......... 87
Sessions, William Steele:
Statement.................................................... 30
Prepared statement........................................... 89
Responses to questions submitted by Chairman Bennett......... 172
Scalise, George:
Statement.................................................... 41
Prepared statement........................................... 174
Spencer, Michael C.:
Statement.................................................... 15
Prepared statement........................................... 176
Responses to questions submitted by Chairman Bennett......... 180
Yarsike, Mark:
Statement.................................................... 19
Prepared statement........................................... 182
ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
Prepared Statement of Richard J. Hillman, Associate Director,
Financial Institutions and Markets Issues, General Government
Division....................................................... 185
Note: Responses to questions submitted by Chairman Bennett to
George Scalise were not received at the time the hearing was
published......................................................
Y2K IN THE COURTS: WILL WE BE CAPSIZED BY A WAVE OF LITIGATION?
----------
THURSDAY, MARCH 11, 1999
U.S. Senate,
Special Committee on the Year 2000
Technology Problem,
Washington, DC.
The committee met, pursuant to notice, at 9:35 a.m., in
room SD-106, Dirksen Senate Office Building, Hon. Robert F.
Bennett (chairman of the committee) presiding.
Present: Senators Bennett, Kyl, Smith (of Oregon), Dodd,
and Edwards.
OPENING STATEMENT OF HON. ROBERT F. BENNETT, A U.S. SENATOR
FROM UTAH, CHAIRMAN, SPECIAL COMMITTEE ON THE YEAR 2000
TECHNOLOGY PROBLEM
Chairman Bennett. The committee will come to order, and you
will be pleased to know that the problem with the lights was
not caused by Y2K.
Today marks the 11th hearing of the Special Committee on
the Year Technology Problem, and we are very pleased to have
Senator Hatch with us here today. He and I have switched
places. It was a week ago I was testifying on Y2K liability
legislation in the Judiciary Committee, which Senator Hatch
chairs. Today, I am welcoming him to the Special Committee's
hearing on the same subject.
Obviously, both this committee and the Judiciary Committee
have an interest, the Judiciary Committee a certain obvious
expertise in the area of Y2K liability. And this, of course, is
true of every sector of the Y2K challenge that we have
investigated because Y2K affects directly or indirectly
virtually all organizations, whether they are government or
private businesses. It is a pervasive problem, so every
committee in the Senate has an oversight in an area that one
way or the other will be affected by Y2K.
We are very encouraged on this committee, which started out
fairly lonely, to have other committees such as the Judiciary
Committee recognize the potential impact of Y2K and to take
efforts to address it. Senator Hatch has certainly done that in
his committee. We applaud his efforts.
I have additional opening statements that I would like to
make, but I think to accommodate Senator Hatch's schedule, I
will stop at that point.
[The prepared statement of Chairman Bennett can be found in
the appendix.]
Chairman Bennett. Senator Kyl, if you have some comments,
we would be happy to hear from you, and then we will hear from
Senator Hatch.
STATEMENT OF HON. JON KYL, A U.S. SENATOR FROM ARIZONA
Senator Kyl. Thank you, Mr. Chairman, for holding this
hearing and thank you Senator Hatch for being here to discuss
the legislation that will be before us. Clearly, last year's
legislation which encouraged information-sharing was a very
good first step, but obviously inadequate. There are still
companies who, fearing liability, are being inhibited from
getting done what is really necessary, and that is remediation
of their problems.
So, like the Year 2000 Information Readiness and Disclosure
Act of last year, it is my hope that we can visit the issue and
develop legislation this year which can ease the fears and
really result in remediation as a substitute for litigation. So
I will look forward to hearing Senator Hatch's testimony, and
again thank you for conducting this hearing today.
Chairman Bennett. We should note, in the case there are any
who are not aware of it, that the legislation to which Senator
Kyl refers is a model that we hope to follow this year. Senator
Kyl took the lead on this committee in helping fashion the
language of that legislation and then worked very closely with
the Judiciary Committee and its staff, the committee of
jurisdiction through which the legislation ultimately had to
move. So we hope that is a model of what will happen again, the
cooperation between the two, recognizing that ultimate
jurisdiction lies not with us, but with Judiciary, but that we
do have some expertise. And Senator Kyl, on that last piece of
legislation, represented that expertise.
Senator Smith.
STATEMENT OF HON. GORDON SMITH, A U.S. SENATOR FROM OREGON
Senator Smith. Thank you, Mr. Chairman. I would simply echo
Senator Kyl's comments and just express the sentiment that my
hope is this doesn't turn into a partisan battle because what
we have here is a potential for a lot of people who were
innocent in the creation of this problem who could end up being
victimized twice if we can't find some reasonable way to
mitigate the litigation potential. So I am hoping we can find
that balance.
Chairman Bennett. That is the concern and hope of all of
us.
Senator Hatch, we are honored that you would be with us. We
appreciate your taking the time and we are delighted now to
hear what you have to tell us.
STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM UTAH, AND
CHAIRMAN, COMMITTEE ON THE JUDICIARY
Senator Hatch. Well, thank you, Mr. Chairman, Chairman
Bennett, and Senators Kyl, Smith, and others on the committee.
We appreciate having this opportunity to appear before you
today, before the Y2K Special Committee, on the problems posed
by Y2K-related litigation. All of you realize how important Y2K
remediation is to consumers, business, and the economy. The
problem is of particular interest in my State of Utah, which
has quickly become one of the Nation's leading high-tech areas
and States.
Building on the bipartisan efforts in the Judiciary
Committee last year in passing the Y2K disclosure law, our
committee has been studying the litigation problem in the hopes
that we can pass a bill that can avoid a potential catastrophic
logjam of Y2K-related cases. Working together, Senator
Feinstein and I have produced a bill, S. 461, the Year 2000
Fairness and Responsibility Act, that encourages Y2K problem-
solving rather than encouraging a rush to the courthouse. Now,
it is not our goal to prevent any and all Y2K litigation; it is
simply to make Y2K problem-solving a more attractive
alternative to litigation. This will benefit consumers,
businesses and, of course, our economy.
The main problem that confronts us as legislators and
policymakers in Washington is one of uniquely national scope.
More specifically, what we face is the threat that an avalanche
of Y2K-related lawsuits will be simultaneously filed on or
about January 3 of the year 2000, and that this unprecedented
wave of litigation will overwhelm the computer industry's
ability to correct the problems that exist at that time. Make
no mistake about it, this super-litigation threat is real, and
if it substantially interferes with the computer industry's
ongoing Y2K repair efforts, the consequences for our country,
as well as the rest of the world, would be disastrous.
Most computer users were not looking into the future, while
those who did assumed that existing computer programs would be
entirely replaced, not continuously modified, as actually
happened. What this demonstrates is that the two-digit date was
the industry standard for years and reflected sound business
judgment. The two-digit date was not even considered a problem
until we got to within a decade of the end of this current
century.
As the Legal Times recently pointed out, ``the conventional
wisdom [in the computer business was] that most in the industry
did not become fully aware of the Y2K problem until 1995 or
later.'' The Legal Times cited a LEXIS search for year 2000
articles in Computerworld magazine that turned up only 4 pieces
written between 1982 and 1984, but 786 pieces between 1995 and
January 1999, in the last 4 years. Contrary to what the
programmers of the 1950's assumed, their programs were not
replaced. Rather, new programmers built upon the old routines,
tweaking and changing them, but leaving the original two-digit
date functions intact.
As the experts have told us, the logic bomb inherent in a
computer interpreting the year ``00'' in a programming
environment where the first two digits are assumed to be ``19''
will cause two types of problems. Many computers will either
produce erroneous calculations--what is known as a soft crash--
or shut down completely--what is known as a hard crash.
What does all this mean for litigation? As the British
magazine The Economist so aptly remarked, ``many lawyers have
already spotted that they may lunch off the millennium bug for
the rest of their days,'' unquote. That is a pretty interesting
comment. Others have described this impending wave of
litigation as a feeding frenzy. Some lawyers themselves see in
Y2K the next great opportunity for class action litigation,
after asbestos, tobacco and breast implants. There is no doubt
that the issue of who should pay for all of the damage that Y2K
is likely to create will have to be sorted out, often in court.
But we face the more immediate problem of frivolous
litigation that seeks recovery even where there is little or no
actual harm done. In that regard, I am aware of at least 20
Y2K-related class actions that are currently pending in courts
across the country, with the threat of hundreds, if not
thousands, more to come. It is precisely these types of Y2K-
related lawsuits that pose the greatest danger to industry's
efforts to fix the problem. All of us are aware that the
computer industry is feverishly working to correct or
remediate, in the historical aspects of this, in industry
language, Y2K so as to minimize any disruptions that occur
early next year.
What we also know is that every dollar that industry has to
spend to defend against especially frivolous lawsuits is a
dollar that will not get spent in fixing the problem and
delivering solutions to technology consumers. Also, how
industry spends its precious time and money between now and the
end of the year either litigating or mitigating will largely
determine how severe Y2K-related damage, disruption and
hardship will be.
To better understand the potential financial magnitude of
the Y2K litigation problem, we should consider the estimate of
Capers Jones, Chairman of Software Productivity Research, a
provider of software measurement, assessment and estimation
products and services. Mr. Jones suggests that, quote, ``for
every dollar not spent on repairing the year 2000 problem, the
anticipated costs of litigation and potential damages will
probably amount to in excess of ten dollars,'' unquote. In
other words, for every dollar not spent on repairing the
problem, then the litigation costs can amount to ten dollars.
The Gartner Group estimates that worldwide remediation
costs will range between $300 billion to $600 billion. Assuming
that Mr. Jones is only partially accurate in his prediction,
the litigation costs to society will prove staggering. Even if
we accept The Giga Information Group's more conservative
estimate that litigation will cost just two dollars to three
dollars for every dollar spent fixing Y2K problems, overall
litigation costs may amount to more than $1 trillion. That is
potentially catastrophic.
Even then, according to the Y2K legal expert Jeff Jinnett,
quote, ``this cost could greatly exceed the combined estimated
legal costs associated with Superfund environmental litigation
. . . U.S. tort litigation . . . and asbestos litigation,''
unquote. Perhaps the best illustration of the sheer dimension
of the litigation monster that Y2K may create is Mr. Jinnett's
suggestion that a $1 trillion estimate for Y2K-related
litigation costs, quote, ``would exceed even the estimated
total annual direct and indirect costs of all civil litigation
in the United States,'' unquote, which he says is currently
$300 billion per year.
Now, these figures should give all of us pause. At this
level of cost, Y2K-related litigation may well overwhelm the
capacity of the already crowded court system to deal with it.
Looking at a rash of lawsuits, we have to ask ourselves what
kind of signals are we sending to computer companies currently
engaged in, or contemplating massive Y2K remediation. What I
fear industry will conclude is that remediation is a losing
proposition and that doing nothing is no worse an option for
them than correcting the problem. This is exactly the wrong
message that we want to be sending to the computer industry at
this critical time.
I believe Congress should give companies an incentive to
fix Y2K problems right away, knowing that if they don't make a
good-faith effort to do so, they will shortly face costly
litigation. The natural economic incentive of industry is to
satisfy their customers, and thus prosper in the competitive
environment of the free market. This acts as a strong
motivation for the industry to fix Y2K problems before any
dispute becomes a legal one.
This will be true, however, only as long as businesses are
given an opportunity to do so and are not forced at the outset
to divert precious resources from the urgent tasks of the
repair shop to the often unnecessary distractions of the
courtroom. A business and legal environment which encourages
problem-solving while preserving the eventual opportunity to
litigate may best ensure that consumers and other innocent
users of Y2K-defective products are protected.
There are now at least 117 bills pending in State
legislatures. Each bill has differing theories of recovery,
limitations on liability, and changes in judicial procedures
such as class actions. This creates a whole slew of new
problems. They include forum-shopping. States with greater pro-
plaintiff laws will attract the bulk of lawsuits and class
action lawsuits. A patchwork of statutory and case law will
also result in uneven verdicts and a probable loss of industry
productivity, as businesses are forced to defend or settle
ever-increasing onerous and frivolous lawsuits. Small States
most likely will set the liability standard for larger States.
This tail wagging the dog scenario undoubtedly will distort our
civil justice system.
Some States are attempting to make it more difficult for
plaintiffs to recover. Proposals exist to provide qualified
immunity, while others completely bar punitive damages. These
proposals go far beyond the approach taken in the Judiciary and
Commerce Committees' bills of setting reasonable limits on
punitive damages. Other States may spur the growth of Y2K
litigation by providing for recovery without any showing of
fault. A variety of different and sometimes conflicting
liability and damage rules create tremendous uncertainty for
consumers and businesses.
If we want to encourage responsible behavior and
expeditious correction of a problem that is so nationally
pervasive, we should impose a reasonable, uniform Federal
solution that substantially restates tried and true principles
of contract and tort law. If there is an example for the need
for national uniformity in rules, I think this is it.
The most appropriate role we in Washington can play in this
crisis is to craft and pass legislation that both provides an
incentive for industry to continue its remediation efforts and
that preserve industry's accountability for such real harm as
it is legally responsible for causing. This will involve a
delicate balancing of two equally legitimate public interests--
the individual interest in litigating meritorious Y2K-related
claims and society's collective interest in remediating Y2K as
quickly and as efficiently as possible. We need to provide an
incentive for technology providers and technology consumers to
resolve their disputes out of court so that precious resources
are not diverted from the repair shop to the courtroom.
And this is the need that our bill, S. 461, the Hatch-
Feinstein Year 2000 Fairness and Responsibility Act meets. The
bipartisan bill, among other things, does the following. It
preserves the right to bring a cause of action. It requires a
90-day problem-solving period which will spur technology
providers to spend resources in the repair room instead of
diverting needed capital.
It provides that the liability of a defendant would be
limited to the percentage of the company's fault in causing the
harm. It specifically encourages the parties to a dispute to
request alternative dispute resolution, or ADR, during the 90-
day problem-solving period, and prevents careless Y2K class
action lawsuits, caps punitive damages, and ensures that the
Federal courts will have jurisdiction over this national
problem.
In conclusion, Y2K presents a special case. Because of the
great dependence of our economy, indeed of our whole society,
on computerization, Y2K will impact almost every American in
some way. But the problem and its associated harms will occur
only once, all at approximately the same time, and will affect
virtually every aspect of the economy, society and government.
What we must avoid, at least in my opinion, is creating a
litigious environment so severe that the computer industry's
remediation efforts will slacken and retreat at the very moment
when users and consumers need them to advance with all
deliberate speed.
Respectfully, I think that our bill strikes the right
balance. Still, I recognize that if we are to enact worthwhile
Y2K problem-solving legislation this year, we must all work
together, Democrats, Republicans, and the administration, in a
cooperative manner that produces a fair and narrowly tailored
bill. Recently, the Judiciary Committee initiated such an
effort, to which both Senators Dodd and Bennett have sent
representatives. And I postponed a markup of the Hatch-
Feinstein bill originally scheduled for today. All of this has
been done in the hope that we can produce a measure which has
even broader political support, can pass the Congress, and can
become law.
Now, I hope this has been helpful to you, Mr. Chairman and
other members of the committee, Mr. Vice Chairman, and my
fellow Senators. I really believe we have to do this. I think
we have to do it now and I think we have to do it in a way that
basically remediates and helps to resolve the problems that we
all anticipate will come.
Chairman Bennett. Thank you very much, Senator Hatch. It
has been very helpful, and it is very gratifying to hear the
detail and the great care that has gone into the consideration
of the various issues and the crafting of this legislation.
Very often, we get testimony that is quite general in nature. I
usually give testimony like that, seeing as how I don't have a
legal education and can't intelligently discuss these details
in the way that you have. We are very grateful to you for your
diligence and your willingness to address this issue and give
it top priority.
I have to go back to one of my first experiences here in
the Senate when Senator Dodd was the chairman of the
appropriate subcommittee in the Banking Committee, on which I
sat as a very junior member. We took up the issue of strike
suits, litigation in the securities field that was not
productive that damaged shareholders, damaged investors, in the
name of protecting them. And that is one of my more satisfying
experiences in the Senate, watching Senator Dodd and Senator
Domenici push that legislation through, and being a very junior
cosponsor of it, participating in the Senate debate. We passed
the legislation ultimately over the President's veto. You talk
about a bipartisan effort; that was a bipartisan effort that
garnered the necessary 67 votes.
So working with Senator Dodd on this issue, I know we can
approach it in a bipartisan fashion. I know there are still
disagreements on it and that there is not unanimity behind the
Hatch-Feinstein approach. But I congratulate you on the
thoroughness with which you have gone after this, your
willingness to consider every aspect of it, and I think we are
on the way. I agree with you absolutely that we have to do it,
and we have to do it now.
If we let this one drag on--well, Senator Dodd has
presented me with a gift.
Vice Chairman Dodd. Under $35.
Chairman Bennett. It is under $35. This is a clock that
says ``Time Remaining, Year 2000,'' and as of the moment there
are 295 days, 13 hours, 3 minutes and 15 seconds. And in
congressional terms, that is no time at all; we can take much
longer than that to write legislation. But in terms of this
particular challenge, that reminds us that we have to act with
uncharacteristic rapidity to deal with this challenge.
Senator Hatch. Well, in legal terms, that is an eternity,
as you know.
Chairman Bennett. All right.
Senator Hatch. Let me just say this. I am very proud of the
work that all of you are doing on this committee, and
especially you, Mr. Chairman, and Senator Dodd. You are
approaching this in the right way.
Now, the reason we have delayed this markup is because we
want this committee to give us some advice. We want as many
Democrats as we can to let us know how we can correct or make
this bill a better bill. We have taken into consideration
almost everything we possibly can to get it to be a reasonable
bill. And if we don't do this, then I think it is going to be a
disaster in this country. It would just be a disaster to have
all these economic efforts diverted to courthouses in this
country rather than to fixing the problems. That is why I am
very appreciative of the leadership that this committee is
providing to the Senate and to the world at large, really.
Thank you for inviting us.
Chairman Bennett. Senator Dodd, did you have an opening
statement or comment? And then we will go back to Senator Kyl.
STATEMENT OF HON. CHRISTOPHER J. DODD, A U.S. SENATOR FROM
CONNECTICUT, VICE CHAIRMAN, SPECIAL COMMITTEE ON THE YEAR 2000
TECHNOLOGY PROBLEM
Vice Chairman Dodd. Well, first, let me thank again you,
Mr. Chairman. This is a very worthwhile and important hearing.
And my good friend and colleague from Utah, our witness here,
with whom I have worked on many issues over the years----
Senator Hatch. You sure have.
Vice Chairman Dodd [continuing]. Dealing with children's
issues and----
Senator Hatch. You are not speaking into the microphone
enough there, telling about all these things.
Vice Chairman Dodd. Well, I am sorry. I apologize.
[Laughter.]
I don't want to ruin your career in Utah either. I want to
be careful.
Senator Hatch. You have had that effect from time to time.
Vice Chairman Dodd. I know; so they tell me, my spies out
there tell me.
But it doesn't surprise me obviously that you are here
either because you care about these issues and you have worked
on them over the years. And we appreciate immensely your
willingness to fashion a piece of legislation and try and come
up with some answers here on this. And let me just share with
you, because I have been--Senator Hatch has talked with me, and
I have talked with Senator McCain, who has legislation they
have marked up out of their committee, as well. And I
appreciate the comments of my chairman here talking about the
securities litigation reform bill that Pete Domenici worked on
for 7 years. That legislation was a long time in coming, but we
put together a good bill there, I think, and it has been
beneficial.
And then we did the uniform standards legislation,
following on, because of what we saw as a growing problem in
the proliferation of actions being brought at the State court
level. And I am concerned about that issue here as well. But
let me just share with you a few thoughts, if I can, on this
because in an anticipation of your testimony here today, we
have tried to do some work. And I appreciate the fact that you
are not having a markup today on this to see if we can't find
some common ground with you.
I am concerned about the explosion here; they are talking
about $1 trillion. You may have mentioned that figure before I
walked in.
Senator Hatch. Yes.
Vice Chairman Dodd. And that may be a conservative estimate
here, depending upon what happens in this area. But in 1997, in
the State courts, there was one case filed for every three
people in the United States, to give you some idea of the
magnitude of this issue. A potential escalation of Y2K
litigation obviously can further impede the efficiencies of our
court system. Aside from the problems it creates in and of
itself, you end up with a unique explosion of litigation
because of this problem we have on our hands.
It makes it more difficult in a variety of other areas as
well. You crowd up the courts, obviously, with these kinds of
lawsuits, costing the taxpayers billions of dollars in
products, services, as well as insurance premiums, shift of
cost of burden to consumers and the like. In the same spirit as
has been noted here, we passed the Year 2000 Information and
Readiness Disclosure Act which acts, as all of you noted, to
encourage a steady flow of information regarding Y2K readiness.
And we should proceed into a discussion of Y2K litigation
reform, obviously, as a follow-on to that.
The Year 2000 Information and Readiness Act brought about a
bipartisan compromise between Democrats and Republicans here,
with industry support, and we think it has made a significant
contribution to businesses sharing information with one another
about this issue. I agree with my colleague and chairman that
even with this legislation, fears of Y2K litigation weigh
heavily on the minds of business owners. Yet, we hear rumors
almost on a daily basis of business enterprises which are doing
relatively little, on the other hand, here.
I was at a hospital, Mr. Chairman, in my State the other
day, Middlesex Community Hospital. We have 31 non-profit
hospitals in Connecticut. I am pleased to report that most of
them are really working very hard on this issue, but I was sort
of surprised to have the hospital administrators tell me the
difficulty they are having with suppliers and manufacturers of
medical devices, of them sharing with the hospital the
assurances on compliance.
In fact, they have even bought a couple of pieces of
medical devices that have embedded chips that they have
recently bought that turned out not to be compliant. So there
is still a problem out here, even with our Disclosure Act, in
getting that. So we need to be careful. We are not going to be
providing some blanket of security here for businesses, with
all the knowledge they should have, of stepping up and doing
what they ought to be doing, placing people's lives in
jeopardy. I don't think any of us want to be a part of a system
that would allow that to happen. So we need to be conscious of
that.
After examining a number of the bills, I am very concerned
that we may go beyond--and this is where I would like to focus
these brief remarks--go beyond what is needed to address the
valid concerns of Y2K litigation, the explosion of litigation
in this area. As I mentioned earlier, we drew the narrow bill
on securities litigation reform. I strongly believe that we
must leave broad tort reform for another day.
Now, there are going to be those who want to use this to
drive a truck through this thing, but I think it is a mistake
if we do that. If we seek through this legislation to achieve
broad tort reform, we run the risk that we will not have
meaningful Y2K liability legislation. Therefore, I am going to
introduce a piece of legislation that is narrow in scope--I
have mentioned this to the chairman already--and I don't think
overreaches. And I would like you, Senator Hatch, to take a
look at this, along with Senator Feinstein and others. There is
nothing concrete here, nothing etched in marble at all.
You asked me for some ideas a week or so ago----
Senator Hatch. Sure.
Vice Chairman Dodd [continuing]. And I am trying to comply
with that suggestion to give you some sense of where I think we
ought to go here. And let me just mention a couple of the
provisions. It sort of tracks, in a sense, what you and Senator
Feinstein have gone, and Senator McCain, in the general
headings.
I would endorse the 90-day period where litigation would be
stayed, giving a defendant an opportunity to correct, and
therefore hopefully mitigate Y2K-related damages.
On the alternative dispute resolution, which I think is
something we ought to try, I believe that alternative dispute
resolution, commonly termed ADR, is a very effective tool in
avoiding the time-consuming and expensive proposition of
litigation for both plaintiffs and defendants. Certainly, ADR
could be an extremely useful tool in delaying the complex and
disparate claims.
Specificity in pleadings. Imbedded within the requirement
for specificity in pleadings is the proposition that Y2K suits
should definitely outline the causes of action which form the
underlying claim for damages. By requiring plaintiffs to detail
the elements of their claim, courts can more accurately judge
and, if necessary, dismiss frivolous or legally insupportable
suits.
During securities litigation reform, we worked to eliminate
strike suits and other attorney-generated class actions.
Similarly, I am concerned that we potentially face an onslaught
of suspect Y2K class action suits. By requiring any alleged
defect to be material, I think we help to ensure that
superficial or frivolous claims would not occur.
In contract preservation, in civil actions involving
contracts, it is the terms of these very contracts that should
be strictly construed. It is important, however, to evaluate
whether this might eliminate State law causes of action based
on implied warranty. And I know you do do that, and I think
this is an area where we may have to do some work.
Senator Hatch. Right.
Vice Chairman Dodd. ``Reasonable effort'' defense in a
claim for money damages. Except in contract, a defendant should
be entitled to enter into evidence that it took measures that
were reasonable under the circumstances to prevent the Y2K
failure from occurring or causing the damages upon which the
claim is based.
An overall discussion of negligence claims. It is our
desire to limit frivolous lawsuits. It is appropriate that we
review the standards of proof and to determine whether those
standards need to be raised.
And, last, on the duty to mitigate, in the complex and
unknown world of potential Y2K failures I think it is important
that perspective plaintiffs make all reasonable efforts to
avoid damages in circumstances where information was readily
available. Yet, we must not obviously, in my view, bar
plaintiffs from their fundamental legal rights, and
particularly when there has been abuse and fraud and failure to
comply when knowledge was available to do otherwise.
So those are just some broad outlines, Mr. Chairman. I
mean, again, there is nothing in concrete on this. But in
response to Senator Hatch's inquiry of a week or so ago, and
Senator McCain's similar request, I think a very legitimate and
proper one, to ask those of us who have not signed on with your
proposals here what would we be willing to support--and we will
get this to you, by the way, in more detailed form, but I would
hope that this might provoke some discussion in the coming days
here, because I agree with the chairman. This is not a time
when we can wait around here.
We can't go, obviously, 7 years or anything remote like it
on this issue here. We have got to deal with it very quickly,
in my view, in the next month or 6 weeks, if we are going to
succeed. And so we are going to have to find some common ground
and it is going to have to be narrow. It was hard enough even
with the securities litigation reform, which was pretty narrow,
to get that through. And as you point out, we had a veto and
overrides, and so forth.
I don't anticipate that here. I think the President and the
administration are anxious, as well, to do something here that
they can support. So I think it is in our interest to work very
hard now in the next few days and see if we can't fashion
something here. It may not satisfy the political appetites of
some who see this as an opportunity for getting a lot more in
the area of tort reform. But my message to them would be if
that is what your purpose is here, it is a purpose that is
going to be achieved, or a result that is not going to occur.
This isn't going to happen.
There is an opportunity to do something here in a narrow
way that I think addresses the very legitimate issues that
Senator Hatch, Senator McCain and others have raised. And if we
work hard at doing that, I think we can provide a valuable
service. To go beyond that here, I think, would be a mistake.
It will not only not do anything in this particular case, but
probably create some more serious problems. So I would urge
that we try and find some time here to work on this.
Senator Hatch. Well, let me just say that virtually
everything you have said we have in the bill, except on the
issue of implied warranties. And we do not intend to end those
suits, so I think we are probably in agreement with virtually
everything you have said.
Vice Chairman Dodd. We have some common ground here, then.
Senator Hatch. So those are good suggestions and we will do
our best to sit down and resolve them with you.
Vice Chairman Dodd. Thanks very much. Thank you, Mr.
Chairman.
Chairman Bennett. Thank you. We want to formally welcome
Senator Edwards, a new member of this committee. We were
pleased with Senator Bingaman's service on this committee. He
made a worthwhile contribution, and we were sorry that his
elevation to the position of ranking member on the Energy
Committee made it impossible for him to have the time to devote
to this committee and therefore necessary to resign. But we are
delighted that Senator Edwards has stepped in.
I warn you, Senator Edwards, you are now, if you are going
to fill Senator Bingaman's slot, going to have to become an
expert on armed services issues and telecommunications issues
as they relate to Y2K. But every senator is expected to be a
generalist and this will be a good experience for you. We are
delighted to have you here and we now welcome your opening
statement or any comments you might have for Senator Hatch.
Vice Chairman Dodd. Mr. Chairman, I want to also welcome
our colleague from North Carolina, and it is a timely arrival
here. Our colleague, in addition to his committee assignments,
is recognized as one of the very fine attorneys in the United
States prior to his decision to join us here in the Senate--I
should say the decision of the people of North Carolina to have
you join us here in the Senate. But he will bring a wealth of
information and knowledge in terms of litigation issues, and so
it is an appropriate first hearing for him to attend.
John, we welcome you to the committee.
Senator Edwards. Thank you, Senator Dodd, and thank you,
Mr. Chairman. Mr. Chairman, I do have an opening statement, but
I don't want to interrupt the testimony of Senator Hatch. I
don't know where you are in this process.
Chairman Bennett. His testimony is completed.
Senator Edwards. OK. That is the last thing I would want to
do is interrupt Senator Hatch.
Senator Hatch. You are great. Well, if you will----
Chairman Bennett. We can either excuse him, if you have an
opening statement that is not necessarily pointed to him, or if
you are addressing the very issues he pointed to, I am sure he
would be willing to stay.
Senator Edwards. I will leave that to Senator Hatch. He is
more than welcome to stay. But I certainly do not want to
interrupt his testimony, but I do have an opening statement.
Senator Hatch. Well, I thank you for your courtesy,
Senator. I think we will go, but let me just say this. I really
appreciate what this committee is doing, and I appreciate the
help we had last year. This committee deserves the credit for
that bill, and we had help from every one of you who were on
this committee last year, particularly the chairman, vice
chairman, and Senator Kyl.
And this bill isn't going to go without your help either,
so we want your help. We want to be able to get this thing
resolved in the best possible way and in the quickest possible
way. But we are facing a tremendous disaster if we don't pass
this bill or something very similar to it, and without any real
just cause or reason. If there was a good just cause or reason,
that is another matter.
We will particularly look forward to hearing your ideas, as
well, Senator Edwards, because you do have a lot of litigation
experience, especially on the side of plaintiffs. I have had
both plaintiffs and defense lawyer--did you start out as a
defense lawyer, like I did?
Senator Edwards. I did.
Senator Hatch. Well, see, then you have had both sides, so
you understand these issues very well. We have great respect
for your legal acumen, and so we will look forward to working
with you and see what we can do to get this thing put together
so that it has wide bipartisan support. But we have got to do
it and we have got to do it real soon.
Thank you.
Chairman Bennett. Thank you very much, Senator.
[The prepared statement of Senator Hatch can be found in
the appendix.]
Chairman Bennett. Senator Edwards.
Senator Edwards. Should I proceed?
Chairman Bennett. Please.
STATEMENT OF HON. JOHN EDWARDS, A U.S. SENATOR FROM NORTH
CAROLINA
Senator Edwards. Mr. Chairman, let me thank you first for
calling this hearing. As you know, this is my first hearing
with this committee, and I look forward to working with you and
Senator Dodd on all of the issues that surround the year 2000.
I do hope that this committee and the Senate as a whole
will carefully review all of these recent proposals that would
restrict the rights of American consumers and small businesses
who seek redress for harms caused by year 2000 computer
problems. I say this because I am deeply concerned about
attempts to deal preemptively with a problem whose scope we can
only guess at right now.
I do offer one simple suggestion. Our goal should be to
encourage real solutions, complete solutions, to the Y2K
problem. This committee's own report concluded, and I am
quoting now, ``A misconception pervades corporate board rooms
that Y2K is strictly a technical problem that does not warrant
executive attention.'' I have to admit that it is hard for me
to understand how lowering the responsibility for this inaction
and lax attitude could actually encourage aggressive and
complex solutions.
I want you all to know that I myself dislike frivolous
litigation as much as anybody else. I honor and respect the
law, and like all of you, I find nuisance suits an affront to
our legal system. But I am also all too aware that for every
frivolous lawsuit, there are ten or more legitimate suits
brought by people whose livelihood has been imperiled by
corporate indifference.
In looking through many of the Y2K suits that have been
filed, I have been struck by how many times small businesses
have called their software vendors asking for a solution before
they ever file suit. And too many times these small
businesses--grocers, doctors, interior decorators--were brushed
off by the people who sold them this product, or they were
offered a fix at predatory prices. So the sad fact is that
sometimes suing is the only way to get a recalcitrant company
to come to the table.
Sweeping liability protection has the potential to do great
harm. Such legislation may restrict the rights of consumers,
small businesses, family farmers, State and local governments,
and the Federal Government from seeking redress for the harm
caused by Y2K computer failures. Moreover, it runs the risk of
discouraging businesses from taking responsible steps to cure
their Y2K problems now before it is too late.
I believe we need to ask whether legislation to limit
liability or alter the legal system will support or undercut a
company's incentive to fix Y2K problems. Why should anyone act
comprehensively now if the law is changed to allow you to wait,
see what problems develop, and then use the 90-day cooling-off
period after receiving detailed written notice of the problem
to think about coming into compliance? Why not wait and see
what solutions are developed by others and draw from them later
in the 3-month grace period after the harm is done and only if
someone complains?
The fact is that many major businesses should have known
about this problem decades ago. And certainly anyone in the
business of creating date-dependent software must have known
about this issue. As a result of this indifference, the Small
Business Administration recently warned that 330,000 small
businesses are at risk of closing down as a result of Y2K
problems, and another 370,000 could be temporarily or
permanently hobbled. I don't think we can turn our backs on
these people. And to me, that means that the rule of law should
not be tinkered with, absent overwhelming evidence.
Last year, we passed the Year 2000 Information and
Readiness Disclosure Act to encourage information-sharing and
forthright disclosure. This year, we have already passed the
Small Business Year 2000 Readiness Act, S. 314, to offer help
to small businesses working to remedy their computer systems
before the millennium bug hits. In his prepared testimony, Mr.
Nations has offered a number of constructive suggestions that I
think we should take very seriously.
Let me say, last, I look forward very much to working with
this committee, to working with you, Mr. Chairman, to working
with Senator Dodd. And I thank you for this opportunity to
speak.
Chairman Bennett. Thank you very much. We will get into
these issues, and we welcome you to be here and appreciate your
contribution. I will resist any attempt to respond because we
have a panel here and presumably they will respond to some of
the issues.
I will make this one overall comment. We cannot consider
legislation that would encourage anyone to slow down his or her
Y2K remediation efforts. We cannot consider legislation that
would say failure is an option, or doing nothing is an option
because Congress is going to protect us.
At the same time, in the world in which we live where just-
in-time inventory creates an enormous chain of suppliers that
run out seven, eight, nine, into double digits. A failure in
that chain that is beyond one's control could, in fact, make it
impossible for a business to fulfill its obligations. The
business should be held liable for that failure. But, in my
opinion, punitive damages in that situation are inappropriate.
A business that has done everything it can to make sure
that its systems are operating that is nonetheless victimized
by a failure somewhere in the just-in-time inventory chain, who
is then, because it has deep pockets, subject to serious
litigation problems even after having acted in a responsible
manner itself, is one that should merit receiving some kind of
protection. And that, I think, is the narrow nature of the
legislation that Senator Dodd is talking about and working with
Senator Hatch on.
I am hoping that we can find some kind of carefully
targeted relief that does not allow those who are irresponsible
to go unnoticed and unsued. At the same time however, relief
that sees that those who act in good faith and do everything
they responsibly can are not held to undue and improper levels
of punitive damages.
So with that general comment, let's turn to the people who
really understand this, the lawyer panel that we have set. We
have four lawyers--Michael Spencer, who is with the law firm of
Milberg Weiss; Charles Rothfeld, with the law firm of Mayer,
Brown and Platt. Mark Yarsike is the grocer. He is not a
lawyer. He has been added at the specific request of Senator
Edwards. And Howard Nations has also been added at the request
of Senator Edwards.
We will hear from the first three. Mr. Nations, we would
ask that you be available for questions, but given the fact
that you were added very, very late, after the witness list had
been drawn up, we would ask you to submit your statement to the
record and then just be available for questions from the panel,
please.
Mr. Nations. Certainly, Senator. Thank you.
[The prepared statement of Mr. Nations can be found in the
appendix.]
Chairman Bennett. All right. Mr. Spencer, we will start
with you.
STATEMENT OF MICHAEL C. SPENCER, MILBERG WEISS BERSHAD HYNES
AND LERACH LLP, NEW YORK, NEW YORK
Mr. Spencer. Thank you, Mr. Chairman and Senators. My name
is Michael Spencer. I am a partner in the law firm of Milberg
Weiss Bershad Hynes and Lerach, in New York City. I very much
appreciate the opportunity to be here today, Senators. I have
never given legislative testimony before. I agree that this is
an important issue, and I welcome the opportunity to share my
views with you.
According to the invitation letter, I believe that I am
here, Senators, because I have been the plaintiffs' counsel in
a small handful of class actions that have been brought against
Year 2000 defendants, that is software manufacturers whose
products have had Year 2000 defects. And I know from the
presentation of Senator Hatch and the statements of several of
the Senators on the Special Committee so far that my views are
substantially different from what Senator Hatch described as
the conventional wisdom in this area. I believe that my views
derive primarily from the specific experience I have had in
actually litigating these matters, and therefore I would like
to try to explain to you why that is.
In summary, Senators, my main views and main concerns are
as follows. First of all, I believe that an attempt to rewrite
the laws that apply to Year 2000 problems at this critical
juncture with respect to this problem will exacerbate the
problems, if they exist, rather than solve them. And that is
because we are already subject to a very well-developed common
law and statutory system and set of legal procedures in our
State and Federal court systems that have over the years
yielded very well-articulated, fair standards for dealing with
these problems.
And I do believe that it would be a large mistake to try to
tinker with that very delicate balance that has already been
achieved. That balance comes from a lot of practical experience
with many different fact situations that judges of all
political and legal persuasions have dealt with over many
years, both at the trial level and the appellate level. And I
think it would be true folly, gentlemen, to attempt on a sort
of wholesale basis, in response to a very particular situation,
the Year 2000 defects, to rewrite those laws in a way that
might well exacerbate the exact problems that we are all trying
to address in a constructive way here.
My second point, Senators, is that the $1 trillion figure
that has been bandied about as an estimate for the cost of
litigation to deal with the Year 2000 problem cannot be
supported by any intellectually honest observer. The figure, I
am sure, came up as a round figure that sounded very large and
was attractive to people who were trying to gain attention for
their statements on this a year or 18 months ago when the
problem came into public view, but there is no scientifically
acceptable way to support that figure. By saying that, I am not
saying that the problem is minor. What I am saying is that no
one in this room or elsewhere has the faintest idea what the
extent of the litigation problem, or indeed the technology
problem will be.
And, finally, Senators, my overall position is that your
committee title has it exactly right. The committee title is
the Special Committee on the Year 2000 Technology Problem, and
it is not primarily a legal problem at this point. And it would
be folly to divert our attention to these legal issues when it
is really the technology that deserves our attention.
What I would like to do very briefly, Senators, is give you
a quick perspective on one of the cases that is a class action
that has been filed so far. It teaches some lessons that I
think are important to your inquiry.
In mid-1995, a small business owner on Long Island bought
an accounting software package which he used to deal with the
normal accounting procedures in his business. In 1997, he read
that his system would be subject to Year 2000 defects. When he
bought his software, it was subject to an express 5-year
warranty that it would perform all of its functions in the way
that was described in the manual. It was clear from what this
small business owner learned in 1997, late 1997, that that was
not going to be the case with respect to his software.
Despite the 5-year express warranty, however, the
manufacturer of the software was not offering to fix that
problem for this small business owner for free. And, in fact,
he would have been required to spend about $2,500 to fix this
system that he had bought for about $12,000 just a couple of
years before with an express warranty. Now, that put him in a
difficult position because $2,500 for a small business owner is
not a insignificant sum of money, particularly when he had
bought this envisioning that it would work for him at least
well into the future.
So what he did is he consulted a lawyer and he consulted my
firm about what to do in this situation. We confirmed with the
company that manufactured the software that a free fix was not
going to be available for this product, despite the warranty.
And at that point, Senators, we decided to bring a class action
suit against that company primarily to require them to honor
their express warranty to make a free fix available to the
customers who had bought the software.
About 3 days after we filed that suit in State court, in
California, where the company was located, we got a call from
the company's lawyer and the first thing that was said to us
was that they were offering a free fix to the people like our
client who were in that situation, contrary to their position
before the lawsuit was filed. And that case has now been
settled on that basis, and just yesterday the State court judge
out in California held a hearing on the settlement and
indicated that he would approve the settlement on that basis.
So, Senators, let me conclude by telling you the three or
four things that I think become evident from that situation.
One is that, unfortunately, some members of the high-tech
community that have manufactured software that has these Year
2000 defects--some of them, not a majority of them, are
attempting to use the Year 2000 problem to make profits that
they do not deserve, in this case by charging people who should
have been beneficiaries of an express warranty to get a free
fix, $2,500 on average per person--and there are thousands of
users of this software--to get the fix. That is profiteering
and it shouldn't be allowed and it is what the legal system and
lawsuits in this case were able to prevent.
No. 2, the existing laws were capable to deal with this
situation. Therefore, Senators, I would conclude that the
existing laws do not need to be fixed in this case. The
litigation concluded very promptly.
And, third, and last, Senators, there are no clear lines
dividing who might be a Year 2000 defect claimant from those
who might be defendants in these cases. The potential claimants
or plaintiffs are going to be individuals and small business
owners across the board. This is not a business-versus-consumer
situation. It is certainly not a politically partisan
situation. And I think that by tinkering with the legal system
in a way that potentially causes legal rights to be removed, it
would be preventing many deserving claimants who would suffer
economic injury from this situation from getting their day in
court.
Thank you.
Chairman Bennett. Thank you very much.
[The prepared statement of Mr. Spencer can be found in the
appendix.]
Chairman Bennett. Mr. Rothfeld.
STATEMENT OF CHARLES ROTHFELD, MAYER, BROWN AND PLATT,
WASHINGTON, DC.
Mr. Rothfeld. Thank you, Mr. Chairman, members of the
committee. My name is Charles Rothfeld. I am a lawyer in the
Washington office of the law firm of Mayer, Brown and Platt. I
represent the Semiconductor Industry Association and the
accounting profession, both of which are members of the Year
2000 Coalition, which is a broad-based group of large and small
companies that have joined together to seek targeted Y2K
legislation. I very much appreciate the opportunity to appear
today to talk about an issue that is of enormous importance and
one that is of abiding interest to a great many lawyers across
the country.
The members of this committee know more than anyone about
the technical aspects of the Y2K computer glitch and the effect
that that glitch may have on the national economy. But it is
important to devote attention to a secondary effect of the Y2K
computer problem that may ultimately have more destructive
consequences and longer-lasting consequences for the national
economy than the computer failures themselves, and that is the
threat of a tidal wave of Y2K litigation, or an avalanche, as
Senator Hatch described in his statement this morning.
I would like to touch briefly on three points in my
testimony today. First, I will survey the kinds of litigation
that we can anticipate arising out of Y2K. Second, I will
address the question of the quantity of litigation we can
expect to materialize. And, third, I will touch briefly on the
subject that Senator Hatch and Senator Dodd discussed, and that
is what Congress can and should do about this problem.
First, on the kinds of cases that are likely to arise, I
could spend 5 hours rather than the 5 minutes I have this
morning detailing those because virtually any kind of claim is
imaginable under Y2K. My written testimony goes into more
detail on the kinds of causes of action that we can probably
expect to see. For present purposes, I will simply note that we
can expect claims of the kind that Mr. Spencer has described
seeking remediation costs. We can expect claims for damages
that actually are caused by Y2K problems. We can expect claims
against fiduciaries. We can expect securities fraud claims, and
ultimately we can expect insurance claims.
Now, these different categories of suits will involve an
enormously wide range of causes of action. People will invoke
contract remedies, warranty remedies, tort remedies of various
sorts, statutory causes of action of all kinds, consumer
protection statutes, unfair trade practices statutes, Federal
RICO statutes, the securities laws.
The availability of all of this law makes very pressing the
, how much litigation actually is going to materialize.
Obviously, at this point, again, as Mr. Spencer said, there is
a speculative aspect to that question. But I think all of the
leading indicators tell us that there is likely to be an
enormous amount of litigation produced by Y2K.
For one thing, the experts all agree that there will be a
tremendous number of Y2K suits. Now, Senator Hatch anticipated
much of what I was planning on saying today. I will note only
that the $1 trillion figure which has received so much
attention this morning--and I agree with Mr. Spencer that we
can't have any great confidence in that figure--the fact that
that has been produced by the people who are most knowledgeable
about this does suggest that this is going to be a gigantic
problem.
And perhaps more revealing is the behavior of the legal
profession up until this point. As of last August, 500 law
firms, my own included, had created specialized Y2K practice
groups. I think that--and I should say I am confident that that
number has increased dramatically in the intervening period.
You could attend probably every day between now and January 1st
a seminar or panel discussion or presentation on how to
initiate and conduct Y2K litigation.
There are specialized Y2K treatises and legal reporting
services that are sprouting up like toad stools all over,
directed specifically on how to engage in Y2K lawsuits. Lawyers
across the country are busy advising their clients on how to
position themselves best to begin Y2K litigation and to defend
against Y2K litigation.
Now, it seems to me that this objective behavior in the
legal marketplace is telling us something that is very
significant. I would find it very surprising if all of these
sophisticated and intelligent attorneys were completely off
base in thinking that there was going to be a wave of Y2K
lawsuits in which they could participate. And at this point, I
think the preparation for Y2K litigation has taken on a
momentum of its own that will make an enormous number of
lawsuits inevitable.
As has been said in a different context, build it and they
will come. Well, the litigation framework for Y2K has been
built and the suits will come. I think that that is confirmed
by our experience in other societal problems that have economic
consequences which also have generated a tremendous amount of
litigation--breast implants and asbestos, which have been
mentioned. I think I should add that those are not happy models
for us to emulate in the Y2K setting. And that, I think,
suggests very strongly that legislation of the sort discussed
by Senator Dodd, introduced by Senators Hatch and Feinstein,
and by Senator McCain, would take a valuable step in addressing
this problem.
I was very gratified to hear the remarks of Senator Dodd
this morning because I think that he recognized the significant
threat posed by Y2K litigation and identified some very useful
provisions that would have the effect of focusing people's
attention on solving Y2K problems rather than after-the-fact
litigation.
I would like to just go on for one more minute, Mr.
Chairman.
Chairman Bennett. Yes, I will give you another minute or
two. I gave Mr. Spencer a minute or two.
Mr. Rothfeld. I think that all the provisions that have
been introduced thus far, and Senator Dodd's suggestions, also,
as I understand them, would, I think, fulfill three very
important principles that my clients regard as essential in
this area.
First of all, they would encourage remediation by giving
people an incentive to take the steps that we would all
reasonably want them to take to become Y2K-compliant. Second,
they would give people an opportunity to solve their problems,
if they do develop, without litigation quickly and cheaply.
And in that regard, I should say to Senator Edwards that I
think that the 90-day period would not have the consequence
that you were concerned about of allowing people to wait and
then take advantage of this period to fix the problem cost-
free. As I understand all of the provisions that have been
introduced, they would delay litigation, but they would not
take away any rights on the part of plaintiffs to engage in a
lawsuit afterwards. And if a defendant waited until the harm
actually was inflicted, they would not get any protection
during the 90-day period.
Finally, I think that all of the bills that have been
introduced, and I think Senator Dodd's proposal, as I
understand it, would have the effect of screening out
insubstantial suits, while preserving the rights of people who
actually have been harmed to go to court. I think it would make
sense for Congress to seriously entertain these proposals and
to take these steps before it is too late.
Thank you, Mr. Chairman.
Chairman Bennett. Thank you very much.
[The prepared statement of Mr. Rothfeld can be found in the
appendix.]
Chairman Bennett. Mr. Yarsike.
STATEMENT OF MARK YARSIKE, CO-OWNER, PRODUCE PALACE
INTERNATIONAL, WARREN, MICHIGAN
Mr. Yarsike. Chairman Bennett, Co-Chairman Dodd, Senator
Edwards, my name is Mark Yarsike and I am a small businessman
from Warren, Michigan. It is an honor for me to appear before
you today and I appreciate your allowing to testify on the Y2K
issue.
I am the first person in the world to ever file a Y2K suit.
That case, filed in Macomb County, Michigan, settled quickly
and proves that the current system works exactly as it should.
I am here to implore you to leave this system as it is. I will
take a jury of my peers in Macomb County under the current
standards, system and laws any day of the week. It is what
worked for me, and I hope you will let it work for the other
small businessmen like me. We are counting on that.
I am grateful to you, Mr. Chairman, for wanting to hear
from a real businessman from outside Washington as to how the
court system will handle the Y2K cases that are sure to appear
within the next several years. Unlike some others who speak on
this issue, I do not pretend to be able to see into the future
or forecast what will occur several years from now. I do know,
however, what happened to me. I am a perfect example of a
simple truth: the current court system can not only handle Y2K,
but it does so quickly, with justice.
I hear many heads of organizations that profess to know
what is best for me. I hear many representatives of big
businesses telling their side of the story. I look at who else
is testifying and I see that I am the only person who
represents what I think makes America work--the mom-and-pop
little store. The bottom line is I and every other small
businessman that I have ever spoken to believe and trust in the
current court system. We know what to expect from our local
courts. We signed contracts knowing and relying upon State laws
protecting us--the UCC, State fraud statutes and the like. We
don't want anything to pull away what is often our only safety
net--State laws which are carefully drafted by local elected
representatives who know what it is like for a small business
to operate in Warren, Michigan; Valley Cottage, New York; or
Broken Bow, Oklahoma.
I would like to briefly tell you my story and explain how
the court system worked for me. My story proves, I think, what
most people instinctively know. The current system, with its
ability to offer a jury of our peers, is in the best interests
of everyone. It vindicates the innocent, rights the wrongs
committed by the guilty, and allows small businessmen like
myself to know that if we sign a contract in Michigan, a
Michigan jury will uphold that contract under Michigan law.
Following in the steps of my parents, immigrants from
Poland, I own a gourmet produce market in the Detroit suburbs.
My parents worked 7 days a week and instilled in me the values
of hard and honest work. I apply those values everyday. I,
along with my partner, Sam Katz, himself a survivor of the
Holocaust, like my parents, have managed to build a successful
business. We offer our customers unparalleled service, adjust
quickly to changes in the market, and treat our employees like
family. All that was put in jeopardy by a profiteering company
trying to take advantage of a Y2K problem. It is only the court
system that saved me.
My parents had a cheap $500 register in their store. It was
basic, but it worked. When I opened my store, I decided to take
advantage of the most current technology, which I needed at the
time. I spent almost 100,000 for a high-tech computer system.
My computer systems were the top of the line, or at least that
is what we thought. The company that I purchased them from
spent hours extolling the virtues of the system. They sent a
salesman from Chicago, they sent me literature, they promised
the system would last well into the 21st century. I believed
them.
Opening day was the proudest day of my life. As we opened
the doors to the store, we were thrilled to see lines of people
streaming in. The store was sparkling. Everything was ready, or
so we thought. As people began to choose their purchases, lines
began to form. Suddenly, the computer systems crashed. We did
not know why. It took over a year and over 200 service calls to
realize that credit cards with an expiration date of 2000 blew
up my computer system, the one which I spent $100,000 on.
The crash of the system was devastating. We had constant
lines. People walked out in droves day after day. We couldn't
take their money. People were waiting with full carts of
groceries, but couldn't pay. We could not process a single
credit card, take cash or checks. We could not make a sale. We
did what anybody else would do. We called TEC America, who sold
us the registers. We called them over 200 times and they came
out with over 200 service calls. Everyday, there were problems,
lost sales and aggravation. We were struggling to keep afloat
week to week, day to day.
The company declared that it was doing its best to fix the
problem, but refused to give us another system to use while
they fixed the broken one. Each time the technician visited the
shop, the company insisted the problem was solved, only to have
the registers fail again hours later. I lost thousands of
dollars and hundreds of customers. I was on the brink of
economic disaster. I could not focus on the day-to-day
operations of my business. I was consumed with making sure this
computer system functioned daily. I finally had to go out and
buy a brand new system. I should have bought the $500 registers
my parents used when they arrived from Poland. At least those
worked.
The huge costs of purchasing the first system and then
replacing it, on top of the lost sales and lost reputation,
caused daily havoc and stress on my partner, myself and all the
employees. And I was getting absolutely no satisfaction from
the computer company which put me in this fix in the first
place, so I turned to the court system.
I approached an attorney, who filed a case in Macomb
County, Michigan. The system worked for me. The company who
caused all this grief finally settled with me soon after I
filed the suit, and I was able to recoup some of my losses. It
was only the fear of facing a jury and explaining their
inexcusable behavior that forced the settlement.
I am just a businessman. I am no legal expert on the
various pieces of legislation before the Senate, but I do know
enough to know that adding more procedural hurdles for good-
faith plaintiffs and allowing defendants to have a ``good
faith'' defense makes absolutely no sense. TEC would never have
settled. If we were lucky, we would still be in litigation, but
more than likely my store would be out of business. I would not
be a small businessman today. I would be a former businessman
today. 120 people would be out of work, my landlord would have
a ``for lease'' sign on the building, and I would be out
looking for a new job.
One thing I know is that the so-called Y2K problem is not a
Silicon Valley problem. It is a Warren, Michigan, problem. And
it is not so much a high-tech problem as it is a problem of
getting companies to take responsibility for their products and
the need to repair or replace them. What we need are
responsible businesses to take care of the problem now and not
spend months and months of wasted time trying to get Congress
to protect them. What I don't understand from my vantage point
in Warren, Michigan, is why Congress is first turning to give
liability protection to companies rather than turning to ways
to get companies to remediate the problem now.
Since I had my problems, I have kept up with the cases
being filed concerning the year 2000 issue in order to see how
things developed after I filed my case. I have seen exactly
what I expected--some meritorious cases like mine proceeding to
settlement, others proceeding to trial, and a few seemingly
insufficient cases being dismissed. The current system is
working. The good cases are being handled quickly. The
wrongdoers are recognizing what they need to do to make it
right. People are getting patches for their computers so that
they can go back and do what is best--sell stereos, deliver
groceries, and clean clothes.
Let's actually do something that fixes the problem. Many of
these bills, with all due respect, make the problem worse by
discouraging these companies from fixing the problem. I ended
up having to replace my entire system. Give me tax credits,
help me get SBA loans. These are the kinds of things that will
help small businesses like myself. Knee-jerk efforts to revamp
the entire system of justice that businessmen rely upon is
wrong.
Finally, if Congress is hell-bent on passing some kind of
liability protection bill for large software manufacturers or a
bill that will later alter the current court system, at least
exclude from the legislation small businesses who may end up
being plaintiffs because they suffer commercial loss from
software defects. Let the big guys cope with this new scheme,
if they want, but not us who have to make payrolls and who need
the protection of State laws under the current system.
Long ago, while sitting in their little grocery store in
Detroit, my parents taught me that sometimes people with the
best of intentions can try to make a problem better but end up
making it worse. I understand what they mean. I know that
Congress is trying to help, but before you act, I hope you will
consider what altering the court system would do to a small
businessman. I know that is why you have allowed me to share my
story and I am grateful that you provided me with this
opportunity to testify today. I will be happy to try and answer
any of your questions.
Thank you, Senator.
[The prepared statement of Mr. Yarsike can be found in the
appendix.]
Chairman Bennett. Thank you very much. I can put your mind
at ease. All of the legislation for which I intend to vote
would not in any way interfere with the circumstance you have
just described. We are not aimed at solving that kind of
problem because we agree with you absolutely that someone who
is damaged as you were damaged should have access to the
courts. Senator Dodd feels that way, Senator Hatch feels that
way. The legislation is not aimed at dealing with that kind of
behavior on the part of the supplier.
I think what you did is appropriate. I think the remedy
that you received is appropriate, and I don't think you need to
have any worry that any of the legislation being passed would
prevent someone in your exact situation from recovering as you
recovered. Our problem is not what is happening now because
what is happening now is not a prototype for what is going to
happen.
What is happening now is that there are isolated Y2K
problems which we knew would happen as we got into this issue,
and it is a bell-shaped curve. We are at the bottom of the
curve now. It is starting to go up. The Y2K problems will peak
in the year 2000, then start to come down. They will not end in
terms of their impact until sometime in 2001, and according to
the Gartner Group, maybe even into 2002.
It is in the top of that bell-shaped curve that this wave
of litigation that we are talking about will occur, not right
now. You caught the front end of the curve. Without knowing the
exact situation, I would speculate that the manufacturer with
whom you dealt probably had never heard of Y2K and was unaware
of the fact that the 2000 date on credit cards was going to
have that effect.
We had evidence before this committee of that phenomenon of
people who were getting credit cards that were expiring in 2000
or 2001 causing their readers to fail. American Express
recognized that and stopped issuing cards with a 2000
expiration date until they spent hundreds of millions of
dollars fixing all of the terminals all around the world.
American Express now issues credit cards with some degree of
confidence that they will be taken care of. But when the first
glitch hit, no one was aware of it. No one had anticipated it.
Now, those who were responsible for it should pay, as they
did in your case. And if a manufacturer continued to ignore it,
after he had the first indication that the expiration date
would cause this kind of problem, he was being deliberately
negligent, in my view, and he should pay. But if you are a
merchant and you have a problem that comes as a result of Y2K
over which you have no control, you should not be sued by
virtue of your failure to deliver your goods beyond your
specific liability. You should not be sued, in my view, for
punitive damages because of a failure that passed on through
you to one of your customers.
Now, you are in a circumstance where that probably doesn't
occur, but there are many small businesses of your size that
are in a supply chain where something happens to them because
of Y2K. Down the chain from them, it hits them and makes it
impossible for them to service their customer. And some of the
suits we are hoping to avoid would be suits you would receive
because of your failure to provide services to which you had
contracted because of somebody else's failure. It is this bell-
shaped curve that we are worrying about.
Now, I agree with the $1 trillion figure being counter-
intuitive. The first time I heard it from the experts who
talked to me about it, I said that cannot possibly be true.
Lloyd's of London, not an insignificant organization, accepts
it and is operating on the basis that the trillion-dollar
figure will be valid. My intuition still tells me that it is
too high. My intuition still tells me that we will fall short
of the $1 trillion for that amount. I just have a hard time
visualizing that much money.
But make no mistake about it, we are going to have a wave
of lawsuits, even under the best of circumstances, even if the
legislation that Senator Hatch and Senator Dodd and others are
talking about passes, that will put a tremendous burden on the
courts, that will make it very difficult, Mr. Yarsike, for you
to get the kind of relief you want because of the way things
are jammed up.
It is an effort to clean that out, to make it possible for
the legitimate claims like yours to go forward.
Mr. Yarsike. May I interrupt?
Chairman Bennett. Let me finish, sir.
It is our determination to make sure that the legitimate
claims like yours go forward and do not get jammed up in this
wave of lawsuits that is causing us to look at this. I assure
you and any who are listening that no one on this committee,
and no one that I know of in the Congress, is anxious to create
legislation that will allow wrongdoers to go free. No one on
this committee is anxious to create a safe harbor for anyone
who will then say we will take advantage of that safe harbor to
avoid fulfilling our contractual responsibilities. That is not
our motive, that is not our purpose, and anyplace where that is
demonstrated to be the consequence of the legislation will
produce on this Senator's part opposition to that part of the
law.
But let us understand that this is a very real problem. It
is worldwide. It is not a matter of a few small businesses
dealing with a few software manufacturers. It is a major, major
catastrophe in the making, and it would be irresponsible of the
Congress not to make some attempt to try to deal with it.
Now, sir, I would be happy to hear your response.
Mr. Yarsike. Well, I read Orrin Hatch's bill and Senator
McCain's bill, and I don't see where it protects the citizen
like myself from fraud. I do business with 1,200 companies in
my business. Four companies I do business with bought new
systems in the last 2 years that are non-Y2K-compatible. Now,
they knew about this problem. That is total fraud.
There are still systems on the shelf being sold daily today
as we speak right now that are non-Y2K-compatible, pushed on by
these companies. Now, where is recourse for us? I don't know
how many hundred-thousand-dollar bills you have, Senator. My
hundred-thousand-dollar bills almost put me out of business. I
didn't sleep. I got an ulcer. I got very sick, and they didn't
give a damn.
Chairman Bennett. You are talking to the member of the
committee who is unburdened with a legal education. I have run
small businesses, mom-and-pop businesses. I have run businesses
with a number of employees, in double-digits, not triple, as
you have. I understand exactly where you are coming from.
Mr. Rothfeld, maybe you have a response to some of this.
Mr. Rothfeld. Well, I do. I think it is important, if we
are talking about the legislation, to focus on what the
legislation actually does and not on generalities and
hyperbole. I have looked at the complaint in Mr. Yarsike's
case, and obviously I am not as familiar with the case as he
is. But I don't see anything in any of the bills that have been
introduced, and I didn't hear anything from Senator Dodd in his
proposal, that would have affected his lawsuit in any way.
I think everybody agrees that there are bad actors in the
world, and they will be in the Y2K situation, as they are
everywhere. And if those bad actors cause injury and that
violates legal standards, they should be held liable. But I
think I am confident that Y2K provides a very fertile ground
for opportunistic, entrepreneurial, insubstantial litigation of
the kind that Senator Dodd described in the securities context
some years ago. And it makes sense to screen out, if we can,
insubstantial suits, while preserving the substantial rights of
people like Mr. Yarsike who have suffered actual wrongs.
One additional point I would make. If we look at other
areas where huge waves of litigation have gone on--and asbestos
comes to mind; that is not a good model for anybody. In the
asbestos context, courts were overwhelmed by lawsuits. More
than 60 cents of every asbestos litigation dollar went to
transaction costs. There were excruciating waits for plaintiffs
before they could recover, and defendants ultimately became
insolvent.
Now, that is not, I don't think, a model that is a happy
one for plaintiffs, and it is not something that we should wish
on the high-technology sector of our economy. So I think that
looking actually at what the bills do and making sure that they
succeed in screening out the insubstantial suits, while
allowing substantial rights to be protected, is what the
Congress should be trying to accomplish.
Chairman Bennett. I have exceeded my time for my round of
questioning. I will come back to the panel.
Senator Dodd.
Vice Chairman Dodd. Again, let me just underscore with our
witness here, Mr. Yarsike, just to say, look, I am tremendously
sympathetic to the kind of situation you find yourself in and
others may find themselves in, in that situation. And I think
Mr. Rothfeld here got it correct, in that when it comes to
State contracts, for instance, I don't want to see those
preempted where State law applies in that situation.
Certainly, in the kind of fact situation you described, any
legislation that I am going to support is going to be drawn in
such a way, I hope, that will allow for the legitimate
lawsuits. One of the things that Senator Bennett and I worry
about is that there are those out there who would see even the
discussion of a limited liability as a way to sort of back off
meeting their responsibilities of becoming Y2K-ready.
Obviously, Senator Bennett has spoken for himself very
clearly on this. I would just echo his comments. Any business
or industry that thinks that somehow this 106th Congress is
going to develop some sort of shield or protection for those
businesses who fail to take the kind of obvious steps, common-
sense steps, to make sure their equipment that they are selling
to people like yourself or others is ready, and a failure to do
so is going to not result in potential serious exposure to
them, is deluding themselves, absolutely deluding themselves.
I will tell you that even getting a limited, narrow bill
through Congress is going to be extremely difficult, extremely
difficult. And to the extent that people try and do something
much broader than that--as I described it, the political
appetite to take advantage of a legitimate situation to try and
jam some larger bill through the Congress on major tort reform
legislation--they end up going nowhere, absolutely nowhere. And
what it will do is create even more confusion because I think
what you will get is an industry and business out there
assuming that Congress is going to do something, not stepping
up to the plate and doing what they ought to do. And you will
end up compounding the problem, in my view.
So it is going to be critically important that we draft, if
we are going to do something here, in a very narrow way. And
anything that I would support does not affect, or would not
affect, your case, Mr. Yarsike. And so I just want to make that
case.
I thank you, Mr. Rothfeld, for your comments about the
legislation. And as I said to Senator Hatch, we are going to
put it in today and invite people to comment on it and see what
they think. Obviously, Mr. Spencer, we would like your comments
as well on this. Obviously, my friend and colleague from North
Carolina knows a lot about this issue, has spent a career
working on these kinds of issues, and brings a unique
perspective, as does the chairman.
In a sense, we have got a wonderful opportunity here. We
have got someone who has served as a very successful, and with
a wonderful reputation as being an excellent plaintiffs
attorney, as well as a very successful person in the business
community, sitting on this committee, who has been involved
with these kinds of issues from different perspectives. And my
hope is that with that kind of involvement and comment, and so
forth, we can get something done in this area.
So, again, I thank all three of you. I would just ask--we
will submit this to you--that you might take a look at it, the
bill, and offer whatever comments you would like to on it to us
in the next week or so rather than get into the specific
questions of what you think of the 90-day period and mitigation
provisions, and so forth.
Our proposal is very different in many ways from what
Senator Hatch has proposed. There is a lot less in this
proposal than what he has in his, and so I would ask you to
kind of look at that. We don't have a side-by-side-by side. We
do for Senator Hatch and Senator McCain, but we will get one
here with this provision, as well, and then invite comments on
it.
Thank you, Mr. Chairman.
Chairman Bennett. Senator Edwards.
Senator Edwards. Thank you, Mr. Chairman. Well, Senator
Dodd, I haven't seen your proposal yet either and I would very
much like to see it.
Let me say, first of all, that I think I have gotten to
know these two gentlemen sitting to my right over the course of
the last 2 months of going through a fairly difficult, intense
process, and I know that they absolutely want to do the right
thing. My concern is, in the effort to do the right thing, that
we don't do things that are unintended. And I only have Senator
Hatch's bill, so I want to ask a few questions about that. And
hopefully I can get a copy of Senator Dodd's proposed bill and
see what the differences are.
But it appears to me, just having read through Senator
Hatch's bill--and I would like to get a comment, Mr. Spencer,
starting with you on this. It appears to me that the negligence
standard that applies in State courts all over this country to
hold everybody responsible for their own conduct to behave like
reasonable and ordinary people would behave has been
dramatically altered in that bill. In fact, the standard has
been raised to a standard that would justify the award of
punitive damages in most cases, which is reckless conduct, a
knowledge aforehand, instead of just the typical negligence
standard that applies in courts all over this country. I wonder
if I could get your comment on that.
Mr. Spencer. I have looked at the legislative provision
about that. I think it is somewhat ambiguous in what it is
trying to do. But if it were interpreted to take disputes to
which a negligence standard would apply in State courts, or
even in Federal courts, and raise that standard--and those, of
course, would be tort cases as opposed to contract cases--that
would be, in my view, a huge mistake. It would act to restrict
the ability of claimants in those cases who, under normal State
law, would have a negligence claim that has been recognized by
the courts for centuries, and turn it into something with a
stricter standard that might well preclude deserving people
from going into court.
The other aspect of it that I am even more concerned about
is that, of course, in our legal system we have contract claims
where the parties have pre-determined what their rights and
responsibilities are, and then we have tort claims for other
situations. And, certainly, if any fault-based or even
reasonableness-based standard is wholesale imported into
contract cases, that completely rewrites our entire legal
system for this category of cases.
And it really would frustrate the expectations of
businesses and consumers who have contracted to allocate these
responsibilities, and turn it into something that no one ever
expected, again to the detriment of people who have been harmed
by these Year 2000 situations and who deserve some economic
redress.
Senator Edwards. Mr. Nations, you haven't had a chance to
speak. I wanted to ask you this question. One of the concerns I
have as somebody who has been involved in the court system for
a number of years, as I know you have, is that I think that
sometimes when you tinker in what appear to be small ways with
the legal system--and these tinkerings, I might add, do not
appear to me to be small--but in ways that on the surface seem
logical and rational, there is an enormously important
interaction between the various contractual remedies,
negligence remedies, the standards of proof that apply.
I notice they raise the standard of proof to clear and
convincing evidence, as opposed to a preponderance of the
evidence, things that have been used by court systems here and
in Britain for hundreds and hundreds of years. And I am just
concerned about what appear to be relatively minor changes and
the effect that has on the overall legal system, a legal system
that we have depended on in this country for an awfully long
time.
I wonder if I could get your comment on that, No. 1. And,
No. 2, I would also like to have your--I notice in reading your
testimony that you had some very specific proposals which
appeared to me to be thoughtful addressing some constructive
ideas about dealing with some of these issues.
STATEMENT OF HOWARD L. NATIONS, HOUSTON, TEXAS
Mr. Nations. Certainly, Senator. Thank you. First of all,
the business rules that we have today, the business judgment
rules, the duty of due care, the UCC, the joint and several
liability rules--these are rules that have been very carefully
honed over the years, over the centuries, as you say, because
most of them come out of England, with the exception of the
UCC. We have a set of rules right now in place that will
control Y2K, a standard set of rules applicable in all 50
States.
The real gravamen of most of the complaints in Y2K is going
to be breach of contract. It is going to be breach of implied
warranty of fitness for ordinary use. It is going to be breach
of implied warranty of fitness for a particular purpose. Those
are UCC issues. They do not involve punitive damages. That is
going to be the great bulk of the litigation, and there is no
recovery for punitive damages.
Senator Edwards. May I interrupt you just for a moment?
Mr. Nations. Certainly.
Senator Edwards. And this is in response to something
Senator Bennett raised earlier. He had a concern, and I know it
is heartfelt, about the possibility of punitive damages in an
unwarranted situation. And I have to add I share that concern.
But are you aware of anyplace in the country that punitive
damages can be awarded in a business context where there is not
some outrageous, truly egregious conduct on behalf of the
defendant?
Mr. Nations. As a general proposition, punitive damages
will only be awarded for highly egregious conduct. They will be
awarded for wanton, willful disregard for the rights of others,
and they will be awarded only in a tort context, not in a
contract context. And the overwhelming percentage of litigation
here is going to be contract litigation. Punitive damages is
not a major issue with respect to Y2K, as I see it. It comes
into play when you have fraud involved, primarily, is what I
see here.
And the situation that you are talking about, Senator, in
the example you gave, Senator Bennett, about the person who
does everything he should do, but he is held liable anyway for
punitive damages--that doesn't occur. You are not held liable
for somebody else's grossly negligent conduct. That is an
independent standard, and joint and several liability doesn't
apply to the egregious conduct. That has to be an independent
finding.
Senator may I address one issue that we were talking about
with respect to the Produce Palace of Mr. Yarsike, how this
bill may affect----
Senator Edwards. I actually intended to ask you about that,
so, yes, please.
Mr. Nations. OK, all right, how this bill may affect Mr.
Yarsike and Produce Palace. It is the several liability
portion, the proportional liability portion of the bill that
may very well affect a small business such as Mr. Yarsike and
Produce Palace. It occurs in this fashion. Joint and several
liability----
Senator Edwards. Can I interrupt you, Mr. Nations?
Mr. Nations. Surely.
Senator Edwards. You are discussing the fact that the bill,
Senator Hatch's bill, provides for proportionate liability and
eliminates what has traditionally been the law in this country
of joint and several liability, and in some ways, at least from
my perspective, puts the burden on the innocent party instead
of putting the burden on the parties who are responsible for
what happened.
Mr. Nations. Absolutely. It will put the loss on a lot of
American small businesses. As Senator Bennett has pointed out,
this is a worldwide situation. A lot of the manufacturers of
products that will cause the Y2K problem ultimately are foreign
vendors. And under several liability, the people who will be
liable, the downstream defendants in joint and several
liability--the sellers, the distributors, and so forth--will
not be liable because they will come in and say, well, I wasn't
aware of this; I didn't know that it wasn't Y2K-complaint. They
are off the hook.
And where do you go? You have to go back, and in this case
if the product that failed in his case had been manufactured in
Japan, for example, and sold FOB Yokohama, he would be left
without a remedy because everybody in the downstream would
have--they would be immunized by this bill and he would be left
to go back against a corporation in Yokohama, where he has no
jurisdiction to get them in the United States. So, that is how
Senator Hatch's bill could apply to prevent recovery by Mr.
Yarsike.
Senator Edwards. Before we leave--and I am running short on
time--tell me just a few, briefly, if you can, constructive
ideas that I saw in your testimony about how to address some of
these problems.
Mr. Nations. Well, the idea I had with respect to how to
accomplish remediation and repair, Senator, is if we could
create a Federal repository for Y2K remediation solutions. The
problem is, as you point out in your report, that there are 500
languages and 36 million different programs. A lot of companies
are working on the same language and the same program in
different parts of the country, and if you could create a
repository that would cause them to place with the Federal
Government their solution to that language and that program--
now, in order to do that, you are going to have to give them an
incentive. So I think the incentive would be a tax incentive,
if you give them a tax break for placing their solution into a
repository. Maybe the tax break could be based upon the number
of times it is used by other companies. But that is a thought
with respect to how to accomplish that.
The second thing is that the Internal Revenue Code has as
Rule 482, Section 482, which I think has--I am sure it is well-
meaning, but as applied to Y2K it is pretty treacherous.
Section 482 says that if a company has multiple divisions--this
would be a big corporation--has multiple divisions around the
country, if they have a division in Chicago that finds a Y2K
solution and they send that out to their division of their same
big company in California and their division in Florida and it
costs them $1 million to create, that is a taxable event. It is
a $1 million taxable event to the California division of the
same company. So 482 should be suspended, I suggest, with
respect to Y2K.
The other suspension, I think, that would help in
remediation and repair would be if you suspend the antitrust
laws in a vertical industry; for example, Ma Bell and the Baby
Bells. They are working on exactly the same problem. They need
the same solutions, but it would be a violation of the
antitrust laws as they exist now to have them share
information. So if you suspend the antitrust laws in that
vertical industry so that they could put their information into
a Federal repository, their solutions into a Federal
repository, because they are clearly working on the same
problems, same solutions.
Those are some of the thoughts. Just a couple of other
things, if I may, and that is----
Chairman Bennett. We are running short on time. We have two
more panels we would like to hear from.
Mr. Nations. OK, thank you, sir. The rest of them were in
my remarks.
Senator Edwards. Thank you, Mr. Nations.
[The prepared statement of Mr. Nations can be found in the
appendix.]
Chairman Bennett. I would like to go on. This is an
interesting panel and we could have a very stimulating time,
but we do have two more panels to hear from. I would comment,
Mr. Nations, that the sharing of information was why we passed
the law last time, and it has not worked to nearly the degree
that we had hoped. We created a Good Samaritan situation where
one organization could share its fixes with another without
fear of lawsuits.
As we try to find out why it has not produced the sharing
of information that we had hoped it would produce, we are told
in many instances the legal departments of the companies
involved are saying, well, the law to the contrary
notwithstanding, it hasn't been tested and we don't want you to
tell anybody what your fixes are just in case when the law is
tested we might be liable.
So, unfortunately, there has not been the kind of sharing
that you are talking about. The idea of setting up a Federal
repository as something of a cut-out for that sharing might be
something to look at it. I think it is an interesting idea. But
we went through this discussion. We passed the legislation in
the last Congress, hoping for good results, and the results
have been less than we had hoped for.
I could go on, as I say, but I will observe my own
admonition to the other members of the committee. Thank you all
very much. We will have written questions, I am sure, for all
of you as this thing goes forward. Thank you for your
testimony. We will now go to the next panel.
Mr. Sessions, we are delighted to have you here. This is
the courts panel. You are a board member of FedNet,
Incorporated, and we will look forward to your testimony.
[The questions and responses can be found in the appendix.]
STATEMENT OF HON. WILLIAM STEELE SESSIONS, BOARD MEMBER,
FedNET, INC.
Mr. Sessions. Good morning, Mr. Chairman, Senator Dodd. I
see Senator Edwards has left. He probably picked a good time--
--
Vice Chairman Dodd. He is coming back.
Chairman Bennett. He will be back.
Mr. Sessions. I am very pleased to be here. When I saw how
I was designated, it reminded me that I am, of course, no
longer a judge. I was privileged to serve as a United States
district judge for almost 13 years, including 7 of those as
chief judge. But I don't claim to have the expertise that might
come from the Administrative Office of the United States Courts
or the Judicial Conference of the United States or the Chief
Justice himself.
What did occur to me this morning while we were sitting
here listening was your need to recognize that assuming all of
the things which you have heard this morning happen, as
President Truman was want to say repeatedly, the buck stops
here. All the efforts that we make along this line, all the
time that is spent, all the contemplated legislation is going
to still end up in the courts. And the courts, both State and
Federal, are going to need to cope with it.
We can talk about the possibility of $1 trillion being
involved either in damages or legal fees or attorneys fees. We
can talk about all the problems that will come as a result of
the Y2K circumstance, and the bulk of them will wind up in the
courts. I find that when Senator Hatch talks about the
provisions of S. 461, there are two areas that are particularly
interesting.
No. 1 is the 90-day cooling-off period, which is 90 days
which can be very well used. The other, of course, is an
adjunct to that; that is, the alternative dispute resolution
capability, ADR. So it occurs to me that any legislation that
comes out that encourages ADR in the Federal area is extremely
important.
We have heard learned counsel talk about those kinds of
litigation which may be involved, and it reminds me of the
multiple choice question answers--A, B, C, D and E; E being
``all of the above.'' I think you can take almost any one of
those areas and presume, that from the constitutionality of a
statute on down the line, there is the strong potential for
ending up in the courts. It can end up as a constitutional
question. It can end up as a pure challenge to the legislation
itself. It can be carrying out the legislation, but it calls
for a court that must receive it and handle it.
Most of our State courts across the country have full
benches. Governors normally, very promptly appoint
replacements, or there are judicial elections that are held
very promptly to fill vacancies and fill those benches. That is
both trial and appellate, and, of course, the supreme courts of
the various states.
The point is that State courts will have a full team on the
field. It is extremely important that the Senate concentrate on
making sure that the period of time we have now, between now
and the time the bell curve hits the top in 2001 or maybe 2003,
be used to make certain that Federal courts will have the
ability to deal with the litigation. If we use that time to be
sure that we have a full team on the field--that is, to have as
many vacancies as exist filled so that we are ready. There has
been discussion about the use of senior judges. Senior judges
are like I in that respect; they are white haired. They have
been on that bench many years. They know all the ins and outs
of both civil and criminal litigation. They are, of course,
entitled not to take a full caseload, but most of them are well
challenged with substantial case loads. The point is that
senior judges can help you considerably in handlling the load,
but there is no substitute for active judges who are actually
there and ready to handle the case loads.
I want to speak for a moment about ADR, and then I will be
willing to answer any questions that I can which you have. My
written testimony is brief, it is succinct, and it is to the
point. ADR, it seems to me, offers a particularly strong
opportunity to deal with Y2K litigation. There are a number of
organizations nationwide, that are involved in alternative
dispute resolution.
The proposed legislation contemplates pre-litigation
mediation; that is, before the filing of the law suits, in
order to have an opportunity to go into ADR, particularly into
mediation. These ADR procedures will allow the parties to be
directly involved in solving their own problem; to arrive at a
solution that they may not necessarily be happy with, but with
which they will be satisfied. The 90-day period that is
contemplated for normal remediation--that is, normal mediation
or the beginnings of arbitration--can also be helpful because
it can immediately shift that burden from both State and
Federal courts. So I think that is very important to think
about ADR and to consider it's viability.
You must take a look at burdonsome statutes that are now on
the books which have, in fact, had the affect of federalizing
crime, in many respects. The experience that we have had with
the statutes may show you that some of those statutes ought not
be Federal laws; that they no longer appropriate as Federal
laws, but rather should be handled by the States, which have
the bulk of the prosecutive capabilities and the bulk of the
judicial capabilities that are needed to deal with crime. This
action of repealing those law would considerably lighten to
load of Federal courts.
Finally, I would say this. You should look at the major
city courts, both State and Federal. They will be the most
likely places where the unique burdens of the legislation will
fall; that is, those suits that are challenging either the
constitutionality or other parts of the statutes themselves.
Those are difficult and lengthy cases requiring considerable
judge power. It needs to be clear that the courts are handling
their business, and handling it well.
Major city courts are going to have a dual problem. They
are probably going to have a rash of the contract-type cases
that Mr. Nations referred to and they are also going to have
the very difficult, long-term litigation that is not going to
go away. You need to have a full bench to meet this challenge.
You should make every effort to be sure that you can do that.
The Senate is, singularly, in a responsible position. There
are no judges placed on the bench without the Senate's approval
of those judges. So I would urge that you will serve the Nation
well if you deal with the Y2K problem by making certain that
the third branch has sufficient judges was able to do the job
with which it is charged under the Constitution. This is
critical and your obligation is clear unceasing.
I thank you for the opportunity to appear here this
morning. My written testimony, I hope will be helpful. I hope
that it is brief enough and that the appendices will be helpful
to you.
Senator Edwards, you were gone the moment I came up. I
thank you for allowing me to be here and to have an opportunity
to respond to the panel's questions.
Thank you, sir.
Chairman Bennett. Thank you very much. Just because you are
no longer a Federal judge presumably doesn't mean that your
memory is gone and you don't have an understanding of----
Mr. Sessions. There is a little bit of intrusion of
Alzheimer's, but I am doing fairly well.
Chairman Bennett. No, no, no.
Vice Chairman Dodd. Senior moments, we call them.
Chairman Bennett. Senior moments.
Mr. Sessions. Senior moments, absolutely. Well, I have got
both, Senator.
Chairman Bennett. OK. You were here during the previous
discussion. Your comment about the bell curve stretching out
into 2003, 2004, maybe even beyond, I think is accurate because
the bell curve that I described is based on the number of
failures that will occur as a result of Y2K. And the lawsuits,
of course, will outlive the failures by a very long period of
time.
Mr. Sessions. They tend to have a life of their own, yes,
they do.
Chairman Bennett. They will have a life of their own, and I
am interested to have you say there will be lawsuits other than
the massive contract disputes that Mr. Nations spoke about.
Mr. Sessions. I believe that is correct, Senator.
Chairman Bennett. That could tie up the courts, and that
is, of course, one of the concerns we have. This is unusual, if
not unique, because it will be one--I was about to say one
event, but that is not true. There will be hundreds of
thousands, if not millions, of events, but they will be focused
around a single date and a single phenomenon tied to that date.
I say date; I should say dates.
You may not have followed this, but we are worried about
April 9th because it is the 99th day of the 99th year and that
could trigger failures in some software programs. We are
worried about September 9th because it is 9/9 of 1999, and that
could trigger some software problems. We are worried about, of
course, the change from 1999 to 2000. We are worried about
February 29, 2000, because the algorithm that is used to
compute dates, for some reason that I won't bother to explain,
does not recognize the leap year in 2000. The algorithm misses
leap years every 400 years, and 2000 happens to be the one.
Mr. Sessions. Of course.
Chairman Bennett. Of course. And so these series of
failures will produce the bell-shaped curve that I talked
about, and it will peak probably not in January of 2000, but
will peak several months thereafter and then begin to taper off
through 2000, as I say, and be with us through 2001.
The lawsuits will, as you indicate, then move out into
2002, 2003, 2004, and so on, and the burden on the courts will
occur in that period. And anything we can do to filter out the
frivolous ones, while protecting the legitimate ones like Mr.
Yarsike's, is what we are after here.
Mr. Sessions. Well, access to the courts is always a great
issue, Mr. Chairman. Access to the courts is very important,
and the Speedy Trial Act of 1974 nearly killed the civil
dockets in many courts, particularly in metropolitan areas.
There were lawyers all over the country whose limited access to
the Federal civil docket made it necessary for them to file
suits in the State courts in order to have the cases heard in a
timely manner.
That ought not happen, particularly with major, complex, or
multi-district, multi-State litigation. Litigation must have
access to have courts that can handle it. Therefore, we must
make sure we have a full Federal judicial team to handle
whatever comes.
Chairman Bennett. Now, I would like your comment on an
issue Senator Hatch raised--we could have gotten into it with
the attorney panel, but again we were spending too much time on
it as it was--about the fact that States are passing laws
exempting themselves. Right and left, as States look at the Y2K
problem, they are passing legislation. I wanted to get into
this, didn't have time to get into this with Mr. Spencer, who
said we can go along just fine. The State laws as they are
currently structured go back hundreds of years and they will be
just fine. The State laws are not as currently structured; they
are being amended, changed, repealed all over the place all the
time.
Do you have a view of the impact of that that you could
share with us?
Mr. Sessions. There was comment made that law firms are
preparing for litigation. These include major law firms that
recognize that these serious questions are probably going to
flow directly into the State courts, but may well end up, one
way or the other, in the Federal system.
And those are major litigations, whether they are State or
Federal. They eat up an inordinate amount of time and they are
not easily subject to mediation or even arbitration because you
are deciding on the viability, the constitutionality, the
appropriateness of law. I think that it is going to be a major
concern. It is going to be on the back of the courts, and the
courts must be prepared to handle it.
Fortunately, the Congress of the United States has taken
steps with the Federal systems since the early 1990's that
would allow mediation to be recognized as an appropriate aid to
the courts. I think there are many former Federal judges who
will be called upon by the courts to deal with litigation
either as special masters or with alternative dispute
resolution, particularly court-annexed arbitration. The former
judges have a blend of the expertise and knowledge of the laws
that will help them deal with the fact issues. It is going to
be interesting.
Chairman Bennett. It is going to be--yes, the Chinese
curse, may you live in interesting times.
Mr. Sessions. Well, I think judges live for that. They are
ready to handle it. That is what they are on the bench for, and
so we are blessed in that regard.
Chairman Bennett. My time has expired.
Senator Edwards.
Senator Edwards. Thank you. Good morning, Judge Sessions.
How are you?
Mr. Sessions. I am fine, thank you. Nice to be here.
Senator Edwards. I was particularly taken by your comments
about the effects of the--was it the 1974 Act on speedy trial?
Mr. Sessions. The Speedy Trial Act of 1974 gave judges 90
days with which to begin the trials or have them dismissed if
there were not motions pending.
Senator Edwards. I happened to be a law clerk in the
Federal court system shortly after that.
Mr. Sessions. Were you in North Carolina?
Senator Edwards. I was in North Carolina. We didn't do
anything but try criminal cases.
Mr. Sessions. That is right, and there are many courts that
today still have that burden. The Western of Texas from which I
come is one of them; the Southern of Texas; and Miami. These
courts that are along the country's borders tend to have that
kind of tremendous problem.
Senator Edwards. And I am also interested in--even with
these various proposals about litigation, I am interested in
asking you about two areas. One is filling these judicial
vacancies. We have two now in my circuit, the Fourth Circuit,
United States Court of Appeals for the Fourth Circuit. And I
also have some district court vacancies that have not been
filled, and have not been filled for a number of years. This is
not something that has been present for 60 days or 90 days;
this has been several years.
I gather from what you are saying that regardless of how we
legislate or don't legislate about liability matters in this
area of Y2K that you do believe Y2K is going to create an
additional burden on the Federal court system, and therefore it
is critically important that we move with dispatch as
judiciously as we can to fill those vacancies.
Mr. Sessions. It is something that you can do in the
natural order of things without any legislation. I recognize
that those are political matters and they are very important. I
recognize that, for instance, in the Fourth Circuit there are
some judges on that circuit who say we do not need additional
people. That may be so, but wherever the litigation hits, the
one thing the U.S. Senate can do is to help prepare the team to
deal with the Y2K problem, however voluminous it is.
The predictions are sufficiently solid enough to know that
the case volume will be one that would fall in the category of,
quote, ``major impact,'' end of quote. We need to be able to
deal with it. The judiciary is going to have the problem. The
Chief Justice is absolutely correct, and I think those people
who speak for the filling of those vacancies, such as the
American Bar Association and other State organizations, as
well, are very sound. The impact on the Federal judiciary can
be lessened by having a full team.
Senator Edwards. And would you agree that a fair assessment
of the need to fill any vacancy, any Federal judicial vacancy
in this country today--part of the calculus should be taking
into account the potential impact of Y2K litigation?
Mr. Sessions. I think it has to be. If you ignore it,
whatever the weight, you run the risk of not having taken your
own medicine; that is, having said Y2K is a tremendous
potential problem, as best we can weigh it is going to be a
significant problem, and therefore we should have done what we
did not do. And then it is a little bit too late. It takes time
to get that done, and I recognize that.
But I think the Senate carries out admirably its
responsibility, but it does need to give the attention to that
particular part of it to be sure that it doesn't fail, to give
the country what it must have to deal with the problem that may
develop.
Senator Edwards. And in terms of filling those vacancies,
what I hear you saying is it is important that we start
focusing on that process now.
Mr. Sessions. You can count me as being right there, yes,
sir.
Senator Edwards. OK, good. I agree with you. The second
thing I wanted to ask you about was when you talk about
alternative dispute resolution, particularly in the context of
Y2K litigation, are you talking about mandatory or voluntary?
Mr. Sessions. You know, I could talk about them both. Every
once in a while, in a mediation, I will have some candid person
either representing his business or himself individually who
will say, you know, judge, you talk about my being here in good
faith but I am not here in good faith, A judge ordered me to be
here. And I always try to deal with that anger at being
required to do something that the party believes to be
nonsensical. I try to make him or his company understand that
they have an opportunity in mediation, where they themselves
can control the outcome and settle the litigation. They are the
ones who can finally agree that although they are not happy,
they are satisfied with what has been arrived at. It is
``doable,'' not what they want, but what they will agree to.
And it is very important in mediation to arrive at that point.
Here, you heard the grocer talk about what he had to do to
get into the settlement posture. It is quite possible now that
with the cadres of mediators that we have, particularly those
who are prepared to deal with heavy litigation, we can actually
do pre-litigation mediations, or very close to it because they
are in the 90-day period that Senate 461 contemplates.
And so if you move to ADR, whether it is court-annexed,
whether it is binding or not binding you have an opoportunity
to dispose of the litigation and relieve the pressure on the
courts.
Senator Edwards. Well, I will just speak from my own
personal experience, having been in literally hundreds of
mediations, non-binding mediations. They have the potential to
be extraordinarily effective, particularly if you have got
talented, experienced mediators conducting them.
Mr. Sessions. I have been in States, Senator, where there
is no mediation process, where I have been like Daniel Boone,
cutting through the forest. But I have found that the minute
those people understand that they have control of the
litigation and it is the last time they are probably going to
have control of the litigation, they really get serious and
then it becomes a good-faith effort. Anger goes and arriving at
a solution becomes the focus of their thinking. How can we get
rid of this? How can we save the dollars that are involved? How
can we save the anguish? How can we save the time that is going
to be spent by our businessmen and businesswomen involved in
this bottle when we ought to be working on our business. It is
that simple.
Senator Edwards. Thank you, judge.
Mr. Sessions. Thank you, sir.
Chairman Bennett. Thank you very much. We appreciate you
being here. Again, I am sorry that the time constraints don't
allow us to spend more time with you because you have much to
contribute. But we will go over your written statement very
carefully, and appreciate the thoughtfulness that went into
preparing it.
Mr. Sessions. Mr. Chairman, any time, any circumstance,
under any way that you want to do it, I will be available to
your committee to either answer questions in writing or
otherwise, or to come back and be with you. I appreciate having
the opportunity to speak. Thank you, sir.
Chairman Bennett. Thank you very much.
[The prepared statement of Mr. Sessions can be found in the
appendix.]
Chairman Bennett. We go now to our final panel, the
industry panel. We have Dr. William Frederick Lewis, who is
President and CEO of Prospect Technologies. We have John
McGuckin, Jr., Executive Vice President and General Counsel of
Union Bank of California, and George Scalise, who is President
of the Semiconductor Industry Association. Gentlemen, we thank
you for your patience in what I know has been a long morning.
Dr. Lewis, we will start with you.
STATEMENT OF WILLIAM FREDERICK LEWIS, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, PROSPECT TECHNOLOGIES, WASHINGTON, DC.
Mr. Lewis. Thank you very much. Mr. Chairman and members of
the committee, I am Bill Lewis, President and Chief Executive
Officer of Prospect Technologies, a small business
headquartered in the District of Columbia. Our firm employs 23
individuals dedicated to providing information solutions to a
number of Fortune 500 companies and U.S. Government agencies
both here in the United States and internationally. Our
business includes computer hardware manufacturing, computer
software, and consultative services. I also come before you
today as a member of the U.S. Chamber of Commerce Small
Business Council.
As we quickly approach the millennium, the greatest issues
we face as an ongoing concern is the year 2000 computer
problem. Technology represents one of America's greatest
accomplishments, as one of our most challenging issues as we
approach the new millennium. On one hand, technology has helped
American business to become more efficient and more able to
compete with our foreign counterparts. On the other hand, as we
have become so reliant on technology, we have become more
vulnerable to the problems of that technology. To our clients
and me, the benefits far outweigh the problems, and we should
continue to explore new opportunities for improving products
and services and competing more effectively around the world.
I raise the issue of risk and reward as it relates to
technology because each day, as a business that provides both
hardware and software solutions to our customers, Prospect
Technologies must continually ensure that our products and
services work to enhance business operations and not complicate
or interfere with normal operations.
I come to you today concerned about the Y2K litigation as
potentially both a defendant and as a plaintiff. From my
perspective, my clients rely on me to certify that the hardware
and software that we manufacture and sell to them will be Y2K-
compliant. Because we are using the latest technology from
corporations like Intel, Advanced Micro Dynamics [AMD],
Microsoft, and others, we have been ensured that their
operating chips and software are, in fact, Y2K-compliant, and
we are confident that all the components are in compliance.
I am not necessarily concerned about the computers leaving
our manufacturing site, but rather what happens once they are
shipped to a client. Once the basic computer is shipped,
clients will load their own applications software and other
operating software to run such programs like scheduling and
payroll. If these application programs are not Y2K-compliant,
most likely as a manufacturer of the computer I am the person
they are going to call first.
In all of my business dealings since founding our company,
we have always approached such technical malfunctions with the
attitude that as a businessman and as a businesswoman, come let
us reason together to find a solution, instead of pointing
fingers or looking for the blame. To put it another way, let's
fix the problem and not litigate the problem.
We have taken this approach, quite frankly, because we have
to. Unlike a Fortune 500 company, I do not have a dedicated
legal team, nor do I have millions of dollars in reserves for
such issues. Instead, I focus on what I do best, and that is to
provide leading-edge technology solutions for companies wishing
to be more efficient and productive in business matters. I must
say that with very few exceptions, my customers respect our
approach to handling complications.
As I mentioned earlier, I could potentially become a
plaintiff in the Y2K-related problems. Obviously, as a
manufacturer of computers, I must rely on my suppliers to
provide the necessary parts according to our contractual
obligations. In the case of manufacturing computers, there
might very well arise a situation in which a supplier's
manufacturing system shuts down or is delayed, and therefore I
do not receive the parts I need to meet my contractual
obligations. My first approach with the supplier would be to
try and work out the problem, but if that should fail and I
accrue damages as a result of lost revenue, I would expect to
have the appropriate compensation for actual damages.
I founded my business on the notion of the American dream.
When I started my business, I knew nothing would come easy, but
rather I would have to work for every penny I earned. I would
take risks and hopefully be rewarded, but there were no
guarantees. Never once during my business planning process did
I say to anybody, well, I will work hard, I will work smart,
but if it all fails, I will get rich by suing someone for
something they did wrong. That is not the spirit of the
American business person, but rather that of a person who is
looking to make a quick buck.
I have special obligations to the men and women that work
for Prospect Technologies, in that we are their livelihood. The
income they make for their services provides their family and
their community with means to function. To that end, I take
every precaution to ensure that the Y2K bug does not adversely
affect their livelihood.
I would like to take a moment to commend the work of you,
Mr. Chairman, Mr. Vice Chairman, and the leadership you and
other members of the Special Committee on the Year 2000
Computer Problem have provided on this critical issue. In
addition, I would like to commend the leadership of Senators
Hatch and Feinstein, and Senator McCain, and their proposed Y2K
legislation in the Senate, and Representatives Davis, Dreier,
Cox, Moran, Cramer and Dooley for their work on H.R. 775, the
Year 2000 Readiness and Responsibility Act, in the House of
Representatives.
As a small business owner who could potentially be both a
plaintiff and defendant in the Y2K litigation, I fully support
their approach to dealing with this complicated issue. Their
legislation will help to encourage businesses to fix the
problem and not litigate the problem. I am particularly
interested in three aspects of the bill.
Because I expect my customers to approach technology
glitches with the same reason that I do, I should give my
suppliers the same courtesy. To that end, I agree with the
provision to provide a 30-day notice to a potential defendant
and allow them 60 days to fix the problem. I suspect that in
many cases it will not take 60 days. However, this is a
reasonable timeframe to ensure compliance. This provision is
very much in sync with our company's philosophy of saying may
we come together and find a reasonable solution to fixing this
problem.
I firmly believe the provisions of the legislation and the
90-day cooling-off period will help alleviate the vast majority
of the problems associated with Y2K. I say this because many
business owners will appreciate the fact that once a problem is
identified, they will have a specific timeframe in which the
issue will have to be resolved.
Similarly, the caps on punitive damages will discourage
frivolous lawsuits filed by those seeking to get rich by
someone else's misfortune. And alternate dispute resolution,
ADR, will help alleviate the time and money needed to prepare
as either a defendant or as a plaintiff in legal proceedings.
Chairman Bennett. Could you wrap up? Your time is gone. I
am sorry to interrupt you.
Mr. Lewis. Let me come to the end by saying the problem
associated with Y2K--the least of my concerns is that we can
fix the problem. My greatest fear has been having to use my
limited resources to defend ourselves or file a lawsuit instead
of investing the funds and knowledge of my firm to create new
technology and new jobs in our area of expertise. I have no
legal team. If I would go to court, I as CEO and my Chief
Technology Officer and my other senior management would become
involved with that suit. This would cause us to be in court
fighting, and that takes time away from the things I do best.
So, finally, again, Mr. Chairman, Mr. Vice Chairman,
members of the committee, I would like to thank you on behalf
of the employees and customers of Prospect Technologies, and
appreciate you having me here today. Thank you very much.
Chairman Bennett. Thank you very much.
[The prepared statement of Mr. Lewis can be found in the
appendix.]
Chairman Bennett. Mr. McGuckin.
STATEMENT OF JOHN H. McGUCKIN, JR., EXECUTIVE VICE PRESIDENT
AND GENERAL COUNSEL, UNION BANK OF CALIFORNIA, SAN FRANCISCO,
CALIFORNIA, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION
Mr. McGuckin. Good morning, Mr. Chairman. I am John
McGuckin, the Executive Vice President and General Counsel of
Union Bank of California, a national bank headquartered in San
Francisco. Today, I am testifying on behalf of the American
Bankers Association.
I want to leave you with three important points about the
American banking industry and the year 2000. First, America's
banks are taking Y2K very seriously. Since 1995, the banking
industry has devoted millions of employee hours and billions of
dollars to addressing Y2K. We recognized early on that Y2K is
much more than a systems problem. Y2K reaches into every part
of the bank. Every product and service is affected. Every
employee and every customer must be knowledgeable about the Y2K
issue.
We also recognized early on that Y2K is not just an
internal operations issue. A bank is dependent upon its
vendors, service providers, data partners, and customers both
here and abroad. America's banks have addressed all these areas
in preparing for Y2K.
The argument that liability legislation will somehow
undermine the incentive American companies have to deal with
the Y2K problem simply does not hold true for banks. Banks
across America are fixing Y2K problems for one simple business
reason. We want to survive and compete in the next millennium.
If we don't address the century change competently, America's
banks and businesses, large and small, will lose customers and
revenues. We do not need the threat of litigation as a
motivating factor. Our customers motivate us. Litigation is
only a distraction from fixing Y2K problems at hand.
My second point is that the American banking industry will
be prepared for the century change. We know we will be prepared
because of the extensive planning and testing we have done and
are doing to our own systems. Many banks are testing systems
now by turning forward the computer clock to January 1, 2000,
and running test programs to verify remediation.
Our internal and external auditors have vigilantly overseen
our progress and reported that progress to our senior
management and directors. Meanwhile, our regulators have
conducted detailed and repeated onsite examinations of our Y2K
programs. The financial regulators have worked in close
partnership with banks across the country to assess each bank's
response to the Y2K problem and to ensure that we are on track
to a timely completion. To put it another way, the money of the
American people will be safe in America's banks. To quote the
chairwoman of the FDIC, money is safe in an FDIC-insured
account, no ifs, ands or buts.
My third message is that the banking industry, along with
the rest of the American business community, urges Congress to
address broader Y2K liability issues this year. Last year's
legislation was helpful in promoting an environment of open
disclosure and discussion of Y2K-related information. But now
we must address the potential tidal wave of litigation which
could engulf the American judicial system, the American
economy, and American businesses large and small after the
century change.
You may be asking yourself if the banking industry has
spent so much money and time on Y2K and if our regulators think
that we will be ready, why are the banks concerned about
litigation?
First, we believe that it is sound policy to remediate, not
litigate. Even after the century change, most companies,
including banks, will work to fix any Y2K problems which occur
rather than litigate them with our customers and our vendors.
This is why we urge a no-surprises, pre-litigation opportunity
to remediate before lawsuits are filed. This is also why
alternate dispute resolution should have a place in any
proposed legislation.
Second, we believe that the vast sums in litigation costs
estimated to arise from Y2K disruptions, both real and
imagined, would be much better spent invested in our economy at
the start of the new century. Litigation, especially class
action litigation, with the potential of unfettered damages, is
easy to begin but very costly to resolve.
Because banks have millions of customers and are financial
intermediaries in millions of transactions everyday, we are
especially vulnerable to deep-pocket litigation. If Congress
agrees that we have made reasonable efforts to address this
once-in-a-millennium problem, you should consider appropriate
legislation which recognizes rather than punishes our
diligence.
In conclusion, Mr. Chairman, we feel confident that the
American banking system will be safe during the century change.
The American banking industry has made an unprecedented
investment to prepare for this unique event in history. But,
nonetheless, we urge Congress to take action to prevent the
derailing of this massive Y2K remediation effort both before
and after the century change into a litigation morass of
unprecedented scope and cost to all of us.
Thank you for the opportunity to address the committee. I
am happy to respond to questions later.
Chairman Bennett. Thank you, sir. We appreciate it.
[The prepared statement of Mr. McGuckin can be found in the
appendix.]
Chairman Bennett. Mr. Scalise.
STATEMENT OF GEORGE SCALISE, PRESIDENT, SEMICONDUCTOR INDUSTRY
ASSOCIATION, SAN JOSE, CALIFORNIA
Mr. Scalise. Thank you, Mr. Chairman. My name is George
Scalise, President of the Semiconductor Industry Association,
and I appreciate the opportunity to be here today.
Let me spend a minute to tell you about the semiconductor
industry, and in particular the U.S.-based portion of that.
This is a $125 billion-a-year industry. The U.S.-based
companies have the leading position in that, with about a 54-
percent market share. The industry grows at about 17 percent,
compounded, and has done that for the last 40 years. We expect
it to continue. But perhaps most important, it reduces its
prices to its customers about 30 percent every year, and that
has gone on from the very earliest days. So there is increased
value and lower cost, with more functionality, with higher
quality each and every year.
We pay our employees roughly twice what the average is for
industry in this country. The Commerce Department states that
we are the leading contributor to value-added of the entire
manufacturing sector in this country which, as you know, is the
definition for creating wealth. And perhaps, again, one of the
more important parts of what we have to do is we spend about a
third of our sales dollar on the combination of research and
development and new plant and equipment each and every year. So
it is a very capital- and a very R&D-intensive industry.
Now, the benefit that flows from this is that the end
customer gets great value. If you look at the desktop computer
and go back just 2 years, the average price for that was about
$1,900. And if you look at the same machine today, with greater
functionality, higher speeds, and so on, it is about $1,200.
That delta of $700 in cost to the consumer is largely the
benefit of lower cost of the semiconductors. Roughly 85 percent
of that cost reduction is as a result of semiconductor pricing.
So $600 of the $700 is the benefit that comes from our
products.
Now, let me get into the Y2K issue and why this is all
important. We talk about pervasiveness. Today, the industry
provides about 10 million transistors every man, woman and
child on this Earth. By the year 2008----
Chairman Bennett. Ten million?
Mr. Scalise. Ten million.
Chairman Bennett. For every----
Mr. Scalise. Here in the U.S., it is about 50 million. In
the less-developed countries, it is down in the area of less
than 3 million, obviously. By the year 2008, we will be
producing 1 billion transistors for every man, woman and child
on Earth. So you can see the definition of pervasiveness here.
What has happened is, as a consequence, there is a real
misunderstanding of what the semiconductor does, and therefore
there is a misperception of what its role is in this whole year
2000 issue. So what I would like to try and do in just a few
minutes here is clarify what the misperception is and provide
the reality that we need to focus on as we deal with the issue.
But let me emphasize that our focus is truly remediation,
not litigation. That is what we want to do, and I think that is
what Dr. Lewis was talking about. We do not want to limit the
legal actions involving personal injury. We think that that
should take a course that it has in the past. We are focusing
on ensuring that the legal system isn't going to be exploited
to extract settlements from those who have been responsible in
dealing with this whole Y2K issue.
Electronic products are a collection of chips and other
components, along with software. And blended together, they end
up with a system that in the final analysis is what is going to
deal with and cause or avoid the whole Y2K issue. The chip is
not the determining factor. A small percentage of chips can be
programmed so that they deal with the date issue, but most
chips do not. I mean, the vast majority of these millions and
millions of transistors we produce have nothing to do with the
date code issue.
In general, the chip makers do not design the software and
put it into these chips. That is largely what the end producer
of the equipment does, and in many instances that is where
their added value comes in. So, in effect, if you looked at the
chip makers, they would be more like the ones who make the
books, and those who use the chips and program them and end up
with the end equipment are the ones who put the words on the
pages. And I think that is one way of describing how we can
differentiate ourselves.
Another term that comes up is ``embedded systems,'' and
there is nothing very unique about an embedded system except it
is a subset of the overall system and it is embedded somewhere
in the architecture. But, again, it has all of the same
attributes, and the software that is going to drive that system
and cause it to do what needs to be done is largely going to be
supplied by the producer of that end equipment. So what we are
trying to do is work with both our suppliers and our customers
to make certain that we are remediating any issues that are out
there today. Anything we can do to help out, that is what we
are doing.
So I hope this gives you at least a reasonable idea of what
the embedded system is, the chip is and what it is not, and
therefore where the distinction lies. So, ultimately, the
manufacturer of the end product is the one that is going to
have to be the one to come forward and help resolve whatever
issues happen to emerge here.
So we believe it is essential that this issue be approached
in such a way that it is not subject to frivolous lawsuits. We
aren't asking for dispensation for anyone who hasn't acted in
good faith. We don't want that. We want to make certain that
those who have acted in good faith should not be punished,
though.
So we do support the aim of the two bills by Senators Hatch
and Feinstein, along with the one from Senator McCain. And
certainly, from what we heard from Senator Dodd here this
morning, it sounds like he is much on the same track. What we
would like to see is have this legislation passed so we can
continue to spend our resources on this productive R&D that
provides the consumer more value for less cost, and more
functionality, and let the benefits flow to the consumers here
in the U.S. and around the world and avoid the litigation that
could be caused by this issue.
Thank you.
[The prepared statement of Mr. Scalise can be found in the
appendix.]
Chairman Bennett. Thank you very much. Let me comment on
your general testimony. One of the things we have learned in
this committee and in the work Senator Dodd and I did on the
Banking Committee before this committee was formed--one of the
happy things we have learned--is that the embedded chip problem
is not as pervasive as we thought it was.
When we first got into this, I was told that the embedded
chip failure rate would be somewhere between 2 and 3 percent,
and a failure rate of 2 and 3 percent of embedded chips would
be catastrophic. And now we are being told on the basis of new
research that the embedded chip failure rate will be .01
percent or something of that kind.
Do you have a number? Can you confirm for me?
Mr. Scalise. No, we don't have a number, but it is a very,
very small percent, because again you have to think in terms of
what is the industry composed of and there aren't that many of
the chips that deal with that function, a very, very small
percentage.
Chairman Bennett. Let's go to these cooling-off periods and
the 30-day remediation period, and so on. Dr. Lewis, you talked
about that. One of the things we are learning on this committee
is that the failure--these are all guesses; I have to
underscore that--the failure period will be for most of the
failures 3 days or less.
Dr. Lewis, do you have any comment on that? You have
probably looked at the data.
Mr. Lewis. The answer is that you would begin to see
problems immediately when a computer has its date indicating
that it is indeed in the year 2000. And, in fact, it is
possible for you, Mr. Senator, to re-set your computer today
and advance your date and cause your computer to think you are
in the year 2000. So the general answer to your question is
right around the year 2000, most computers will begin to
experience this problem. And something unusual may go wrong.
Chairman Bennett. But presumably it could be fixed in a 3-
day period?
Mr. Lewis. No, that is not necessarily true. As I mentioned
before, it, the problem, could be in the applications software
that the customer has loaded. It could be on a number of
things, and it would take a period for my engineers to go in
and talk with the customers, discuss it with them, assess what
is going on. It is our experience that much older software is
more prone to the problem than the newer software, for
innumerable reasons I could get into.
So the answer to some of these questions would be a
migration path from an older piece of software to a newer piece
of software might be a solution for many of these Y2K problems
for an individual customer.
Chairman Bennett. What I am driving at is that if the
projections being made by the consultants that we have had
before the committee are correct, the bulk of the problems in
the United States--I don't want to get into the problem of
overseas--the bulk of the problems in the United States could
be resolved in a relatively short period of time and that the
30-day period or 90-day period in the legislation would be
sufficient to get the problem solved.
Mr. Lewis. Senator, I now understand your question a little
better. We may argue about a day or two here or there, but
clearly within a reasonably short period of time, there would
be some kind of an amicable solution arrived at between the
supplier and the customer at that point.
Chairman Bennett. So the provisions for that in the
legislation you think are sound policy?
Mr. Lewis. Absolutely. We strongly support that cooling-off
period. Let us come in and fix the problem, and it would take
the period of time that is already mentioned in the bill.
Chairman Bennett. Now, Mr. McGuckin, your comment about you
being driven by your customers, not by lawsuits, reminds me of
a phrase from my younger days. I was working for a company and
they said we have a very unique incentive program here, and
that is if you do your job, you get to keep it. And I think
that is basically the attitude of most business, that if they
do their job, they get to keep their customers, they get to
keep their market share, and that is indeed the driving force.
Now, our examination on this committee corroborates what
you have said about the banking industry, and the banking
industry as a whole is perhaps the best prepared or among the
best prepared of the industries dealing with this. You have
spent an enormous amount of money. Citicorp, for example,
originally said when I got into this they were going to spend
$500 million fixing the problem. And then by the time this
committee was formed, we were told it was going to be $650
million. Now, I understand it is getting close to $800 million,
and probably by the time the thing finally works its way
through the bell-shaped curve, it could conceivably top $1
billion in this one corporation alone.
Some other large corporations are talking about numbers in
that area, and you are obviously getting a return on that
investment in the form of getting the problem under control and
getting remediation. Nonetheless, you will have problems. Do
you have any kind of a study in the ABA or anecdotal
information that you could share with the committee with
respect to where you expect the problems to arise that might
fall into either the 30-day or 90-day period where you would
have to deal--or are you confident enough that there won't be
any?
Mr. McGuckin. I am certainly not confident that there won't
be any, Senator. I think that this is a totally unpredictable
situation. The banking industry for quite some time has dealt
especially with our consumer customers within that window
period. If you look at your banking statement, you will see on
it an 800 number that you can call if the information is
incorrect. And we expect that many of our consumers, when they
review their banking statements after the year 2000, will do
just that, and so we are geared up and we are used to that.
I think that the issue that is unknown to us is as the
ripples of Y2K begin to run through our customer base, we don't
know how it is going to affect a small company that we lend to.
We don't know how it is going to affect a large company for
which we do the payroll or the employee benefit recordkeeping,
or for which we invest the funds in the 401(k) plan. Those
issues are not going to be spotted on January 3. Consumer
issues I think probably will be.
But as we go out through the year and we receive data from
a company for their payroll or their 401(k) plan, which affects
hundreds of customers and consumers and employees, we have to
make sure that that data goes through our system clean and it
doesn't infect our system again. In each of those cases, I
think if we find a glitch, if we find a problem, we are going
to go immediately back to the company and hope that we can work
with the company within the cure period to correct problems. It
is in our incentive to do that because we want to keep that
customer. You are absolutely right.
Chairman Bennett. One final question and then I will go to
Senator Edwards. When we first started looking at this--oh, it
has been 2 years ago now that Senator Dodd and I got into it on
the Banking Committee--we were told there wasn't a single ATM
machine anywhere in the country that was Y2K-compliant. You
have been working for 2 years now. Can you give us a number or
a percentage for ATM's, because that is the first place where
you will get panic if people feel they can't get their money
out of the bank?
I am trying to tell people don't draw out large sums of
money with respect to Y2K. Now, am I right in saying that or am
I going to be embarrassed as people can't get their money? Can
you give us some kind of a figure on ATM remediation and where
it is nationwide?
Mr. McGuckin. Well, we will try not to embarrass you,
Senator. That is one of our major jobs. Unfortunately, I will
have to get back to you on the number. What I can tell you is
that the banks throughout the country and the ATM systems are
systematically checking each one of those ATM's. And we
anticipate that by well in advance of the year 2000, the ATM
system will be Y2K-OK. And whether you will see that on your
ATM or you will get it from your bank, we anticipate that the
ATM's will be OK.
The issue--and this is one of the ripple effects that I
know the committee has already taken a look at--is getting
enough cash to those ATM's to be ready for what we anticipate
will be larger than normal withdrawals. Many consumers are used
to on the third day of a 3-day weekend going to their ATM and
finding that it is out of money. That is something that we all
deal with, and you just go to another ATM.
On this weekend, a major part of our contingency planning
throughout the entire banking industry is how do we get the
cash which the Fed has already thought about and has already
put in place--how do we get that to that ATM so that when you
walk up to it anytime during that weekend, there is cash
available? That, I think, is the more significant planning and
contingency issue before the banking industry than whether or
not the ATM's will recognize your card when you put it in. We
feel confident it will, Senator.
Chairman Bennett. OK.
Mr. Lewis. Senator, if I may support my colleague, Mr.
McGuckin, I can speak of Europe, since we are in the process of
opening a European office. Currently, three French banks have
people whose sole job is to go to ATM machines in France and
try putting in a card which has the year 2000 on it. The
failure rate to obtain cash is anywhere from 40 to 60 percent
right now. We clearly know the rest of the world is very far
behind us.
Chairman Bennett. Yes.
Chairman Bennett. Senator Edwards.
Senator Edwards. Thank you, Senator Bennett.
Mr. McGuckin, let me ask you just a couple of questions and
start by commending you. It does appear to me from everything I
have read in trying to catch up with the work that--and I have
got a long way to go to catch up with the work that Senators
Dodd and Bennett have done on this committee for a couple of
years now--that the banking industry has worked extraordinarily
hard to avoid the upcoming problems.
You may be interested in knowing that when Chairman
Greenspan testified before the Banking Committee, I asked him
the question, if you were an elderly couple with your money in
the bank--I don't know if you were present for that--at the end
of 1999, what would you advise them to do? And his advice was
to leave the money in the bank, and I think that is in large
part due to the work that you all have done.
I do want to ask a couple of questions. First, Dr. Lewis,
if I can start with you, when did you first become aware of Y2K
problems?
Mr. Lewis. The Y2K problem has been around since days of
early cobol programmers. At that time we were trying very hard
way back when, about 30 years ago, to save space. It was a
common technique where storage space was much more valuable or
much more expensive, so when we programmed it was common to
leave off as many what we thought to be a few insignificant
bits of data as possible. So it would go back to when I first
started programming when I was a teenager.
Senator Edwards. And that would have been roughly when?
Mr. Lewis. We are talking about the early 1960's.
Senator Edwards. Do you know--and I am not asking about you
specifically; I am asking about what you know about. We have
heard some stories this morning and I have read about some
other stories. Are you aware of any situations where
manufacturers or vendors, at least from your perspective, have
tried to profiteer from Y2K problems, Y2K problems of their own
making or that they have some responsibility for?
Mr. Lewis. I can certainly tell you as a representative
from the technology community that I know a lot of people are
desperately trying to fix their systems to become Y2K
compliant. I cannot tell you from personal experience, Senator,
of a firm that is trying to do something with their software
that would cause damage or harm to other people in the Y2K
area.
Senator Edwards. Mr. Scalise--am I pronouncing that right?
Mr. Scalise. Yes.
Senator Edwards. Let me ask you the same question I just
asked Dr. Lewis.
Mr. Scalise. No, I don't know of any instance where that is
the case. In fact, in the semiconductor industry, I guess we
can pride ourselves on the fact that we not only compete
vigorously, but we also finds ways to collaborate in the
appropriate manner. And in this instance, through Sematech, we
are assessing all of the equipment that comes into the industry
on a coordinated basis to make certain that it is going to be
complaint, so that there is a coordinated effort to make
certain this doesn't happen. So we are looking at it upstream
and downstream in that regard, and hopefully avoiding and
remediating wherever necessary.
Senator Edwards. Senator Bennett asked about the cooling-
off period, 30, 90 days. Ninety days is what is in Senator
Hatch's bill. Let me just tell you candidly what my concern is
about that and, Dr. Lewis, get you to respond to this, if you
would.
I am concerned about the small business who--you know, they
are told there are going to be 90 days. Their computer system
has shut down. They can't make payroll. Their cash registers
don't work. A lot of the small businesses that I have known and
represented over the years couldn't survive 30, 60, 90 days of
essentially being out of business. If you were to put yourself
in their shoes--I am asking you to trade hats here for a
minute, but if you were to put yourself in their shoes, can you
see why they might have concerns about such a period, 30 or 90
days?
Mr. Lewis. But remember, Senator, if you will, I am a small
business, too. I have 23 employees. In fact, in part of my
testimony I spoke about what would happen to my firm in the
case of the Y2K when I was not able to get parts and able to
understand that I would not be able to fulfill my----
Senator Edwards. So you don't have to work hard to put
yourself in that position.
Mr. Lewis. Oh, absolutely not! And that is why I come back
to that phrase, quoting the Bible, of saying come let us reason
together. If the problem will be exacerbated due to older
pieces of software or things that are not more recently
constructed, taking into account that, oh, by the way, 1900 now
when we program means the year 2000 and not 1900, then there
are many remedies.
For instance, there are wonderful packages out there,
modern packages, that do payroll. There are wonderful, modern
packages out there that do manufacturing.
Senator Edwards. But, Dr. Lewis, who is going to pay for
that?
Mr. Lewis. I can say that giving us the time when two
businessmen can work together on something, that is an
additional opportunity for businessman to businessman, business
woman to business woman, we can all work together to come out
with some kind of a solution. There may exist packages that we
might be able to give that could have a thousandsfold times the
benefit of the original piece of software. I don't have an
answer for you, Senator, right now.
Senator Edwards. You understand why I would be concerned
about that?
Mr. Lewis. Absolutely, but that is why I am saying during a
cooling-off period where we can come up with an amicable
solution on both parts, that will allow that--we can do that
with either ADR or just this cooling-off period we have been
speaking about--that will allow for good American business to
take over and not immediately jumping the gun to say we have a
lawsuit. Let me tell you the problem that would happen if I
were sued.
My company would probably shut down. As CEO, I would be
involved. My chief technologist would be involved. I would no
longer be able to function in my leadership role. My customers
would not be serviced. My employees would not be paid. I would
be in a difficult period of time.
Senator Edwards. As the result of a lawsuit?
Mr. Lewis. Absolutely, because I would have to be involved.
In this case, remember, if one of my computers was involved
with this, again as a small business, I would directly have to
be involved. I do not maintain a legal staff. I do not have
millions of dollars of reserve. So I personally would have to
be involved in this lawsuit against my firm.
Senator Edwards. I guess what my concern about the 90-day
cooling-off period--and I see my time is up, so I will make
this brief. My concern about the 90-day cooling-off period is I
think it could also be described as a 90-day small business
shutdown period, I mean, unless something is worked out. And I
hear what you are saying.
Mr. Lewis. Yes.
Senator Edwards. I mean, basically, your response is good
people of goodwill who work together in a normal business
context can come together, absent a lawsuit, and work these
things out. I hear you. I mean, I am not misunderstanding your
testimony. But my concern is that 30-or 90-day period also has
the potential--I mean, sometimes things don't get worked out,
and it also has the potential of putting small business out of
business, including a small business like yourself. And I have
a real concern about that.
Mr. Lewis. Senator Edwards, I understand your concerns, but
if I may just make two points to that----
Senator Edwards. I will ask Senator Bennett. My time is up.
Chairman Bennett. Go ahead.
Mr. Lewis. If I can respond, Senator Bennett, I want to
quote something that you said. It is in very much in my best
interest to keep my customer satisfied because he or she is
also my source of revenue. So I will be, during that period of
time, going to work very hard to rectify that situation and not
put them out of business.
Secondly, if I were involved in a lawsuit, I physically and
my other people that should be fixing this problem could not be
out there with our unfortunate customers. We would be in court.
Senator Edwards. Thank you, Dr. Lewis. Thank you all very
much for being here.
Chairman Bennett. We can do another round if you have
additional questions.
Senator Edwards. I actually, Senator, only had one other--I
had read a comment that I would like to get the response from
the three witnesses, and that would be all I would care to ask
about.
Chairman Bennett. Well, let me make a comment first. I have
been where Dr. Lewis is talking about. I have been at the head
of a very small business that had a lawsuit that we felt was
inappropriate, and some of our shareholders said let's fight it
on a matter of principle. And I said you fight this on a matter
of principle and you are out of business. You settle.
Our legal bills were running $25,000 a month, at a time
when $25,000 a month would put us out of business. And I
settled for $2,500 a month, and people were grumbling, yes, but
you are giving in and they are wrong and the principle--you
have got to make the point. And I said, I am sorry, I don't
want to make the point, I want to survive. And the worst thing
that can happen to a small business that is struggling to
survive is to get hit with a lawsuit because the time and the
attention, the focus of the management team is all destroyed as
far as building the business is concerned. So I know exactly
what you are saying and where you are on that, and that is the
kind of concern that I have here.
Now, let me make another comment. Any small businessman who
gets caught--now, this is not a legal issue; again, I am
speaking from a business perspective--any small businessman who
gets caught unaware by a Y2K problem is himself guilty of some
kind of negligence. That is what we are holding these hearings
for. That is why Tony Blair in the British Isles has billboards
with his signature on it saying this is the No. 1 issue facing
the survival of the United Kingdom. I am not exaggerating very
much. I don't have the exact words, but they are pretty close
to that.
A small businessman who does not take the time to pick up
the phone and call Dr. Lewis and say is my software going to be
all right, can I get a Y2K response from you, is a small
businessman who is being negligent in terms of his own
shareholders. When people ask me what should I do with respect
to Y2K, I always say to them take charge of your own Y2K
problem. Call your bank and make sure your bank is going to be
Y2K-compliant. Call your software supplier and ask the
question. Don't sit around and wait for the failure and then
say, oh, gee, I can sue somebody.
I gave this speech in a small, rural Utah town and people
asked me what should we do, and I said, you know, take charge,
call everybody. Among other things, I said call the mayor and
make sure the water purification system in the town is going to
work, because most water purification plants are run by
computers.
At the end of the speech, a fellow came up and introduced
himself, shook my hand, and he said, I am mayor. He said you
have just triggered a whole bunch of phone calls that I am
going to get. I said, Mr. Mayor, is your water purification
system going to work? And he said I don't have the slightest
idea; it never occurred to me to ask that question before.
As I say, that is why we are holding these hearings. I
would hope that every businessman and woman, regardless of
size, gets on the phone and starts this process that you are
talking about, Dr. Lewis, far in advance of the year 2000, gets
in touch with the software supplier. If you have got Windows
95, get a hold of the web site of Microsoft and get the fix
because Windows 95 is not Y2K-compliant. There is a free fix
that can be downloaded, but you have to go get it.
And I don't want people to say, well, because I didn't go
get it and Microsoft didn't contact me and I had a failure on
my Windows 95, now I am going to sue, and jam up the courts. Or
more importantly somebody saying I am going to file a class
action lawsuit on behalf of every Windows 95 user. It is
irresponsible if you are using Windows 95 and you are not
checking to make sure that the applications you use are, in
fact, compliant. You have an obligation to your employees and
your shareholders to do that yourself.
I will get off my soapbox, Senator. Go ahead.
Senator Edwards. Actually, Senator Bennett, a lot of what
you say I agree with. I think that I, speaking for myself,
believe strongly in personal accountability and responsibility.
And I think you are right. I think that all these businesses
have a responsibility to take the action they can to ameliorate
whatever damage may be done. I think a lot of what you say
makes just good old common sense.
But I will have to tell you I put it in the context of a
legal system that--and I understand your perspective and I
respect it very much, and I have defended people in your
position and I have seen the anguish that you describe. But on
the whole, I have watched a legal system over 20 years that
works for the most part and protects the rights of people whose
rights need to be protected.
I guess my hope and wish in this process is that we be
thoughtful and balanced in our approach to it. And it is
certainly what I intend to do, and I know from having listened
to you and your comments that you intend to do that. Again, I
thank these witnesses, who I think also have the same attitude.
Chairman Bennett. Thank you all. We appreciate your coming.
We appreciate your patience with some long-winded Senators.
That is part of the occupational hazard.
The committee is adjourned.
[Whereupon, at 12:23 p.m., the committee was adjourned.]
A P P E N D I X
------
ALPHABETICAL LISTING AND MATERIAL SUBMITTED
______
Prepared Statement of Chairman Robert F. Bennett
Today marks the 11th hearing of the Special Committee on the Year
2000 Technology Problem. We are pleased to have Senator Hatch with us
today. It would appear that Senator Hatch and I have switched places.
Just over a week ago I was testifying on Y2K liability legislation at
the Senate Judiciary Committee, which Senator Hatch chairs, and today,
I am welcoming him to the Y2K Committee's hearing on the same subject.
For obvious reasons, both the Y2K Committee and the Judiciary
Committee have an interest and expertise in the arena of Y2K liability.
Such has been the case with every sector we have investigated, because
Y2K affects directly or indirectly all organizations, be they
government agencies or private businesses. It is a pervasive problem.
Every committee within the Senate has oversight of an area that in one
way or another will be effected by Y2K. We in the Senate Special
Committee on the Year 2000 Technology Problem are encouraged when other
committees such as the Senate Judiciary Committee, recognize the
potential impact of Y2K and take steps to address it. Senator Hatch has
certainly done that in his committee and we applaud his efforts.
While we are here to discuss many of the issues that were raised in
that earlier Judiciary Committee hearing, our hearing is taking a broad
approach to the subject. We want to examine the specific liability
bills circulating in the Senate, but we also wish to address other
subjects, such as the potential for court overload, and the effects
that Y2K litigation may have on the operation of businesses either
faced with lawsuits or forced to seek legal recourse through the court
system. In a related matter, businesses that are sued will often turn
to their insurance companies to collect on their policies. The GAO has
ongoing work in this area for the Committee, and will issue its
findings in the near future. However, GAO recently told us that
insurance regulators are lagging behind in their efforts to increase
awareness and provide guidance for Y2K, and to conduct examinations to
assess and verify Y2K readiness. In addition, the industry isn't
planning to validate Y2K readiness through broadscale testing. We're
concerned that Y2K failures in the insurance industry might, among
other things, adversely affect businesses that are trying to collect on
their insurance policies in the aftermath of litigation. GAO has
provided its preliminary findings in a statement for the record for
today's hearing.
There have been some alarming projections concerning the total cost
of Y2K-related litigation. I think the figures $500 billion to $1
trillion speak for themselves. That is more money than most people care
to conceptualize. Let me help you with that--if your business lost $1
million every single day since the year 740 BC, that would equal
roughly $1 trillion in total losses. That amount of money is staggering
to imagine. It's over 14% of our nation's total GDP. We have been
referred to as a litigious people, but how could such an insurmountable
cost be possible? I want to paint the most accurate picture of the
situation that I can. However, the very size of the problem makes it
difficult, and almost surreal, to grasp.
According to the February 16, 1999 Congressional Research Service
Report for Congress on legal issues surrounding the Y2K computer
problem, the following are potential defendants in Y2K liability suits.
Hardware and software vendors, consultants, and service
providers;
Corporate boards of directors and top management;
Software licensees;
Product manufacturers;
Landlords of ``smart'' or secured buildings;
Banks, securities firms, and other financial entities;
and Insurers
You have undoubtedly noted that the list is not short. The
defendants will not be the only individuals adversely affected by
litigation. All parties involved in a suit sacrifice time and
resources. Furthermore, the time, effort, and resources in terms of
personnel and money, that is allocated towards litigation by
corporations, firms and other organizations, versus the greater
priority--Y2K remediation--equates to time, effort and resources not
invested in the research and development of viable solutions to this
problem. Anything we do, we must do quickly and we must ensure
fairness. Senator Hatch, you and Senator Feinstein, as well as Senator
McCain have already worked closely on this problem and I feel that we
are getting close to finding a solution.
Fear of litigation catalyzed our efforts to pass the ``Year 2000
Information and Readiness Disclosure Act,'' which promotes the free
disclosure and exchange of information related to Year 2000 readiness.
It does work to provide some liability protection for the release of
certain information. Today we will investigate the prospect of a more
aggressive, yet narrowly tailored bill which would act to neither
reward nor encourage irresponsible behavior relative to Y2K problems.
I've said before that the best deterrent to trial lawyers running amuck
with Y2K is remediation. If the problem is fixed, there should be no
cause for visiting our courts. Ultimately, this is the best answer to
the question, ``how do we keep the flood gates closed to the impending
wave of litigation?'' At the same time, we must consider in the
presentation of any bill, that providing a safe-haven for businesses
that work to mitigate their Y2K exposure, should not at the same time
protect those who would choose to ignore the threat of Y2K-related
system failures. In that regard, our mission is two-fold: first, to
preserve the right of the government to bring action against those who
failed to disclose their Y2K status while allowing consumers and
business associates to seek fair retribution for damages; and second,
to extend protection to companies and others who have strived to do all
they can to navigate the obstacles of Y2K in such a way that it would
be obvious to any reasonably thinking person that they fulfilled their
duty.
__________
Prepared Statement of Vice Chairman Christopher J. Dodd
Thank you Mr. Chairman. Your leadership throughout the last eleven
months is greatly appreciated. Yours has been the loudest voice of
warning about a variety of Y2K issues, and I'm sure the American people
are truly grateful. We welcome all in attendance today, and thank the
witnesses for their participation and for the effort they have made in
taking time out of their busy schedules to be here. We especially thank
Senator Hatch for taking time from his day to join us.
Today we are examining the potential effect that the Y2K problem
may have on litigation. I believe that our ultimate goal should be to
encourage Y2K compliance. Our legal system is already burdened by a
tremendous number of cases. the burgeoning caseload in federal courts
is well-known, and the problem in the state courts is just as bad. In
1997, there was one case filed in the state courts for every three
people living in the United States. A potential escalation in Y2K
litigation could further impede the efficiency of our court system, and
cost taxpayers billions in inflated costs for products and services, as
well as insurance premiums, as companies shift the cost burden to
consumers.
In the same spirit that we passed ``The Year 2000 Information and
Readiness Disclosure Act,'' which acts to encourage a steady flow of
information regarding Y2K-readiness, we should proceed into a
discussion of Y2K litigation reform. ``The Year 2000 Information and
Readiness Disclosure Act'' brought about a bipartisan compromise that
satisfied industry concerns. It was crafted with a single purpose in
mind, and I hope that we would take this same approach in developing
Y2K litigation reform.
I agree with Senator Bennett that even with this legislation, fears
of Y2K litigation weigh heavily on the minds of business owners. Yet,
we hear rumors, almost on a daily basis, of business enterprises which
are doing relatively little in the way of remediation. Even with ``The
Year 2000 Information and Readiness Disclosure Act,'' corporate
attorneys may still be counseling their clients to be wary of full-
disclosure. But, the Act has worked to encourage many companies to
begin thinking in terms of Y2K remediation. Further reform should shine
a stronger light on those who choose to do nothing.
After examining the various Y2K litigation bills, I am very
concerned that they may go beyond what is needed to address the very
valid concerns of a Y2K litigation explosion. As some of you may know,
in 1995 I joined with Senator Domenici to author Securities Litigation
Reform Legislation. This was a limited, carefully crafted remedy to
correct specific known abuse. I have frequently stated that any Y2K
litigation should be similarly designed and should avoid overreaching
its intended purpose. Many interest groups will therefore have to curb
their political appetites. I strongly believe that we must leave broad
tort reform for another day. I don't want to make the perfect the enemy
of the good. If we seek through this legislation to achieve broad tort
reform, we run the risk that we will not have meaningful Y2K liability
protection.
Therefore, I intend to introduce a bill that is narrow in scope and
does not overreach. The goal of this bill will be do discourage
frivolous suits and therefore guard against the potential flood of Y2K
litigation. I intend for this bill to provide for the following:
An opportunity for defendants to cure--I endorse a 90-day
period, where litigation would be stayed giving a defendant an
opportunity to correct and therefore, hopefully mitigate Y2K-related
damages.
Voluntary Alternative Dispute Resolution (ADR)--I
strongly believe that alternative dispute resolution, commonly termed
ADR, is a very effective tool in avoiding the time consuming and
expensive proposition of litigation for both plaintiff and defendant.
Certainly ADR could be an extremely useful tool in resolving the
complex and disparate legal claims that may arise from Y2K-related
failures.
Specificity in pleadings--Embedded within the requirement
for a specificity in pleadings is the proposition that Y2K suits should
definitively outline the causes of action which form the underlying
claim for damages. By requiring plaintiffs to detail the elements of
their claim, courts can more accurately judge, and if necessary,
dismiss frivolous or legally unsupportable suits.
Requirements of minimal injury in class action suits--
During securities litigation reform we worked to eliminate ``strike''
suits and other attorney-generated class actions. Similarly I am
concerned that we potentially face an onslaught of suspect Y2K class
action suits. By requiring any alleged defect to be material we help
ensure that superficial or frivolous Y2K class action suits do not
occur.
Contract Preservation--In civil action involving
contracts it is the terms of those very contracts that should be
strictly construed. It is important, however, to evaluate whether this
might eliminate state law causes of action based on implied warranty.
Reasonable Efforts Defense--In a claim for money damages,
except in contract, a defendant should be entitled to enter into
evidence that it took measures that were reasonable under the
circumstances to prevent the Y2K failure from occurring or from causing
the damages upon which the claim is based.
Negligence--In an overall discussion of negligence claims
and in our desire to limit frivolous law suits, it is appropriate that
we review the standards of proof and determine whether those standards
need to be raised.
Duty to Mitigate--In the complex and unknown world of
potential Y2K failures, it is important that prospective plaintiffs
make all reasonable efforts to avoid damages in circumstances where
information was readily available. And yet, we must not bar the
plaintiff from their fundamental legal rights.
I hope that a bill based on these principles will meet our
objectives without overstepping the bounds of our intentions. I welcome
the perspective and insight that each of our witnesses bring to us
today.
Thank you Mr. Chairman.
__________
Prepared Statement of Senator Orrin G. Hatch
Chairman Bennett and Senator Dodd, let me express my gratitude for
your decision to invite me to testify before the Y2K Special Committee
on the problems posed by Y2K-related litigation. Both of you recognize
how important Y2K remediation is to consumers, business, and the
economy. This problem is of particular interest in my state of Utah
which has quickly become one of the nation's leading high tech states.
Building on the bipartisan efforts in the Judiciary Committee last
year in passing the Y2K disclosure law, our Committee has been studying
the litigation problem in the hopes that we can pass a bill that can
avoid a potential catastrophic logjam of Y2K-related cases. Working
together, Sen. Dianne Feinstein and I have produced a bill--S. 461,
``The year 2000 Fairness and Responsibility Act''--that encourages Y2K
problem-solving, rather than encouraging a rush to the courthouse. It
is not our goal to prevent any and all Y2K litigation. It is to simply
make Y2K problem-solving a more attractive alternative to litigation.
This benefits consumers, businesses, and the economy.
The main problem that confronts us as legislators and policy makers
in Washington is one of uniquely national scope. More specifically,
what we face is the threat that an avalanche of Y2K-related lawsuits
will be simultaneously filed on or about January 3, 2000 and that this
unprecedented wave of litigation will overwhelm the computer industry's
ability to correct the problem. Make no mistake about it, this super-
litigation threat is real, and if it substantially interferes with the
computer industry's ongoing Y2K repair efforts, the consequences for
America could be disastrous.
Most computer users were not looking into the future while, those
who did, assumed that existing computer programs would be entirely
replaced, not continuously modified, as actually happened. What this
demonstrates is that the two-digit date was the industry standard for
years and reflected sound business judgment. The two-digit date was not
even considered a problem until we got to within a decade of the end of
the century.
As the Legal Times recently pointed out, ``the conventional wisdom
[in the computer business was] that most in the industry did not become
fully aware of the Y2K problem until 1995 or late.'' The Legal Times
cited a LEXIS search for year 2000 articles in Computerworld magazine
that turned up only four pieces written between 1982 and 1994 but 786
pieces between 1995 and January 1999. Contrary to what the programmers
of the 1950s assumed, their programs were not replaced; rather, new
programmers built upon the old routines, tweaking and changing them but
leaving the original two-digit date functions intact.
As the experts have told us, the logic bomb inherent in a computer
interpreting the year ``00'' is a programming environment where the
first two digits are assumed to be ``19'' will cause two kinds of
problems. Many computers will either produce erroneous calculations--
what is known as a soft crash--or to shut down completely--what is
known as a hard crash.
What does all this mean for litigation? As the British magazine The
Economist so aptly remarked, ``many lawyers have already spotted that
they may lunch off the millennium bug for the rest of their days.''
Others have described this impending wave of litigation as a feeding
frenzy. Some lawyers themselves see in Y2K the next great opportunity
for class action litigation after asbestos, tobacco, and breast
implants. There is no doubt that the issue of who should pay for all
the damage that Y2K is likely to create will ultimately have to be
sorted out, often in court.
But we face the more immediate problem of frivolous litigation that
seeks recovery even where there is little or no actual harm done. In
that regard, I am aware of at least 20 Y2K-related class actions that
are currently pending in courts across the country, with the threat of
hundreds more to come.
It is precisely these types of Y2K-related lawsuits that pose the
greatest danger to industry's efforts to fix the problem. All of us are
aware that the computer industry is feverishly working to correct--or
remediate, in industry language--Y2K so as to minimize any disruptions
that occur early next year.
What we also know is that every dollar that industry has to spend
to defend against especially frivolous lawsuits is a dollar that will
not get spent on fixing the problem and delivering solutions to
technology consumers. Also, how industry spends its precious time and
money between now and the end of the year--either litigating or
mitigating--will largely determine how severe Y2K-related damage,
disruption, and hardship will be.
To better understand the potential financial magnitude of the Y2K
litigation problem, we should consider the estimate of Capers Jones,
Chairman of Software Productivity Research, a provider of software
measurement, assessment and estimation products and services. Mr. Jones
suggests that ``for every dollar not spent on repairing the Year 2000
problem, the anticipated costs of litigation and potential damages will
probably amount to in excess of ten dollars.'' The Gartner Group
estimates that worldwide remediation costs will range between $300
billion to $600 billion. Assuming Mr. Jones is only partially accurate
in his prediction--the litigation costs to society will prove
staggering. Even if we accept The Giga Information Group's more
conservative estimate that litigation will cost just two dollars to
three dollars for every dollar spent fixing Y2K problems, overall
litigation costs may total $1 trillion.
Even then, according to Y2K legal expert Jeff Jinnett, ``this cost
would greatly exceed the combined estimated legal costs associated with
Superfund environmental litigation . . . U.S. tort litigation . . .
and asbestos litigation.'' Perhaps the best illustration of the sheer
dimension of the litigation monster that Y2K may create is Mr.
Jinnett's suggestion that a $1 trillion estimate for Y2K-related
litigation costs ``would exceed even the estimated total annual direct
and indirect costs of all civil litigation in the United States,''
which he says is $300 billion per year.
These figures should give all of us pause. At this level of cost,
Y2K-related litigation may well overwhelm the capacity of the already
crowded court system to deal with it.
Looking at a rash of lawsuits, we must ask ourselves, what kind of
signals are we sending to computer companies currently engaged in or
contemplating massive Y2K remediation? What I fear industry will
conclude is that remediation is a losing proposition and that doing
nothing is no worse an option for them than correcting the problem.
This is exactly the wrong message we want to be sending to the computer
industry at this critical time.
I believe Congress should give companies an incentive to fix Y2K
problems right away, knowing that if they don't make a good-faith
effort to do so, they will shortly face costly litigation. The natural
economic incentive of industry is to satisfy their customers and, thus,
prosper in the competitive environment of the free market. This act as
a strong motivation for industry to fix a Y2K problem before any
dispute becomes a legal one. This will be true, however, only as long
as businesses are given an opportunity to do so and are not forced, at
the outset, to divert precious resources from the urgent tasks of the
repair shop to the often unnecessary distractions of the court room. A
business and legal environment which encourages problem-solving while
preserving the eventual opportunity to litigate may best insure that
consumers and other innocent users of Y2K defective products are
protected.
There are now at least 117 bills pending in state legislatures.
Each bill has differing theories of recovery, limitations on liability,
and changes in judicial procedures, such as class actions. This creates
a whole slew of new problems. They include forum shopping. States with
greater pro-plaintiff laws will attract the bulk of lawsuits and class
action lawsuits. A patchwork of statutory and case law will also result
in uneven verdicts and a probable loss of industry productivity, as
businesses are forced to defend or settle ever-increasing onerous and
frivolous lawsuits. Small states most likely will set the liability
standard for larger states. This tail waging the dog scenario
undoubtedly will distort our civil justice system.
Some states are attempting to make it more difficult for plaintiffs
to recover. Proposals exist to provide qualified immunity while others
completely bars punitive damages. These proposals go far beyond the
approach taken in the Judiciary and Commerce Committee's bills of
setting reasonable limits on punitive damages. Other states may spur
the growth of Y2K litigation by providing for recovery without any
showing of fault. A variety of different and sometimes conflicting
liability and damage rules create tremendous uncertainty for consumers
and businesses. If we want to encourage responsible behavior and
expeditious correction of a problem that is no nationally pervasive, we
should impose a reasonable, uniform Federal solution that substantially
restates tried and true principles of contract and tort law. If there
is an example for the need for national uniformity in rules, this is
it.
The most appropriate role we in Washington can play in this crisis
is to craft and pass legislation that both provides an incentive for
industry to continue its remediation efforts and that preserves
industry's accountability for such real harm as it is legally
responsible for causing. This will involve a delicate balancing of two
equally legitimate public interests: the individual interest in
litigating meritorious Y2K-related claims and society's collective
interest in remediating Y2K as quickly and efficiently as possible. We
need to provide an incentive for technology providers and technology
consumers to resolve their disputes out of court so that precious
resources are not diverted from the repair shop to the court room.
And this is the need that our bill, S. 461, the Hatch-Feinstein
``Year 2000 Fairness and Responsibility Act'' meets. The bipartisan
bill, among other things does the following:
*Preserves The Right to Bring a Cause of Action;
*Requires a 90-Day ``problem-solving'' period which will spur
technology providers to spend resources in the repair room instead of
diverting needed capital;
*Provides that the liability of a defendant would be limited to the
percentage of the company's fault in causing the harm;
*Specifically encourages the parties to a dispute to request
alternative dispute resolution (ADR) during the 90-day problem-solving
period; and
*Prevents Careless Y2K Class Action Lawsuits;
*Caps punitive Damages; and
*Insures that the Federal Courts will have jurisdiction over this
national problem.
In conclusion, Y2K presents a special case. Because of the great
dependence of our economy, indeed of our whole society, on
computerization, Y2K will impact almost every American in some way. But
the problem and its associated harms will occur only once, all at
approximately the same time, and will affect virtually every aspect of
the economy, society, and government. What we must avoid is creating a
litigious environment so severe that the computer industry's
remediation efforts will slacken and retreat at the very moment when
users and consumers need them to advance with all deliberate speed.
Respectfully, I think our bill strikes the right balance. Still, I
recognize that if we are to enact worthwhile Y2K problem-solving
legislation this year, we must all work together--Democrats,
Republicans, and the Administration--in a cooperative manner which
produces a fair and narrowly tailored bill. Recently, the Judiciary
Committee initiated such an effort--to which both Senators Dodd and
Bennett have sent representatives--and I postponed a mark-up of the
Hatch-Feinstein bill originally scheduled for today. All of this has
been done in the hope that we can produce a measure which has even
broader political support, can pass the Congress, and become law.
__________
Responses of Orrin G. Hatch to Questions Submitted by
Chairman Bennett
Question 1. Isn't the figure you quoted of $1 trillion in worldwide
litigation costs exaggerated?
Answer. Let me stress that the $1 trillion figure represents a very
rough estimate by a group of respected consulting firms, trade
associations, law firms, and businesses. In truth, however, while no
one can predict with certainty exactly what the total litigation cost
will be, almost all the legitimate experts agree that Y2K-related
litigation will have a profound effect on the economy.
Pending legislation in nearly all 50 States will have a significant
effect on the Y2K litigation environment. Litigation in States that
habitually award unrealistically high punitive damages will have two
harmful side effects. First, in small States that make it relatively
easier to win punitive damage awards, insurance rates in other States
will likely increase as a result.
Second is the so-called ``shadow effect'' that large punitive
damage awards in one State will have on litigation in other States. As
we recounted in detail in a recent report by the RAND Corporation, the
``shadow effect'' induces companies to settle even frivolous lawsuits
because they fear excessive punitive damage awards. Although there is
no way to document this statistically, plenty of anecdotal evidence
suggests that the ``shadow effect'' does indeed exist. This was one of
the key points the RAND report made. Reflecting on this, I think the
RAND analysis will most certainly apply in the Y2K litigation arena. I
also think we can reasonably predict right now that those States that
enact legislation imposing strict liability and a negligence per se
standard on information technology companies--meaning that liability
can be imposed without any showing of fault--are likely to attract the
bulk of Y2K claims, especially class actions. Not only would such State
laws clog the courts, they would create a distinct Y2K ``shadow
effect.''
Question 2. How does S.461 ameliorate the problems you've just
described?
Answer. There are two major ways in which our bill will help hold
down the potentially exponential growth of Y2K-related litigation
costs.
First, the bill provides a strong incentive for information
technology companies to fix their Y2K problems before litigation
occurs. In this way, fewer of these firms' precious resources will be
drained from the repair shop to the court room. The bill acts to
encourage problem solving in several ways. Perhaps the most important
way it does this is through the mandatory 90-day cooling-off period
that the bill imposes on all would-be litigants of Y2K disputes and
through the duty to mitigate that is required of plaintiffs.
The bill also promotes problem solving by allowing defendants in
contract suits to offer evidence of reasonable efforts in avoiding a
Y2K problem. This provision will act as an incentive for potential
defendant companies to continue or even increase their remediation
efforts because they will know they can offer this in evidence if the
dispute ever goes to court.
Similarly, the bill codifies the common-law defense against
negligence claims--which is almost universally accepted in every
State--that the defendant acted reasonably in his efforts to prevent a
Y2K problem or avoid its associated damages. By preserving this defense
to negligence claims, the bill will effectively pre-empt State strict
liability and negligence per se laws, which, as I said earlier, often
drive up damage awards. This provision will induce defendant companies
to continue or increase their remediation efforts because evidence of
such efforts negates the element in a negligence claim that the
defendant acted unreasonably or created an unreasonable risk of harm.
In other words, States have always recognized that proof that the
defendant acted reasonably is a defense to negligence.
Let me also point out that if any potential defendant company
refuses to communicate with the plaintiff during the waiting period or
in any way acts in bad faith or with a corrupt motive, the bill's
defenses are not available to them. It will then be far more likely
that they will be held liable, which is as it should be.
Question 3. Why does the bill preempt state law?
Answer. In addition to providing a strong incentive for Y2K problem
solving, the bill will also help to hold down litigation costs because
it meets an urgent need for uniform legal standards. First, the bill's
class action provisions allow a Federal court to dismiss a class action
in which the aggregate value of all claims does not exceed $1 million,
where the class numbers less than 100, where the primary defendants are
State officials or governments, where State law predominates, or where
the primary defendants are not citizens from different States. These
provisions will help to reduce the widespread abuses of class actions
in the mass tort context, where plaintiffs' attorneys, not the
individual victims, get the lion's share of the monetary award.
Second, the bill imposes reasonable limits on punitive damages,
thus greatly reducing the ``shadow effect'' I talked about earlier.
Third, the bill's state of mind provisions in the section governing
tort claims serves to prevent States from enacting strict liability and
negligence per se statutes that often act as magnets for litigation. In
that regard, let me also mention that the clear-and-convincing evidence
standard will only apply to quasi-intentional torts such as
constructive fraud. Ordinary negligence claims will be unaffected. For
those special tort claims that do require proof of some state of mind,
I believe the clear-and-convincing evidence standard is fully justified
by the emergency situation Y2K has created.
Question 4. Doesn't S.461 unnecessarily federalize State contract
and tort law?
Answer. If there was ever a prime example of an emergency situation
that requires a Federal solution and nationally uniform legal
standards, Y2K is it. Not only will Y2K substantially affect interstate
commerce, which will allow Congress to exercise its commerce power, but
the problem is genuinely and pervasively national in scope. No
technology failure in recent memory will have quite the magnitude on
the United States as a whole as the simultaneous disruption of many of
its computer systems. The dependence of our economy, government, and
society on computerization has had more far-reaching, national
implications than almost any other technology in our history, except
perhaps electric power and the internal combustion engine. As a result,
Y2K will be a truly unique event. To respond to this event, Congress'
role should be to encourage industry to solve Y2K as expeditiously as
possible without the crippling distraction that hysteria-driven
litigation will create.
Aside from the overwhelming need for a Federal solution, I must
point out that doesn't create a newfangled Federal law of contracts or
torts. Rather, the bill merely preserves the traditional State common-
law defense to negligence claims. Our intent is to prevent States from
disrupting the litigation environment and causing Y2K remediation to
slacken by rushing to impose strict liability or negligence per se
standards on the computer industry at this critical time. Since
reasonableness is always relevant to disprove the element in a
negligence suit that the defendant breached his duty to exercise
ordinary care, S.461 merely creates a Federal standard out of the
negligence law that already prevails in all 50 States.
In addition, the bill's contract provisions ensure that in the vast
majority of cases, the terms of any written agreement will govern the
legal relationship between the parties, unless the contract is found
unconscionable as a matter of State law. In doing this, the bill
ensures that the parties to a contract are guaranteed to receive the
benefits and protections for which they bargained. And when such
agreements are silent on Y2K issues, our bill merely requires that the
commercial law that was in effect at the time the contract was formed
and in the State where the contract was formed will govern. The only
change our bill makes is to allow defendants in contract suits to offer
evidence of reasonable efforts to prevent a Y2K problem or avoid Y2K-
related damages. Unlike the tort section, this provision is not a
complete defense to liability, it merely guarantees that the jury will
be able to consider evidence of the defendant's remediation efforts.
Finally, I want to emphasize that the bill's mandatory 90-day
cooling-off period is substantially derived from the Uniform Commercial
Code, versions of which govern the sale of goods in most States. Again,
our bill doesn't change State law so much as it extends the UCC's
waiting-period concept to transactions involving both goods and
services.
__________
Prepared Statement of Senator Jon Kyl
Good morning, I would like to thank all our distinguished witnesses
who have taken the time to be here today. I especially would like to
thank our distinguished Chairman, Senator Bennett, for his outstanding
leadership and for his efforts to inform the public on the year 2000
problem. This Committee's hearings have helped enforce the message of
preparedness, rather than panic when it comes to addressing the
``Y2K.''
The issue of liability is an important issue to me. Last Congress,
I sponsored the Year 2000 Information and Readiness Disclosure Act,
which became law. That legislation encouraged companies to disclose and
exchange information about computer processing problems, solutions,
test practices, and test results that have to do with preparing for the
year 2000. The goal of the bill was to encourage information sharing,
which would in turn lead to remediation, which would in turn lead to
greater Y2K compliance.
However, many companies still fear liability and it is that fear of
lawsuits that is inhibiting them from getting done what is needed--
which is remediation.
Like the Year 2000 Information and Readiness and Disclosure Act, it
is my hope that we can re-visit the issue of liability and create a
solution that will ease fears and which will result in remediation
rather than litigation.
__________
Prepared Statement of Dr. William Frederick Lewis
Mr. Chairman and members of the committee, I am Bill Lewis,
President and Chief Executive Officer of Prospect Technologies a small
business headquartered in the District of Columbia. Our firm employs 23
individuals dedicated to providing information solutions for
corporations and government agencies both here in the United States and
internationally. Our business includes computer hardware manufacturing,
computer software, and consultative solutions. I also come before you
as a member of the U.S. Chamber of Commerce's Small Business Council.
Working with organizations like the United States Coast Guard, the
Federal Maritime Commission, the Department of Defense, Princeton
University, Enterprise Rent-a-car, a McGraw Hill, we provide solutions
that help to dramatically improve business processes through the use of
technology and the Internet.
As we quickly approach the new millenium, the greatest issue that
we face as an ongoing concern is the Year 2000 computer problem. I
would like to take a moment to commend the work that you Mr. Chairman,
and Mr. Vice Chairman have done thus far and the leadership you and the
other members of the Special Committee on the Year 2000 Computer
Problem have provided on this critical issue.
Technology represents one of America's greatest accomplishments as
well as one of our most challenging issues as we approach the new
millenium. On the one hand, technology has helped American business to
become more efficient and more able to compete with our foreign
counterparts. On the other hand as we have become so reliant on
technology, we become more vulnerable to problems with that technology.
To our clients and me, the benefits far outweigh problems and we should
continue to explore new opportunities for improving products and
services and competing more efficiently around the world.
I raise the issue of risk and reward as it relates to technology,
because each day as a business that provides both hardware and software
solutions to our customers, Prospect Technologies must continually
ensure that our products and services work to enhance business
operations and not complicate or interfere with normal operations. As a
result, I am continually challenged as the President and Chief
Executive Officer to check and double check that our products and
services do not adversely effect one of our customers. I come to you
today concerned about Y2K litigation as potentially both a defendant
and as a plaintiff.
From my perspective, my clients rely on me to certify that the
hardware and software that we manufacture and sell to them will not
crash on January 1, 2000. As a manufacture of computers, each component
must be certified that it is capable of knowing that ``00'' means Year
2000 and not the year 1900. Because we are using the latest technology
from corporations like Intel, Advanced Micro Devices (AMD) Microsoft,
and others, we have been assured that their operating chips are in fact
Y2K compliant and we are confident that all other components are in
compliance.
I am not necessarily concerned about computers leaving our
manufacturing site, but rather, what happens once they are shipped to
the client. Once the basic computer is shipped, clients will load their
own application software and other operating software to run such
programs like scheduling, payroll, and manufacturing systems. If those
application programs are not Y2K compliant, most likely as the
manufacturer of the computer I will be the first person they call to
report a problem.
In all of my business dealings since founding our company, we have
always approached any such technical malfunctions with the attitude
that as businessmen and businesswomen, come let us reason together to
find the solution instead of pointing fingers or looking for blame. Put
another way, let's fix the problem and not litigate the problem.
We have taken this approach because quite frankly, we have to.
Unlike a Fortune 500 company, I do not have a dedicated legal team or
millions of dollars in reserve for such issues. Instead, I focus on
doing what I do best and that is provide leading edge technology
solutions for companies wishing to have more efficient and productive
business operations. I must say that with very few exceptions, my
customers respect our approach to handling complications. They
recognize that if my staff and I are in court defending our livelihood,
it becomes almost impossible to provide the solutions that are going to
make their business better.
As I mentioned earlier, I could potentially become a plaintiff in
Y2K related problems. Obviously as a manufacture of computers, I must
rely on my suppliers to provide the necessary parts according to our
contractual obligations. In the case of manufacturing computers, there
might very well arise a situation in which a suppliers' manufacturing
systems shuts down or is delayed and I therefore do not receive the
parts I need to meet my contractual agreement. My first approach with
the supplier would be to try and work out the problem, but if that
should fail, and I accrue damages as a result of lost revenue, I would
expect to have the appropriate compensation for actual damages. I do
not however, expect to be compensated for punitive damages because
quite frankly there are no such damages in this instance.
I founded my business on the notion of the American Dream. When I
started the business, I knew nothing would come easily, but rather, I
would have to work for every penny I earned. I would take risks and
hopefully be rewarded, but there were no guarantees. I understood this
from the onset and I instill this attitude in every one of our
employees. Never once during my business plan did I say, ``well I will
work hard and work smart, but if that fails, I will get rich by suing
someone for something they did wrong.'' This is not the spirit of the
American businessperson but rather the person who is looking to make a
quick buck!
I have a special obligation to the men and women that work for
Prospect Technologies in that we are their livelihood. The income they
make for their services provides their family and their community with
the means to function. To that end I am taking every precaution to
ensure that the Y2K bug does not adversely effect their livelihood.
I would also like to take a moment to commend not only the members
of this committee, but also Senator Hatch and Senator Feinstein, and
Senator McCain for their leadership on legislation that will help to
encourage businesses to fix the problem and not litigate the problem.
I have had an opportunity to review the provisions of each of their
perspective bills, and as a small business owner who could potentially
be both a plaintiff and a defendant in Y2K litigation, I fully support
their approach to dealing with this complicated issue. More
specifically:
The provisions dealing with the alternative dispute
resolution will encourage business owners to work together and find
alternatives to litigation for solving the problem at hand.
Because I expect my customers to approach technology
glitches with a sense of reason, I should also give my suppliers the
same courtesy. To that end, I agree with the provision to provide a 30-
day notice to a potential defendant and allow them 60 days to fix the
problem. I suspect that in many cases it will not take 60 days;
however, this is a reasonable time-frame to ensure compliance. This
provision is very much in sync with our company's philosophy of saying
``may we come together and find reasonable solutions to fixing the
problem.''
I don't think it would come as a surprise to anyone who has been in
business, but unfortunately sometimes, it is necessary to threaten
legal action to get an issue resolved. The problem with doing so
requires me to prepare for such a suit and also to hire a qualified
attorney. After the initial steps are completed, often, the supplier
will realize that it is time to fix the issue and the case never goes
to court but rather is solved in an amicable way. Unfortunately for me,
I have already spent the money on an attorney and more importantly it
has used important time that could have been spent with my customers or
individuals creating technology to meet customer demand.
I firmly believe the provisions of this legislation and providing
this 30 day notification period coupled with 60 days to fix the problem
will help to alleviate the vast majority of the problems associated
with Y2K. I say this, because many business owners will appreciate the
fact that once a problem is identified, they will have a specific
timeframe in which the issue will have to be resolved.
With regards to caps on punitive damages, I firmly
believe that this legislation will discourage frivolous lawsuits filed
by those seeking to get rich from someone else's misfortune. Small
business owners like me are working diligently to fix the problem. If
parties are able to reap huge punitive awards from this unfortunate
situation it will truly represent a setback for many years to come in
the small business community.
Small business owners like myself are fighting every day to ensure
payrolls are met, bills are paid, and keeping an eye on our
competitors. My typical day begins at approximately 6:30 in the morning
and ends sometime around 9:00 in the evening. I typically put in
another 20 hours on the weekend and it is not unusual to work around
the clock to beat a customer deadline. Put another way, working 90-100
hours per week and throwing in a couple of hours per night for sleep
does not provide a lot of time for other things.
If during the course of the year 2000 computer problem, I have to
add hours and days of time to become a plaintiff or defendant in Y2K
legal proceedings, it will most certainly cause my corporation, my
employees, their families and their communities to suffer. Time spent
in court will take precious time away from not only me, but also from
our Chief Technologist and our General Manager of Customer Support.
This time spent in litigation is much better spent in the areas of
fixing the problem, innovation, and providing services to our clients
that will ultimately provide further growth and jobs in the U.S.
economy.
Of all the problems associated with the Y2K, the least of my
concerns has been whether we can fix the problem. My greatest fear has
been having to use our limited resources to defend ourselves or file
lawsuits instead of investing the funds and knowledge to create new
technology and new jobs in our area of expertise.
I encourage this committee, members of the U.S. Senate and U.S.
House of Representatives to enact the Y2K legislation proposed by
Senators Hatch and Feinstein, or the legislation introduced by Senator
McCain in the Senate and the Year 2000 Fairness and Responsibility Act
in the U.S. House of Representatives. This legislation will help to not
only protect small business owners like me from frivolous lawsuits, but
it will also help to protect future innovation that will provide
incredible benefits for many years to come. Both consumers and business
owners should have the opportunity to seek damages caused by Y2K;
however, this should not become a one-time bonanza or payday for
individuals looking to make an easy buck. I firmly believe that
Americans have the will and determination to come through this
dangerous period in our history if we focus on working together to fix
the Year 2000 computer problem and not work against one another to
litigate the Year 2000 computer problem.
Again, Mr. Chairman, Mr. Vice-Chairman and the members of the
committee, I would like to on behalf of the employees and customers
that I represent thank you for having me here today and for your
thoughtful leadership in dealing with this issue.
__________
Responses of Dr. William Frederick Lewis to Questions Submitted by
Chairman Bennett
Question 1. Dr. Lewis, you testified that you agree with the
legislative proposals to provide a 30-day notice to a potential
defendant and give them 60 days to solve a Y2K-related problem. As a
potential plaintiff, how do you think this requirement would work if
the problem you had was a mission-critical one, and your business could
not wait 90 days for the problem to be solved?
Answer. The 30/60-day notice provision in S. 96 and S. 461 would
not adversely affect a potential plaintiff who had a mission-critical
failure due to a Y2K problem. The notice/cure period only applies to
cases seeking money damages. If the potential plaintiff needed
immediate relief (i.e., sooner than 30-90 days), the legislation
explicitly reserves a plaintiff's ability to sue for equitable relief
such as for specific performance of a contract.
Question 2. It is possible that a number of your customers could
suffer Y2K failures in the first week of the year 200. Whether or not
these failures are traceable to something your company did, several of
these customers might threaten to take you to court. How would these
threats affect your firm's ability to solve your customers' problems?
What would be most helpful in preventing these immediate threats of
lawsuits?
Answer. The Y2K problem is unique--Y2K failures and Y2K lawsuits
will cluster around a single date, January 1, 2000. If my customers
threaten to sue me, as a prudent businessperson, I would have to
prepare to defend myself. Rather than spending resources to help fix my
customers' problems, I would have to use those resources to get ready
for the lawsuits. The most helpful thing Congress can do to help my
company solve any problems my customers have because of Y2K is to
establish a set of fair, fast and predictable ground rules that
encourage remediation over litigation and to encourage the quick and
fair resolution of legitimate claims once litigation occurs. It seems
to me that Congress has a choice in this situation. It can either do
nothing and watch our economy be crippled by Y2K-related litigation, or
it can provide valuable leadership and proactively establish a system
to resolve disputes efficiently so businesses can address our nation's
needs as it moves into the 21st century.
Question 3. You testified that most of your customers recognize
that if your staff and you are in the court because of a problem it is
almost impossible for you to solve that problem. Have you had any
discussions with your customers on the possibility of Y2K-related
failures and how you might try to deal with them outside of the legal
process? For example, have your customers indicated that they would be
willing to engage in alternative dispute resolution?
Answer. My company has always approached technical problems such as
Y2K with the attitude that, as responsible businesspeople, we should
reason together to find the solution instead of pointing fingers or
looking for blame. Put another way, we want to fix the problem and not
litigate it. We have taken this approach because we have to. Unlike a
Fortune 500 company, my company (and other small businesses like it)
does not have a dedicated legal team or millions of dollars in reserve
for such issues. I must say that with very few exceptions, my customers
respect our approach to handling complications. They recognize that if
my staff and I are in court defending our livelihood, it becomes almost
impossible to provide the solutions that are going to make their
businesses better. I believe that the provisions dealing with
alternative dispute resolution will encourage business owners to work
together and find alternatives to litigation for solving their Y2K
problems and I think my customers would agree with that. Most
businesses do not want to be in court, they simply want to have their
problems taken care of so they can go back to doing business. Voluntary
alternative dispute resolution mechanisms help accomplish that goal.
Question 4. Dr. Lewis, I understand from your testimony that from
your position as a potential plaintiff, you wouldn't expect to see a
situation where punitive damages were warranted. If you did, however,
would you still be in favor of the proposed punitive damages cap?
Answer. The legislation would not prevent small businesses from
recovering their legitimate losses and damages. This legislation allows
all plaintiffs to be fully compensated for their Y2K losses. The bill
does not prevent a plaintiff from recovering consequential damages or
any other damages allowed by contract or law. As pointed out by the
question, the legislation does cap punitive damages, but does so at a
reasonable level and does not entirely preclude a plaintiff from being
able to recover them. If there were a circumstance where I expected to
see punitive damages, I would still support the reasonable limits
contained in this legislation.
Question 5. Dr. Lewis, there are some who believe that the threat
of litigation is what will make most companies fix Y2K problems for
which they are responsible, and that adding the 90-day cooling-off
period removes that as an incentive. From your perspective as a
potential plaintiff, do you think the threat of immediate litigation
serves that incentive purpose? From your perspective as a potential
defendant, would adding the 90-day cooling-off period make you think
you could just put off fixing the problems?
Answer. The need for this legislation is that the entire business
community is concerned that Y2K has the strong potential to become a
litigation bonanza for those who engage in filing frivolous lawsuits.
The sad fact of such a situation is that for each frivolous lawsuit any
company has to defend, valuable resources will have to be shifted from
efforts to correct Y2K problems or to otherwise engage in business to
defending against that suit. If that situation were allowed to occur,
it would not encourage the remediation of Y2K problems. The 30/60
notice and cure period will not encourage potential defendants to wait
to fix problems. It is still smart business practice to do everything
you can do to take care of your customers before problems occur. The
notice period would not change this principle of good business. As a
potential plaintiff, I want to see any Y2K problems I experience be
taken care of as well as having my business relationships be preserved.
Litigation does not always meet those goals. The notice period gives
potential plaintiffs, such as my company, the ability to have their Y2K
problems solved quickly rather than waiting for years in court.
__________
Prepared Statement of John H. McGuckin, Jr.
Mr. Chairman, I am John H. McGuckin, Jr., Executive Vice President
and General Counsel of Union Bank of California, and am testifying on
behalf of the American Bankers Association (ABA). The ABA brings
together all categories of banking institutions to best represent the
interests of this rapidly changing industry. Its membership--which
includes community, regional and money center banks and holding
companies, as well as savings associations, trust companies and savings
banks--makes ABA the largest banking trade association in the country.
I am pleased to be here today to discuss what the banking industry
is doing to address the Year 2000 computer problem (Y2K). These
hearings are very important because information about the Y2K problem--
and what the government and industry are doing to meet this challenge--
is critical to maintaining confidence in our economy.
I would like to begin by thanking Senator Bennett and Senator Dodd,
for your outstanding leadership on the Y2K issue. You have both done
much over the past two years to encourage a vigorous, constructive
response to the Y2K challenge in both the public and private sectors.
On behalf of ABA, I would also like to thank the Senators who have
recognized the importance of addressing the threat of Y2K litigation
before it becomes a harsh reality. In particular, I would like to
commend the efforts of Senator John McCain, Senator Orrin Hatch,
Senator Dianne Feinstein, and other co-sponsors of Y2K legislation
introduced in the Senate this year.
The Y2K challenge essentially has two components. The first is
technology--making sure that software and hardware systems will work on
January 1, 2000 and beyond. The second is communication--making sure
the public is knowledgeable about the problem and what is being done to
solve it. Even if the technical problems are fully resolved, people
need to know about it. If nothing is said, the information void will
surely be filled with misleading and provocative stories that will
create undue anxiety, and lead to bad decisions. The problems created
by adverse public reaction or panic could be far worse than the actual
problem. The news media, government, private industry, bankers, and all
other stakeholders must join forces to stabilize the public opinion,
and manage expectations.
The banking industry is working hard at solving both aspects of the
Y2K problem. Since 1995, the banking industry has devoted millions of
man-hours and billions of dollars to addressing Y2K. The banking
industry is well into the testing period for all critical systems,
working closely the Federal Reserve and other federal bank regulators.
Our progress is right on track. The ABA and individual banks have also
done a tremendous amount of work to keep our customers informed about
our progress. We believe this communications effort is right on track,
too.
At Union Bank of California, Y2K has been identified as the single
most critical project to be completed this year. Its criticality has
been communicated through senior management, right down to every
employee and business manager. Nothing at our bank has higher priority
or greater scrutiny than this important project.
At Union Bank of California, we are preparing for the century
change with a comprehensive enterprise-wide Year 2000 Program. We have
identified all of the major systems and have sought external and
internal resources to renovate and test the systems. We are testing
purchased software, internally developed systems and systems supported
by external parties as part of the program. We are evaluating customers
and vendors that have significant relationships with us to determine
whether they are adequately prepared for year 2000. In addition, we are
developing contingency plans to reduce the impact of some potential
events that may occur.
Our Year 2000 Program is comprised of numerous individual projects
that address the following broad areas: data processing systems;
telecommunications and data networks; building facilities and security
systems; vendor risk; customer risk; contingency planning; and
communications. We have identified over 2000 individual projects. The
projects vary in size, importance and materiality from large
undertakings, such as remediating complicated data systems, to smaller,
but still important, projects, such as installing compliant computer
utility systems or assuring that building equipment will perform
properly. The program continues to evolve as we identify new projects
to keep up with the increased understanding of year 2000 implications
and evolving external requirements. Virtually all of the projects
currently identified have begun, and approximately 2/3 have been
completed.
At Union Bank of California, our Year 2000 Program Office reports
on progress monthly to our Executive Management Committee and quarterly
to the Audit and Examination Committee of our Board of Directors. Other
committees of the Board of Directors receive periodic reports on Y2K
preparedness in their areas of oversight responsibility. Our internal
Audit Division, the National Bank Examiners from the Comptroller of the
Currency and examiners of the Federal Reserve Bank of San Francisco
regularly assess our year 2000 preparations and report to the Audit and
Examination Committee.
The banking industry is unique in that it has extensive levels of
federal and state regulation and examination. We have worked closely
with bank regulators to address all aspects of the Y2K issue. The
results of the Y2K compliance examinations have been very positive. We
believe it would be very helpful for the bank regulators to comment
publicly the industry's readiness for Y2K, and remind the public of all
that is being accomplished.
There are four key messages that I would like to leave with the
Committee today:
The banking industry is on track meeting critical
deadlines;
Educating our customers and the public generally is
vital;
The safest place for customers' money is in the bank; and
Congress should enact legislation to encourage businesses
to devote resources to remediation, not litigation.
Before turning to these points, I want to take a moment to focus on
why these issues are so important to the banking industry. We take our
role in the economy and in each community we serve very seriously. Our
business is built on the trust established with our customers over many
decades. Maintaining that trust is no small matter to us. When
customers put money in a bank, they need to feel that their funds are
secure, accessible when they need them, and financial transactions will
be completed as expected. It is, therefore, no surprise that we in the
banking industry understand that so much is at stake in addressing the
Y2K problem.
On a larger scale, our national economy relies on a smoothly
functioning payment system. It's something the general public takes for
granted because our payment system is so efficient, accurate and easy
to use. Assuring this high level of performance requires the collective
efforts of many participants: banks, thrifts, brokerage firms, regional
clearinghouses, and the Federal Reserve.
Careful planning, correcting and testing is crucial to minimize any
disruptions from the century date change. But we must be realistic: it
is inevitable that some glitches will occur. Contingency planning,
therefore, must be and is an integral part of the process. In the case
of the banking industry, our contingency plans are examined by the bank
regulators. We intend to be as prepared as possible for any
eventuality.
Preparedness, however, goes well beyond the banking and financial
sector. The tightly woven fabric of our economy means that businesses,
households and government must work together. Success depends upon the
efforts of all sectors of the economy, including energy,
telecommunications, transportation, public utilities, retail services,
etc. Bankers have reached out to other industries, as well as our
customers, to ensure that we all come through this challenge intact.
I. Technology: The banking industry is on track meeting critical
deadlines
Many banks began their Y2K risk assessment efforts as early as
1995. The cost of assessing, correcting, testing and contingency
planning will easily exceed $9 billion, in the banking industry alone.
The goal of this massive commitment of effort and resources is to
provide a smooth transition of banking and financial services into the
21st century with minimal disruptions.
The Y2K strategy involves awareness, assessment, renovation,
validation and implementation. Key components of these broad strategic
areas include the assessing of business risks, conducting due diligence
on service providers and software vendors, analyzing the impact on
customers, and assuring customer awareness of progress in addressing
Y2K concerns.
At Union Bank of California, we plan to complete all projects
currently identified prior to the year 2000. The most important
projects are the ``mission critical'' application systems upon which we
rely for our principal business functions. We have renovated and tested
all these systems. However, outside services provide three of them. Our
outside service provider has renovated and tested each of these
systems, but we still need to validate them ourselves.
In addition to testing individual systems, we have begun integrated
contingency testing of our ``mission critical'' and many other systems
in a separate computer environment where dates are set forward in order
to identify and correct problems that might not otherwise become
evident until the end of the century.
While we do not significantly rely on ``embedded technology'', that
is microprocessor-control devices as opposed to multi-purpose
computers, in our critical processes, all building facilities are being
evaluated, and we expect all systems using embedded technology be
confirmed as year 2000 ready by June, 1999.
We rely on vendors and customers, and we are addressing year 2000
issues with both groups. We have identified over 300 vendors and have
made inquiries about their year 2000 readiness plans and status.
We also rely on our customers to make necessary preparations for
the year 2000 so that their business operations will not be
interrupted, thus threatening their ability to honor their financial
commitments. We have identified over 2,500 borrowers, capital market
counter parties, funding sources and large depositors that constitute
our customers having financial volumes sufficiently large to warrant
our inquiry and assessment of their year 2000 preparation.
One of the greatest challenges to business managers is identifying
and then addressing the vast number of outside touch-points to a
business unit. These include vendors, suppliers, service providers, and
a host of other businesses that touch us from outside on a daily basis.
Ongoing communication and monitoring of these partners is critical to
the success of the Y2K effort.
Regulatory Oversight
The banking industry is unique in that it is a highly regulated
industry at both the state and federal level. Since 1997, the banking
industry has worked with the regulators in assessing the extent of the
Y2K problem and developing a three-phase plan of attack.\1\ The public
is not aware of the tremendous joint efforts between the banking
industry and government regulators to meet the Y2K challenge. During
phase one, completed June 30, 1998, federal bank supervisors conducted
on-site examinations of every depository institution and rated them on
their remediation plans and written testing strategies. Regulators also
conducted on-site examinations of firms providing data processing and
system services.
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\1\ The Federal Reserve, the Office of the Comptroller of the
Currency (which regulates national banks), the Federal Deposit
Insurance Corporation, the Office of Thrift Supervision, and the
National Credit Union Administration work jointly on key regulatory and
supervisory issues through what is known as the Federal Financial
Institutions Examination Council, or FFIEC. Through this cooperative
regulatory effort, the FFIEC has played an important role in promoting
Y2K education and communication among bankers and service providers.
For example, representatives of the banking industry trade groups meet
on a quarterly basis in Washington with staff members from the various
Y2K teams of the FFIEC member agencies to discuss ongoing efforts,
upcoming programs and publications, and to exchange news on Y2K
developments in general. The banking agencies have also offered
countless regional seminars on Y2K issues, as provided for in the
``Examination Parity and Year 2000 Readiness for Financial Institutions
Act.'' We are extremely pleased at these joint efforts and the agencies
should be commended for their work in this area.
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During phase two, supervisors are examining banks for how well the
testing of critical systems is progressing and on contingency plan
development. This is critical as it measures the success of the
remediation efforts. For banks with their own internal systems, testing
was to be completed by the end of last year. By March 31, 1999, banks
relying on outside service providers should have testing completed. All
institutions should also have initiated external testing with
customers, other banks and payment system providers.
The results of on-site, phase one and phase two examinations show
that the banking industry is right on track meeting its goals. As of
December 31, 1998, 97 percent of the industry held the highest rating
and only 17 institutions--out of more than 10,000 banks and thrifts--
received unsatisfactory ratings. These poorly rated institutions are
being closely monitored by the regulatory agencies.
Phase three includes final testing of internal and third-party
systems and testing with the Federal Reserve and clearing systems
participants. Phase three will run from April 1 through December 31,
1999, with a critical deadline of June 30 for completion of testing
validation and implementation of remediated systems. After June 30,
institutions will continue to monitor and update contingency plans as
may be required by external developments, and monitor customer and
counter-party risk. Agency examiners will continue to check on bank
testing implementation and contingency plans, and, where needed, with
continued on-site reviews.
Testing with the Federal Reserve and clearing system participants
is very important. Starting last summer, the Fed established dedicated
times for banks to test the operability of systems for Y2K compliance.
Systems tested include Federal Funds Transfer, Fed Automated
Clearinghouse (ACH) transactions, check processing and other payment
systems. The Fed reports that more than 6,000 banks have already
conducted tests of these systems. Additional testing by the banks will
be happening throughout the first half of 1999.
Credit and debit card systems have already been tested for Y2K
compliance and adjustments to software and hardware have been made.
Many cards in use today have expiration dates in the year 2000 or
beyond. Systems needed to be ready to recognize these cards as valid
when they were issued last year. I am happy to report that the
transition was made so smoothly and with so few problems that the
public was largely unaware that any changes had been made.
Contingency Planning
While we believe our systems will be ready for the century date
change, we nonetheless are actively developing Y2K contingency plans.
One reason contingency planning is so important is because banks rely
on a whole host of outside service providers, which are undertaking
their own Y2K remediation over which we have little control. For
example, utility companies provide electricity for banking offices,
branches and ATM machines; telecommunications facilitates customer
inquiries of financial records and verifies transactions at ATM
machines and at point-of-sale terminals (for credit cards and debit
cards) in retail establishments. And banks rely on armored cars to
deliver cash to bank branches and ATMs, and other transportation
services to deliver checks for clearing at large banks or through the
Federal Reserve. We are asking questions of these providers and testing
compatibility of remediated systems.
At Union Bank of California, we are developing year 2000
remediation contingency plans and business resumption contingency plans
specific to the year 2000. Remediation contingency plans address the
actions we would take if the current approach to remediating a system
is falling behind schedule or otherwise appears in jeopardy of failing
to deliver a year 2000-ready system when needed. Business resumption
contingency plans address the actions that we would take if critical
business functions cannot be carried out in a normal matter upon
entering the next century due to system or supplier failure.
We are developing plans for system-wide or regional failures and
for individual critical operating units when necessary. We expect to
complete development of plans for the operating units and their
validation in June 1999. We expect to complete development of plans to
address system-wide and regional facilities and their validation in
September 1999.
Having plans to deal with unexpected events is nothing new for the
banking industry. Every bank has business recovery plans in the event
of natural disasters such as hurricanes, earthquakes, tornadoes, floods
and fires. When those occasions arise, the bank is typically the first
business in the community to be back up and running. Here are just a
few examples of this:
The two-dozen banks in the Grand Forks, North Dakota area
got their banks up and running in April 1997 within days of the worst
flooding by the Red River in this century. Banks reopened in trailers,
truck stops and grocery stores to keep the cash flowing.
On the morning of December 8, 1998, construction
equipment severed a cable in suburban San Francisco, causing a massive
regional power outage across Northern California. While the power
company worked to repair the damage, Bay Area banks, including Union
Bank of California, continued to operate and provide customer services.
In fact, some banks took advantage of the event as an opportunity to
implement portions of their Y2K contingency plan designed to deal with
power outages.
In Des Moines in 1993, one bank avoided disruptions by
moving most of its 750 employees to temporary offices after rising
waters flooded out four of its mortgage operations' downtown buildings.
And as a levee threatened to burst down-river in Kansas City, Missouri,
one bank CEO rented a tractor trailer and with is 23 employees, trucked
vital bank records and equipment to higher ground.
After Hurricane Andrew roared through south Florida,
bankers hauled in portable generators, transferred employees from other
parts of the state and quickly made available several billion dollars
in storm-related emergency loans.
Banks recovered quickly after the World Trade Center
bombing in New York. Several banks, including Union Bank of
California's New York subsidiary, continued to process payments to
corporations around the globe despite the disaster. Within hours these
banks shifted their processing to off-site disaster-recovery locations
where, over the weekend, employees worked around the clock to complete
the processing.
Most banks reopened within a day or two of the powerful
1994 Los Angeles/Northridge earthquake, including our own branches at
Union Bank of California. One bank's credit-card processing facility
near the epicenter suffered structural damage, so the bank moved to
vacant offices downtown, leased buses to transport some 520 employees
to the new location and kept customer services flowing.
When fire swept through the 62-story First Interstate
headquarters building in Los Angeles in 1988, key bank employees
quickly implemented the bank's new $1.5 million disaster plan in an
underground command center seven blocks away. The CEO said later that
the only customers affected by the huge fire were those who banked in
the headquarters' first-floor branch.
A detailed disaster plan made it possible for bank
customers to continue to get cash and make deposits after a
Thanksgiving Day fire in 1982 caused $75 million in damage, destroying
the Minneapolis headquarters of Norwest Bank. Two days later a Norwest
ad read: ``It takes more than a five-alarm fire to slow us down.''
The ABA has published its own guidance for banks to follow as they
proceed through the contingency planning process, ABA Millennium
Readiness Series, Year 2000 Contingency Planning Program Management.
II. Beyond Technology: Maintaining Consumer Confidence
The steps banks are taking now are intended to make sure our
systems will work when the calendar changes. Perhaps the bigger
challenge is maintaining public confidence. We believe that Congress
has a critical role to play, as do bankers, in keeping consumers
informed about what is being done and what they can do to prepare for
the century date change. People want and need to know that their money
will be safe, their records secure and their banks open to serve them
next January.
Consumer education is vital. Recent focus group research by ABA
indicates that consumers, while concerned about Y2K, are not overly
alarmed by the prospect of the calendar change. However, we know there
will be tremendous speculation between now and January 1 about what
will work and what will not work. Many consumers we met with did not
know that the federal financial regulators are examining every bank
multiple times to test compliance on the full range of systems,
software, backup and other contingency plans. The fact that bank
regulators are watching over banks' Y2K efforts is good news to
consumers. The fact that the Federal Reserve is printing billions of
extra dollars and is working to expedite cash delivery to banks from
the current three days to same-day delivery is also good news to
consumers. And the fact that deposits are federally-insured up to
$100,000 and backed up by the full faith and credit of the federal
government is good news as well. The message is that the American
banking industry will be ready.
One unique factor affecting the Y2K issue that is different than
other historical events, is the advent and widespread usage of the
Internet as an information medium. News reported on the Internet
surrounding the Y2K issue ranges from sensible advice and preparation,
to absolute propaganda. One problem with the proliferation of the
Internet is the inability of many consumers to separate fact from
fantasy. Many people have not realized that not everything printed on
the Internet is true. There is much irrational, irrelevant and
misleading information being circulated regarding this issue.
Therefore, there must be an equally aggressive effort to dispense facts
and dispel fiction.
This raises another critical point. Several well-intentioned
organizations are advising consumers to withdraw extra cash ``just to
be on the safe side.'' In fact, it is anything but the safe side.
People need to think twice about how much money they want to be
carrying around with them and keeping in their house. Personal safety
is each individual's responsibility. Exploiting the year change will
tempt many people, from champagne vendors to petty thieves, who are
well aware that people will be withdrawing extra money. There has
already been one publicized report of $20,000 withdrawn from a bank in
preparation for Y2K, buried in the backyard--and stolen. The safe side?
Not at all.
The message is simple: The safest place for customers' money is in
the bank. The depositor does not have to worry about theft or loss, and
deposits are FDIC-insured. The consumers we spoke to in our focus
groups were concerned about the accuracy of their bank records and
getting access to their cash. In terms of accuracy, customers get
statements of their accounts monthly. Banks reconcile their books daily
and have extensive backup records to preserve the financial data. In
addition, banks will be taking extra precautions with manual reports
and backups during the calendar change. At Union Bank of California, in
addition to regular monthly statements, our customers are able to
obtain activity statements either from the ATM or by requesting
statements through telephone banking services, for account
reconciliation at any time should it be necessary.
How much cash will people need? Probably about as much as they
would need on any other holiday weekend. Personal checks are Y2K-
compliant and will work anywhere--in the bank and at a wide range of
retailers and service providers, both in- and out-of-state. If people
are still concerned about their cash needs, they can put a little extra
money in their checking account--their FDIC-insured checking account.
Would you want to be carrying around a lot of extra cash? Would you
want your elderly relatives to be carrying around a lot of extra cash?
I certainly would not.
There are common sense steps consumers can take to prepare for the
century data change. Here are some of the prudent measures that banks
around the country have been advising their customers to take?
Read the information their bank sends about Y2K. Please
call the bank if they have any questions at all. Trust, but verify, in
other words.
Hold onto bank statements, bank receipts, canceled checks
and other financial records, especially for the months leading up to
January 2000.
For customers that bank on-line, make sure home computers
are Y2K-ready. Check with computer and software manufacturers for
details on how to do this. And visit your bank's website to learn more
about its Y2K preparation.
Copy important financial records kept on home computers
to a back-up disk.
Do not turn your money over to anyone who promises to
hold it or ``keep it safe'' through the data change.
Withdraw only as much cash as would be needed for any
other holiday weekend.
To maintain consumer confidence in the banking industry, ABA is
communicating with bankers, consumers and the media. We have produced
three informational videos for banks to use with their customers--one
designed for retail customers, a second for a bank's tellers and other
front-line personnel, and a third for small business customers. We send
a monthly fax newsletter to banks, which contains updates, helpful tips
and shares ideas that have worked for other banks. We have provided
ads, a Y2K customer communications kit to help bankers reach out to
their customers, telephone seminars on a wide range of aspects of the
Y2K challenge, a Y2K Project Management Manual and a Y2K Contingency
Plan Manual. The latest piece in this continuing series is a Y2K
Instruction Booklet containing tips to help banks comply, communicate
and cope. ABA's web site--www.aba.com--provides our members with other
Y2K resources and information. Additionally, many banks maintain
websites to inform their customers of the progress being made by the
bank's Y2K project team.
In December, ABA ran a full-page ad in USA Today and beamed a video
news release via satellite to more than 700 television stations around
the country to reach out directly to consumers. The news release
included part of an interview with John Koskinen, chairman of the
President's Council on Year 2000 Conversion, who has aid the banking
industry is ``ahead of the curve'' in Y2K preparedness.
ABA has also been holding media briefings jointly in Washington
with the other financial trade groups, and around the country in
collaboration with the state bankers associations. We are also doing
special media tours, making bankers available to discuss Y2K issues on
TV and radio.
Customer communication is a must for every bank in the country.
After all, every customer wants to know about their particular bank. No
one knows how consumers will behave leading up to January 1, and we
will continue to conduct research to track their behavior and their
level of concern. One thing is sure: they need information, sound
advice and reassurance--from their bank, the banking industry, the
federal banking regulators, and the U.S. Congress.
III. Why Y2K Legislation is Needed
Congress, government and regulators have a special role to play in
disseminating accurate information and creating an environment for open
discussion. The bill enacted by Congress last year, the Year 2000
Information and Readiness Disclosure Act (P.L. 105-271), was an
important first step in this direction. It encouraged information
sharing among parties who are actually working on Y2K problems, by
providing legal protection for their disclosures of technical
information. Further, it helps to ensure that disclosure of Y2K-related
technical information will not become the subject of lawsuits.
Congress can make a difference this year as well. In particular, we
urge Congress to consider broader Y2K liability issues, such as
disruption liability, punitive damages, class actions, and alternative
dispute resolution. The cost of doing nothing may be considerable. As
noted above, the industry has already spent billions of dollars on Y2K
remediation efforts. Industry consultants further project that $2
million could be spent on litigation for every $1 million spent on
system remediation.
Business survival depends on remediation. Banks and businesses have
every incentive to fix the problem so that they can stay in business
and continue to serve their customers. Speaking for the banking
industry, it is clear that Y2K readiness is a competitive issue. Banks
want to keep our customers and build our businesses, and to do so we
must be ready for Y2K. We do not need the threat of litigation as a
stick to make us remediate. In fact, the litigation threat is an
impediment, a distraction from the tremendous task at hand. Congress
should keep this in mind as opponents of Y2K legislation allege that
proposals to reduce the litigation threat will somehow remove the
incentives to achieve Y2K readiness. Nothing is further from the truth.
Here is a sampling of Y2K remediation and litigation cost
estimates, cited by Representative David T. Dreier during the recent
introduction of his Y2K liability legislation, H.R. 775, the Year 2000
Readiness and Responsibility Act:
``What we do know is that the Y2K event represents the
largest computing project that the information technology
industry has faced in the 50-year history of its existence. It
is estimated that the global cost for remedying the problem
could be as high as $600 billion. Possible litigation after the
event could reach $1.4 trillion.''
Mr. Joseph E. Connor, United Nations
Under-Secretary-General for Management,
December 11, 1998.
``Estimates of the worldwide cost to cure the problem could
range from $600 billion to $1 trillion. Companies would
normally devote these financial resources to improving profits,
developing new products, hiring or sweetening paychecks.''
Knight Ridder Newspapers, December 1, 1998
``The Gartner Group estimates that litigation costs over Y2K
service and product failures, both real and imagined, could
soar to $1 trillion or more.'' TIME, June 15, 1998
``The final cost of the Millennium Challenge, however, may
well exceed $1 trillion. The reason for this is that most
estimates only incorporate the direct cost of becoming `Year
2000 compliant.' Little attention is paid to the costs
associated with project management, delayed upgrades, diverted
resources and potential litigation.''
``The Millennium Challenge,'' a report
published by the Merrill Lynch Forum, July 1997
``The amount of legal litigation associated with Year 2000
has been estimated by Giga Information Group to be $2 to $3 for
every dollar spent fixing the problems. With the estimated size
of the market for Year 2000 ranging from $200 billion to $600
billion, the associated legal costs could easily near or exceed
$1 trillion.''
Ann K. Coffou, Managing Director, Giga Year
2000 Relevance Service, before the U.S. House
Committee on Science, Subcommittee on
Technology March 20, 1997
The banking industry is in a unique position regarding potential
Y2K-related litigation. Banks of all sizes serve as financial
intermediaries in virtually every transaction in the economy, from
retail transactions to trade finance, real estate conveyancing,
business credit lines, investment advisory services, and securities
trading and settlement. If such transactions or services become
disrupted in January 2000 for any reason, banks will become the
immediate targets for litigation because of their perceived ``deep
pocket'' status, regardless of their role in any Y2K disruptions
underlying the claims.
As has been noted by the federal banking regulators, some federal
consumer protection laws limit a financial institution's civil
liability to third parties (i.e., customers and other private
litigants) for unintentional violations that result from ``bona fide
errors,'' provided the institution establishes by a preponderance of
the evidence that it has maintained procedures reasonably adapted to
avoid such errors. However, these provisions have been rarely invoked
and have been narrowly interpreted when analyzed by the courts.
Without clarification by Congress, however, it is doubtful whether
the ``bona fide error'' provisions would provide any protection for
financial institutions against frivolous or abusive litigation. Absent
such clarification, insured depositor institutions could face a wave of
speculative class action claims by professional litigators seeking
damages from alleged Y2K-related disruptions of consumer financial
services.
IV. Guiding Principles for Y2K Legislation
Starting last year, the ABA has been working with our members and
with a multi-sector coalition of more than 60 industry groups \2\ to
formulate legislative proposals that would encourage Y2K problem
solving, and discourage speculative litigation. ABA strongly urges
Congress to consider the following principles in enacting legislation
that would create a rational framework for Y2K dispute resolution. Here
are a set of principles that we believe should guide Y2K legislation:
---------------------------------------------------------------------------
\2\ Since the summer of 1998, a multi-sector coalition of industry
groups, known as the Year 2000 Industry Coalition, has worked on Y2K
legislation, both disclosure issues and broader liability issues. Among
the participants in the coalition besides ABA are: National Association
of Manufacturers, Edison Electric Institute, Information Technology
Association of America, U.S. Chamber of Commerce, National Federation
of Independent Businesses, National retail Federation, American
Insurance Association, Business Software Alliance, Securities Industry
Association, and more than 60 other trade and industry groups
representing all economic sectors.
---------------------------------------------------------------------------
Contracts Prevail: Existing contracts should be the first
point of reference to define the rights and obligations of parties to
any Y2K dispute.
Cure Period: Potential defendants, such as product
vendors or service providers, should have the opportunity to cure a Y2K
problem before a lawsuit is filed. Parties need to devote their finite
resources to remediation, not litigation.
Mediate not Litigate: Parties should be encouraged to
resolve disagreements through alternatives to litigation. Likewise,
parties with legitimate claims must have their rights protected, but
abusive and frivolous claims should be discouraged.
Mitigation: Claimants should have a duty to mitigate
damages they could reasonably have avoided. This is a longstanding
principle of law that needs to be applied to Y2K claims.
Specific Claims: In the course of pre-trial dispute
resolution or filing a lawsuit, the plaintiff should be required to
identify the material defect and state the specific remedy sought,
rather than submitting vague or broad claims which obscure the chances
of fixing the problem.
Damage Limits: Limit Y2K contract litigation to actual
direct damages, and place limits on consequential or punitive damages,
unless parties have agreed otherwise by written contract. This would
not apply to personal injury or fraud claims.
Evidence of Efforts: Provide for ``reasonable efforts''
evidence to be considered by the tryer of fact in resolving contract or
tort claims. Such an evidentiary framework allows parties to establish
their good faith and due diligence in achieving Y2K readiness.
Proportionate Liability: Liability of a defendant should
be based on their proportionate fault in causing a Y2K disruption.
Proportionate liability should be applied in tort claims, rather than
joint and several liability, which unfairly targets ``deep pocket''
defendants who may not be primarily responsible for the harm. A federal
comparative negligence rule would allow courts to apportion liability
among multiple parties.
Speculative Suits: Discourage speculative class action
lawsuits through minimum claim requirements, notice procedures, and
clarifying federal diversity jurisdiction.
Sector-Neutral: Legislation should be sector-neutral,
with no sector of the economy or level of government obtaining special
exemptions not available to other entities.
Protect Legitimate Claims: Creating a framework for
rational resolution of Y2K-related disputes is important to every
sector of the economy. Otherwise, the judicial system is likely to
become clogged with frivolous suits, thus delaying resolution of
legitimate claims.
These are serious issues which demand a bipartisan response. Many
of these principles have been incorporated into Y2K liability proposals
which are now awaiting action by Congress:
S. 96 The Y2K Act Co-sponsors include: Sen. John McCain (R-Ariz.),
Sen. Spencer Abraham (R-Mich.), Sen. Bill Frist (R-Tenn.), Sen. Slade
Gorton (R-Wash.)
S. 461 The Year 2000 Fairness and Responsibility Act Co-sponsors
include: Sen. Orrin Hatch (R-Utah), Sen. Dianne Feinstein (D-Calif.)
Sen. Mitch McConnell (R-Ky.)
H.R. 775 The Year 2000 Readiness and Responsibility Act Co-sponsors
include: Rep. David Dreier (R-Calif.), Rep. Tom Davis (R-Va.) Rep. Jim
Moran (D-Va.), Rep. Bud Cramer (D-Ala.), Rep. Chris Cox (R-Calif.)
Each of these proposals incorporates many of the provisions that
ABA considers to be vital for promoting Y2K problem-solving and claim
resolution across economic sectors. The ABA continues to work with the
multi-sector coalition to secure passage in Congress of a bill that
reflects the principles outlined above, and encourages remediation over
litigation to meet the Y2K challenge.
VI. Conclusion
Mr. Chairman, the banking industry is working diligently to meet
the Y2K challenge, and is doing so with a wide ranging response that
sets an example for other industries to follow. Financial institutions
across the U.S. are implementing Y2K project plans that are vast in
scope, complexity and scale. However, we do not need the threat of
litigation spurring us on. Banks and businesses already have the
greatest incentive to finish the job for Y2K readiness, and that
incentive is the goal of survival as a viable business. Banks are
devoting tremendous resources to overcoming the challenges of Y2K. But
entire segments of the economy and the judicial system could be rocked
by the ordeal of protracted Y2K litigation. We urge Congress to take
action to prevent the potential derailing of the massive Y2K
remediation effort into a litigation tangle of unprecedented scope and
cost.
Thank you very much for the opportunity to address this committee.
I would be glad to answer any questions.
__________
Responses of John H. McGuckin, Jr. to Questions Submitted by
Chairman Bennett
Question 1. By all accounts, the banking industry is ahead of many
other sectors in its Y2K compliance effort. It is also clear, however,
that no industry will be immune from Y2K lawsuits. Given the relatively
high level of preparedness in the sector, what types of lawsuits do you
expect the financial services sector to be most vulnerable to next
year?
Answer. The banking industry is in a unique position regarding
potential Y2K-related litigation. Banks of all sizes serve as financial
intermediaries in virtually every transaction in the economy, from
retail transactions to trade finance, real estate conveyancing,
business credit lines, investment advisory services, and securities
trading and settlement. If such transactions or services become
disrupted in January 2000 for any reason, banks will become the
immediate targets for litigation because of their perceived ``deep
pocket'' status, regardless of their role in any Y2K disruptions
underlying the claims.
It is difficult to predict which area of financial services will
generate the largest volume of Y2K-related litigation. Similarly, no
one could have predicted the Rodash line of class actions against
mortgage lenders that mushroomed in the early 1990s. Those cases
involved the treatment of fees under the Truth in Lending Act, and the
lawsuits spread rampantly until Congress stepped in to put an end to
the litigation.
Banks are at greater risk in Y2K lawsuits stemming from
transactions not covered by the federal consumer protection laws, since
the ``bona fide error'' provisions might not apply. Such transactions
include cash management services for business customers, investment
advisory and fiduciary services, and other services outside the
traditional retail banking realm.
Question 2. You testified that the ``bona fide error'' provisions
in certain federal consumer protection laws would not provide any
protection against frivolous or abusive lawsuits unless there is
clarification by Congress. What type of clarification is necessary?
Answer. The ``bona fide error'' provisions were designed to limit a
financial institution's civil liability to third parties (i.e.,
customers and other private litigants) for unintentional violations
that result from ``bona fide errors,'' provided the institution
establishes that it has maintained procedures reasonably adapted to
avoid such errors. To date, the provisions have been rarely invoked and
have been narrowly interpreted when analyzed by the courts.
Typically when errors or problems occur and a consumer contacts his
or her financial institution, the bank routinely researches the problem
and, if the bank is at fault, offers to remedy the situation. In many
instances, the bank offers to fix the problem even if the error
originated with a third party. This could be the case, for example,
with direct deposit payments or automated loan payments that somehow go
astray. Banks generally follow this practice because they value the
ongoing relationship with their customers.
However, one concern is that errors or problems occurring on or
after the century date change could become grounds for lawsuits, as
plaintiffs' attorneys seek to exploit any disruptions and turn them
into Y2K claims. If this were to occur, consumers might be advised by
attorneys to turn down offers by their financial institution to resolve
disputes, and instead be encouraged to pursue potentially larger
settlements by alleging ``Y2K failures'' either individually or through
class action lawsuits. In such cases, banks would seek to rely on the
``bona fide error'' defense to limit their liability.
Accordingly, ABA urges Congress to clarify that ``bona fide error''
or ``inadvertent error'' provisions do in fact apply to Y2K
disruptions. This could be done with a technical amendment, noting that
Y2K disruptions are one type of ``computer malfunction and programming
errors'' contemplated in the statutes. Once again, the maintenance of
reasonable procedures by a financial institution to prevent such errors
would be a precondition for seeking such protection. This clarification
would be helpful in discouraging speculative Y2K lawsuits against banks
that have offered to resolve Y2K disruptions affecting consumer
financial services.
Question 3. Of the three Y2K liability proposals before Congress,
which one best addresses the concerns of the banking industry?
Answer. In ABA's testimony, we outlined several principles that we
believe should be part of any Y2K liability legislation enacted by
Congress. Among the most important of those principles are the
following: 1) a pre-trial cure-period to give parties a chance to fix
Y2K problems before filing lawsuits; 2) alternative dispute resolution
to encourage parties to mediate, not litigate; 3) proportionate
liability of responsible parties to avoid unjustly punishing ``deep
pocket'' defendants; 4) mitigation of damages by plaintiffs to prevent
excessive consequential damages claims; 5) limits on punitive damages
to deter speculative Y2K litigation; and 6) specific pleading
requirements so that broad, vague claims are not filed.
The current version of S. 96, The Y2K Act, contains many of these
elements, and is supported by the ABA as a rational Y2K dispute
resolution framework for promoting remediation rather than litigation.
On the House side, ABA views H.R. 775, the Year 2000 Readiness and
Responsibility Act, which has at least 81 bipartisan co-sponsors, as
the best approach to resolving these issues.
__________
__________
Prepared Statement of Howard L. Nations
Distinguished Senators, thank you for the opportunity to address
your committee on this very important issue. The inquiry which we are
asked to address is how the potential of liability will affect an
entity's ability to timely repair and remediate its year 2000 problems.
Examination of the rules of business law, by which the conduct of
business entities is measured, reveals that the law, as it exists in
all fifty states, encourages business leaders to immediately address
their Y2K problems. Business leaders are held to a standard to take
honest, informed, good faith efforts to seek immediate Y2K solutions in
order to avoid causing damage, both to their own company and to those
with whom they do business. Through avoiding the causation of Y2K
damage, entities can avoid liability. It seems reasonable to assume
that the desire to avoid causing damage and the fear of liability
arising from such damage should provide sufficient motivation to
reasonable business leaders to immediately address Y2K solutions.
America's time honored common law principles and the statutory laws
of all fifty states have been promulgated by the best legal minds of
the past two centuries, carefully honed in court on a case by case
basis, applied in jury trials with sworn testimony and rules of
evidence, fine tuned by trial judges and honed into strong legal
principles by the appellate courts of this land. The resulting business
principles which have emerged from the cauldron of American justice are
time tested and tempered and should be applied to resolve the business
problems arising out of Y2K just as they have been applied to business
problems in America since its inception.
There is no need for federal legislation regarding Y2K liability
because the common law principles, state statutes and the Uniform
Commercial Code, which has been passed by the legislatures of all fifty
states, provide all of the business rules and guidelines needed to
measure the conduct of business entities, provide motivation for
immediate remedial action, and provide remedies for wrongdoing. The
business law in question provides both rules and remedies. Responsible
business leaders and consumers who have followed these business rules
in matters relating to Y2K are now entitled to rely upon the remedies
which business law provides in order to recover from those who ignore
the rules and cause damage. It is inherently unfair to change the Y2K
rules with two minutes left in the fourth quarter in order to alter the
outcome to the detriment of those who have acted responsibly, and
followed the rules but will be damaged because of the failure of others
to act reasonably.
To focus on the issue of how liability will affect an entity's
ability to fix its Y2K problems, we need only understand the function
of the business judgment rule, the duty of due care, the Uniform
Commercial Code, and the concept of joint and several liability which
have controlled business transactions of this type for several decades.
The directors of a corporation owe a fiduciary duty of care to the
corporation and its shareholders in carrying out their managerial
roles. That is, they must exercise the same degree of care and prudence
that ordinary persons in a like position under the same or similar
circumstances would use.
The business judgment rule requires that business persons take
informed, honest, good faith actions in the best interest of the
company which they presume to lead. Corporate directors who
investigate, evaluate, deliberate and document as required by the
business judgment rule and the duty of due care will be immunized in
their efforts to remediate their Y2K problems. Absent an abuse of
discretion, the judgment of directors in making a business decision
will be respected by the courts. Aronson v. Lewis, 473 A.2d 805, 812
(Del. 1984). This does not seem to be an unduly harsh burden to place
upon corporate directors. These rules certainly should motivate
officers and directors to act promptly and reasonably to remedy Y2K
problems.
Federal legislation in this area of business law is unnecessary
because the Uniform Commercial Code has been adopted by the
legislatures of all fifty states, thus providing uniformity to Y2K
business law. Under the terms of the Uniform Commercial Code the
manufacturers of the defective systems and devices which are at the
base of the Y2K problem are subject to liability for breach of implied
warranty of fitness for a particular purpose, implied warranty of
merchantability, express warranties, and breach of contract. The
Uniform Commercial Code was originally formulated through the joint
efforts of the best business law minds in the country. The UCC has been
effective enough to gain the confidence of fifty state legislatures and
the rules, once adopted, have been finely honed by appellate courts
over the past three decades. The rules of the UCC have also been taught
in business schools and used in business practice over the past three
decades. Y2K presents precisely the type of legal disputes which the
UCC was designed to resolve. Most of the Y2K business litigation will
hinge on breaches of implied warranties or written contracts. The UCC
implied warranties rules should provide a great impetus to business
leaders to make every effort to become Y2K compliant before damage
occurs.
Additionally, a party who reasonably fears that the other party
will not be able to perform is given protection by the U.C.C. in that
the party may demand assurances that performance will be forthcoming at
the proper time. If these assurances are not received within a
reasonable time, the party seeking assurances can treat the contract as
repudiated and suspend its performance. Thus, the U.C.C. clearly
provides adequate remedies for buyers and sellers of all goods,
including any good covered by proposed Y2K legislation. To remove the
provisions of the UCC from the law controlling Y2K can only serve to
remove motivation for timely compliance of those who have already
procrastinated in addressing Y2K solutions.
In light of such protections which currently exist in the laws of
all fifty states, liability will attach only to those corporate
officers and directors who fail or refuse to act with due care and do
not follow the business judgment rule. Hence it is incredibly
disingenuous for a business leader to claim the inability to repair Y2K
problems because such repair may, in some mysterious way, predicate
liability. It is respectfully submitted that these business leaders
should be concentrating on limiting the damage which they are about to
cause instead of seeking limitations on the damages which they fear
they will have to pay. The best way to avoid paying damages is not to
cause damage. This can be accomplished by focusing, in the limited time
remaining, on the remediation process, which they should have
undertaken years ago.
Currently, the law in most states provides for joint and several
liability of parties in the chain of distribution of a defective
product, with the accompanying right of indemnification of downstream
defendants by upstream parties until the costs of the damage is
ultimately placed on the original tortfeasor. There are sound business
and legal principles which predicated the development of this rule and
its acceptance by the courts. There has seldom been a greater need in
American jurisprudence for maintaining the rules of joint and several
liability than in the Y2K litigation field. The reason is that many of
the defective products and business systems in America are manufactured
by foreign vendors. As reported in this Committee's Report, there is
grave concern about the level of Y2K remediation outside of the United
States and among many of our most frequent trading partners:
The Committee is greatly concerned about the international
Y2K picture . . . Several U.S. trading partners are severely
behind in their Y2K remediation efforts. S. Rpt. No. 105-106-10
at 6 (1999).
The biggest Y2K impact may occur internationally. While the
U.S. should have started its Y2K preparations earlier,
worldwide preparations generally lag even further behind. S.
Rpt. No. 105-106-10 at 1 (1999).
If small business and consumers are left with only several
liability against foreign vendors, there will be no remedy and the loss
will be absorbed completely by the American consumers and businesses.
Many of the products which are marketed in the United States are sold
f.o.b. at the dock in the shipping country, e.g., f.o.b. Yokohama.
Joint and several liability permits recovery by the end user from the
seller in the United States and a cause of action by the seller against
the foreign manufacturer. The U.S. distributor will be contracting
directly with the foreign vendor and will generally contract for venue
in American courts to resolve disputes, with local state law applying
to the dispute. Contracts should also contain provisions for submission
to the U.S. courts by the foreign vendors for dispute resolution. End
users have no such contracts and the abolition of joint and several
liability will leave many American consumers and businesses without a
remedy for Y2K damage done to them by foreign vendors.
The Y2K problem confronting responsible business leaders in America
who have followed the U.C.C. and sound business rules is that they are
now facing losses generated by non-compliant vendors, many of whom are
foreign.
Possibly, examination of the application of existing law to real
life Y2K situations will serve to illustrate how effectively current
law functions in the Y2K world and why there is no need to reject the
U.C.C. and change the law.
As of March 11, 1999, there have been fifty-six law suits related
to Y2K filed in the United States. Many of those cases have been
consolidated into class actions so that the total number of actual
lawsuits is closer to thirty. Most of the lawsuits are class actions by
small businessmen or consumers against vendors who are seeking
excessive prices for Y2K upgrades on products which should have been
Y2K compliant at the time they were sold. For example, Dr. Robert
Courtney is an OB/GYN solo-practitioner in New Jersey. In 1987, Dr.
Courtney purchased a computer medical system from Medical Manager, Inc.
for tracking surgery, scheduling due dates and billing. In 1996, the
computer crashed from lack of sufficient memory. At that time, Dr.
Courtney replaced his old system with a new state of the art Pentium
system from Medical Manager for $13,000, a sizable investment for a
small town solo-practitioner. The salesman assured Dr. Courtney that
the new computer system would last at least ten years. One year later,
Dr. Courtney received a letter from Medical Manager telling him that
the system which he had purchased was not Y2K compliant and it would
not be useful to him as of January 1, 1999. In order to solve the Y2K
problem which Medical Manager had built into their 1996 model system,
Dr. Courtney would have to pay an additional $25,000 for an upgrade.
After the company ignored Dr. Courtney's request for a free upgrade
of his 1996 system, he retained an attorney and sued Medical Manager
seeking to have them either repair or replace his computer system at
their cost. Dr. Courtney was designated as a class representative and
it developed that Medical Manager had 17,000 other small businessmen-
medical practitioners from whom they were demanding $25,000 for Y2K
upgrades. Not surprisingly, within two months after filing the class
action Medical Manager offered to settle by providing all 17,000
customers who bought a non-Y2K-compliant system after 1990 with a free
``patch'' that would make their old systems Y2K compliant. The sudden
appearance of the software ``patch'' rendered it unnecessary for 17,000
doctors to buy a new upgraded system at the cost of $25,000 each.
Application of current law not only saved $425,000,000 in unnecessary
costs to small businesses but also avoided $425,000,000 in profiteering
by Medical Manager through the sale of unnecessary Y2K upgrade systems
when a software patch was obviously always available.
This is typical of the type of profiteering which currently
confronts small businesses, even prior to January 1, 2000. Small
businesses will be a large segment of the plaintiffs in Y2K litigation.
For many small businesses, an outlay of $25,000 or a delay of ninety
days during which they are out of business as a result of a non-Y2K
compliant product will be fatal to the business and lead to bankruptcy.
This will be particularly true if the damages which they can recover
from the provider of the non-Y2K compliant device or product are
limited. Courtney is an excellent example of how well the current civil
justice system works. Within sixty days of filing the lawsuit, the
profiteering by the defendant ceased, the demand for $25,000 from
17,000 small businessmen was withdrawn and shortly thereafter, a free
patch was distributed to 17,000 doctors which magically made their old
systems Y2K compliant.
Another type of damage which will arise out of Y2K will be the
result of negligence by the creators of the system software or
programmers of the embedded chips. It is possible that we have seen a
preview of coming attractions in New Zealand. At 12:01 a.m. on February
29, 1996, in the largest industrial plant in New Zealand, all of the
steel manufacturing machinery which was controlled by computers ceased
to operate. The problem was that the computer system manufacturer had
failed to program 1996 as a leap year. As a result of this negligence,
millions of dollars in machinery was ruined and the plant was out of
business until new machinery could be obtained. This may be typical of
the type of failures which we will see after January 1, 2000 across
America. Serious consideration should be given to where the financial
losses arising out of such negligence should be placed, on the
negligent system software provider or on the business which purchased
the software in the good-faith belief that it would function properly.
If a situation such as the New Zealand steel mill occurs in the United
States and currently pending federal legislation is past, a limitation
of damages in the amount of $250,000 would pay only a fraction of the
cost of the losses of the steel mill. These damages limitations would
result in millions of dollars in losses to the innocent party. A ninety
day notice period would add insult to injury. These changes in the law
would be particularly devastating since the insurance industry has
indicated that they will deny coverage across the board on Y2K related
losses.
Over centuries of well-reasoned law, it has been determined that
losses of this type are better placed on the tortfeasor whose
negligence caused the damage than on the party which suffers the loss.
This is the current law in America which would control Y2K situations
such as this one and it is respectfully submitted that such law should
not be changed in order to protect the wrongdoer at the expense of the
innocent business victim. Retention of this law should provide
motivation to business leaders to seek immediate Y2K repairs.
Thus, it is respectfully submitted that the law as it currently
exists is far better suited to the resolution of Y2K claims than a
complete overhaul of these time-honored principles, created without
adequate time for reflection, amid a morass of misinformation and under
the pressure of special interest groups who seek to protect themselves
from the consequences of their own actions.
This Committee has acknowledged the level of misinformation
as follows:
The Committee has found that the most frustrating aspect of
addressing the Year 2000 (Y2K) problem is sorting fact from
fiction . . . The internet surges with rumors of massive Y2K
failures that turn out to be gross misstatements, while image
sensitive corporations downplay real Y2K problems. S. Prt. No.
105-106-10 at 1 (1999).
One of the myths surrounding the Y2K litigation is the often cited
Lloyds of London estimate of one-trillion-dollars in litigation costs.
The one-trillion-dollar figure emanated from the testimony of Ann
Coffou, Managing Director of Giga Information Group before the U.S.
House of Representatives Science Committee on March 20, 1997, during
which Ms. Coffou estimated that the Year 2000 litigation costs could
perhaps top one-trillion-dollars. Ms. Coffou's estimate was later cited
at a Year 2000 conference hosted by Lloyds of London and immediately
became attributable to the Lloyds organization rather than the Giga
Group. Obviously, those who want to use the trillion-dollar estimate
for their own legislative purposes prefer to cite Lloyds of London
rather than the Giga Group as the source of this estimate. There has
been no scientific study and there is no basis other than guesswork as
to the cost of litigation. The trillion-dollar ``estimate'' by the Giga
Group is totally unfounded but once it achieved the attribution to
Lloyds of London, the figure became gospel and is now quoted in the
media and legislative hearings as if this unscientific guess by this
small Y2K group should be afforded the dignity of scientific data. This
is just another of the many myths that surround Y2K and certainly
should not be given any credibility for changing 200 years of common
law, and setting aside the U.C.C., the business judgment rule, the duty
of due care and joint and several liability.
Thus, in this atmosphere of misinformation, a short time-line and
the pressures of special interest groups, it seems appropriate to
inquire as to whether this is the proper time, place and forum in which
to change 200 years of well-established common law and override the
Uniform Commercial Code.
A further inquiry worthy of examination before changing the well-
established rules by which business is conducted in America is what is
the nature of the ``crisis'' with which we are dealing, what is the
cause of the ``crisis,'' and does it warrant the pre-emption of state
laws and the Uniform Commercial Code.
Y2K is a computer problem which has been known to exist for
decades. The business community has had decades of notice and an equal
amount of time to address the solution to Y2K.
The Y2K crisis is not a computer crisis but rather a crisis of
corporate leadership which irresponsible business leaders seek to
compound with a crisis of corporate accountability. We are in this
situation because business leaders have made the conscious decision to
ignore the Y2K problem and to procrastinate in implementing solutions
until what began as a business problem has now become a business
crisis. Consider the findings of this Committee regarding
procrastination:
Leadership at the highest levels is lacking. A misconception
pervades corporate boardrooms that Y2K is strictly a technical
problem that does not warrant executive attention. . . . S.
Prt. No. 105-106-10 at 3 (1999).
Many organizations critical to Americans' safety and well-
being are still not fully engaged in finding a solution. . .
. Id at 1.
Most affected industries and organizations started Y2K
remediation too late. . . . Id at 2.
In discussing why many business leaders have been reluctant to
``champion difficult and complex issues'' this Committee found that:
Y2K competes poorly against issues such as . . . market
share and product development. It lacks familiarity, and in a
results-driven economy, Y2K remediation costs are difficult to
justify to . . . shareholders. Additionally, few wished to be
associated with the potential repercussions of a failed Y2K
remediation attempt. Id at 7.
Thus, irresponsible business leaders have chosen to concentrate on
market share and profits while ignoring the necessity of addressing Y2K
remediation. Their procrastination in seeking Y2K solutions will now
damage those with whom they do business. These are the leaders who are
now seeking Congressional endorsement of their procrastination in the
form of legislation which will absolve them of responsibility for the
losses and damages which they are about to cause. This is particularly
damaging to their consumers and business affiliates since the insurance
industry has indicated the intention to deny Y2K coverage across the
board. Therefore, Congressional absolution to the procrastinators,
tortfeasors and wrongdoers will simply shift the damage to their
customers and victims. It is respectfully submitted that the U.C.C.,
the law in fifty states, should not be rejected in favor of a federal
Procrastinators Protection Act.
There is no acceptable excuse for businesses not being Y2K
compliant other than their own procrastination in addressing the
problem. A brief examination of the Y2K time-line indicates that the
Y2K problem has been well known and steadily approaching for decades.
In the late 1950's when magnetic tape format allowed greater memory
capacity and less concern with space problems, programmers who were
aware of the distant Y2K problem assumed that technical advances would
eliminate the problem prior to 1/1/2000.
In 1960 Robert Bemer, a pioneering computer scientist, advocated
use of the four-digit rather than the two-digit date format which is
the basis of the Y2K problem. He was joined by forty-seven other
industry specialists in an effort to devise computer programming
standards that would use a four-digit rather than a two-digit date
field. In 1964, IBM had the opportunity to correct the problem when the
revolutionary system/360 mainframe came on line and set standards for
mainframes for years to come. However, IBM chose to maintain the two-
digit date field.
In 1970, Robert Bemer and eighty-six technical societies urged the
Bureau of Standards to adopt the four-digit rather than the two-digit
date field in order to avoid Y2K problems. The Bureau of Standards, at
the urging of the same entities who now face the Y2K problem, adopted
the two-digit standard.
In 1979, Robert Bemer, writing in Interface Age, again reminded the
computer world that the inevitable Y2K problems would occur on 1/1/2000
unless the defect was remedied. Mr. Bemer's warnings were again
ignored.
Notice again went out to the industry in 1984 when Jerome and
Marilyn Murray published Computers in Crisis: How to Avoid the Coming
Worldwide Computer Collapse. The Murrays recognized the problem when
they attempted to calculate annuities beyond the year 2000 and were
unable to do so because of the Y2K date field problem. This notice by
the Murrays put the entire manufacturing and computer industry on
notice that this was a problem which needed to be addressed and timely
remediated.
In 1986 a South African programmer, Chris Anderson, placed a
magazine ad decrying ``the time bomb in your IBM mainframe system'' in
reference to the two-digit date field. This occurred thirteen years ago
at a time when responsible business leaders should have been seriously
considering the remediation of impending Y2K problems. Instead, IBM
responded to the magazine ad in 1986 by stating, ``IBM and other
vendors have known about this for many years. This problem is fully
understood by IBM's software developers, who anticipate no difficulty
in programming around it.''
In 1989, the Social Security Administration computer experts found
that overpayment recoupment systems did not work for dates after 2000
and realized that thirty-five million lines of code had to be reviewed.
In 1994, the Social Security Administration timely began a three-year
review of their software and today the Social Security Administration
is the leader among government agencies in software remediation, having
timely undertaken the management of the problem. In doing so, they set
the standard of responsible conduct against which to measure those
confronted with Y2K remediation problems.
In 1993, two events occurred which placed both the federal
government and the business world on notice that the Y2K problem needed
to be addressed immediately. The first event was the testing by
engineers at North American Aerospace Defense Command of the NORAD
Early Warning System. As the engineers set computer clocks forward to
simulate 12:01 a.m. on 1/1/2000, every NORAD Early Warning computer
screen froze. Additionally, in 1993, Peter De Jager wrote ``Doomsday
2000,'' which was published in Computerworld concerning the Y2K defect.
In this article, Mr. De Jager stated, ``We and our computer were
supposed to make life easier. This was our promise. What we have
delivered is a catastrophe.''
Responsible business leaders followed the lead of the Social
Security Administration and heeded the warnings of Robert Bemer, the
technical scientific community, and authors such as the Murrays and
Peter De Jager. They timely undertook remediation of their Y2K problems
in the early 1990's when there was sufficient time and talent available
to solve the problems. Unfortunately, a large contingent of corporate
leaders procrastinated, and failed and refused to follow the business
judgment rule and to act with due care for the best interests of their
corporation and are now to be found in the halls of Congress lobbying
for Congressional forgiveness for the breach of contracts and the
consequences of the negligent manner in which they have approached the
Y2K problem. Such Congressional seal of approval on procrastination and
corporate irresponsibility would send the wrong message to the voters,
the wrong message to the public, and the wrong message to those who
will soon be victimized by such corporate irresponsibility.
It is respectfully submitted that rather pre-empting the law of the
fifty states controlling business activities, this Honorable Senate may
effectively help businesses who are actively seeking remediation and
who have already undergone the cost of remediation and repair by
considering the following types of legislation:
1. Legislation to aid in remediation and repair.
a. Create a federal repository for Y2K remediation solutions
which could be traded across industries. There are more than
five hundred programming languages and thirty-six million
programs to be remediated. Offer a tax benefit to a company
which achieves a remediation solution and places the solution
in a repository for use by others with similar problems. The
tax credit may be based upon the number of users who are aided
by the remediation solution.
b. Suspend application of Sec. 482 of the Internal Revenue
Code which requires that Y2K repairs by one division of a
company be treated as a taxable asset if used by other
divisions of the same company. This would promote the use of
repair tools or software packages between divisions without
such transfer between divisions being a taxable event;
c. Suspend the enforcement of the portion of the antitrust
laws which would prevent the sharing of Year 2000 repairs and
technologies within vertical industries because of the impact
on competition. Currently, the impact on competition which may
result from sharing Y2K technologies and repairs may constitute
a technical violation of the anti-trust laws. Any action which
promotes the more expeditious repair of Y2K problems without
adverse impact on other companies, should be encouraged without
regard to the impact on competition.
2. Tax Relief.
a. Allow the option to amortize the cost of Y2K repairs over
several years or be treated as expenses in the year incurred;
b. Issue a directive to the Internal Revenue Service that
they are to minimize the risk to taxpayers from punitive IRS
actions in the event that their withholding information or
interest information is incorrectly recorded due to the Year
2000 errors;
c. Provide additional corporate tax relief for businesses to
compensate, to some extent, for the cost of the Y2K repairs;
3. Relief for Governmental Agencies
There is a basis for concern about the impact of Y2K on
governmental bodies ranging from small cities to larger cities
and states. Governments at every level are confronted with a
double impact on solvency. First, each government has to budget
its own costs for remediation of governmental Y2K problems.
Secondly, the financial impact on taxpaying citizens and
businesses will adversely affect the bottom line of taxes
collected by governmental bodies. Thus, each governmental body
will be confronted with more bills to pay and less tax revenue
with which to pay them. In order to avoid interruption of vital
infrastructure services to our citizens, it is respectfully
suggested that an emergency financial relief system be
established for aiding governments which find themselves unable
to deliver vital services as a result of this double financial
impact.
4. Y2K Compliance
It is respectfully suggested that a considerable amount of
confusion and possibly even litigation may be avoided in the
future by the adoption of a standard definition for ``Y2K
Complaint.'' At the present time the term is used very loosely
without precise definition and businesses who are seeking to
ascertain whether their vendors or those with whom they do
business are ``Y2K Complaint'' should be cautious to ascertain
that they and their vendors are defining the term in the same
manner. It is respectfully suggested that the best definition
for the term ``Y2K Complaint'' is found in the Federal
Acquisition Regulation (FAR), part 39.002, published in Federal
Acquisition Circular (FAC) 90-45:
``Year 2000 compliant means information technology that
accurately processes date/time data (including, but not limited
to, calculating, comparing, and sequencing) from, into, and
between the twentieth and twenty-first centuries, and the years
1999 and 2000 and leap year calculations. Furthermore, Year
2000-compliant information technology, when used in combination
with other information technology, shall accurately process
date/time data if the other information technology properly
exchanges date/time date with it.''
To return to the original inquiry, it seems obvious that in the
time remaining before the inevitable arrival of 12:01 a.m. on January
1, 2000, business entities which have procrastinated for several years
in addressing Y2K remediation could best spend their time in long
overdue efforts at Y2K solutions rather than pursuing a Congressional
Seal of Approval on procrastination.
The law of all fifty states, the Uniform Commercial Code, the
business judgment rule, the duty of due care and the concept of joint
and several liability have been finely honed for decades to handle
precisely the type of litigation which will be the hallmark of year
2000 lawsuits, business versus business. To set aside decades of law in
order to protect those who brought about this crisis of corporate
leadership would be unfair to the responsible business entities which
are entitled to rely on the remedies which those well-established
business rules provide. There is no need for federal legislation
regarding Y2K liability.
Thank you for the opportunity to be heard on this important issue.
__________
Prepared Statement of Charles Rothfeld
Mr. Chairman, I appreciate the opportunity to testify today about
the litigation consequences of the year 2000 computer issue. My law
firm, Mayer, Brown & Platt, is one of the many in the United States
that has created a practice group devoted to taking on Year 2000 legal
issues. My firm also represents the Semiconductor Industry Association
and the accounting profession in connection with legislative efforts
currently underway in Congress to address the Y2K issue. Both the SIA
and the accounting profession participate in the Year 2000 Coalition, a
broad group of large and small businesses that supports Federal
legislation to encourage remediation and discourage insubstantial or
avoidable litigation.
The technical aspects and likely business consequences of the Y2K
issue are, by now, generally familiar. It seems safe to say that, even
if the United States avoids catastrophic computer and systems failures,
the Y2K bug will cause glitches, inconveniences, and sporadic or
temporary business shutdowns that will be felt throughout the economy.
We are here today, however, to talk about a secondary effect of the
Y2K phenomenon that ultimately may have more destructive, expensive,
and long-lasting consequences for the Nation than the millennial
computer failures themselves: there is a substantial danger that Y2K
glitches may generate an unparalleled wave of litigation. Certainly,
that is the general expectation of lawyers who defend business cases.
And knowledgeable plaintiffs' lawyers appear to agree; attorneys at
Milberg, Weiss, Bershad, Hynes & Lerach, for example, one of the
nation's leading plaintiffs' firms, have written that ``[a]mong lawyers
in the United States, it is widely anticipated that there will be
numerous system failures, leading to damages suffered by enterprises,
and a concomitant effort to allocate liability--many a litigator's
dream scenario.''\1\
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\1\ Spencer & Graziano, Year 2000 Computer Litigation.
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Against this background, I'd like to touch on three points in my
testimony today. First, I'll review the sorts of Y2K lawsuits that we
can expect. Second, I'll look at the volume of litigation that is
likely. And third, I'll briefly consider the steps that Congress could
take to ameliorate the most serious problems created by excessive Y2K
litigation.
A. Likely Types of Y2K Litigation
The ubiquity of computers and the potentially pervasive nature of
Y2K problems throughout the business world means that the sorts of
lawsuits that might arise out of the year 2000 problem are virtually
limitless. After all, there are any number of relationships that might
be affected by the Y2K glitch. Most obvious is the connection between
an information technology (``IT'') provider and its customers. But
computer-related business interruptions also could affect dealings
between any business and its suppliers or customers, causing domino
effects up and down the distribution chain. In addition, companies may
be affected by errors on the part of entities with whom they exchange
electronic data. And Y2K failures may drive down company values, which
inevitably will lead to second-guessing about the performance of
corporate officers or directors.
Litigation is possible--indeed, it is likely--at every stage of
this process.\2\ While the variety of possible claims makes it
impossible to offer a comprehensive compendium of Y2K suits, for
present purposes it may be useful to break prospective litigation into
four categories: claims designed to recover remediation costs; claims
based on a failure to deliver goods or services, or on other types of
business interruptions; claims against fiduciaries and actions that
assert securities fraud; and insurance claims.\3\
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\2\ The material in this section of my testimony rests
substantially on work done by Andrew Morris of Mayer, Brown & Platt.
See Morris, An Overview of Year 2000 Litigation Risks Confronting
Financial Institutions, in Y2K Adviser (Mar. 1998) (``Overview'');
Morris, The Year 2000 Problem: A Primer on Legal Risks, J. Internet. L.
(Oct. 1998) (``Primer'').
\3\ An attorney at Milberg Weiss has identified six stages of Y2K
litigation, including ``Defective Software Litigation,'' Defective
Hardware Litigation,'' ``Who is Responsible Litigation,'' ``Disaster
Litigation,'' ``Breach of Duty of Disclosure Litigation,'' and
``Insurance Litigation.'' Kathrein, Year 2000 Litigation--The
Perspective of Plaintiffs' Counsel.
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1. Claims for remediation costs. The first and perhaps most obvious
category of suits involves claims seeking remediation costs that are
brought by technology users against entities that assertedly are
responsible for the defects in non-compliant products. To date, most
potential disputes between IT vendors and customers have been resolved
amicably, with the bulk of vendors providing technical assistance, free
upgrades or patches, and support in the testing process. But several
dozen cases have been filed against IT vendors,\4\ and at least one
suit has been brought against a consulting firm that assisted the
plaintiff in the selection of computer systems.\5\ There is some reason
to expect that the pace of this litigation will pick up in the future
as larger companies turn their attention from carrying out remediation
to recovering remediation costs, and as smaller companies that have
been behind the Y2K curve begin to recognize that they have significant
problems. In fact, some users who have spent large sums on remediation
may conclude that they must sue vendors or consultants simply to
fulfill fiduciary duties to shareholders.\6\
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\4\ See, e.g., Paragon Network v. Macola Inc., Ohio Ct. Common
Pls., Marion City, No. 98-CV-0119; Capellan v. Symantec, Calif. Super.
Ct., Santa Clara Cty., No. 772147; Issokson v. Intuit, Inc., Calif.
Super. Ct., Santa Clara Cty., No. CV 773646.
\5\ J. Baker v. Andersen Consulting, No. 98-01597 (Mass. Super.
Ct., Norfolk Cty.)
\6\ Morris, Overview, at 4.
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The legal theories in these sorts of cases would include the
following:
Contract and warranty claims. Claims of this sort typically will
allege breach of contract or warranty. Because express Y2K warranties
are rare, especially in sales of technology products that took place
prior to the last year or so, these suits are likely to assert implied
warranties of merchantability and of fitness for a particular purpose
such as those recognized by the Uniform Commercial Code.\7\
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\7\ The law is unsettled on whether the Uniform Commercial Code--or
analogous principles--applies to software licenses. See Architectronics
Inc. v. Hunkar Laboratories Inc., 935 F. Supp. 425, 432 (S.D.N.Y.
1996).
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It should be noted that this sort of litigation often will involve
difficult and complex issues that will increase the length and expense
of the suits. One source of dispute will concern the enforceability of
warranty disclaimers and damages limitations. Another will involve the
characterization of the contract. For example, contracts for the sale
of goods generally are governed by a 4-year statute of limitations;
other types of contracts often are controlled by limitations periods of
6 years or more.\8\ Plaintiffs therefore will attempt to claim that
their contracts involve the sale of services, an assertion that will
raise difficult issues when software is sold together with consulting
or maintenance services. As one knowledgeable commentator has noted,
``[t]his is likely to lead to a raft of litigation over whether the
goods or services aspect of a contract predominates.''\9\
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\8\ See, e.g., UCC Sec. 2-725; 735 ILCS 5/13-206.
\9\ Morris, Overview, at 5.
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Tort and related claims. Plaintiffs also may assert tort claims
based on negligence, product defect, fraud (including allegations of
misrepresentations about the capacity of the IT product) and the like.
Plaintiffs could make similar claims under state deceptive trade
practices and consumer protection statutes. These theories are
discussed in greater detail below.
2. Business interruption and related claims. A second--and
potentially far broader--category of suits involves attempts to recover
losses caused (directly or indirectly) by a Y2K failure. As might be
imagined, cases in this category could involve an enormously broad
range of possible parties and factual situations. Any company that
makes use of IT products (which is virtually every business of any size
in the United States), or whose suppliers or customers make use of IT
products, could suffer an injury that is traceable to a Y2K failure.
These suits are likely to advance contract, tort, and statutory claims
of various sorts.
Contract claims. Virtually all business-to-business relationships,
and many business-to-consumer relationships, are governed by contract.
As a consequence, essentially any Y2K problem that causes a company to
fail in its business obligations could lead to a contract action.
Examples would be suits by purchasers against IT vendors for damages
caused by a Y2K failure (as distinct from suits seeking remediation
expenses); actions by customers against suppliers that fail to deliver
promised goods or services; claims by suppliers against customers that
cannot accept delivery; and suits by companies against anyone whose
nonperformance (or inadequate performance) made it more difficult (or
impossible) for the company to operate. On the consumer side, customers
could bring suit against financial institutions or securities firms
whose operations were interrupted, or against IT vendors whose products
were defective, or against other providers of goods and services who
failed to perform as promised.
The financial stakes in these cases could be enormous. Business
plaintiffs alleging breach of contract would in most cases seek
consequential damages, which could include lost profits and damages for
business interruption.\10\ And consumers (whether individuals or
businesses) often would be able to participate in class actions because
the purchasers would have signed similar form contracts. Even if each
class member suffered only minimal damages, the amount at issue in such
class suits would be very large.
---------------------------------------------------------------------------
\10\ Id. at 5 n.9.
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Tort claims. Failures that cause an interruption of or interference
with business also could lead to tort claims. Plaintiffs in such suits
could include persons who have had contractual or other direct dealings
with one another; plaintiffs also could include third parties who never
did business with the defendant but who suffered an injury that somehow
was traceable to the defendant's failure. In such third-party cases,
plaintiffs seeking defendants with deep pockets could bring negligence
suits against parties whose actions indirectly caused damage, arguing
that the injury was a foreseeable consequence of the defendant's
failure to achieve Y2K compliance.
The likeliest tort cause of action would be one alleging
negligence. Such a claim typically would assert failure to adhere to a
reasonable standard of care, or would allege the existence of a duty to
exercise care, breach of that duty, and resulting harm to the
plaintiff. Plaintiffs could allege negligence in a wide variety of
settings: against a consultant or professional who assertedly failed to
exercise due care in the provision of services; against an IT provider
who is alleged to have failed adequately to test its products; against
any business that harmed another because it was insufficiently
attentive to Y2K issues.
Plaintiffs also are likely to assert fraud claims, arguing that the
defendant intentionally made false statements of fact. Such claims are
possible whenever the defendant's statements about the Y2K status of
its products, or about its own readiness, prove not to be true.\11\
Indeed, one commentator who practices in the field has noted that many
of the inquiries that companies are now sending to other entities with
whom they deal are transmitted ``precisely so that they can use them
later as the basis for litigation. They may try to characterize
statements made in responses as contract terms--and thus the basis of
contract claims, or as representations--and thus the basis of negligent
misrepresentation or even fraud claims.''\12\ Depending on the
circumstances, plaintiffs also might reach into a grab-bag of other
tort claims, such as violation of a post-sale duty to warn,\13\ or
departure from specialized duties that are said to govern particular
relationships.\14\
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\11\ Id. at 7.
\12\ Morris, Primer, at 10.
\13\ See cases collected at Products Liability: Manufacturer's
Postsale Obligation to Modify, Repair or Recall Product, 47 A.L.R. 5th
Sec. 2a (1997); Products Liability: Liability of a Manufacturer or
Seller as Affected by Failure of Subsequent Party in Distribution Chain
to Remedy or Warn Against Defect of Which He Knew, 45 A.L.R. 4th 777
(1993).
\14\ See, e.g., Beshara v. Southern National Bank, 928 P.2d 280
(Ok. 1996) (banks owe elevated duty to customers).
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It should be added that one complication in these suits will be the
``economic loss rule,'' which bars the recovery of economic damages,
such as lost profits, in many tort cases.\15\ While this rule seemingly
would preclude the award of damages in many Y2K tort suits, the
doctrine varies in its details from state to state, and the exceptions
to the doctrine ``are evolving and ill-defined.''\16\ These
uncertainties, and the likelihood that ``[c]reative plaintiffs may try
to circumvent [the rule] altogether,''\17\ may make litigation about
the applicability of the rule uncertain, protracted, and expensive.
---------------------------------------------------------------------------
\15\ See, e.g., East River Steamship Corp. v. Transamerica Delavel
Inc., 746 U.S. 858, 874-876 (1986); Danforth v. Acorn Structures, Inc.,
608 A.2d 1194, 1195-1200 (Del. 1992); Restatement (Third) of Torts:
Products Liability, Sec. 1 (com. d), Sec. 21.
\16\ Morris, Overview, at 4. See Cunningham, Orphans of the
Economic Loss Doctrine: Tort Liability of Information Providers and
Preclusion of Comparative Negligence, 8 DePaul Bus. L.J. 41 (1995);
Nussbaum, The Economic Loss Rule and Intentional Torts: A Shield or a
Sword, 8 St. Thomas L. Rev. 473 (1996).
\17\ Morris, Overview, at 7.
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Statutory claims. In addition, plaintiffs may base suits for
business interruption or product defect on various statutory causes of
action. Claims may be based on state unfair trade practices or consumer
protection statutes, which often are couched in vague and very broad
terms.\18\ These statutes have been invoked in many of the Y2K suits
that already have been brought. Plaintiffs also might rely upon the
Federal Racketeering and Corrupt Organizations Act, arguing that the
defendant committed mail or wire fraud by making false statements about
the state of its Y2K compliance through the mails or over the
telephone. RICO suits, which entitle the plaintiff to treble damages,
provide ample opportunity for strike suits.
---------------------------------------------------------------------------
\18\ See, e.g., MGLA 93A, Sec. 2(a) (``unfair methods of
competition and unfair or deceptive acts or practices in the conduct of
any trade are hereby declared unlawful'').
---------------------------------------------------------------------------
3. Claims against fiduciaries and securities suits. A different
category of suits involves fiduciary/derivative claims or securities
actions that might be brought by shareholders. First, in the event of
Y2K failures that damage a corporation, shareholders could bring
actions on behalf of the corporation, asserting that directors breached
duties of care or loyalty. Such suits could be triggered by failures
that damaged the company's business operations and profitability, or
that led to judgments against the company in Y2K litigation--and, in
the event that the company is not damaged by Y2K problems, could even
be based on allegations that directors wasted company assets by
spending too much on remediation. Plaintiffs could recover the
company's lost profits, out-of-pocket expenses, or legal judgments paid
by the company.
In theory, defendants in such derivative suits are protected by the
``business judgment'' rule, which rests on ``a presumption that in
making a business decision the directors of a corporation acted on an
informed basis, in good faith and in the honest belief that the action
was taken in the best interests of the company.''\19\ But this
presumption may be overcome by a showing of ``gross negligence,''\20\ a
vague allegation that may be difficult for the defendant to rebut on a
motion to dismiss. In the words of one attorney who written in the
field, to take advantage of the business judgment rule ``the officer or
director must take action and make an informed, reasonable decision in
good faith. If no action is taken, or there is the absence of a
conscious and documented decision, there is no protection.''\21\ The
difficulty of determining whether that prerequisite is satisfied
provides fertile ground for litigation.
---------------------------------------------------------------------------
\19\ Kahn v. Roberts, 1995 WL 745056 *4 (Del. Chan. 1995) (citation
and internal quotation marks omitted).
\20\ Id. at *3. See also Rabkin v. Philip A. Hunt Chemical Corp.,
13 Del. J. Corp. L. 1210 (Del. Ch. Dec. 17, 1987).
\21\ Kathrein, supra, at 14.
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Second, other types of fiduciary suits also are possible. Investment
advisors, trustees, and many other entities may owe fiduciary
duties to their customers and clients. If customer funds are
lost as a result of such an entity's actions, plaintiffs may
recover both the lost funds and consequential damages.
Third, a potentially broader category of actions involves securities
fraud suits that would be based on asserted misstatements about
Y2K readiness, or about alleged failures to disclose material
information bearing on Y2K issues. Public companies are
required to make extensive disclosures of information to the
Securities and Exchange Commission. In particular, the SEC
recently required disclosures regarding Y2K readiness and
preparations.\22\
---------------------------------------------------------------------------
\22\ See www.sec.gov/rules/concept/33-7558>.
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Any misstatement (or omission) in these disclosures, or in other
corporate communications, could form the basis of a suit against the
corporation or corporate officers--and possibly against third parties,
such as auditors, who arguably were involved in the review or
formulation of the statement. Indeed, any drop in share prices
following a Y2K failure could prompt a securities fraud suit based on
the allegation that the defendant failed to disclose relevant
information about the state of Y2K compliance.
4. Insurance claims. A final category of suits--and, presumably,
the last to be brought--will involve litigation regarding insurance
coverage. Such litigation could involve claims brought under various
types of policies for damages caused by Y2K failures, and also could
involve claims that remediation costs are covered.
B. The Likely Volume of Y2K Litigation
While it thus is clear that a great many types of Y2K suits are
possible under existing law, deciding how many actions actually will be
brought necessarily involves a more speculative undertaking. But the
signs and leading indicators point strongly toward the conclusion that
the volume of litigation will be substantial.
First, virtually every expert attempt to assess likely litigation costs
indicates that the expense of Y2K suits will be enormous. The
most widely cited figure suggests that litigation costs could
approach $1 trillion.\23\ Even if that figure proves inflated,
there appears to be a consensus among the analysts that the
number of suits likely will be without parallel in recent
experience. A panel at last summer's convention of the American
Bar Association, for example, predicted that legal costs
associated with the Y2K problem will exceed the combined
litigation costs attributable to asbestos, breast implant,
tobacco, and Superfund lawsuits.\24\ That amount exceeds the
aggregate estimated annual cost of all civil litigation in the
United States. Indeed, it is noteworthy that more than 50
lawsuits--only one of which alleges an actual Y2K failure--
already have been initiated, more than 9 months before the
arrival of the year 2000. And Y2K litigation is likely to be
protracted and expensive because it presents legal issues in a
novel and very technical context.
---------------------------------------------------------------------------
\23\ See, e.g., Atkinson & Ward, Avoiding a Y2K Lawsuit Frenzy 3
(PPI Mar. 1999).
\24\ Carter, Lawyers Suit up for a Juicy Millennium Bug Feast,
Austin American-Statesman A2 (Aug. 5, 1998).
---------------------------------------------------------------------------
Second, the legal profession is now engaging in frantic preparations
for anticipated Y2K litigation. As of last August, some 500 law
firms, including those on the plaintiffs and on the defense
side, had established specialized year 2000 practice
groups,\25\ and that number is sure to have grown in the
intervening months. Seminars, presentations, and panels on how
to initiate and litigate Y2K cases, with titles like
``Litigation Strategy for Year 2000,''\26\ ``Year 2000 Computer
Crisis: The Litigation Summit,''\27\ ``Year 2000: Exposures and
Coverage,''\28\ or ``Year 2000 Legal Liability Forum''\29\ are
presented virtually every week. Specialized Y2K publications
and treatises are multiplying.\30\ Law firms across the country
are busily informing their clients how to best position
themselves both to bring and to defend against Y2K
litigation.\31\
---------------------------------------------------------------------------
\25\ Carter, supra, at A2.
\26\ Presented by Law Journal Seminars (Apr. 12 & 13, 1999).
\27\ Presented by Fulcrum Information Services (June and July
1998).
\28\ Presented by Mealey's (Oct. 8 &9 1998).
\29\ Presented by the Institute for International Research (March
22 & 23, 1999).
\30\ E.g., R. Williams & B. Smyth, Law of the Year 2000 Problem:
Strategies, Claims and Defenses (1999); Mealey's Year 2000 Report.
\31\ See, e.g., Morris, Overview.
---------------------------------------------------------------------------
All of this activity in advance of the year 2000 is remarkable, and
allows us to draw conclusions with some confidence about what is likely
to happen after the date change. It is improbable that all of these
sophisticated and intelligent attorneys are completely off base in
preparing for lawsuits; the objective marketplace is telling us that a
substantial wave of litigation is likely. And even if these lawyers are
wrong in some objective sense about whether there should be many suits,
this enormous investment of legal capital is acquiring a momentum that
makes a wave of actions inevitable. Plaintiffs' lawyers are gearing up
to sue, while defense lawyers have conditioned their clients to expect
suits. The litigation itself is sure to follow.
Third, experience shows that societal problems that have economic
consequences almost always are addressed through litigation.
The history of asbestos is one obvious example. But the Y2K
issue has unique features suggesting it will impel a uniquely
large volume of suits. The Y2K problem has consequences that
are pervasive, potentially affecting almost everyone in the
United States. And the problem has a lead time that (at least
theoretically) allows potential defendants to take corrective
action--meaning that, if something goes wrong, it will be
possible in almost every case to allege (rightly or wrongly)
that someone is at fault. In these circumstances, our legal
culture inevitably will attempt to assign blame in the only way
it can: through the medium of litigation.
It should be added that the example of asbestos provides a
frightening model of what could happen as a consequence of Y2K
litigation. Pointing to the volume of asbestos suits, the Report of the
Judicial Conference Ad Hoc Committee on Asbestos Litigation found that
dockets in both Federal and state courts continue to grow;
long delays are routine; trials are too long; the same issues
are litigated over and over; transaction costs exceed the
victims' recovery by nearly two to one; exhaustion of [the
defendants'] assets threatens and distorts the process; and
future claimants may lose altogether.
Report at 3. The Committee added that ``[t]he transaction costs
associated with asbestos litigation are an unconscionable burden on the
victims of asbestos disease,'' citing a RAND Corporation finding that,
``of each asbestos litigation dollar, 61 cents is consumed in
transaction costs * * * . Only 39 cents were paid to the asbestos
victims.'' Id. at 13 (footnote omitted). These tremendous costs were
found to diminish the funds available to compensate plaintiffs:
``[u]nfairness results because of the excessive transaction costs and
the finite resources available to pay meritorious claims.'' Id. at 14.
If translated to the Y2K setting, this would not be a happy state of
affairs for plaintiffs, and it surely is not an outcome that we should
be anxious to visit on the economy's high technology sector.
C. Proposals for Reform
Against this background, it would make sense for Congress to take
limited steps to rationalize the inevitable Y2K litigation before it
hits. Such legislation should be constructed around several principles.
Because fixing Y2K problems is the best way to avoid litigation,
legislation should encourage companies (and individuals) to take all
reasonable steps to correct defects in their systems before problems
develop. Because litigation inevitably involves waste and high
transaction costs, legislation should give people an incentive to
resolve their disputes quickly and informally in the event that
computers do fail. And legislation should temper the possibility of a
litigation crisis by screening out the most insubstantial lawsuits--the
ones where there has no been no real harm--while preserving the rights
of people who have suffered substantial injury.
In my view, the bills that have been introduced by Senators Hatch
and Feinstein, and by Senators McCain and Gorton, as well as the
bipartisan Y2K bill that has been introduced in the House, are faithful
to those principles. Some of their notable provisions are the
following:
A Pre-Litigation Waiting Period. This provision doesn't take
substantial rights away from anyone. Plaintiffs who seek injunctive
relief are not affected at all. The provision affects only people who
are asking for money damages. Those plaintiffs would not get a judgment
from a court for many months or years anyway; they won't be hurt by a
brief delay before bringing suit. But that delay will keep disputes off
the litigation track for a reasonable period so that the parties have a
chance to resolve issues between themselves, without getting the courts
involved and running up huge legal fees. By doing that, the provision
focuses the parties on getting Y2K problems fixed, which is in
everyone's interest. Plaintiffs who are not satisfied with the result
will be able to get into court, without having given up any of their
rights.
Requirement of Pleading With Particularity. Plaintiffs know and can
easily explain what damages they have suffered. They can describe the
ways in which a product isn't working. And it is unfair for a plaintiff
to accuse a defendant of acting with a bad state of mind unless the
plaintiff is able to articulate some factual basis for that allegation.
This provision simply makes it easier to smoke out insubstantial claims
at an early point, before the defendant runs up substantial litigation
costs.
Duty to Mitigate. This provision codifies a rule that is generally
recognized under tort and contract law. It is sound policy to give
everyone an incentive to take reasonable steps to minimize a societal
problem like the Y2K glitch. And it makes no sense to reward people who
refuse to take actions that they know could easily and cheaply prevent
Y2K failures. Because the provision makes use of a fact-specific
``reasonableness'' standard, unsophisticated consumers would not be
expected to take extraordinary steps to educate themselves about the
Y2K problem; the provision should come into play only when ordinary
people in the plaintiff's position should have been aware of
information that would have let them prevent the injury. The bottom
line is that legislation should encourage remediation of Y2K defects,
and both potential defendants and potential plaintiffs should be
obligated to participate in that effort.
Contract Preservation. As a general matter, contractual provisions
should be enforced--and judges should not be permitted to throw out
pieces of a contract after the fact on the basis of ambiguous and
amorphous ``public policy'' considerations. The parties to contracts
have worked out their rights and obligations between themselves; if,
for example, the contract contains a liability limitation, that
typically means that the party insisting on the limitation would not
have entered into the contractual relationship at all unless it
believed that the limitation would be enforceable. It is patently
unfair to deprive that party of the benefit of its bargain if things
later go wrong. This is a particular problem for people who might be
hired to remediate computer systems. Fear of potential liability is so
great that these experts are now reluctant to take on such projects
because they have no assurance that even seemingly iron-clad
contractual liability limitations will be enforced. Providing that
assurance would be a great help in solving Y2K problems before they
develop.
Proportionate Liability. It is fundamentally unfair to make a
defendant pay for something that is someone else's fault and over which
the defendant had no control--and it is particularly unfair when, as
often will be true in Y2K cases, some of the responsibility for the
injury is borne by the plaintiff. Without proportionate liability,
plaintiffs' lawyers always will name a deep pocketed defendant in their
suits so long as there is any chance that the people who really are
responsible for the injury are judgment-proof; the lawyers will know
that the deep-pocket will have to pay the entire judgment so long as a
jury can be persuaded to find it even 1 percent responsible. That kind
of scheme simply encourages frivolous litigation by giving lawyers the
leverage to bring abusive suits that the defendant will have no choice
but to settle.
Exclusivity of Contract Remedies (the ``Economic Loss Rule''). This
provision, which simply codifies the common law rule that prevails in
many jurisdictions, accomplishes three things. First, it brings
valuable uniformity in a confusing area that is sure to be extensively
litigated in the Y2K context.
Second, it prevents a plaintiff from attempting to get out of a deal
that it made by contract. The courts generally have recognized
that the rights of parties who have entered into a contract
should be governed by that contract, and not by tort rules that
are outside of the agreement. If the contract specifically
precludes the award of economic losses, there is no reason that
a party should be allowed to evade the limit that it agreed to.
And if the contract is silent on the question of economic
losses, the parties will expect their rights to be governed by
existing state contract law; if that law provides for economic
losses (as it typically does, so long as the damages were
foreseeable), the plaintiff will be made whole. Plaintiffs
therefore will not be left without a remedy.
Third, where there is no contract between the parties, this provision
establishes that economic losses are available only when those
losses grow out of personal injury or injury to tangible
property. Courts have recognized that the prospects of economic
losses in other circumstances are so remote and unforeseeable
that it would be unfair to make defendants liable for them.
While such suits likely will be rare, permitting them would
allow for unanticipated and potentially limitless liability.
Class Action Minimum Injury Requirement. Without the limitations in
this provision, plaintiffs' lawyers will be able to manufacture
essentially fictitious classes by finding trivial or theoretical
defects in products and bringing strike suits to extort settlements.
And by definition, this provision applies only when the defect is not
material as to most class members, meaning that the defect will not
have any significant effect on the operation of a product.
Class Actions: Federal Jurisdiction. There is a compelling Federal
interest in having the suits governed by this provision decided by
Federal courts. These cases will be national class actions involving
citizens of many states--and Federal courts have far more experience
than do state courts in resolving such claims. Moreover, because the
Y2K problem raises issues of great importance to the national economy,
it is important that the issues in such cases get the sort of
nationally uniform treatment that is possible only in Federal court.
The interests of states are safeguarded by the exception that allows
suits to remain in state court when most plaintiffs and defendants are
citizens of that state.
* * * *
If we are facing a tidal wave of Y2K litigation, these provisions
certainly are not a panacea: they make only modest and incremental
changes. But they are likely to place a renewed focus remediation,
while providing mechanisms to weed out the most insubstantial
litigation. Legislation of that sort will both strengthen the economy
and assist plaintiffs who have suffered real injury.
__________
Responses of Charles Rothfeld to Questions Submitted by
Chairman Bennett
Question 1. Mr. Rothfeld, you've obviously given a lot of thought
to the kind of lawsuits that might be filed as a result of Y2K
failures. Do you have any prediction as to the kinds of actions that
might be most prevalent?
Answer. It is impossible to be confident about what sorts of Y2K
suits are most likely to arise. Because Y2K glitches may develop
throughout the economy, and because computers and computer-generated
data are ubiquitous, Y2K claims may be brought by and against virtually
every imaginable set of parties. Of course, we can be sure that many
suits will be brought against technology companies, seeking to hold
them liable on contract, tort, or various statutory theories for damage
flowing from Y2K failures. And the plaintiffs' bar certainly will
initiate many class actions alleging software or hardware product
defects. Having said that, however, I hesitate to predict that any
particular category of suit is likely to be most prevalent.
Question 2. You testified that proposed legislation should temper
the possibility of a litigation crisis by screening out the most
insubstantial lawsuits--the ones where there has been no real harm--
while preserving the rights of people who have suffered substantial
injury. What evidence do you have that there will be so many
insubstantial lawsuits that legislation is required to screen them out?
Answer. We can point to evidence of at least three sorts that a
large volume of insubstantial litigation is almost inevitable.
First, that conclusion is supported by the expectations and
preparations of the legal profession. Many hundreds of law firms have
created specialized Y2K practice groups; publications and presentations
to help lawyers prepare for Y2K litigation have become common; and
lawyers are counseling their clients on how to position themselves to
initiate Y2K suits. The investment of all of this legal capital
encourages clients to sue, and places an irresistible pressure on
lawyers to initiate lawsuits--whether or not they are justified. In
this respect, the Y2K problem presents opportunities to lawyers that
are very similar to those offered by securities litigation prior to
enactment of the Private Securities Litigation Reform Act of 1995.
Second, we already have seen more than 50 Y2K suits initiated. Many
of these were insubstantial claims that were dismissed because the
plaintiffs have not yet suffered any injury. Of course, this is only
the smallest tip of the iceberg; the numbers will increase
exponentially after the year 2000 when actual computer glitches
materialize. That a large percentage of claims that already have been
filed have proved to be insubstantial, however, strongly suggests that
this is an area that lawyers will milk for quick settlements. And when
faced with large numbers of suits, defendants will not be able to
litigate the cases through to judgment; they will have no choice but to
settle.
Third, experts who have looked at the Y2K problem expect there to
be an enormous volume of litigation. Even the most conservative
estimates predict that litigation costs will be a multiple of the
expenditures devoted to remediation, which suggests that litigation
will consume an amount running at least into the hundreds of billions
of dollars. Of course, not all of this litigation will be frivolous.
But if even a modest percentage of it is, the volume of insubstantial
suits will be tremendous.
Question 3. With respect to the 90-day waiting period, isn't that
too long a time to wait for a fix if a small business suffers a
critical failure?
Answer. The waiting period would not affect any substantial rights
of small businesses. If a business wants to bring suit for injunctive
relief--for example, to get specific performance of a contractual right
to repair of defective software--the 90-day prelitigation period would
not apply at all. On the other hand, if the business is bringing suit
for money damages, even without the 90-day period the plaintiff surely
will not complete the litigation and obtain compensation for many
months or years; if time is of the essence, under existing law the
business never will get relief until it is too late. Understood in that
context, waiting an additional 30 (or 90) days before bringing suit
will not materially disadvantage the plaintiff. To the contrary, the
waiting period may help the plaintiff get quick relief by obligating
the potential defendant to focus within 30 days on what it can do for
the potential plaintiff to head off litigation. At the same time, if
the small business engages in self-help during the pre-litigation
period (for example, by hiring a third party to repair its system, or
by purchasing an alternative system), the business can obtain complete
relief from the defendant for any expenditures it has made.
Question 4. You testified that fear of potential liability is so
great that computer experts who remediate systems are now reluctant to
take on such projects because they have no assurance that iron-clad
contractual liability limitations will be enforced. Can you explain why
they have such concerns?
Answer. Expert remediators are concerned that judges might seize on
vague common law doctrines to void limitations on liability or warranty
disclaimers. Because potential Y2K liabilities are so great, many
experts are reluctant to have anything to do with Y2K remediation
projects because they fear that, if a glitch occurs, the party whose
system they contracted to remediate could attempt to hold the
remediator liable for all damages. Of course, the experts would have
contracts with the businesses whose system they tried to remediate, and
they could try to limit their liability by contract with those
businesses. But the concern is that, if Y2K problems are widespread,
judges who are sympathetic to the plaintiffs in such cases could void
the contractual liability limitations as unconscionable or contrary to
public policy. The state-law rules governing those doctrines are vague,
and without a clear statement that such contractual provisions will not
be voided, remediators will be reluctant to take the chance that
liability limitations will be held enforceable.
Question 5. You testified that without certain limitations,
plaintiffs' lawyers will be able to manufacture essentially fictitious
classes by finding trivial or theoretical defects in products and
bringing strike suits to extort settlements. How do you draw a line
between what anyone would agree was a material defect and what might be
a material defect to only some people?
Answer. The determination of materiality is a familiar one in the
law and arises in a wide range of settings. Whether a defect was a
material one as to particular users or for particular purposes would be
a factual question that would turn on all of the circumstances: the
intended use of a product, the specifications of the product, the
nature and effect of the defect, and so on. Finders of fact should not
have any trouble making that determination.
__________
Prepared Statement of Hon. William Steele Sessions
__________
Responses of Hon. William Steele Sessions to Questions Submitted by
Chairman Bennett
Question 1. Judge Sessions, you testified that you believe most of
the class action, shareholder derivative, multi-district, intellectual
property and other large complex cases will find their way to federal
court, as opposed to state courts. For the benefit of the non-lawyers
among us, why would that be the case?
Answer. My reasoning for predicting a higher volume of the above
matters finding their way into federal court is based upon the nature
of the cases and the historical filing track record of similar matters.
Traditionally, lawsuits arising under laws of the United States
have included intellectual property matters, antitrust and trade
regulation cases, civil rights cases, and Securities Exchange Act of
1934 matters and the like. Coupled with appropriately large dollar
amounts in controversy, diversity cases are federal court mainstays as
well. In some cases exclusive/mandatory jurisdiction is a factor along
with ease of nationwide discovery, familiarity of both the bench and
counsel with these types of actions in the federal courts.
The state courts would likely field the bulk of personal injury,
professional liability, property damage and the standard tort
litigation almost exclusively.
Question 2. You testified that the federal courts are already
overloaded, and that a deluge of new Y2K-related matters likely will
cause a judicial bottleneck that will be unusually difficult to
address. How would that bottleneck manifest itself in terms of, for
example, the time it takes to resolve not only the new Y2K cases but
the other cases that are normally filed in the federal courts? What
impact would this bottleneck have on the justice system overall?
Answer. Assuming that the Y2K litigation deluge hits hard, and as
one massive wave of filings, the bottleneck could be devastating. We
must make certain predictions about the manner in which the filings
will flow. If we assume that failures occur on January 1, 200, that the
failures are colorably imputed to the some loss on that date or soon
thereafter, and that filings related to those failures follow a
predictable date patterns, (within six months), then we can forecast a
massive wave of filings within six months of the date of failure.
Once we assume a deluge of fillings, the ramifications are readily
apparent. Due to the requirements of the Speedy Trial Act of 1974,
federal courts will continue to be required to place a preference on
criminal cases and the civil case docket will lag appreciably. As more
civil matters are filed, the more the civil docket will lag. At some
point, parties will not be able to obtain meaningful justice due to the
delay in having their matters adjudicated. Memories will fade,
witnesses will die or be unfindable. Not only will the Y2K civil cases
be ``lost in the shuffle'', but all other civil cases as well.
Additionally, the learning curve for courts on the merits of the
various cases and the insurance coverage problems will cause delay
which is virtually unavoidable.
Even a well-organized, well-maintained docket will creak under the
pressure of a massive docket. Dispositive motions will be delayed,
trial dates will be pushed back and the problem at some point will
begin to circle back on itself. That is, the longer it take to properly
allow litigation to process through the system, the longer it will
take. That may sound redundant but it is not.
Question 3. Based on what you know of the types of lawsuits that
will probably be filed, would you anticipate the need for any special
training of federal judges to handle these cases?
Answer. I do not anticipate that the overwhelming majority of the
cases will be computer technical at their core. In other words, a
medical malpractice case, an accounting fraud case, a securities fraud
case, and a patent infringement case or an engineering product case all
require very technical explanations for what went wrong, but the legal
process is routine.
A judge must know how to manage the legal process well, but does
not normally need to have an expert knowledge about the subject matter
of the various litigations. The judge does not have to be an expert in
brain surgery, dismantling accounting systems, engineering an atom-
splitting machine or analyze stock portfolios. Similarly, the judges do
not have to understand the various computer program languages in order
to deal with Y2K disputes. But they must possess some knowledge which
relatively minimal training can give to them. A training film, produced
by the Federal Judicial Center or the Administrative Office of the
United States Courts could be very helpful. You might send United
States Magistrate-Judges from each of the ninety-four Districts to
receive the necessary training. After ``training the trainer'' that
person can then return to their districts and seminars can be held for
the judges and magistrate-judges who will be working on the Y2K
litigation.
Question 4. You testified that there is a shortage of federal
judges to adjudicate the cases that already exist in federal courts.
About how many cases is the average district court judge assigned per
year? Can you elaborate on the type of work that would be involved for
a judge in some of the Y2K lawsuits?
Answer. When I left the bench in 1987, I believe that four hundred
cases per judge was the standard justification for authorizing a new
judgeship. Judges in various districts carry between three hundred and
eight hundred cases on their dockets. The number of cases filed is not
always an accurate guide about the real load carried by a judge but it
is helpful in assessing the potential impact of a Y2K deluge. The
nature of certain cases skews the number of hours spent per case. A six
months criminal trial could have a tremendous impact on a small docket.
Judges with those kinds of cases must necessarily have a smaller number
of cases on their dockets. Certain geographic locations have higher
filing rates than other location.
The type of work involved in a Y2K deluge is likely to include the
certification of classes, Daubert reviews of expert qualifications,
diversity of citizenship challenge motions, jurisdictional and venue
questions, conflict of laws issues, issues of first impression on novel
theories of law, as well as the traditional handling of motions and
discovery along with trial duties.
Question 5. Judge Sessions, you testified that the Chief Judge of
Cook County, Illinois had taken measures to reduce the caseload and
delay in this court system, and that the influx of Y2K litigation might
undo that work. Could you elaborate on the measures he has taken and
explain whether or not those measures might be effective in the Y2K
context?
Answer. I am informed that Judge O'Connell has utilized a firm and
reassuring hand to guide the administration of justice in Cook County.
He has found efficiencies in tracking cases and held people
accountable. Of course, as a general rule, the federal courts are well
run and the court administrators do a marvelous job.
In Cook County, Judge O'Connell has tried to assure that the
efficiencies already in place in the federal system were mirrored in
the state court system. Both systems will be impacted by a Y2K deluge.
It is difficult to compare the state and federal systems.
Question 6. You testified that legislation geared toward the swift
and fair resolution of cases through such vehicles as alternative
dispute resolution, dual track systems, and similar programs might be
the best solution to the Y2K problem. Can you elaborate on what you
mean by ``dual track systems''? How would alternative dispute
resolution of Y2K lawsuits alleviate the pressure on the court system?
Answer. The tracks of the ``dual track systems'' might best be
described as the ``traditional track'' of litigation and a ``fast
track'' of litigation. The parties are allowed to ``opt in'' or ``opt
out'' of a fast track which might include early intervention
techniques, including early neutral evaluation, mediation, arbitration,
(binding or non-binding), summary jury trials, mini trials and the
like. The fast track allows for limited discovery, expert testimony
through reports, condensed live testimony and the parsing of ancillary
issues. It allows the parties to get the main issues early in the case,
review each others positions and have an adjudication on the core
issues.
Such voluntary submission to a condensed, concentrated legal review
should be given a faster track, so that the premium is on swift
resolution, without sacrificing sound judicial judgment.
Those not choosing to avail themselves of the ``fast track'', will
have the standard, traditional course of litigation. On either the fast
track or the traditional track, sound implementation of ADR will move
cases without the cost, time and delays associated with a full trial.
Anything that provides full, fair swift and sound justice, such as ADR
could, improves the ability of the courts to dispense meaningful
justice to the parties remaining.
__________
Prepared Statement of George Scalise
THE Y2K CHALLENGE: A SEMICONDUCTOR INDUSTRY PERSPECTIVE
Mr. Chairman, members of the Committee, thank you for inviting me
to be here today to testify about the Year 2000--an issue that I
believe is the biggest challenge facing the business community today.
Before I begin, I would like to tell you a little bit about the
Semiconductor Industry Association. The SIA represents over 90 percent
of the U.S. semiconductor industry. Today, the U.S. chip industry holds
the lead in world market share. According to Department of Commerce
data, the chip industry contributes more to this country's GDP in terms
of value added than any other manufacturing industry. The industry is
both capital intensive and R&D intensive: indeed, our members must
spend a third of their revenues on research and capital equipment,
among the highest percentage of any industry in the world.
These tremendous investments in R&D and capital equipment have
yielded a direct benefit to consumers everywhere: the cost of our
products continues to decline, and the functionality continues to
increase. The increase in computing power has allowed the spread of PCs
to homes, schools and small businesses, and it has enabled the
explosion of the Internet and e-commerce. The Economic Report to the
President last year pointed out that without the faster-than-average
recent rate of decline in computer prices, overall inflation would have
risen steadily since early 1994: instead, because of the fall in
computer prices, inflation has actually decreased.
An Introduction to the Y2K Issue
Semiconductors have become a part of everyday life: they exist in
everything from coffee makers and alarm clocks to advanced computers
and electronic equipment. In part due to the pervasiveness of our
products, there is a misperception being perpetuated that the Year 2000
issue is somehow a ``chip problem.'' I would like to address and
clarify this misperception.
First, though, I would like to emphasize that the overarching goal
of the SIA and its members is to focus energy and resources on
remediation rather than litigation. Our goal is not to offer protection
to those in the business community who have been slow to act on Y2K or
to limit actions involving personal injury. We are focused on insuring
that the legal system is not exploited to extract settlements from
responsible companies or to cause harm to the U.S. economy by diverting
resources from productive uses such as R&D.
As you know, the Y2K challenge stems from a decades-old practice of
sorting and processing dates in a two-digit format, a practice that
emerged when conserving computer memory was considered essential
because of its high cost. What this means from a practical viewpoint is
that electronic products that process dates in this way, which could
include everything from computers to the family VCR, may not know
whether ``00'' means the year 1900 or the year 2000. Another date-
related issue that companies are confronting arises from the practice
of some computer programmers who use ``dummy dates'' such as ``99'' or
``00,'' which can trigger system shutdowns and other effects when dates
that include those numbers are reached. Because electronic products are
highly integrated into today's world, these problems can have far-
reaching effects.
Evaluating whether a product is Y2K ready is quite complicated.
Many electronic products are collections of semiconductors and other
parts that operate and interact according to instructions supplied by
software. It is the interaction of all these hardware and software
elements that determines whether a particular product is Y2K ready. To
complicate matters, many elements found in the same product may have
been made and/or programmed by different companies.
The Unique Challenges Facing the Semiconductor Industry
The semiconductor industry faces a considerable challenge in
evaluating Y2K readiness issues. There are thousands of different kinds
of semiconductors. The vast majority of semiconductors are incapable of
generating, comparing or sorting date information. These semiconductors
are unaffected by the Y2K issue. A small percentage of semiconductors
are capable of generating or processing date information when software
is added to the chip: the software is typically specified and owned by
the customer, not the chipmaker. An even smaller number of chips have
circuitry that is designed to generate or process dates, and even in
this category the chipmaker may be manufacturing to customer
specifications.
In general, chipmakers do not design or develop the programming for
their products: in fact, typically the programming is the proprietary
material of the third party that developed it, not the semiconductor
manufacturer. Even when the chipmaker has access to the programming--
which is provided as a series of zeros and ones--it typically is not
permitted by confidentiality agreements to verify through reverse-
engineering that the product is Y2K ready. For similar reasons, if a
semiconductor manufacturer has been asked to manufacture to a design
applied by a customer, the chipmaker can't determine whether the
semiconductor is Y2K ready.
Further complicating this issue is the fact that semiconductors are
an integral part of larger ``embedded'' systems that affect the
operations of a myriad of electronic products. Embedded systems provide
control functions in numerous products, from the family VCR to
microwave ovens to cars. Embedded systems have the ability to compute.
Typically, these systems also contain instructions--usually in the form
of software--that determine how the end product operates and what it
computes. Again, these instructions are usually not developed by the
chipmaker, but rather by the manufacturer of the end product.
Another critical issue is how the semiconductor device will work as
part of an electronic product, which may contain other parts that are
not Y2K ready. For example, a typical electronic product such as the
family computer contains a collection of parts that work together. It
is the interaction of all these elements that dictates whether the
product is Y2K ready. In the case of the computer, these parts include
the microprocessor, the BIOS (Basic Input Output System) that controls
the interface between the operating system and the computer hardware
and controls the system's real-time clock, the operating system and the
software applications. Because the readiness is determined by the
interaction of all its various components, the manufacturer--or in some
cases the distributor or owner--of the finished electronic product is
the only entity capable of testing and evaluating whether the product
is Y2K ready.
The Chip Industry's Response
Semiconductor makers are conducting extensive research and
evaluation programs to resolve the Y2K issues within their control. As
part of this comprehensive effort, our companies are working
cooperatively with suppliers and customers to help resolve questions
and concerns about the Y2K readiness of electronic products. Because of
the complexity of these issues, the semiconductor industry supported
the Year 2000 Information and Readiness Disclosure Act, signed into law
by the President last October 19, which encourages companies to
disclose vital information about Y2K issues so that they can work
together to solve common issues.
I hope this statement helps explain the relationship of ``embedded
systems'' and chips to the Y2K issue. As I have already noted, the
ultimate solution to this question is beyond the control of the
semiconductor supplier. Chipmakers can and will continue to assist
their customers by providing information. Ultimately, the manufacturer
of the finished electronic product is the only one capable of
determining how the elements of the system function together as an
integral unit and whether the product is Y2K ready. And at the consumer
level, individuals and businesses must contact the manufacturers of
electronic products to determine whether they are Y2K ready.
Today, I would ask your help to insure that chipmakers and any
other businesses that have approached the Y2K issue in a responsible
and forthright manner not be subject to frivolous lawsuits. I am not
asking for dispensation for any business or individual that has not
acted in good faith. I am suggesting that those who have acted in good
faith should not be punished. This is the aim of two bills--one
introduced by Senator Hatch and Senator Feinstein, and a separate
measure put forth by Senator McCain--both of which we strongly support.
As I mentioned at the beginning of my testimony, semiconductors
contribute more to the U.S. economy than any other manufacturing
industry. Please help us insure that we can continue to spend our
resources on productive R&D and other investments, rather than on legal
fees. Companies need to be focusing their attention on remediation, not
litigation.
__________
Prepared Statement of Michael C. Spencer
My name is Michael C. Spencer. I am a partner at Milberg Weiss
Bershad Hynes & Lerach LLP in New York City. I have been asked to
provide testimony to the Special Committee in light of my experience in
prosecuting Y2K-related actions filed by my firm, and to comment on the
potential ``litigation explosion'' that assertedly may arise from Y2K-
related failures.
Overview
My perspective on the Year 2000 issues facing the Congress and our
society at large exactly reflects the name given to this Special
Committee: this is a ``technology problem,'' not a litigation problem.
My central point is that the law does not need changing to respond to
Y2K issues. Our existing substantive common law rules and our existing
court procedures can and will deal with these problems adequately.
These rules and procedures have been developed and tested over lengthy
periods of experience by litigants and jurists of all political
persuasions. The value of this past experience is highest when our
system confronts issues like the prospect of Y2K legal disputes. We
should not contemplate jettisoning our time-tested rules and procedures
just at the time when they are most needed.
There really should be no ``sides'' in discussing Y2K legal issues.
The potential claimants or plaintiffs in Y2K disputes may include all
types of individuals and firms; for example, large businesses, which
typically are viewed as defendants in most debates over litigation
issues, are as likely to be plaintiffs as defendants in these
situations. Nevertheless, we are seeing a special-interest group--high-
tech product vendors whose products contain unresolved Y2K defects--
seek wholesale revisions to substantive and procedural law simply to
protect themselves from legal exposure, at the expense of our
established system for resolving these types of disputes. If enacted,
these steps would undermine basic confidence in the ability of the
legal system to provide just solutions to these problems.
So far, only a relatively small number of lawsuits have been filed
arising from Y2K problems (several dozen at most). The facts giving
rise to many of the lawsuits reflect a disturbing trend: the proclivity
of some high-tech firms to dishonor their legal responsibilities to
stand behind the performance of their products (typically software or
firmware), and instead to use Y2K problems as an opportunity to extract
revenues and profits from their customers--who are forced to pay for
Y2K fixes when they should be receiving them for free. These cases are
being adjudicated based on adequate existing law, but have not yet
progressed far enough to provide clear answers to the questions of
liability presented in them.
In general, because of the pervasive involvement of computer and
chip technology in most aspects of modern life, Y2K failures may lead
to disputes covering the full range of civil legal liabilities,
involving (for example): claims in tort and in contract; large and
small claims; economic, property, and bodily injuries; mass consumer
claims or highly individualized claims; immediate and consequential
damages; invocation of policies favoring compensation and deterrence.
As requested by the Special Committee, this statement also outlines
existing legal mechanisms for handling these issues.
Experience and Perspective from Which This Statement Is Derived
The law firm at which I work, Milberg Weiss, is probably the
largest and best-known firm specializing in handling litigation for
plaintiffs with respect to large-scale business and economic disputes,
often on a contingency-fee basis and often using class action
procedures. Our cases often involve securities fraud, accounting
failures, abuses of consumer protection laws, environmental and health
issues, and antitrust violations. We also have an active pro bono
practice, which ranges from representing individual Social Security
claimants to mass actions to recover assets stolen in the Holocaust. We
have offices in New York, California, and Florida.
I and others at Milberg Weiss first became involved in Y2K
litigation a little over a year ago, when a small business owner on
Long Island came to us concerning an accounting software package he had
purchased in July 1995. He had recently been informed by the software
vendor that his version of the software was not ``Y2K compliant''
(i.e., it contained Y2K defects) and that it would fail to process
entries and transactions accurately as the millennium approached.
Moreover, although the software had been sold with an express five-year
warranty, the vendor had informed owners of this version that the Y2K
problem would not be fixed free charge; an upgrade would need to be
purchased. Depending on the number of program ``modules'' being used,
the fix would cost about $2500 for the average user, versus an original
acquisition cost of $5-10,000. This amounted to a substantial and
unanticipated cash outlay for small business users.
We were retained to bring a class action. The client's company, on
behalf of itself and a proposed class of other owners of similar
software, sued the software manufacturer for breach of warranty and
related claims in state court in northern California, where the
manufacturer was located. This was the first class action raising Y2K
issues in the country. The vendor's immediate reaction to the lawsuit
was to offer a free fix--an immediate salutary result for all class
members. If the company had offered the free fix all along, which in
our view was its obligation under its pre-existing warranties, no
litigation would have been necessary. The laws and procedures involved
in the lawsuit were not specific to Y2K problems in any way: this was a
fairly straightforward warranty dispute, made novel only because it was
the first class action in the Y2K arena, and thus attracted lots of
attention. The case was settled on the practical ``free fix'' basis
(although not until further legal disputes were resolved after several
months of effort), and the final court hearing on the fairness of the
settlement is scheduled for March 10, 1999 (shortly after this
writing). Atlaz Int'l, Ltd. v. Software Business Technologies, Inc.,
No. 172539 (Marin Co. Super. Ct., Calif., filed Dec. 3, 1997).
My firm has commenced several other Y2K class actions, in
situations that are broadly similar, in various courts around the
country. Our clients in these cases include a computer store, a medical
practice, individual consumers (one salesman, one independent film
distributor), a car dealer, a windowshade manufacturer, and a bottled
water distributor. We have heard from scores of other software owners
who are similarly aggrieved, including large and small businesses,
municipalities, and nonprofit organizations. These cases are well
suited for class action treatment because the defendants' conduct
alleged to be unlawful has similar or identical effects on all
claimants (owners of Y2K-defective software for which the manufacturer
has a warranty or consumer-protection obligation to fix it free of
charge, but refuses to do so). As with any collection of litigated
actions, these cases have had a variety of results: some have settled,
some are still in early stages of litigation, some have been through
court proceedings in which we have been required to amend our pleadings
to conform to the courts' views of applicable law, and one has been
dismissed and is on appeal. In all of these cases, we have found very
widespread support for our claims among the members of the proposed
classes, for the simple reason that people cannot understand why they
should have to pay substantial sums to fix software they bought only
recently, with the reasonable expectation that it would function
properly at least for several years into the future.
Outline of Potential Y2K Lawsuits--Claims and Defenses
The Special Committee's invitation for testimony requests an
explanation of the potential causes of action and types of lawsuits
that might arise in the event of Y2K-related failures. The following
comments, in outline form, describe potential claims and the types of
issues that have arisen or may arise.
A. User vs. Vendor (Software, Embedded Chips)
1. Owners of Y2K-defective software or firmware (machines
controlled by embedded chips) may sue for breach of warranty, fraud,
breach of contract, or violation of consumer protection and unfair
business practice statutes.
2. In general, these cases divide into two groups: those brought by
consumers or with respect to consumer products, for which statutory
consumer protections apply, including provisions preserving implied
warranty obligations even if contractually disclaimed; and those bought
by businesses or with respect to non-consumer products, which may be
governed by UCC principles that often recognize warranty disclaimers.
In either situation, claims may also arise for fraud (for example, if
the vendor has induced purchase by fraudulent statements) and/or for
breach of contract (for example, if maintenance contracts are
terminated or deemed not to cover correction of Y2K defects).
3. Most of the litigations already commenced are in this category,
because users are damaged immediately when vendors refuse to provide
free fixes required under applicable principles, and users either
purchase the fixes or abandon the software/firmware.
4. The cases are often suitable for class action treatment because
of the common legal and factual issues involved. Consequential damages
(i.e., economic damages deriving from Y2K malfunctions, such as
accounting errors or missed deliveries) are typically excluded from the
class actions because they may involve non-common issues. See Microsoft
Corp. v. Manning, 914 S.W.2d 602, 610-11 (Tex. App. 1995) (class
certification sustained for non-Y2K consumer software defect claims
based on ``mere purchase of a defective product''; excluding
consequential damages).
5. Defenses include lack of ripeness (vendors argue that owners may
not sue unless and until the Y2K defect is ``manifest'' and produces a
computer malfunction or causes consequential damages--see Issokson v.
Intuit, Inc., No. CV 773646, slip op. (Santa Clara Co. Super. Ct.,
Cal., Aug. 27, 1998); lack of privity (in cases involving express
warranty claims and disclaimers); and contract disclaimers and
integration clauses purportedly limiting warranty and fraud claims--see
Paragon Networks Int'l v. Macola, Inc., No. 98-CV-0119, slip op.
(Marion Co. Ct. of Common Pleas, Ohio, Dec. 16, 1998).
B. Users vs. Consultant
1. The only reported Y2K case in this category so far is Young v.
J. Baker, Inc., No. 98-01597 (Norfolk Co. Super. Ct., Mass., filed Aug.
17, 1998). The consultant that advised on purchase and implementation
of a client's computer system sought a declaratory judgment that it was
not liable for negligence, malpractice, or breach of contract arising
from Y2K problems that subsequently arose. This case was sent to
mediation and reportedly was subsequently resolved without any decision
on the merits. Consultants' defenses in these cases may include
invocation of the economic loss rule (which may in some cases limit
tort-based recoveries when product failures cause only economic harm)
and other defenses mentioned above.
C. Securities Purchases vs. Company
1. Companies that have allegedly issued materially false reports
about their Y2K problem, and companies providing Y2K remediation
services that issued materially false statements about business
prospects, have been the subject of a handful of securities fraud class
actions. These cases do not appear to involve issues different from any
other securities fraud cases.
D. Shareholders vs. Corporate Directors/Officers
1. These ``derivative'' cases would typically allege that corporate
directors and officers breached their duties of care to their companies
by failing to fix Y2K problems, causing injury to the company. These
cases have not yet materialized. Defendants would typically assert
defenses such as the business judgment rule. The legal issues again do
not appear to be different from those in other derivative cases.
E. Victim of Y2K Failure vs. System Owner
1. The broadest category of potential claims involves victims of
consequential damages suing the manufacturers, owners, or users of
computer systems whose failures caused the damages, and follow-on
``chain reaction'' claims designed to assign legal responsibility to
parties actually at fault.
2. These claims may involve both economic and bodily injury (the
latter, for example, in cases of hospital equipment failure or transit
system mishaps) and could include both tort- and contract-based causes
of action. These cases again would raise typical issues and defenses,
ranging from statutes of limitation; reasonable conduct in identifying
and remedying Y2K defects; and allocation of responsibility in
contracts among economically related parties.
3. Depending on a number of factors, including the types of
injuries involved and the relationship between injured parties and
parties whose equipment suffered Y2K failures, many of these cases may
be appropriately brought as class actions. For example, a financial
institution's failure to process transactions due to Y2K defects in its
proprietary computer system, leading to customers' defaults on
financial obligations, would appear to be well-suited for class
treatment. Courts have been more reluctant to permit class treatment
for claims involving non-economic bodily injuries on the ground that
diverse legal and factual issues may predominate over common issues.
Note: The above outline of potential lawsuits in this area is
necessarily simplified. The legal profession has held numerous
conferences on Y2K-related litigation and remediation topics in the
past 18 months to prepare for issues that may arise. Course materials
from these conferences provide more exhaustive information about these
matters. See, e.g., Course Materials: Crises at the Millennium,
Computer Law Association (Nov. 10-11, 1998, New York).
Perspective on the Challenges to Our Legal System Arising from Y2K
Defects
The announced topic for the panel discussions at this hearing of
the Special Committee is ``Y2K in the Courts: Will We Be Capsized by a
Wave of Litigation?'' As stated in my introduction, my principal
observation is that the vast majority of our society's time and
resources should be devoted to fixing the Y2K technology problem, and
not to litigation matters. For those interested in litigation, however,
the Special Committee's focus on a possible ``wave'' of litigation at
least identifies the issue, which is whether unprecedented quantities
of litigation will ensue. There is no need to be especially concerned
about the qualitative ability of our court system to handle Y2K
problems because our present substantive law and procedural rules are
in fact well-developed to deal fairly with Y2K issues. The types of Y2K
cases that may be litigated involve familiar fact patterns and legal
principles that are present in thousands of commercial and consumer
cases that the courts handle successfully every week.
Our system of slowly developing common law principles, augmented in
some respects by statutes incrementally enacted over time to deal with
general problems not sufficiently addressed by common law (such as
consumer protection issues), is widely recognized as the most efficient
and efficacious method for achieving economic justice in the world.
This system reflects accumulated wisdom of numerous judges and
litigants who have faced factually diverse problems sought to be
resolved fairly using claims and defenses developed and argued by
lawyers for many decades. In a truly conservative sense, the genius of
this system should be honored and preserved.
The present legislative proposals in the Senate and the House are
devoted almost exclusively to restricting rights and remedies for Y2K
problems, which would have the ultimate result (if enacted) of forcing
the ultimate victims of Y2K failures to bear the economic costs of
their injuries, and of immunizing those who should be held responsible
for addressing the problem in the first place. The attempt to reduce or
remove existing rights and remedies simply because the Y2K problem may
be widespread, and because many of those responsible for its appearance
are in high-technology industries, is simply unjust.
For example:
A pre-complaint notification provision, promoted as
implementing a superficially appealing ``cooling-off'' period, in fact
would simply delay efforts to obtain redress from defendants that have
committed Y2K wrongs. A required three-month lag in filling claims
would probably act to reduce likelihood of settlement by removing any
legal pressure on a defendant to take the claim seriously. While such a
three-month lag might appear harmless to some observers, a small
business owner who is highly dependent on a computer system that needs
an immediate Y2K fix may not be able to wait that long for results. And
it is notable, even remarkable, that the effect of filing a lawsuit in
many of the class actions already brought has been to cause the
defendant to offer an immediate free fix to members of the proposed
class--a clear demonstration of the efficacy of prompt legal action in
appropriate circumstances.
The House legislation would enact a ``reasonable efforts
defense'' to contract actions. Existing law for centuries has required
contracting parties to perform their contractual obligations as agreed
upon (unless limited doctrines of impossibility or unconscionability
apply)--not merely to make ``reasonable efforts'' to perform. This
would amount to a wholesale pro-defendant rewriting of contract law.
The proposed ``codification of the economic loss rule''
would apparently jettison established complex principles for economic
loss recovery in areas such as malpractice, where state and federal
courts have carefully developed standards in response to specific
factual situations over many years.
Limitations on liability of directors and officers (to
the greater of $100,000 or their compensation over the past year) and
ad hoc limitations on punitive damages for truly egregious wrongdoing
amount to makeshift restrictions on recovery that bear no relationship
to any compensation or deterrence objectives in the law.
``Proportionate liability'' for defendants in Y2K tort
actions would abrogate traditional doctrines of joint and several
liability for defendants who participate in joint activity that causes
injury, and shift the risk of a defendant's insolvency from other
defendants that joined in the wrongdoing, to the victims who would now
be disabled from recovering complete damages.
Implementation of a ``knowledge or reckless disregard of
a substantial risk'' standard for a defendant's liability where state
of mind is an element of a cause of action again disregards carefully
developed judicial and legislative standards applicable to various
claims involving state of mind or standards of care.
Restrictions on class actions, through heightened notice
requirements, a ``minimum injury'' requirement, and fee limitations
lack any justification other than antipathy toward class actions and
fear that this remedy may actually be effective in ensuring that high-
technology companies honor their tort, contract, and statutory
obligations to consumers and other potential class plaintiffs. There is
no plausible reason to impose ad hoc limitations on class actions for
Y2K problems--in fact, those who are truly concerned about an increased
volume of litigation should be promoting class actions (in which many
claims are aggregated), not impeding them.
Heightened pleading requirements similarly would be
contrary to established procedural law in other similar cases and have
no apparent justification other than to protect potential defendants.
the assertion by some organizations favoring this proposed
legislation that it somehow would ``protect consumers'' is astounding,
because the legislation's only practical result would be to protect
businesses potentially responsible for injuries resulting from Y2K
defects.
The responsible way to approach challenges to our court processes
that might arise if Y2K actions represent a significant increase in
federal and state court caseloads is not to limit the ability of
victims to recover--it is to prepare courts to deal with possible
increased filings. Ensuring the judgeship positions are filled and
court administration positions fully staffed is one obvious step. And
as has always been true when an area of law develops quickly,
precedents will be established in early cases that will guide later
potential claimants and defendants in resolving subsequent disputes
without resort to the courts, and assist courts in adjudicating later
cases that are litigated. That is the way our common law system
typically functions, and there is every good reason to preserve the
strengths of that system in the face of possible increases in case
volume if widespread Y2K problems materialize.
A Final Note on the Equities in Y2K Disputes
Although the Y2K problems is commonly referred to as the
``millennium bug,'' that term is a misnomer. A bug is an unanticipated
problem. The Y2K problem has been anticipated for several decades. The
failure of the computer industry to remedy this problem in their
products, because of years of industry procrastination and denial, is
the only reason the problem is perceived as a crisis at this time.
Economic responsibility for the problem should be borne by the persons
or entities that failed to correct the problem despite many
opportunities to do so. The present efforts to restrict or eliminate
those entities' legal liabilities in this area represent special-
interest opportunism at its worst.
__________
Responses of Michael C. Spencer to Questions Submitted by
Chairman Bennett
Question 1. Mr. Spencer, you testified as to your belief that the
90-day cooling-off period would just delay efforts to obtain redress.
Isn't it possible that there are many responsible businesses out there
that wouldn't see the 90-day cooling-off period as a chance to delay,
but as a chance to avoid litigation by solving the problem when it is
brought to their attention?
Answer. In every situation of which I have been aware, potential
claimants who have suffered a Y2K problem and believe it is the
responsibility of another entity (typically, a software vendor) to fix
the problem have contacted the vendor and sought a solution long before
any litigation was commenced. No one wants to start litigation before
less drastic alternatives are explored--it is too expensive, and is
usually employed only as a last resort.
On the other hand, there have been, and undoubtedly will continue
to be, situations in which a potentially responsible vendor has already
announced definitively that (for example) it will not fix a Y2K defect
in its software products for free, or its maintenance contracts do not
cover Y2K defects. In those situations, a 90-day mandatory ``cooling-
off period'' would serve only to delay any legal remedies that software
users might need immediately--particularly if those users are consumers
or small businesses that depend on the software, and a Y2K defect has
made their computer systems inoperative. Such a delay can work a real
hardship on these users, and might also exacerbate ``ripple effect''
problems suffered by others who deal with businesses dependent on the
defective software. Finally, our court system is designed to provide
reasonably prompt remedies; a 90-day required delay would be contrary
to that laudable goal.
Any and all responsible parties to a Y2K dispute can always agree
to a cooling-off period before litigation is filed, and most do desist
from immediate litigation, as described above. But a mandatory delay
period would hurt those who need immediate remedies (particularly, for
example, small business owners who rely heavily on the proper
functioning of their systems and might suffer substantial financial
difficulties if a free fix is not provided promptly), and not really
help those who are not suffering urgent problems and thus would be
likely to seek non-litigation resolutions regardless of any mandatory
delay period.
Question 2. You testified that Y2K failures may lead to disputes
covering the full range of civil legal liabilities. Based on your
experience in bringing Y2K actions, do you have any sense of what kind
of lawsuits will be more common than others?
Answer. Because computers and embedded chips have become
ubiquitous, lawsuits over Y2K defects in those products will likely
arise in a wide variety of legal contexts. Claims to obtain Y2K fixes
or recover the costs of those fixes typically are based on contract law
principles (breach of warranty or breach of maintenance agreements,
often covered by the Uniform Commercial Code) and on consumer
protection statutes. Claims seeking recovery of damages for the effects
suffered as a result of Y2K defects may be based on contract principles
(the defects may cause one party to breach its contractual
obligations), tort laws (for example, product liability or negligence),
or statutory violations (for example, system failures at financial
institutions may cause a wide range of statutory banking, consumer
protection, or securities violations).
In general, the types of claims that may arise will probably be
similar to the types of claims already in the legal system. In cases of
preexisting contracts, the parties may already have bargained for
particular allocations of responsibility for such problems. In cases of
tort and statutory violations, existing laws, as interpreted by the
courts over the years, should suffice to obtain just adjudications
within reasonably predictable parameters. In fact, these are the types
of cases that courts across the country deal with successfully and
efficiently every day.
Question 3. Of the companies and individuals that have come to you
for advice about Y2K problems they have had or anticipate having, can
you give a sense of how many had tried to have the problems solved
without litigation? If so, what were the difficulties they encountered?
Answer. They all tried to have the problems solved without
litigation. Of those who were seeking a Y2K fix (without regard to
whether it would be available free of charge under an applicable
warranty) or a free Y2K fix (because the software was under warranty
but the manufacturer was not honoring it), some succeeded in persuading
the manufacturers to provide the requested remedies, and lawsuits were
not filed. In some cases, the manufacturers initially resisted and
lawsuits were filed, but the manufacturers then offered Y2K fixes (or
free fixes) immediately. In a few cases, solutions were not offered by
the manufacturers and litigation is ongoing. The principal underlying
difficulty in all of these circumstances is the manufacturers'
unwillingness to recognize that they are responsible for the Y2K
problem in their software, and in appropriate cases to acknowledge
their warranty obligations to provide a free fix. Many manufacturers
view Y2K problems as profit opportunities (i.e., to collect upgrade
charges from . . . . . . . problems). This is highly
regrettable--particularly because many other manufacturers are
scrupulous about honoring their responsibilities to their customers.
In addition, potential claimants may face prospects or threats of
retaliation if they file and pursue claims in litigation--which can be
very daunting for a software user whose business is dependent on
obtaining continued support services from the software company.
Question 4. Mr. Spencer, you testified that, in your view, the
responsible way to approach this issue is to prepare courts to deal
with possible increased filings. What do you think of proposals to
encourage the use of alternative dispute resolution?
Answer. First, I think the single most important step that can be
taken to prepare the court system is to fill all open judgeship and
other court personnel positions. We cannot expect the system to work if
it is not fully staffed. In conjunction with that step, we should
ensure that class actions remain a viable method for handling numerous
claims involving common legal or factual questions, since proper
utilization of this procedure can make courts more efficient and
relieve court congestion.
Alternative dispute resolution should certainly be encouraged for
those disputants willing to make use of that method. However, mandating
ADR would be a cop-out: the very purpose of our court system is to
resolve disputes that cannot be handled in less formal or adversarial
ways. There is no reason to conclude that the courts cannot handle Y2K
claims that rise to this level of seriousness.
Question 5. Mr. Spencer, what is your opinion of whether there will
be a major increase in the number of lawsuits brought for Y2K-related
reasons?
Answer. So far there have been very few lawsuits. My opinion as to
whether there will be a modest increase in number, or the ``tidal
wave'' some members of this Committee have envisioned, is essentially
highly speculative, as is everyone else's. If there are widespread
system failures due to Y2K defects, then there may well be more
lawsuits. Again, if many of the lawsuits share common legal or factual
questions, use of the class action device can reduce the burden on the
courts by aggregating similar claims.
Question 6. Some comparisons have been made between class action
asbestos complaints and possible class action Y2K complaints. Based on
your knowledge, what parallels exist between the two and what
differences might there be, in terms of costs, damages awarded, and the
concentration of claims being made during a limited time period?
Answer. I see more differences than similarities between the two
situations. Asbestos claims developed over a long period of time and
generally involved bodily injury, where the principal litigation issues
have concerned causation of disease--which have in turn posed obvious
obstacles for class action treatment. On the other hand, most Y2K
claims are likely to arise within a reasonably short period of time
(even if many harmful effects are experienced only gradually, as
contaminated date data is recalled or used). The principal litigation
issue I see in connection with Y2K defects concerns allocation of legal
responsibility between software, hardware, and chip manufacturers on
the one hand, and users on the other hand--but that issue will arise in
a wide variety of contexts involving torts, contracts, and statutory
provisions, as described above. Although superficially the asbestos and
Y2K problems might appear similar because each involves fairly
widespread harms grouped under a common name, in fact the a. . . .
. . . problem are likely to be substantially different.
__________
Prepared Statement of Mark Yarsike
Chairman Bennett, Co-Chairman Dodd, Senators, my name is Mark
Yarsike, and I am a small businessman from Warren, Michigan. It is an
honor for me to appear before you today, and I appreciate your allowing
me to testify on the Y2K issue. I am the first person in the world to
ever file a Y2K suit. That case--filed in Macomb County, Michigan--
settled quickly and proves that the current system works exactly as it
should. I am here to implore you to leave the system as it is. I'll
take a jury of my peers in Macomb County under the current standards,
system, and laws any day of the week. It's what worked for me, and I
hope you'll let it work for the other small businessmen like me. We're
counting on that.
I am grateful to you, Mr. Chairman, for wanting to hear from a real
businessman from outside Washington as to how the court system will
handle the Y2K cases that are sure to appear within the next several
years. Unlike some others who speak on this issue, I do not pretend to
be able to see into the future and forecast what will occur several
years from now. I do, however, know what happened to me. I am a perfect
example of a simple truth: the current court system can not only handle
Y2K cases, but it does so quickly and with justice.
I hear many heads of organizations that profess to know what's best
for me. I hear many representatives of big business telling their side
of the story. I look at who else is testifying and I see that I am the
only person who represents what I think makes America work--the mom and
pop little store. The bottom line is this: I, and every other small
businessman that I have ever spoken to, believe in and trust in the
current court system. We know what to expect from our local courts. We
signed contracts knowing and relying upon state laws protecting us--the
UCC, state fraud statutes, and the like. We don't want anything to pull
away what is often our only safety net--state laws which were carefully
drafted by locally elected representatives who know what it is like for
a small business to operate in Warren, Michigan, or Valley Cottage, New
York, or Broken Bow, Oklahoma.
I would like to briefly tell you my story, and explain how the
court system worked for me. My story proves, I think, what most people
instinctively know: the current system, with its ability to offer a
jury of our peers, is in the best interests of everyone. It vindicates
the innocent, rights the wrongs committed by the guilty, and allows
small businessmen like myself to know that if we sign a contract in
Michigan a Michigan jury will uphold that contract under Michigan law.
Following in the steps of my parents, immigrants from Poland, I own
a gourmet produce market in the Detroit suburbs. My parents worked 7
days a week and instilled in me the values of hard and honest work; I
apply those values everyday. I, along with my partner Sam Katz, himself
a survivor of the Holocaust like my parents, have managed to build a
successful business. We offer our customers unparalleled service,
adjust quickly to changes in the market, and treat our employees like
family. All that was put in jeapordy by a profiteering company trying
to take advantage of the Y2K problem. It is only the court system that
saved me.
My parents had a cheap $500 cash register in their store. It was
basic, but it worked. When I opened my store, I decided to take
advantage of the most current technology. I spent almost $100,000 for a
high-tech computer system. My computer systems were the top of the
line--or at least that is what I thought. The company that I purchased
them from spent hours extolling the virtues of the system--they sent a
salesman from Chicago, they sent me sales literature, they promised
that the system would last well into the 21st Century. I believed them.
Opening day was the proudest day of my life. As we opened the doors
to the store, we were thrilled to see lines of people streaming in. The
store was sparkling, everything was ready. Or so we thought.
As people began to choose their purchases, lines began to form.
Suddenly, the computer systems crashed. We did not know why. It took
over a year and over 200 service calls to realize it was credit cards
with an expiration date of 2000 or later that blew up my computer
system--the one which I spent $100,000 on.
The crash of the system was devastating. We had constant lines.
People walked out in droves, day after day. People were waiting with
full carts of groceries to pay but couldn't. We could not process a
single credit card or take cash or checks. We could not make one sale.
We did what anyone would do. We called TEC America, which had sold
us the registers. We called them over 200 times. Every day there were
problems, lost sales, aggravation. We were struggling to keep afloat
week-to-week, day to day.
The company declared that it was doing its best to fix the problem,
but refused to give us another system to use while they fixed these
broken ones. Each time their technician visited our shop, the company
insisted that the problem was solved--only to have the registers fail
again hours later.
I lost thousands of dollars and hundreds of customers. I was on the
brink of economic disaster. I could not focus on the day-to-day
operations of my business. I was consumed with making sure this
computer system functioned daily. I finally had to go out and buy a
brand new system. I should have bought the $500 dollar registers my
parents used when they arrived from Poland--at least those worked.
The huge costs of purchasing the first system, and then replacing
it, on top of the lost sales and lost reputation caused daily havoc and
stress on my partner and myself and all the employees--and I was
getting absolutely no satisfaction from the computer company which put
me in this fix in the first place.
So I turned to the court system. I approached an attorney and we
filed a case in Macomb County, Michigan. The system worked for me. The
companies who caused all this grief finally settled with me soon after
I filed suit and I was able to recoup some of my losses. It was only
the fear of facing a jury and explaining their inexcusable behavior
that forced the settlement.
I'm just a businessman. I am no legal expert on the various pieces
of legislation before the Senate. But I do know enough to know that
adding more procedural hurdles for good-faith plaintiffs and allowing
defendants to have a ``good faith'' defense makes absolutely no sense:
TEC would never have settled. If we were lucky, we would still be in
litigation. But more than likely, my store would be out of business.
I would not be a small businessman today--I would be a former small
businessman. 120 people would be out of work, my landlord would have a
``for lease'' sign on my store's front window, and I would be looking
for a job.
One thing I know now is that the so-called Y2K problem is not a
Silicon Valley problem. It's a Warren, Michigan problem. And its not so
much a ``high tech'' problem as it is a problem of getting companies to
take responsibility for their products and the need to repair or
replace them. What we need are responsible businesses to take care of
the problem now--and not spend months and months of wasted time trying
to get Congress to protect them. What I don't understand from my
vantage point in Warren, Michigan is why Congress is first turning to
giving liability protection to companies rather than turning to ways to
get companies to remediate the problem now.
Since I had my problems, I have kept up with the cases being filed
concerning the Year 2000 issue in order to see how things developed
after I filed my case. I've seen exactly what I would expect--some
meritorious cases like mine proceeding to settlement, others proceeding
to trial, and a few seemingly insufficient cases being dismissed. The
current system is working. The good cases are being handled quickly;
the wrong-doers are recognizing that they need to do what is right.
People are getting patches for their computers so that they can go back
to what they do best--sell stereos, deliver groceries, clean clothes.
Let's actually do something that FIXES the problem. Many of these
bills--with all due respect--make the problem worse by discouraging
these companies from fixing the products. I ended up having to replace
my entire system. Give me tax credits for those purchases. Help me get
SBA loans. Those are the kinds of things that will help. Knee-jerk
efforts to revamp the entire system of justice that businessmen rely
upon is wrong.
Finally, if Congress is hell-bent on passing some kind of liability
protection bill for large software manufacturers, or a bill that will
alter the current court system, at least exclude from the legislation
small businesses who may end up being plaintiffs because they suffer
commercial loss from software defects. Let the big guys cope with this
new scheme if they want, but not us who have to make payrolls and who
need the protection of state laws and the current system.
Long ago, while sitting in their little grocery store in Detroit,
my parents taught me that sometimes people with the best of intentions
can try to make a problem better, but end up making it worse. I
understand what they mean. I know that Congress is trying to help. But,
before you act, I now hope you will consider what altering the court
system will do to the small businessman. I know that is why you have
allowed me to share my story, and I am grateful you provided me the
opportunity to testify today. I will be happy to try and answer any
questions you may have.
__________
ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
______
Prepared Statement of Richard J. Hillman
Mr. Chairman and Members of the Special Committee:
Financial institutions are regulated for a variety of reasons,
including both safety and soundness and customer protection. This
regulation supplements market discipline, especially in cases where
customers have difficulty evaluating a company's financial soundness.
This is true for depository institutions, securities firms, and
insurance companies. The Year 2000 computer problem is an issue that
can affect the ability of an institution to continue to provide
services to its customers; that is, it can affect both safety and
soundness as well as customer protection. Therefore, it is appropriate
that financial regulators be actively involved in making sure that (1)
institutions know what is expected of them to become prepared and (2)
customers and others who depend on a continued stream of services can
be confident about the operational viability of their financial
institutions.
At the request of this Committee and the Ranking Member of the
House Committee on Commerce, we have reviewed the activities of bank
and securities regulators and have reported that, after a slow start,
they have generally made real progress in validating the preparedness
of their regulated institutions. We have recently taken a similar look
at the insurance industry and its regulators and, unfortunately, have
found that their regulatory presence regarding the Year 2000 area is
not as strong as that exhibited by the banking and securities
regulators. In this effort, we visited and surveyed 17 state insurance
departments. Those departments regulated companies providing about 75
percent of insurance written in the nation. At a future time we will be
happy to share with you the detailed results of that work. However, at
your request, we would today like to present a few preliminary results
comparing some of the Year 2000 regulatory actions, both in timeliness
and scope, of regulators in all three of the major financial
industries--banking, securities, and insurance.
We wish to emphasize that we in no way intend to suggest that there
are likely to be major problems in any of the three sectors. Indeed,
regulators, as well as other available studies, suggest that the
financial sector is doing reasonably well in its preparation for 2000.
However, there are significant differences in the extent of validation
taking place in the banking and securities industries compared to the
insurance industry.
Consequently, it is difficult to know how much confidence to place
in reports about the readiness of the insurance industry, where there
is generally less validation. To illustrate differences among the
regulators, we will briefly focus on two broad areas of regulatory
activity--guidance and verification.
Regulatory Approaches to Facilitate Financial Institutions' Efforts to
Become Year 2000 Ready
Banking and securities regulators have supplied guidance and
direction regarding Year 2000 problems, while state insurance
regulators we contacted have provided little guidance to their
regulated institutions. Within the banking industry, the Federal
Financial Institutions Examination Council (FFIEC) \1\, through its
member agencies, has taken actions to (1) raise banking industry
awareness regarding the Year 2000 problem and (2) provide financial
depository institutions with Year 2000 guidance, including expectations
for when certain phases of conversion should be completed. Within the
securities industry, the Securities Exchange Commission (SEC) has
engaged in similar efforts to promote and encourage Year 2000
readiness, primarily through the securities industry's self-regulatory
organizations (SROs). But, for the most part, as discussed below, state
insurance regulators we contacted and the National Association of
Insurance Commissioners (NAIC) \2\ have not been as proactive in this
area.
---------------------------------------------------------------------------
\1\ FFIEC was established in 1979 as a formal interagency body
empowered to prescribe uniform principals, standards, and report forms
for the federal examination of financial institutions, and to make
recommendations to promote uniformity in the supervision of these
institutions. The Council's membership is composed of the federal bank
regulators--Federal Deposit Insurance Corporation, the Federal Reserve
System, and the Comptroller of the Currency--plus the regulators for
credit unions and thrift institutions--the National Credit Union
Administration and the Office of Thrift Supervision, respectively.
\2\ NAIC is a membership organization of state insurance
commissioners. One of the NAIC's goals is to promote uniformity of
state regulation and legislation as it concerns the insurance industry.
---------------------------------------------------------------------------
Raising Industry Awareness
In our assessment guide,\3\ we state that Year 2000 awareness
efforts should be completed during 1996. In June 1996, FFIEC began to
raise industry awareness by disseminating letters to the boards of
directors and senior management of all federally supervised banking
institutions on key topics associated with Year 2000 readiness. Also
starting in June 1996, SEC sent letters to the industry trade
associations and subsequently to individual firms informing them of the
threat posed by Year 2000 problems to their operations and urging them
to address these problems as one of their highest priorities. In
contrast, individual state regulatory efforts to raise insurers'
awareness generally did not begin until 1997 or, for a few of the
states we visited, until late 1998. These efforts typically took the
form of questionnaires to insurers inquiring about their state of
preparedness. In addition, the NAIC coordinated a national survey of
insurance companies in August 1997 to, among other things, serve as an
impetus for them to take appropriate action.\4\ Because of state
insurance regulators' late start, less time is available to fully
assess the Year 2000 preparedness of insurers and to provide assurances
to the public that the insurance industry will continue to operate into
the new millennium.
---------------------------------------------------------------------------
\3\ Year 2000 Computing Crisis: An Assessment Guide, GAO/AIMD-10-1-
14, September 1997.
\4\ NAIC summarized the survey results in a report, Year 2000
Insurance Industry Awareness, issued in December 1997.
---------------------------------------------------------------------------
Providing Guidance and Milestones
FFIEC has issued interagency guidance to federally regulated
depository institutions on Year 2000 topics such as testing,
contingency planning, and business risk. It has also established and
formally communicated to the banking industry, specific deadlines for
when companies were expected to have completed certain phases of Year
2000 conversion (e.g., remediation, testing of mission critical
systems, and third party testing.) Although SEC has issued limited
guidance on Year 2000 problems, the Securities Industry Association and
other SROs have issued guidance to their members. In particular, the
National Association of Securities Dealers issued guidance on such
topics as investor concerns and testing requirements, and it conducted
workshops around the country to raise awareness and provide assistance
regarding the Year 2000 problem. Moreover, similar to the banking
regulators, the SROs established milestone dates for their respective
member organizations.
With a few exceptions, state insurance regulators we contacted have
not provided insurance companies with formal guidance or regulatory
expectations regarding Year 2000 readiness. Some state officials took
the position that it was not their role to be directive with companies
regarding Year 2000 solutions, but rather to monitor their progress. A
few others noted that they did not have the expertise and/or resources
to provide specific guidance on preparing for 2000. In September 1998,
NAIC issued a statement of insurance regulatory expectations regarding
due diligence in preparing for 2000.\5\ This statement was intended to
provide useful guidance to the industry as well as to state insurance
regulators. However, dissemination was left to the initiative of the
individual states, and it was not uniformly made available to all
insurers. A few states we visited as late as December 1998 were still
unaware that NAIC had completed action on the regulatory guidance.
---------------------------------------------------------------------------
\5\ Insurance Regulatory Statement Regarding Industry Year 2000
Compliance and Remediation, approved by NAIC's Year 2000 Working Group
on 9/8/98.
---------------------------------------------------------------------------
Regulatory Verification of Financial Institutions' Year 2000 Readiness
Financial regulators have two principal ways of verifying the Year
2000 readiness of their regulated institutions. These are on-site
examinations and broad scale testing. Examinations on Year 2000 issues
focus primarily on the actions that institutions are taking to prepare
for 2000, in other words, on the process up to and including a review
of test results and contingency planning. In contrast, successful broad
scale tests demonstrate that, after all the preparations, each of the
pieces work, individually and together. Broad scale testing is more
meaningful in some industries than in others. To be meaningful, such
testing requires considerable interconnectedness among the
participants. The structure of the securities industry and, to a lesser
extent, of the banking industry leads itself to such testing. In cases
where this interconnectedness may be absent or limited, as in the
insurance industry, examinations become the most effective means for
regulators to verify the status of financial institutions' Year 2000
preparedness.
Banking regulators rely primarily on examinations targeted directly
at issues related to Year 2000 problems to validate the progress and
status of their regulated institutions. The first round of such
examinations began in May 1997. Regulators are now nearing completion
of the second round of targeted examinations. At its conclusion, every
institution will have been examined twice. This will provide regulators
with not only a snapshot of institutions' status now, but a perspective
of their progress over time. Furthermore, time will still be available
for regulators to return to institutions where questions remain. In
addition to targeted examinations, at the encouragement of the Federal
Reserve System, depository institutions are expected to participate in
broad scale tests demonstrating their ability to successfully interface
with the Federal Reserve's wholesale payments system. Such tests
provide further assurances of the readiness of the banking industry to
meet Year 2000 challenges.
The interconnectedness of the securities industry leads itself to
broad scale testing to an even greater extent. With the approval of the
SEC, over 400 institutions are participating in ``street-wide''
testing. A preliminary test was successfully held in June 1998 and
another test is now ongoing. In addition, the SEC has conducted some
examinations of securities firms and SROs have conducted more extensive
examinations, but the examination coverage has not been as extensive as
in the banking industry. Street-wide testing is the principal Year 2000
validation vehicle in the securities industry.
Validation by insurance regulators of the Year 2000 readiness of
insurance companies began late and, in most states, lacks the vigor
demonstrated by bank and securities regulators. The NAIC added nine
questions on Year 2000 preparations to the Examiners Financial Handbook
(used by all states) in late 1997. Most states we contacted began
coverage of their regulated companies during regularly scheduled
financial examinations beginning in early 1998. However, state
insurance regulators routinely examine their companies only once every
3 to 5 years. As a result, many companies will not have had a regular
financial examination between 1998 and 2000. Recognizing this, some
state regulators have begun or are considering incorporating targeted
Year 2000 examinations into their validation programs. One state began
conducting such examinations in mid-1998. Several more began targeted
examinations late in 1998. Others have either begun or plan to begin
targeted examinations during 1999. Four of the 17 state insurance
departments we visited told us that they did not plan to conduct
targeted examinations. In those states now conducting targeted
examinations, the stated goal, with a few exceptions, is to examine
only those companies thought to pose the greatest risk.
Conclusions
Compared to standards presented in our assessment guide and to
other financial regulators, state insurance regulators we contacted
were late in raising industry awareness of potential Year 2000
problems. They also provided little guidance to regulated institutions
and failed to convey clear regulatory expectations to companies about
Year 2000 preparations and milestones. Nevertheless, we found that the
insurance industry is reported both by its regulators and by other
outside observers to be generally on track to being ready for 2000.
However, most of these reports are based on information that has been
self-reported by the insurance companies. Relative to other financial
regulators, insurance regulators' efforts to validate this self-
reported information began generally late and too limited.
__________