[Senate Hearing 106-171]
[From the U.S. Government Publishing Office]
S. Hrg. 106-171
THE Y2K BILL:
THE NEXT GENERATION
=======================================================================
HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
on
S. 461
A BILL TO ASSURE THAT INNOCENT USERS AND BUSINESSES GAIN ACCESS TO
SOLUTIONS TO THE YEAR 2000 PROBLEM-RELATED FAILURES THROUGH FOSTERING
AN INCENTIVE TO SETTLE YEAR 2000 LAWSUITS THAT MAY DISRUPT SIGNIFICANT
SECTORS OF THE AMERICAN ECONOMY
__________
MARCH 1, 1999
__________
Serial No. J-106-4
__________
Printed for the use of the Committee on the Judiciary
U.S. GOVERNMENT PRINTING OFFICE
59-523 CC WASHINGTON : 1999
------------------------------------------------------------------------------
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio DIANNE FEINSTEIN, California
JOHN ASHCROFT, Missouri RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan ROBERT G. TORRICELLI, New Jersey
JEFF SESSIONS, Alabama CHARLES E. SCHUMER, New York
BOB SMITH, New Hampshire
Manus Cooney, Chief Counsel and Staff Director
Bruce A. Cohen, Minority Chief Counsel
(ii)
C O N T E N T S
----------
STATEMENTS OF COMMITTEE MEMBERS
Page
Hatch, Hon. Orrin G., U.S. Senator from the State of Utah........ 1
Leahy, Hon. Patrick J., U.S. Senator from the State of Vermont... 3
Sessions, Hon. Jeff, U.S. Senator from the State of Alabama...... 22
Feinstein, Hon. Dianne, U.S. Senator from the State of California 24
CHRONOLOGICAL LIST OF WITNESSES
Statement of Eleanor D. Acheson, Assistant Attorney General,
Office of Policy Development, U.S. Department of Justice,
Washington, DC................................................. 7
Panel consisting of Harris N. Miller, president, Information
Technology Association of America, Arlington, VA; Laurene West,
year 2000 healthcare consultant, Midvale, UT; Mark Yarsike, co-
owner, Produce Palace International, Warren, MI; B.R. McConnon,
president, Democracy Data and Communications, Alexandria, VA,
on behalf of the National Federation of Independent Business;
Harris Pogust, Sherman, Silverstein, Kohl, Rose and Podolsky,
Pennsauken, NJ; and Stirling Adams, corporate counsel, Novell,
Incorporated, Orem, UT......................................... 28
Statement of Hon. Robert F. Bennett, a U.S. Senator from the
State of Utah.................................................. 38
ALPHABETICAL LIST AND MATERIALS SUBMITTED
Acheson, Eleanor D.:
Testimony.................................................... 7
Prepared statement........................................... 11
Adams, Stirling:
Testimony.................................................... 60
Prepared statement........................................... 62
Bennett, Hon. Robert F.:
Testimony.................................................... 38
Prepared statement........................................... 42
Leahy, Hon. Patrick J.: Submitted the prepared statement of John
A. Koskinen, President's Council on Year 2000 Conversion....... 5
McConnon B.R.:
Testimony.................................................... 50
Prepared statement........................................... 53
Miller, Harris N.:
Testimony.................................................... 28
Prepared statement........................................... 30
Pogust, Harris:
Testimony.................................................... 54
Prepared statement........................................... 58
West, Laurene:
Testimony.................................................... 34
Prepared statement........................................... 36
Yarsike, Mark:
Testimony.................................................... 44
Prepared statement........................................... 48
APPENDIX
Questions and Answers
Responses of Eleanor Acheson to Questions from Senator Hatch..... 73
Responses of Mark Yarsike to Questions from Senators:
Hatch........................................................ 74
Leahy........................................................ 75
Responses of B.R. McConnon to Questions from Senator Hatch....... 78
Responses of Harris L. Pogust to Questions from Senators:
Hatch........................................................ 78
Leahy........................................................ 114
Torricelli................................................... 118
Responses of Stirling Adams to Questions from:
The Senate Committee on the Judiciary........................ 120
Senator Leahy................................................ 121
Additional Submissions for the Record
Prepared statement of Hon. John Ashcroft, a U.S. Senator from the
State of Missouri.............................................. 149
Prepared statement of Thomas J. Donohue, for the U.S. Chamber of
Commerce, and U.S. Chamber Institute for Legal Reform.......... 150
Prepared statement of David C. Crane on behalf of the
Semiconductor Industry Association............................. 154
Prepared statement of Melissa W. Shelk on Behalf of the American
Insurance Association.......................................... 156
THE Y2K BILL: THE NEXT GENERATION
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MONDAY, MARCH 1, 1999
U.S. Senate,
Committee on the Judiciary,
Washington, DC.
The committee met, pursuant to notice, at 10:04 a.m., in
room SD-226, Dirksen Senate Office Building, Hon. Orrin G.
Hatch (chairman of the committee) presiding.
Also present: Senators Ashcroft, Abraham, Sessions, Leahy,
and Feinstein.
OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM
THE STATE OF UTAH
The Chairman. Well, we will begin today's hearing. Today's
hearing is entitled ``The Y2K Bill: The Next Generation.'' It
is a hearing on S. 461, the Year 2000 Fairness and
Responsibility Act, that Senators Feinstein, McConnell and I
introduced last week. The bill is the next generation or
follow-up legislation to the Senate Judiciary Committee-
reported safe harbor bill that passed the Congress last year.
Passage of this measure is important for consumers, businesses,
and the economy, especially in my home State of Utah, and I
think elsewhere. In Utah, we have quickly become one of the
Nation's leading high-tech States, and we are concerned about
this.
In working together to develop this legislation, Senator
Feinstein and I have sought to produce a bill 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, and it is to simply make Y2K problem-solving a more
attractive alternative to litigation. If we are to enact
worthwhile Y2K problem-solving legislation this year, we must
work together in a bipartisan manner on a fair and narrowly
tailored bill. S. 461, it seems to me, gives us that
opportunity.
Now, first of all, while our bill encourages problem-
solving, nothing in it prevents injured parties from eventually
bringing legitimate Y2K actions. The bill merely creates an
opportunity for companies to correct problems and an additional
incentive to settle cases. This will spur technology providers
to spend resources in the repair room instead of diverting
needed capital to the courtroom.
Now, with regard to the 90-day problem-solving period, this
is a main feature of our bipartisan bill; in other words, its
requirement that there be a 90-day delay before any Y2K-related
litigation may begin. More specifically, this mandatory
cooling-off or problem-solving period is designed to allow a
consumer to notify in a simple communication the technology
provider, the supposed source of the Y2K problem, about the
exact nature of the problem, how the consumer has been injured
as a result, and what remedy is sought. The technology provider
then has the chance to fix the problem. If no agreement is
forthcoming, the consumer has the full right to sue.
With regard to proportionate liability, our bill provides
that the liability of a defendant would be limited to the
percentage of the company's fault in causing the harm. This
will discourage the targeting of so-called deep-pocketed
defendants.
On alternative dispute resolution, the bill specifically
encourages the parties to a dispute to request alternative
dispute resolution, or ADR, during the 90-day problem-solving
period. In the event that the parties do engage in ADR, the
bill requires the defendant to promptly pay any settlement. By
ensuring expeditious payment of settlements, the bill makes
out-of-court resolution a little more attractive for any and
all parties.
On contract preservation, the bill ensures that if a
contract does not limit liability for Y2K actions, or if there
was not a true meeting of the minds in a contract which limits
liability, recovery is available. Where, however, the contract
specifically limits liability for actions that include Y2K
claims, the bill justly limits recovery.
Now, this bill prevents careless Y2K class action lawsuits
by requiring courts to determine whether an alleged Y2K defect
was material as to a majority of class action members and
whether members of the class are seriously engaged in the
litigation, the bill guards against plaintiffs lawyers
gathering large numbers of plaintiffs that have not really been
harmed by a given Y2K defect or have only a passing interest in
the case. The bill also limits punitive damages and ensures
that our Federal courts have jurisdiction over what has become
a major national problem.
In summary, it is clear that consumers and businesses have
been and will be harmed by Y2K defects. And it is true that the
Y2K problem could very well disrupt distribution systems and
certain key sectors of our economy. It is also true, however,
that the Y2K problem could spawn a rash of litigation that will
inevitably shift scarce resources from fixing the Y2K problem
to defending lawsuits, many of which will be frivolous. Indeed,
one expert estimated that the worldwide cost of Y2K litigation
could well be more than $1 trillion. We will hear much more
about this from our witnesses today.
Now, our bill will 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 will 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 task of the repair shop to the often unnecessary
distractions of the courtroom.
In the end, 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.
Finally, I want to stress that we hope to proceed on a
bipartisan basis, one that is modeled on the cooperation we
achieved last year in passing the Year 2000 Information and
Readiness Disclosure Act. That kind of bipartisan cooperation
will be indispensable if we are to pass legislation in time for
it to be of any use to consumers and businesses.
Now, I want to welcome our esteemed witnesses. I believe
the witnesses today will shed new light on the Y2K problem and
how our bill helps to resolve that predicament. And we will
keep the record open for a week if additional testimony needs
to be submitted.
Let me turn to the ranking member at this time, and we will
move on from there.
STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE
STATE OF VERMONT
Senator Leahy. Thank you, Mr. Chairman. I do hope that the
Judiciary Committee is going to carefully review all the recent
proposals, including those that would restrict the rights of
American consumers and small businesses to seek redress for
harms caused by year 2000 computer problems.
I think we should have just one simple, direct principle.
Our goal should be to encourage Y2K compliance. Every single
statement I have heard from everybody, no matter which piece of
legislation they support, say they want Y2K compliance, and
that should be our driving purpose. That is what we were
looking for when we worked cooperatively last year with the
President, the Vice President and the administration on the
Year 2000 Information and Readiness Disclosure Act, which you
have referred to, Mr. Chairman.
That is why I am cosponsoring and looking forward to Senate
passage tomorrow of the Small Business Year 2000 Readiness Act,
S. 314, to offer help to small businesses that are working to
remedy their computer systems before the millennium bug hits.
I am concerned that sweeping liability protection has the
potential to do great harm. Such legislation may restrict the
rights of consumers and small businesses and family farmers and
State and local governments, and even the Federal Government,
from seeking redress for the harm caused by Y2K computer
failures.
What worries me is that it tells all 50 of our State
legislatures that they are irrelevant and we are going to
rewrite every State law through Federal preemption. And I think
it runs the risk of discouraging businesses from taking
responsible steps to cure their Y2K problem before it is too
late.
By focusing attention on liability-limiting proposals, no
matter how much some special interests might want them, instead
of on the remedial steps that need to be taken now, Congress
could be contributing to distraction and delay from what should
be our principal focus--encouraging Y2K compliance. Remedial
efforts are necessary now.
Now, these recent legislative proposals by Senator Hatch
and Senator McCain raise many questions that need to be
answered before we move forward. If we do not proceed
carefully, then broad liability limitation legislation could
reward the irresponsible, at the expense of the responsible and
the innocent, and that would not be fair or responsible.
Removing accountability from the law removes one of the
principal incentives to find solutions before the problems
develop. In fact, why would congressional consideration or
passage of special interest immunity legislation make anyone
more likely to expend the resources needed to fix computer
systems to be ready for the millennium? In fact, some would ask
would it not likely have just the opposite effect.
Why should individuals, businesses and governments act
comprehensively now if the law is changed to allow you to wait,
see what problems develop, and then use a 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 instead of working to
develop your own, draw from them later in the 3-month grace
period after the harm has been done, and then only if somebody
complains?
I would rather continue the incentives our civil justice
system allows to encourage compliance and remediation now, in
advance of the harm. I am not looking at what we do after
somebody has been harmed. I would like to make sure the harm
doesn't occur in the first place. And I would rather reward
responsible business owners who are already making the
investments necessary to have their computer systems fixed for
Y2K than to reward special interests with immunity for the
irresponsible.
I sense that some may be seeking to use fear of the Y2K
millennium bug to revive failed liability limitation
legislation in the past. These controversial proposals may be
good politics in some circles, but they don't solve Y2K.
Instead, we should be looking to the future, creating
incentives to accelerate the efforts to cure the Y2K bug.
The international aspect is one of the most important. We
encounter a world as we are working to bring our systems into
compliance that a lot of foreign suppliers to U.S. companies
pose significant risks for all of us. And so we should consider
whether creating a liability limitation model is going to help
us in the international arena.
Under the bipartisan leadership of Senator Bennett and
Senator Dodd, the Special Committee on the Year 2000 Technology
Problem has done an outstanding job of raising awareness of the
consequences that could result from ignoring the bug. I look
forward to reviewing the findings and report of the Special
Committee.
The administration is working hard to bring the Federal
Government into compliance. The President decided to have the
Social Security Administration's computers overhauled first and
then tested and retooled and retested again. He was able to
announce that Social Security checks will be printed without
glitches in January 2000. Now, that is success.
Last month, I hosted a Y2K conference in Vermont to help
small businesses prepare for 2000. Hundreds of small business
owners from across Vermont attended the conference. Vermonters
are working hard to identify their Y2K vulnerabilities and
preparing action to resolve them. This is the right approach.
We should not be waiting to sit back, let the problems occur,
and then say, well, you got hurt, but, you know, we have got
liability protection and now we will see what we can do about
it. We should fix the problems first.
During the last Congress, I joined with Senator Hatch to
introduce and pass into law the consensus bill known as the
Year 2000 Information and Readiness Disclosure Act. We worked
on a bipartisan basis with Senator Bennett and Senator Dodd,
the administration, industry representatives, and others to
reach agreement on a bill to facilitate information-sharing to
encourage Y2K compliance. And, Mr. Chairman, that was a good
bill. It has helped. It is working to encourage companies to
work together and share solutions and test results. It promotes
company-to-company information-sharing.
The North American Electric Reliability Council got a great
response from its efforts to obtain detailed Y2K information
from various industries. Large telephone companies are sharing
technical information over Web sites designed to help each
other in solving year 2000 problems. I understand that Novell,
which sent a witness to today's hearing, uses a Web site
pursuant to our Act, to the Hatch-Leahy Act, to educate its
customers about year 2000 software problems. Under a provision
I included, that law also established a national Y2K
information clearinghouse and Web site at GSA--again, a great
place to go if you are a small business.
Now, I understand your bill, Mr. Chairman, was introduced
just last Wednesday. It is very complex. A number of us are
beginning our analysis. Some of the witnesses may not even be
familiar with it yet and it will take some time to examine it.
I would hope that you will also join me in taking a hard look
at S. 96, the Y2K Act which was introduced 3 months ago by
Senator McCain, in January. I understand that on Wednesday, he
released a revised working draft of that bill. I hope that you
will join with me and ask to have sequential referral of S. 96
to us. I mean, this is going to override many of our State laws
and I think that we should be looking at it because of that.
We have a number of witnesses who have appeared on short
notice, including Eleanor Acheson from the Justice Department,
Mark Yarsike and Harris Pogust. I thank them for coming on such
short notice.
Could I conclude by entering into the record a statement
from John Koskinen? He chairs the President's Council on the
Year 2000 Conversion. He is attending the global conference on
Y2K compliance in Manila and thus could not be here. So if we
could put his statement in the record?
The Chairman. We certainly will.
[The prepared statement of Mr. Koskinen follows:]
Prepared Statement of John A. Koskinen, President's Council on
Year 2000 Conversion
I am in the Philippines today to meet with the National Year 2000
Coordinators from over 25 Asian-Pacific countries who are holding a
series of meetings to discuss individual country and regional efforts
to address the Year 2000 (Y2K) computer problem. However, I am pleased
to have the opportunity to present to the Committee my views on the
subject of Y2K liability limitations and efforts to prepare computers
for the date rollover.
The Council is focused on efforts to ensure that as many
information technology systems as possible function effectively through
the transition to the next century. In addition to its work to prepare
Federal Government systems for the Year 2000, the Council's more than
25 working groups have been reaching out to promote action on the
problem in the private sector, among State and local governments, and
internationally.
Last year, the Council worked with Congress to enact the bipartisan
``Year 2000 Information and Readiness Disclosure Act,'' because there
was strong evidence that concerns about liability for inaccuracies in
voluntary statements were interfering with the sharing of information
about technical solutions and the Y2K preparedness of businesses and
governments throughout the country. During this process, we carefully
distinguished between the need to increase the sharing of information--
which would result in more systems being remediated--and dealing with
the underlying question of whom should be held liable for actual Year
2000 failures or the cost of remediation efforts.
The bills before the Judiciary and Commerce Committees focus on
liability litigation, which is not a Year 2000 readiness issue. In
fact, I have serious doubts that these bills will do anything to
enhance readiness and increase the number of systems able to
effectively make the century transition. In addition, we need to ensure
that discussion speculating about the possibility of voluminous
litigation does not inadvertently increase the possibility of
unnecessary overreaction by the public as a result of a misperception
about the magnitude of the number of systems that will fail.
From my perspective, we need organizations to do everything they
can between now and the end of this year to ensure that their systems
and those of their customers and suppliers are made Year 2000
compliant. My principal concern about any liability legislation is that
we do nothing to interfere with that goal. For example, I believe it
would be counterproductive to establish a minimum standard of
performance that triggers legal protections. I want to encourage
leaders of every organization in the United States to keep asking if
there is anything more they can do to get more systems fixed rather
than seeking advice from their lawyers about when they have done what
is necessary and can move on to other issues.
Ultimately, the best way to limit liability is to make sure that
systems work, and we need everyone concentrating throughout the rest of
this year on meeting that challenge. Significant progress is being made
on the Year 2000 problem in the Federal Government and in critical
sectors of the economy such as banking, electric power, oil and gas,
and telecommunications. But much work remains. Our top priority must be
continuing efforts with State and local government, the private sector,
and the international community to maximize the number of compliant
systems and thereby minimize potential disruptions related to the
century date change. The Department of Justice has extensive expertise
in analyzing efforts to limit liability or revise litigation procedures
and is well positioned to speak to those issues.
I appreciate having the opportunity to share my views on this
matter with the Committee.
Senator Leahy. I thank you for holding this hearing, Mr.
Chairman, but I do feel that the one before the Commerce
Committee affects so many parts of our jurisdiction that when
that comes out of committee, we should ask for sequential
referral.
The Chairman. Thank you, Senator. We will sure look at
that.
Our sole first witness on our first panel is the Honorable
Eleanor D. Acheson. Ms. Acheson is currently the Assistant
Attorney General for Policy Development in the U.S. Department
of Justice. She has been with the Department since 1993 and is
responsible for a broad range of policy initiatives. I want to
welcome you and thank you for coming this morning.
Senator Bennett--we will try to fit him in as soon as he
gets here. He is head of our committee on Capitol Hill and we
are naturally very interested in what he has to say. But we
will proceed with Ms. Acheson at this time.
STATEMENT OF ELEANOR D. ACHESON, ASSISTANT ATTORNEY GENERAL,
OFFICE OF POLICY DEVELOPMENT, U.S. DEPARTMENT OF JUSTICE,
WASHINGTON, DC
Ms. Acheson. Thank you, Mr. Chairman. Good morning. I
appreciate the opportunity to appear before this committee to
express the Justice Department's preliminary views regarding
the proposed Year 2000 Fairness and Responsibility Act.
This Act was introduced last Wednesday. The Department is
still in the process of reviewing it and my submitted
testimony, as well as this summary, presents only the
Department's initial reactions to its more significant
provisions. The Department fully supports the objective of the
sponsors of this Act insofar as they seek to curtail frivolous
Y2K actions and to encourage companies and individuals to focus
their efforts on fixing Y2K problems before they occur.
At the same time, however, we are mindful that
congressional amendment of State substantive law, as well as
State procedures, should not be undertaken without real and
compelling reasons, and must be done in ways consistent with
the Constitution and important policy considerations, such as
federalism.
This legislation presents a number of questions. First,
does the legislation support or does it undercut the incentives
that encourage companies to fix Y2K problems now? Second, has
the factual predicate been established for the unprecedented
changes that would be wrought by this bill, including the
wholesale rewriting of State law?
Prior litigation reform measures have been based upon
detailed study by both Houses of Congress and have been
justified by demonstrated abuses. There has been no such
examination in this context. Yet, the bill deals broadly with
an entire universe of tort, contract and statutory claims.
Moreover, while Y2K failures will likely generate
litigation----
[Technical interruption.]
Senator Leahy. I told you to fix that computer, Mr.
Chairman. [Laughter.]
The Chairman. I thought it was just the administration's
appearance here today. [Laughter.]
We will try to prevent those types of glitches. We hope
they are not starting before the year 2000.
Please continue, Ms. Acheson.
Ms. Acheson. Thank you.
Moreover, while Y2K failures will likely generate
litigation, it is difficult to predict at this time who will
experience those problems, whether those persons will resort to
litigation to resolve them, and what impact on which sectors of
the economy that litigation will have. Thus, the Department
will be looking to see whether the legislation addresses only
those problems that are likely to arise.
Third, does the legislation comport with the Constitution,
and in a way as to foreclose reasonable challenges to its
constitutionality? Finally, does the legislation create more
public policy and practical implementation problems than it may
solve?
To the extent we have identified concerns about the current
bill in the context of our continuing analysis, the Department
is committed to working with the committee to craft
appropriately tailored legislation that responds to genuine Y2K
liability or litigation-related problems likely to disrupt the
American economy.
Title II of the Act amends Federal and State contract law
as it applies to year 2000 claims, and in so doing effectively
modifies the terms of already negotiated contracts and existing
contractual relations. Section 202 of the Act, for example,
creates a ``reasonable efforts'' defense in Y2K contract
actions that would allow a defendant who had otherwise breached
the express terms of the contract to show that the efforts it
took to implement the contract were reasonable in order to
limit or eliminate its liability.
In general, a party to a contract is obligated to fulfill
its promises and is liable to the other party for damages to
the latter resulting from the former's breach of contract. It
does not matter whether the party breaching the contract made
reasonable efforts to avoid doing so. Creating a post hoc
``reasonable efforts'' defense that absolves parties to Y2K-
related contracts seems to be unfair to the contracting
plaintiffs who bargained and paid for contract compliance by
the other party. Moreover, this defense appears to undercut
incentives for Y2K contractees to discharge their obligations.
Instead of being required to fulfill their contracts, potential
defendants need only make reasonable efforts to do so, with the
risk of failure being transferred to the other party.
In a similar fashion, section 201 of the Act requires a
court to enforce all written terms of a contract even if those
terms, in violation of State law, disclaim certain kinds of
warranties or are unconscionable. As a result, the Act would
appear to validate contract terms that were ineffective or
illegal at the time they were made.
Title II may also implicate Fifth Amendment property
interests under the Takings Clause of the Constitution. A
business that paid for maintenance and a promise by a vendor to
remedy defects in software that suffers a catastrophic Y2K
failure could have a claim for compensation from the Government
if that interest were invalidated by Federal legislation.
Title III of the Act modifies Federal and State substantive
tort law as applied to year 2000 actions for money damages and
not involving personal injury. Sections 302 and 303
significantly alter the rules of tort liability for Y2K actions
involving money damages. Section 302, for example, appears to
foreclose some Y2K actions premised on a theory of negligence.
Even if section 302 does not always foreclose a negligence
claim, a question over which reasonable minds might differ,
section 302 does clearly require plaintiffs to satisfy a
greater burden of proof in their tort actions. Y2K tort
plaintiffs would be required to establish the critical elements
of their tort actions, the defendant's knowledge and
foreseeability, by clear and convincing evidence, even though
this standard is usually reserved for use in quasi-criminal
proceedings.
Section 303 erects a ``reasonable efforts'' defense similar
to that contained in title II. This section provides a complete
defense to liability, no matter how much the defendant was at
fault. For example, the defendant could have recklessly
disregarded a known risk of Y2K failure. Such a defendant has
no responsibility for the damages suffered by the plaintiff as
long as the defendant makes reasonable, albeit unsuccessful,
efforts to fix the defect.
Section 104(a), while titled ``Duty to Mitigate,'' imposes
what appears to be a second complete defense to liability that
bears little resemblance to the common law duty to mitigate.
Again, these defenses would appear to be available even when
the defendant is clearly at fault.
Other sections of title III curtail damages. Most
dramatically, section 305 would appear to foreclose in tort
cases the recovery of economic losses; that is, financial
damages that flow from the defendant's tortious activity,
unless they are incidental to personal injury or property
damage claims. This provision appears to have the effect of
granting defendants full immunity from tort suits involving
fraud and misrepresentation, including securities fraud, where
financial loss is unlikely to be unaccompanied by a personal
injury or property claim or damage. Indeed, this section
appears to preclude recovery in any tort case that does not
involve personal injury or damage to tangible property.
Section 304 caps the punitive damages that may be awarded
on Y2K claims, and section 306 caps the potential liability of
directors and officers. This latter may turn out to be a
windfall to insurance companies who have already been paid for
unlimited coverage but will have only to pay out under the
caps.
Section 301 abolishes joint and several liability entirely,
substituting strict proportionate liability, even though most
States have retained some form of joint and several liability
to avoid placing all the risks on plaintiffs.
We have several concerns about these provisions. First, we
do not understand, at least as yet, that State law is somehow
defective in these areas. Second, a number of these provisions
appear to provide disincentives to achieve Y2K readiness.
Third, portions of title III may have undesirable collateral
consequences. For example, the bill as currently drafted covers
tort actions brought by governments and could curtail the
ability of the SEC or other Federal and State agencies bringing
regulatory or enforcement actions. Title III also overlaps in
unpredictable ways with recent Federal legislation governing
securities litigation.
Title IV essentially federalizes class action standards in
class actions involving Y2K claims, even when the Y2K claim is
only a small part of the overall action. Title IV would permit
removal of State class actions to Federal court when any class
plaintiff is diverse from any defendant, and further provides
that cases so removed but not certified under Federal class
action standards be remanded to State court, stripped of their
class allegations.
This mechanism effectively prevents States from setting
their own policies concerning class actions involving Y2K
claims, and in cases where individual claims are too small to
justify litigation, may well leave large numbers of plaintiffs
without redress. Title IV also imposes onerous opt-in
requirements that may have the practical effect of making many
class actions impossible.
The material changes to contract and tort law to State
procedure and practices and to class action law and procedure
that the Act would effect raise many unknowns about Y2K
litigation under such a regime. Chief among those questions has
to be will small business and consumers injured by wrongful
conduct still be able to obtain compensation for the harm that
they suffer. The changes to current law appear to make it much
more difficult, if not impossible, for small businesses and
consumers to invoke traditional contract remedies, and
significantly limit claims under statutory and tort law even in
the face of reckless or intentional wrongdoing.
Finally, some concerns about the scope of the Act. The Act
appears to cover Y2K lawsuits initiated by Federal and State
governments and their agencies which are explicitly included
within the Act's definition of ``person.'' Title II's
modifications to State and Federal contract law seem likely,
for instance, to alter Government contracts law significantly,
and more specifically the provisions of the Contracts Dispute
Act which controls contract disputes involving the Federal
Government.
Title III's modifications to tort law may have a similar
effect on Government-initiated actions under consumer
protection statutes. The limitations on the financial liability
of corporate officers and directors contained in section 306
may, as discussed above, curtail the SEC's enforcement powers.
There is likely to be considerable dispute over whether or
not lawsuits are subject to the Act. Plaintiffs will want
likely to avoid styling their claims as year 2000 claims, and
defendants will probably assert Y2K-related defenses in order
to bring the claims under the terms of the Act. State and
Federal courts will then be forced to determine whether the Act
or normal State tort and contract law controls.
In light of the fact that the Act works great changes in
State law which may have a great impact on the outcome of any
given Y2K lawsuit, substantial disputes about the Act's
coverage are likely to be common and will occupy much judicial
time, complicating what would otherwise be rather
straightforward contract or tort litigation.
These are some of the concerns of the Justice Department
with respect to the Year 2000 Fairness and Responsibility Act.
On the other hand, there are ideas in the Act--for example,
alternative dispute resolution and provisions for pre-filing
notice with the opportunity to cure--that we believe provide
common ground for us to work with the committee.
We are sympathetic to the concerns about Y2K liability and
the need to act responsibly and expeditiously. We feel we need
to know more of the nature and scope of any litigation-related
problems that develop and are or may be beyond the ability of
current law, procedure and practice to deal with. Above all, we
must not do anything that would result, however
unintentionally, in undermining Y2K readiness.
Accordingly, the Department would urge the committee not to
act hastily, but instead to reflect carefully before enacting
legislative provisions like the bill before you today that
greatly alter the substantive and procedural tort and contract
law of the States with regard to Y2K lawsuits. We are committed
to working with the committee to create a responsible and
balanced approach to any necessary Y2K litigation reform.
Thank you for the opportunity to address the committee
today.
[The prepared statement of Ms. Acheson follows:]
Prepared Statement of Eleanor D. Acheson
Good morning. I appreciate the opportunity to appear before the
Committee on the Judiciary to express the Justice Department's very
preliminary views regarding the proposed Year 2000 Fairness and
Responsibility Act.
introduction
The Year 2000 Fairness and Responsibility Act (``the Act'') was
introduced last Wednesday. As many components of the Department are
still in the process of considering its provisions, my testimony today
will outline only the Department's initial reactions to some of the
Act's more significant provisions.
The Administration has no quarrel with the objectives of this
legislation insofar as it seeks to curtail frivolous Y2K actions and to
encourage companies and individuals to focus their efforts on fixing
Y2K problems before they occur. In crafting legislation to serve these
objectives, however, we must be careful not to bar small businesses and
consumers who have legitimate Y2K claims from the courts and not to
create disincentives to Y2K readiness. We must also be mindful that
Congressional amendment of state substantive laws, as well as state
procedures and practices, is not a step to be taken without real and
compelling reasons. And, even in such circumstances, there may be
constitutional and significant federalism policy reasons to avoid those
extraordinary means.
With these principles in mind, this proposed legislation raises a
number of questions for us to consider. First, does the legislation
support--or does it undercut--the incentives that encourage companies
to fix Y2K problems now (thereby avoiding costly malfunctions before
they occur)? Second, has the factual predicate been established for the
unprecedented changes that would be wrought by this bill, including the
wholesale rewriting of state law? Prior litigation reform measures have
been based upon detailed study by both Houses of Congress and have been
justified by demonstrated abuses. Before acting with respect to Y2K
litigation, we should be comfortable in our estimation of what type of
litigation is likely to arise, who the parties are likely to be, and
which sectors of the economy are likely to be affected. If, for
example, Y2K failures involving large businesses may be resolved more
by negotiation than litigation, a bill directed primarily at Y2K
litigation between such businesses might well be unnecessary. The need
for justification is even more pressing when the legislation imposes
dramatically different rules upon a relatively discrete subset of cases
that are in many respects similar to those cases not affected by the
legislation. Third, is the legislation targeted at frivolous lawsuits
or will it prevent businesses and consumers with legitimate claims from
vindicating their rights? Fourth, does the legislation comport with the
Constitution and do so in a way that forecloses reasonable challenges
to its constitutionality? Finally, would the legislation create more
public policy and practical implementation problems than it would
solve? While we share with the desire to act responsibly and
expeditiously in this context, we feel it is important to answer these
questions thoughtfully before enacting any legislation.
We have yet to answer any of these questions fully with respect to
the bill before the Committee. But our preliminary analysis indicates
that this bill would be by far the most sweeping litigation reform
measure ever enacted if it were approved in its current form. The bill
makes extraordinarily dramatic changes in both federal procedural and
substantive law and in state procedural and substantive law. For all of
the issues we have identified with the current bill, the Department is
absolutely committed to working with the Committee to craft an
appropriately tailored bill that responds to genuine Y2K-related
litigation problems.
I will now outline the Department's initial thoughts on the current
bill, and will begin with the provisions that alter substantive law
affecting Y2K claims.
modification of pre-existing y2k contracts
Title II of the Act amends federal and state contract law as it
applies to ``year 2000 claims'' and, in so doing, effectively modifies
the terms of already-negotiated contracts and existing contractual
relationships. Most of these provisions appear to narrow, and in some
cases eliminate entirely, the grounds and extent of relief available in
breach-of-contract actions.
Section 202 of the Act, for example, appears--either intentionally
or unintentionally--to create a ``reasonable efforts'' defense in Y2K
contract actions that would allow a defendant who had otherwise
breached the terms of a contract to show that the efforts it took to
implement the contract were ``reasonable'' so that it could ``limit[]''
or ``eliminat[e]'' its liability. As far as we are aware, this would be
a novel defense in contract law. As a general matter, a party to a
contract is obligated to fulfill its promises and is liable to the
other party for damages to the latter resulting from the former's
breach of the contract absent force majeure or other extremely rare
circumstances. It does not matter whether the party breaching the
contract made reasonable efforts to avoid a breach. This widespread
rule of basic contract law has been in existence for hundreds of years
in the common law, is currently reflected in our contract statutory
schemes (e.g., the Uniform Commercial Code), and is essential to
commerce.
In a similar fashion, Sec. 201 of the Act would require a court,
unless there is some defect in the formation of the contract, to
enforce all written terms of a contract, even if those terms disclaim
certain kinds of warranties, are unconscionable, or render the contract
an unenforceable ``adhesion contract.'' Most state legislatures,
however, have adopted some version of the Uniform Commercial Code
(``UCC'' or ``the Code''), which renders unenforceable in commercial
contracts certain warranty disclaimers, as well as unconscionable
contract terms and ``adhesion contracts.'' These sections of the Code
are designed to protect both individual and business consumers from
particularly egregious contract terms imposed upon them by contracting
parties with far greater economic power. The Act would appear to
validate such terms, even though they were ineffective or illegal at
the time they were made. Following in much the same pattern, Title II
``freezes'' the state law regarding the defenses of impossibility and
commercial impracticability--and, in some cases, damages--to what it
was on a specific date in the past: January 1, 1999 (for the defenses)
or the time of contract formation (for damages).
Some of the provisions of Title II may be unfair both to American
business and to American consumers. Creating a post hoc ``reasonable
efforts'' defense that absolves parties to Y2K-related contracts of
their contractual obligations seems to be unfair to the contracting
plaintiffs who bargained--and paid--for contract compliance by the
other party. That a breach resulted from a Y2K malfunction does not
change the fact that the proposed reasonable efforts defense deprives
parties to a contract of their paid-for bargain. Similarly, mandatory
enforcement of only the written terms of a contract will upset the
expectations of those businesses and consumers who relied upon the UCC
for protection against unconscionable terms and illegal disclaimers.
Together, these provisions seem extremely unfair and may, in many
cases, leave without any remedy legitimately aggrieved plaintiffs who
prudently bargained for protection against Y2K failures.
The reasonable efforts defense, in particular, appears also to
undercut the incentives for potential contract defendants to discharge
their contractual duties to prepare for--and prevent--potential Y2K
errors. Presumably, under most bargained-for contracts, these
defendants would be fully liable for a breach of contract if Y2K
malfunctions occur; as modified by the Act, these defendants would be
able to reduce or avoid liability, even if Y2K errors occur, as long as
they made ``reasonable efforts'' to implement the contract. By
curtailing the extent of their contractual liability, the Act may also
curtail their incentives to meet the terms of the contract. Thus, the
Act may actually fail to serve its own avowed purpose--``giv[ing] all
businesses and users of technology products reasonable incentives to
solve year 2000 computer date-change problems before they develop.''\1\
John Koskinen, the Chairman of the President's Y2K Council, expressed
these same concerns about the bill as currently written in his letter
to this Committee.
---------------------------------------------------------------------------
\1\ See Sec. 2(b)(1).
---------------------------------------------------------------------------
We also preliminarily note that Title II may implicate
constitutional interests and issues. There may be contracts for which a
legislatively imposed post hoc reasonable efforts defense would raise
issues under the Takings Clause of the Fifth Amendment. Contracts for
computer services or software often contain explicit allocations of
responsibility for remedying defects. Businesses that paid for
maintenance and for commitments by vendors to remedy software defects,
including defects that might cause Y2K failures, could file claims for
compensation from the government if federal legislation invalidated
those commitments. Title II's requirement that state courts in some
circumstances apply substantive state law as that law existed on a
particular date in the past may also raise some constitutional concern.
These provisions effectively deny to state legislatures (and apparently
state common law courts) the power to modify their own substantive law
as they see fit to respond to changing circumstances.
Finally, Title II raises some fundamental policy and practice
implementation problems that bear greater consideration. Initially, it
is not clear how modifying the rules of liability that apply to
meritorious contract actions will necessarily deter frivolous Y2K
claims, which by definition will be filed regardless of the rules of
liability. Moreover, the provisions requiring enforcement of all
written contract terms would seem to displace the judgment of nearly
all state legislatures that certain types of contract terms in
commercial contracts are against public policy. We strongly question
whether sufficient study has been made to justify hastily discarding a
principle of contract law that has become a cornerstone of consumer
protection in so many states for very good reasons. In the same vein,
requiring courts to apply state law as it existed at some date in the
past withdraws from states their authority to respond reasonably to
changing circumstances. The Act may also require courts to apply state
law to various parts of a contract from three different time periods--
the current law, the law as of January 1, 1999, and the law at the time
of contract formation. This would, at a minimum, complicate what might
otherwise be a relatively straightforward application of state contract
law.
modification of substantive tort and other civil law
Title III of the Act modifies federal and state substantive tort
law (and other civil law) as applied to ``year 2000 actions'' for money
damages not involving personal injury. The various sections place a
greater burden of proof upon Y2K plaintiffs in these lawsuits, create
new defenses, and significantly limit the damages that may be
recovered. Several sections appear to preclude liability or recovery
even when a defendant is clearly at fault. Is it sound policy for
Congress to displace state law in such a dramatic way?
Sections 302 and 303 significantly alter the rules of liability for
Y2K actions involving money damages. Section 302, for example, appears
to foreclose some Y2K actions premised on a theory of negligence. Under
ordinary principles of tort law, some Y2K negligence claims are likely
to require proof that the defendant ``should have been aware'' of the
potential Y2K failure and/or its likelihood to injure the plaintiff.
Section 302(a), however, requires the plaintiff in any cause of action
requiring proof of the defendant's actual or constructive awareness to
prove that the defendant was ``actually aware'' or ``recklessly
disregarded a known and substantial risk.'' This ``recklessness plus''
standard would seem to preclude any such claim premised on culpability
short of recklessness--that is, the standard appears to exclude
negligence.
Section 302 clearly would require plaintiffs to satisfy a greater
burden of proof in their civil actions. Instead of prevailing upon
proof of their claims by a ``preponderance of the evidence,'' Y2K
plaintiffs would have to establish the critical elements of their
actions--the defendant's knowledge and foreseeability--by ``clear and
convincing evidence.''
Similarly, Sec. 303 erects a ``reasonable efforts'' defense similar
to that contained in Title II. This section provides a complete defense
to liability--no matter how much the defendant was at fault (for
example, the defendant could have recklessly disregarded a known risk
of Y2K failure). Such a defendant would have no responsibility for the
damages suffered by the plaintiff as long as the defendant made
reasonable, albeit unsuccessful, efforts to fix the defect.
Section 104, while titled ``Duty to Mitigate,'' appears to create
two more new defenses--one complete and one partial--neither of which
bears much resemblance to the common-law duty to mitigate. At common
law, plaintiffs are not usually permitted to recover from defendants
any damages they could reasonably have avoided after they are injured.
By contrast, Sec. 104(a) seems to bar recovery of any damages if a
defendant can show that the plaintiff should have known of information
that ``could reasonably'' have aided the plaintiff in avoiding the
injury upon which his Y2K claim is based. Even when Sec. 104(a) does
not act as a complete bar, Sec. 104(b) seems to preclude recovery for
those damages that could have been avoided by consulting this Y2K
information. By imposing an affirmative duty on Y2K plaintiffs to seek
out publicly disseminated information or else lose their right to
maintain an action at all, Sec. 104 sweeps far beyond the fairness
concerns that animate the common law duty to mitigate. Again, these
defenses would appear to be available even when the defendant was
clearly at fault.
Other portions of Title III significantly curtail the types and
amount of damages a Y2K plaintiff may collect should he prevail in
establishing liability. Most dramatically, Sec. 305 would appear to
foreclose the recovery of ``economic losses''--that is, financial
damages that flow from the defendant's tortious activity--unless they
are incidental to personal injury or property damage claims. This
provision apparently grants defendants full immunity from civil suits
involving fraud and misrepresentation (including securities fraud),
where financial loss is unlikely to be unaccompanied by any personal
injury or property damage. Indeed, this section appears to preclude
recovery in any case that does not involve personal injury or damage to
tangible property.
Additionally, Sec. 304 caps the punitive damages that may be
awarded on Y2K claims, limiting damages against most defendants at the
greater of $250,000 or three times the plaintiffs' actual damages, and
limiting damages for individuals and small-business defendants at the
lesser of $250,000 or three times the plaintiffs' actual damages.
Section 306 would apply in suits against corporate directors and
officers and would cap their personal liability in Y2K actions at the
greater of $100,000 or their past 12-months' compensation, as long as
they did not intentionally make misleading statements or withhold
material information with the specific intent to harm the plaintiff.
This latter standard likely would not often, if ever, be met, so the
cap on liability would apply in almost every case, even those in which
fraud were proved.
Title III may also significantly impact whether a prevailing Y2K
plaintiff will actually be able to recover his damages. Section 301
provides that a Y2K plaintiff may recover from each defendant only the
amount of damages that defendant was responsible for causing. This
would abolish all species of ``joint and several liability,'' which in
varying forms permits tort plaintiffs to hold any one defendant
responsible for more than its share of damages. Because Y2K
malfunctions may be caused by the complex interaction of software
programs and computer hardware from several defendants, Sec. 301's rule
of absolute proportionate liability will, at the very least, place a
greater burden on plaintiffs who will be forced to track down all
potential defendants in order to receive a full recovery. Moreover,
because many of these software and hardware companies are mid- to
small-sized companies that are created and dissolved with some
regularity, it is more likely that the rule of ``proportionate
liability'' will create ``orphan'' liability that cannot be assigned to
any still-existing defendant. As a result, a small business forced to
shut down temporarily because of Y2K malfunctions may not be able to
recoup its losses, which may be essential if it is to remain in
business. Small business owner Mark Yarsike, for example, testified to
the Commerce Committee earlier this month that his fledgling grocery
store would have failed had he not been permitted to recover the losses
he incurred when he was unable to process credit cards expiring after
1999.
In examining these changes to substantive state law, the Department
has a number of concerns. First, we are troubled that the need for some
of these provisions has yet to be demonstrated. With regard to
Sec. 301's rule of ``proportionate liability,'' for example, the
Department understands why a pure ``joint and severable liability''
rule may, on occasion, be deemed unfair to defendants, but only a
handful of states currently follow such a pure rule. Instead, many
limit a defendant's ``joint and several'' exposure to certain
defendants (for example, those who are at least X percent responsible
for the plaintiff's injury) or to certain percentages (for example, X
times the defendant's proportional liability). As a result, we would
urge the Committee to further investigate the need to foreclose modest
forms of ``joint and several liability'' before resorting to an
absolute ``proportional liability'' rule--which lies at the extreme end
of the spectrum of potential options. We would also ask the Committee
to consider further whether the case has been made for overhauling
state law by abolishing recovery for most ``economic loss.'' Also, we
are not yet convinced that it is necessary to cap the liability of
corporate directors and officers, who are already protected in most
states by the ``business judgment rule'' that insulates them--and the
insurance companies who insure them--from liability as long as they act
reasonably in governing the affairs of the corporation. Indeed, the
practical effect of this provision might well constitute a windfall to
insurance companies, who have been paid for unlimited coverage but will
have to pay only up to the cap.
Second, it appears that a number of Title III's provisions might
provide disincentives to achieve Y2K readiness. Again, John Koskinen
shares these concerns. Limiting a defendant's liability by
circumscribing his duty of care with a ``reasonable efforts'' defense
may in fact undercut the incentives to take all necessary steps to make
computer systems and other machinery Y2K-compliant. Although some of
the proponents of the Act argue that limiting liability in advance
gives potential defendants more incentive to fix Y2K problems now
because they will get some ``credit'' for their ``reasonable efforts,''
this argument is unpersuasive to us at this stage. Given that the goal
today is to get ready for Y2K problems before they happen, rewarding a
person for only making ``reasonable efforts''--instead of fixing the
problems completely--seems counterintuitive. By the same token, capping
punitive damages for Y2K defendants would reduce the deterrent effect
of those damages, and accordingly leave such prospective defendants
with less reason to take action now to avoid Y2K problems before they
occur. We share the sponsors' worry about the potential effect of
punitive damage awards on small business, but are concerned that an
across-the-board cap may create the wrong incentives.
Third, we fear that some portions of Title III may, as a practical
matter, have undesirable (and perhaps unintended) collateral
consequences. As currently drafted, the bill covers civil actions
initiated by government entities, including regulatory agencies. The
SEC, for example, currently has responsibility for safeguarding the
integrity of the securities markets, and towards that end has been
active in bringing cases designed to promote timely Y2K compliance by
market intermediaries.\2\ Title III, and Sec. 306 in particular, would
likely interfere with these SEC actions. The Act is also likely to
engender confusion in private securities fraud actions, which are
already covered by specialized provisions in the federal securities
laws that contain liability protections, such as the 1998 Securities
Litigation Uniform Standards Act and the 1995 Private Securities
Litigation Reform Act. Overlaying an additional layer of liability
protection on top of these existing protections threatens to create a
confusing and possibly conflicting set of legal standards that would
lead to more complex, prolonged litigation over which set of liability
protection provisions applies. Title III's comprehensive reform
provisions may have a second, unintended effect--creating federal court
jurisdiction over Y2K-related civil actions. Because it would amend
rules to govern liability, and require courts to apply a federally
prescribed rule that differs from the rule prescribed by current state
law, the Act might be construed to create a federal question over which
federal courts would have jurisdiction.
---------------------------------------------------------------------------
\2\ See, e.g., ``Disclosure of Year 2000 Issues and Consequences by
Public Companies, Investment Advisers, Investment Companies, and
Municipal Securities Issuers,'' Release Nos. 33-7558, 34-40277, IA-
1738, IC-23366 (Aug. 4, 1998), reprinted at .
---------------------------------------------------------------------------
I have flagged some of the Department's chief initial concerns
regarding the provisions of the bill that amend the substantive law
applying to Y2K-related claims. Indeed, the Act's extensive amendments
to state substantive law raises many unknowns about how Y2K litigation
would operate under such a regime. For example, will small businesses
and consumers injured by wrongful conduct still be able to obtain
compensation for the harm that they suffer? The changes to current law
appear to make it much more difficult, if not impossible, for small
businesses and consumers to invoke traditional contract remedies, and
significantly limit claims under statutory and tort law even in the
face of reckless or intentional wrongdoing.
The Act amends state procedural requirements attendant to Y2K
litigation as well, and it is to those provisions I will now turn.
pre-litigation procedures
Title I of the Act would impose some pre-litigation obligations
upon plaintiffs seeking to bring civil claims premised on Y2K
malfunctions. Section 101 requires plaintiffs to notify potential
defendants of their intention to file a lawsuit 90 days in advance, and
requires defendants to respond by explaining what actions they have
taken, or will take, to ``cure'' the Y2K defect that forms the basis
for the plaintiff's lawsuit. Section 102 encourages parties to use
alternative dispute resolution mechanisms for resolving their Y2K
claims. Section 103 imposes heightened pleading requirements on
plaintiffs' Y2K-related claims by mandating that they plead with
particularity the facts supporting their allegations of material
defects, their prayer for damages, and their proof of the defendant's
state of mind. Section 103 also stays discovery while any motion to
dismiss based on failure to comply with these pleading requirements is
pending.
The Department supports mechanisms that encourage parties to settle
their disputes without litigation, and looks forward to working with
the Committee in securing passage of appropriate provisions. We are not
at this time convinced, however, that the need for heightened pleading
requirements--or the need for stays of discovery pending a pleading-
based motion to dismiss--has been established. We would welcome the
opportunity to work with the Committee in exploring the need for these
requirements and in fashioning a provision that avoids the
constitutional concerns that arise from imposing procedural
requirements upon state courts.
federalizing y2k class actions
The provisions of Title IV would grant the federal district courts
jurisdiction (either original or by removal) over any Y2K-related class
action as long as at least one of the defendants and one of the class
plaintiffs are from different states. While the Act requires district
courts to decline jurisdiction over certain Y2K class actions involving
securities and grants them discretion to decline jurisdiction over
class actions that involve primarily in-state parties and issues or
that involve few plaintiffs or little money, it is unlikely that either
of these discretionary grounds will be invoked very often. We note that
these provisions are markedly similar to those contained in legislation
proposed in the last Congress and to which the Department had
significant objections. Title IV also imposes new and possibly onerous
notification requirements on the class plaintiffs.
The Department is concerned about the practical effect of
federalizing every class action that involves a Y2K claim. Granting
defendants the power to remove all Y2K class actions to federal court
may result in the dismissal of a number of meritorious class actions
that would have otherwise proceeded to resolution in the state courts.
It is possible that some Y2K class actions will be brought by primarily
in-state plaintiffs who wish to apply their state's law against
defendants from the same state. While a district court might have
discretion to deny this removal, it may not do so when defendants face
a number of similar, single-state class actions. Instead, the court is
likely to grant removal and consolidate the cases into a single class
action under Sec. 1407 of Title 28. In that case, the federal court
hearing the now-consolidated class action will be required to apply the
substantive law of several different states. While the differences in
law may be ameliorated to some extent by the Act's amendment of state
substantive law, there will still be differences in the various states'
laws. The court would at the very least be obligated to spend time
canvassing the substantive law of many states to determine whether a
class action applying those laws presented any common legal issues. If,
as is often the case, the states' laws were sufficiently dissimilar,
the court would find few common legal issues and would accordingly be
unable to certify the class.\3\ Under this latter scenario, the Act
requires that the class actions be remanded to their respective state
courts, but stripped of their class allegations. For those plaintiffs
whose individual claims are so small as to make an individual action
impractical, relief would be unlikely (because any attempts to
reconstitute the class in state court will again prompt removal,
consolidation, and remand stripped of class allegations). Thus,
granting defendants the power of removal effectively grants them the
power to terminate meritorious state-based Y2K class actions and to
leave large numbers of plaintiffs without redress for their legitimate
Y2K-related damage claims.
---------------------------------------------------------------------------
\3\ See Fed. R. Civ. P. 23(a)(2) (one prerequisite to class
certification is the existence of ``questions of law or fact common to
the class'').
---------------------------------------------------------------------------
Moreover, the Department is not yet convinced that the benefit to
be gained by federalizing Y2K class actions outweighs the cost. Unlike
Titles II and III that alter substantive state law, Title IV--by
permitting removal and then remand stripped of class allegations--does
little more than effectively impose federal procedural law on Y2K class
actions. We do not believe that it is appropriate--or desirable--to
supplant the state courts' class action procedures. Because, in our
federal system, states are encouraged to experiment and take different
approaches to judicial administration and substantive law, the Act's
imposition of federal standards on state class actions may be perceived
to be an attack on federalism itself and the Constitution's allocation
of authority between the state and federal governments.
Section 402 would impose a heightened notice requirement on Y2K
class actions. Instead of the constructive notice now permitted in
``opt-out'' class actions under the Federal Rules of Civil Procedure,
Sec. 402 requires plaintiffs to send direct notice to every class
member via first-class mail with a return receipt requested. If the
plaintiffs cannot verify individual class members' actual receipt of
the notice, those members are excluded from the class unless they
affirmatively ``opt in'' to the class action. This may severely cripple
the ability of private parties to bring some legitimate class actions.
For example, these notice requirements might preclude a securities
class action premised on a fraud on the market theory because it is
often impossible to identify (and hence notify) the victims of such
schemes in advance. At a minimum, this new notice requirement imposes
significant costs on the Y2K class action plaintiffs that no other
class action plaintiff must bear, and is not guaranteed to provide any
benefits.
coverage
As a final matter, the Department has a number of concerns
regarding the scope of the Act. For example, we are very concerned that
the Act appears to cover Y2K lawsuits initiated by federal and state
governments and their agencies, which are explicitly included within
the Act's definition of ``person.''\4\ Applying the Act's substantive
and procedural limitations to these sovereigns may interfere with their
ability to enforce their own laws. Title II's modifications to state
and federal contract law seem likely, for instance, to alter government
contracts law significantly and, more specifically, the provisions of
the Contract Disputes Act, which controls contract disputes involving
the federal government. Title III's modifications to substantive law in
civil suits may have a similar effect on government-initiated actions
under consumer protection statutes. The limitations on the financial
liability of corporate officers and directors contained in Sec. 306
may, as discussed above, curtail the SEC's enforcement powers. The
Department would urge this Committee to give fuller consideration to
whether it is either necessary or advisable to reach Y2K actions in
which governmental entities are parties, either as plaintiffs or
defendants.
---------------------------------------------------------------------------
\4\ See Sec. 3(6)./
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With respect to private litigation, we are concerned that the Act
may reach more than Y2K lawsuits even though the stated purpose of the
Act is to ``encourage the resolution of year 2000 computer date-change
disputes involving economic damages without recourse to unnecessary,
time consuming, and wasteful litigation.'' \5\ Titles II and III of the
Act, which extensively modify state tort and contract law, apply to any
``year 2000 claim.'' As currently drafted, however, a ``year 2000
claim'' involves any cause of action or defense that directly or
indirectly asserts ``any failure by any device or system * * * or
software * * * in processing, calculating, comparing, sequencing,
displaying, storing, transmitting, or receiving date-related data
including [Y2K data].'' \6\ The term ``including'' strongly implies
that Y2K date-related failures are simply one species within a larger
universe of date-related failures covered by the Act. In that same
vein, a ``year 2000 claim'' also includes any ``failure to recognize or
accurately process any specific date,'' without limiting the coverage
to Y2K problems.\7\ Title IV of the Act has a noticeably broader scope
because it creates federal jurisdiction over class actions even if only
one of the plaintiffs' claims is a ``year 2000 claim,'' thereby
subjecting non-Y2K claims to the provisions of the Act.
---------------------------------------------------------------------------
\5\ See Sec. 2(b)(2) (emphasis added).
\6\ See Sec. 3(12), 3(13) (emphasis added)./
\7\ See Sec. 3(13)(B)./
---------------------------------------------------------------------------
It seems very likely that even a well-tailored definition will
invite considerable dispute over whether or not certain lawsuits are
subject to the Act. Plaintiffs' lawyers are likely to avoid styling
their claims as ``year 2000 claims,'' and often will not know if a
particular problem has indeed been caused by a Y2K failure. Conversely,
defense lawyers will likely assert Y2K-related defenses in order to
bring the claims under the terms of the Act. State and federal courts
will then be forced to determine whether the Act, or normal state
substantive law, controls. In light of the fact that the Act works
great changes in state law, which may have a substantial impact on the
outcome of any given Y2K-lawsuit, substantial disputes about the Act's
coverage are likely to be common and will occupy much judicial time,
significantly adding to the length and complexity of civil litigation.
Even clear definitions are unlikely to aid courts forced to grapple
with questions of the Act's coverage when a single cause of action has
both Y2K and non-Y2K bases. If, for instance, a building security
system fails because a Y2K computer chip malfunctioned and the security
company also failed to secure the emergency exit door, a court would
still need to determine whether to apply the Act notwithstanding the
contributing non-Y2K cause or whether (and how) to sever the claim
given the two causes. Wasteful use of scarce judicial resources on
these coverage issues seems inevitable, with greatly increased costs of
litigation for both plaintiffs and defendants.
concluding remarks
In my testimony today, I have outlined the more important of the
preliminary concerns of the Justice Department regarding the Year 2000
Fairness and Responsibility Act. As noted above, there are ideas in the
Act--alternative dispute resolution and provisions for pre-notice
filing with an opportunity to ``cure,'' to name two--that the
Department would like to aid the Committee in developing and crafting
into appropriate legislative provisions. While we have concerns about
some of the other provisions in terms of constitutional issues, public
policy, practicality, and their effect on Y2K readiness incentives, we
are eager to work with the Committee to address these concerns.
In closing, let me say again that we are sympathetic to the need to
act responsibly and expeditiously with any Y2K litigation legislation,
but we believe that we need to know more about the nature and scope of
any liability- or litigation-related problems that are likely to
develop and with which current law, procedure, and practice would be
unable to cope. Above all, we must do nothing that will undermine Y2K
readiness. Accordingly, the Department urges the Committee not to act
hastily. Rather, we urge you to reflect carefully before enacting
legislative provisions, like the bill before you today, that would
greatly alter the substantive and procedural law of the states with
regard to Y2K lawsuits. Indeed, it would be useful to know the view of
the states as to any novel approaches to Y2K liability or litigation
and to study what the states are doing to prepare for Y2K lawsuits, as
sufficiently responsive action by the states may obviate the need for
Congressional action. We are committed to working with the Committee to
formulate mutually agreeable principles that would form the basis for a
needed, targeted, responsible and balanced approach to Y2K litigation
reform.
I thank you for the opportunity to address this Committee.
The Chairman. Thank you, Ms. Acheson. We appreciate you
coming. As I understand at least part of your testimony, a
criticism of the bill is that certain provisions may have,
``unintended consequences.'' I guess all legislation has some
degree of unintended consequences. What I think we can agree to
is the intended consequences of the bill.
It is the intent of Senator Feinstein and myself, and
hopefully others, that this litigation reduce frivolous
litigation and create a strong incentive for industry to fix
the Y2K problem. My personal belief is that you share those
goals and that the Justice Department shares those goals.
Will you work with us in order to refine this bill, the
language of the bill, so that we minimize any unintended
consequences that we can foresee?
Ms. Acheson. Absolutely, Senator Hatch.
The Chairman. That is important to us. You know, I think we
have a lot of differences with some of the statements that you
have made here today in the interpretation of this bill, but we
are willing to work with you to see if we can resolve those
differences.
Let me just clarify a point that you have made in your
testimony. I understand that the ``reasonable efforts''
provision is not an affirmative defense. All the provision does
is allow some evidence that reasonable efforts were made by
companies to fix the problem. So it is not an absolute
affirmative defense.
And we would differ on a number of issues that you have
stated here today, but I also understand that the
administration has consistently opposed certain civil justice
reform measures, such as caps on punitive damages. Of course,
the purpose of punitive damages is to deter future bad
behavior, but punitive damages is most effective in intentional
tort cases and in personal injury cases, at least as I view it.
In general, the justification for the caps here is that in
many cases the Y2K problem will be the result of neither
negligent nor wrongful behavior. As such, punitive damages, if
applied, would have little deterrent effect. Now, are you aware
that personal injury cases are exempt from this bill, and that
caps on punitive damages do not apply to those types of tort
actions?
Ms. Acheson. Yes, I am.
The Chairman. Do you not agree that caps on punitive
damages, particularly in the breach of contract cases in which
historically punitive damages did not apply, create an
incentive for companies to fix Y2K problems because litigation
costs would be less likely to soak up capital needed to
remediate the problem?
Ms. Acheson. Well, I guess, Senator Hatch, on that point we
may have some difference of perspective because I think, first
of all, a point John Koskinen makes in his letter and a point
that we make is on the readiness issue, the law both with
respect to actual damages and compensatory damages and then
punitive damages is as it is, and it was that way when parties
entered into their various relationships here.
So we are concerned that a change that would, in fact,
remove some of the implicit pressures that exist in the law on
defaulting or negligent or restless parties to correct their
behavior or correct the problems that they have made for other
people would be removed. So it is not as if we are suddenly
larding punitive damage provisions onto a situation. The
situation has developed in the context of already existing long
since legal structures, and we are concerned with the impact
and the message sent by removing them.
Second, I would say that the point that you make about the
bite of punitive damages in contract--I think you are
absolutely right on as a generic and theoretical matter.
Punitive damages are far--they are, I guess, maybe indeed rare
in contract actions, and there is no reason why there should be
more recoveries in Y2K litigation, really, either in the
contract or the tort side of the house.
So I guess our question would be if, in fact, the focus of
this legislation is to deal with abusive or frivolous lawsuits,
which I gather the word ``insubstantial'' is meant to collect,
what about the meritorious cases? The frivolous, insubstantial
cases that might come are going to be dealt with as frivolous,
insubstantial, non-meritorious cases that already come in the
State and Federal courts. And most of them, even if they are
loaded up with punitive damage type claims, judges and other
actors have procedures in place to deal with.
So I guess our response is we don't see the need to change
this structure with respect to this type of litigation and are
worried that, in fact, the doing of it will send a signal that
we don't intend.
The Chairman. Well, we appreciate your testimony and I
appreciate your kind offer to work with us and see if we can
perfect this bill, because we file them and then we work on
them and we try to get them perfect. And I would like to have
the administration on board when we take it to the floor,
assuming that this bill does come up on the floor.
At this point, we will turn to Senator Leahy.
Senator Leahy. Thank you, Mr. Chairman. I was just going to
say who--no, I am not going to say that.
The Chairman. He has been resisting all morning saying that
you Republicans are in charge in the Senate; now, why can't you
get the thing to run on time? [Laughter.]
I can't blame him. I am a little upset myself.
Senator Leahy. I am afraid you reminded me of a couple
times when it was even worse when we were in charge.
[Laughter.]
That is the only thing that has kept me from resisting.
The Chairman. I had a long list I was going to bring up.
Senator Leahy. I am sure you did. [Laughter.]
It is called mutual deterrence.
This bill, as I said earlier, we have just barely gotten to
see it. Even though there has been a lot of talk about it, it
has only been in the last couple days we have seen it. And I
have read it and I am concerned reading it that it appears to
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.
Let me ask you a series of questions. Does the Department
of Justice agree that S. 461 restricts the rights of consumers
from seeking redress for the harm caused by Y2K computer
failures?
Ms. Acheson. Senator, it certainly does, as it is currently
drafted, appear that it would have that effect, assuming that
consumers and small business proceeded with respect to Y2K
claims the way I think we have come to understand they proceed
with respect to other types of claims.
Senator Leahy. Then it would be the same for small
businesses seeking redress for the harm caused?
Ms. Acheson. I agree.
Senator Leahy. And does the Department of Justice agree
that S. 461 restricts the rights of family farmers from seeking
redress for the harm caused by Y2K computer failures under the
same standards?
Ms. Acheson. Putting family farms, in my experience, in the
same category as small business--I cannot speak to anything
particular about family farms, but I would assume they would
face the same challenges.
Senator Leahy. Assuming they are small businesses, they
would?
Ms. Acheson. Small business, yes.
Senator Leahy. And State and local governments?
Ms. Acheson. I think that the challenges for State and
local governments are even more complicated. Yes, there are
constraints, and they fall not only on the rights of the
government themselves, of their contractual rights, and so
forth, but the functions that we rely on them and the rights
that we rely on them to enforce for the greater public good in
the context of their regulatory and enforcement authorities.
And it raises a lot of questions on those lines.
Senator Leahy. You had said in your testimony about the
Justice Department's analysis, speaking of the Department's
analysis, ``Preliminary analysis indicates that this bill would
be by far the most sweeping litigation reform measure ever
enacted if it were approved in its current form.'' Can you tell
us in layman's terms what that means?
Ms. Acheson. Well, I think there are several levels to that
statement. The first level is looking at what it would do to
longstanding principles and substantive law in the area of
contract law. Principles that have been outstanding in the
common law for many hundreds of years would be undone
specifically for this kind of legislation. And I can give you
some examples if you like, but the same applies with respect to
the underlying law of tort, negligence and recklessness.
It would not only change substantive law, it would narrow
the liability and damages recovery rights for plaintiffs. It
puts a lot of procedural burdens on plaintiffs for this
litigation that they don't ordinarily have. That is one whole
layer that it would complicate, and I would be happy to amplify
on any point of that.
But the second is that it is the Federal Government--and
this is another layer--stepping in and actually directing these
changes to State substantive law and procedure and practice,
which raises a whole other set of questions.
Senator Leahy. Well, I am concerned about the terms and, of
course, the lack of any case law in this because we are going
into such a new area. I can see every plaintiff going into
court on something like this and arguing that they are not a
Y2K lawsuit so they can escape the strictures blocking out the
questions of liability. Of course, every defendant is going to
say, well, it is a Y2K lawsuit so that they can get the law's
legal protection. And then the court is going to have to
determine what is a Y2K lawsuit, without any stare decisis,
without any past cases.
In S. 461, they have definitions of ``year 2000 claim'' or
``year 2000 failure.'' These are apparently words of art which
trigger the special legal protections. Do we know how far the
scope of those definitions go?
Ms. Acheson. Senator, I don't think we do. And, in fact, I
think one of the matters in the spoken testimony that I gave,
but also in the written testimony we have focused on is the
breadth particularly of the Y2K failure that seems to pick up a
tremendous number and different aspects of failures in any
device or system, or any software, firmware, or other set or
collection of processing instructions. And it goes on and on
and on, and then it says ``including the failure to accurately
administer or account for transitions or comparisons from,
into, and beyond the 20th and 21st centuries, and the failure
to recognize or accurately process any date, and the failure
accurately to account for the status of the year 2000 as a leap
year.''
It would seem to me, just as a narrow point but good
example of your point, is that that is, it would seem to me,
way overbroad for the problem that I understood we were
concerned about. And, two, it is so broad that it will provide
anybody trying to color anything as a Y2K claim a broad brush
to do it.
Senator Leahy. And I worry about the bill's breath too. We
worked a lot with the Small Business Administration because
most of the businesses in Vermont, even our newest high-tech
businesses, are small businesses. They say 330,000 small
businesses are at risk of closing down because of the Y2K
problems nationwide. Another 370,000 could be permanently
hobbled. It may not be any fault of their own. It may be that a
small manufacturing company does just-in-time inventory, but
their supplier is shut down, so they become shut down.
S. 461 poses a 90-day waiting period on access to the
courts for Y2K actions. Now, most of these small businesses may
have limited cash flow, other resources. If a court doesn't
grant injunctions or say you have got to wait 90 days, they
could be out of business. Is that a concern that you share?
Ms. Acheson. It is a concern. I mean, I think that is a
provision that brings together, it seems to me, the tensions
here because I think one of the things that certainly
characterized the efforts of the industry, the concerns of the
Senators, the concerns of the Federal Government, is a
tremendously positive and constructive effort to fix their own
problems, Y2K problems, and help other people fix theirs. And
so it seems to me a tremendously positive policy idea to have a
sort of stand-still time to effect a cure. On the very same
point, it runs into the type of practical problems for small
businesses that you have described.
Senator Leahy. Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Sessions.
STATEMENT OF HON. JEFF SESSIONS, A U.S. SENATOR FROM THE STATE
OF ALABAMA
Senator Sessions. Thank you, Mr. Chairman. I want to
congratulate you and Senator Feinstein and the others who have
taken the lead on this important issue.
We do have a problem, in my opinion. The tort legal system
is just not the way to settle this tremendously complex and
expensive process of computer Y2K problems. I just don't think
it is the proper way to do it. It is going to involve
extraordinary expenses and random rewards to one person and
zero benefits to another, costing huge sums of money and taking
large amounts of time.
I believe your analysis, Ms. Acheson, is just too naive in
how these things are going to actually play out. What is going
to happen is that in every county, every circuit court in
America, hundreds, perhaps thousands of these cases will be
filed. Plaintiff lawyers will be claiming punitive damages in
every one of them as sort of a hammer, a threat; you could call
it even an extortive-type threat to the company to force
settlements even where settlements are not necessary.
One of the individuals who is going to testify here today,
I understand--Mr. Yarsike will testify that he is against this
bill, but it took him 2\1/2\ years to get his case to
conclusion. And that is what happens. We had testimony, Mr.
Chairman, as you know, about the asbestos litigation. I have
practiced law all my life until the 2 years I have been in this
Senate, and I am horrified to know that in asbestos only 40
percent of the money paid out by asbestos companies actually
got to the victims of asbestos. Sixty percent was eaten up in
litigation costs.
So I think we are at an incredibly complex period. We are
talking about $1 trillion in costs. That $1 trillion needs to
go to fixing this problem. All the asbestos companies are in
bankruptcy. We certainly don't want to have all our major
computer companies in bankruptcy. They need to be spending
their money fixing this problem.
So I am really troubled by, I think, the analysis that you
have presented. I think it is way too negative. I think this
administration has got to deal with this problem. This
administration does not need to be in the position of just
stonewalling this and taking nothing but the trial lawyers
position. Certainly, they will be making millions, and hundreds
of millions of dollars out of the litigation--billions of
dollars out of it.
And I know they are the number one financial supporters of
this administration, but we are going to have to do something
for the people of this country. So I am a little disappointed
in what I consider an excessively negative view. I know the
chairman is willing to consider helpful comments to improve
this legislation. I know Senator Feinstein would, too, but I am
just real troubled about that.
Let me just say this. Isn't it true under the 90-day rule
that when you are talking about tens of thousands of cases that
might be brought, isn't it likely that more small businesses
will get their cases favorably disposed of and their problems
handled quicker than if they all filed a lawsuit at the same
time?
Ms. Acheson. It is very hard to say, Senator, you know, and
I think one of the points that we have tried to make here, and
we believe it, is that, you know, you have a view about what is
going to happen here. Other people have very different views
about what is going to happen here, both with respect to
failures and with respect to resulting litigation.
We don't know, and that is what we are saying. And what we
are saying is until we know, until we get a little bit of a
better handle on the extent and nature of failures and the
extent and nature of resulting litigation, before we undertake
something that may well in the end be called for--we are not
saying this is not called for; we are saying we simply do not
yet have a factual predicate to know whether some or all of
this may be called for--that we ought to continue to work on
the Y2K problems.
What I am hopeful of is that the small businesses that you
are talking about have identified their Y2K problems, their
own, the people upstream from them and the people downstream,
and are working right now to solve those problems. As I
understand, if you get out on the World Wide Web and you look
at what is out there, there are businesses working hard on
solving the problem, and spending a lot of money doing it.
I don't know what money they may be spending for lawyers,
and so forth, but what I am hopeful of is we won't have all
these pieces of litigation lined up because we will have solved
their problems. And I am not saying that, you know, there won't
be any. Surely, there will be some.
Senator Sessions. Well, it is the kind of problem I think
you could send a good person in or a good computer company
could have tried to design a system that they thought would
work and they have tried to repair it and they found out they
didn't. Three times the actual damages that is suffered by a
company--isn't that a sufficient compensation, and would the
risk of even more than that make companies reluctant to even
attempt to undertake repair of systems?
Ms. Acheson. Well, I think if you had a company that went
in three times and actually tried hard to, you know, repair the
problem, they may end up with the contract damages under the
State law. But I don't see in that case how they should be
liable for punitive damages. It seems to me punitive damages is
when somebody does something truly outrageous, and attempting
to respond to your customer and fix the problems----
Senator Sessions. Well, limiting the punitive damages to
three times actual losses seems like to me a pretty generous
compensation and a fairly rational way to present some
predictability to the companies who are undertaking to fix this
problem. Wouldn't you agree that that would be helpful?
Ms. Acheson. Senator, as a personal matter, I agree with
you completely. I think the position of the administration on
this issue has always been this is a matter for State law
reform and State law process and State law legislative
determination.
Senator Sessions. Well, I agree with you. Most of the
complaints you have made about the bill are simply that it
changes existing law and, of course, that is what the goal of
this legislation is, to change existing law to make it more
rationally able to help us get through this crisis we are
facing.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator.
[The prepared statement of Senator Sessions follows:]
Prepared Statement of Hon. Jeff Sessions
Computers have grown to be an integral part of our daily lives.
Although studies differ on the extent of preparedness, most analysts
agree that all Y2K problems will not be solved before January 1st. It
should be expected that many people will suffer as a result of the Y2K
computer bug. But because we live in a society in which people go to
court and sue over even minor of inconveniences, I am inclined to
believe the reports that claim litigation expenses associated with this
problem could reach $1 trillion.
In addition to the problems resulting from the computer failure, it
is absolutely necessary that we not allow this flood of litigation to
worsen the situation. Testimony before this committee on asbestos
litigation revealed that only 40 percent of the money awarded to
plaintiffs actually reached the victims. The other 60 percent was taken
by attorney's fees and court costs. The Asbestos suits are symbolic of
mass litigation that provide too little benefit to those individuals
who suffer actual harm. We should try to prevent similar injustices
from occurring in Y2K litigation. Legislation which encourages business
to repair Y2K problems and not waste resources defending themselves in
court serves the public interest. We must avoid costly, time consuming
litigation in which the lawyers are the only real winners.
Congress must also seek to avoid a situation where the court system
has become so cluttered with marginal or frivolous lawsuits that
individuals and businesses who have suffered genuine harm are not able
to obtain relief. The legal system must focus on the legitimate
lawsuits to ensure that they proceed in a timely fashion. An injured
party does not need to compound that injury by enduring several years
of litigation.
I look forward to working with the Chairman and other members of
this committee to promote legislation which will encourage businesses
to work diligently on fixing the problem, minimize unnecessary,
unjustified and frivolous Y2K lawsuits, but still protect those
individuals with legitimate legal claims.
The Chairman. Senator Feinstein.
STATEMENT OF HON. DIANNE FEINSTEIN, A U.S. SENATOR FROM THE
STATE OF CALIFORNIA
Senator Feinstein. Thank you very much, Mr. Chairman.
Welcome, Ms. Acheson. I must say I am somewhat surprised by
the response to this, which I frankly find not very helpful. I
think there is a major problem. I got into this because of the
concern about what might happen and the fact that more than 20
percent of America's high-tech jobs are in California.
We tried to craft a moderate piece of legislation; it is
certainly much more so than the House. I believe that some
legislation is, in fact, going to pass. I think both Senator
Hatch and I have said that we are eager to work with the
administration. We are eager to see amendments, and I would
certainly hope that the Administration would be willing to work
with us on this.
I think not to recognize the degree to which frivolous
suits take place and the degree to which there is a possibility
for these suits to take place even on a class action basis in
the Y2K era is kind of like being an ostrich and putting one's
head in the ground.
What we have tried to do in this legislation is not prevent
legitimate suits from going ahead, but be able to provide a
dampening effect on the frivolous suit and the frivolous class
action lawsuit, which we believe is brought sometimes just for
the purpose of early settlement and the collection of money.
So, that is the intent.
I have said over and over again that we are willing to
entertain amendments. We have tried to vet this legislation in
the short time we have had. I have sent this legislation now to
every major computer company that I know of in the State of
California, asked them to review it. We have asked ATLA to
review it and submit comments. We initially heard, well, they
are just going to oppose it. Now, I am very hopeful that they
will review it in a respectful way and present some amendments.
But let me just end by saying I am somewhat surprised by the
comments.
Let me ask a couple of questions, if I can. You have argued
that section 201 of the bill would enforce all contracts, even
those that would otherwise be unenforceable. Yet, clause (c) of
201 specifically states that the section will not apply to
contracts that are unenforceable due to an infirmity of
formation. We meant for this provision to exempt contracts of
adhesion between a large company and one with no negotiating
power and other unenforceable contracts.
Do you think this exclusion is not clear? Do we need to
change it?
Ms. Acheson. I think it was our impression that that
exclusion was unclear. I think that how we read this was that
contracts that appeared to be carved out were contracts as to
which a court determined that the contract as a whole was
unenforceable due to an infirmity in the formation. And yet
provisions that are unconscionable and have been held by State
law or warranties and such like are really--they are just one
piece of the contract.
And the way most--I shouldn't say I know this as a matter
of most States, but certainly the States that I have practiced
in and are familiar with and the Uniform Commercial Code have
overridden offensive warranty and sort of limited provision
problems. And so the whole contract doesn't become
unenforceable; it is just that provision gets thrown out.
Senator Feinstein. Well, perhaps you would take a look at
it and submit some language.
Ms. Acheson. Absolutely, absolutely. I mean, contracts of
adhesion, it seemed to me, when the whole contract is a problem
would be picked up in your unenforceable contract thing, but
the oppressive or offensive provision piece wouldn't.
Senator Feinstein. Now, as you know--and I thank you very
much. We would appreciate an amendment, and obviously we want
this to be as right as it possibly can be.
As you know, the House bill puts all punitive damage
recoveries into a year 2000 recovery fund. In this bill, the
plaintiff keeps punitive damage awards. The Administration has
in the past opposed punitive damage caps for product liability
legislation. However, this Y2K legislation affects only a
narrow class of cases, those dealing with Y2K defects. These
suits have never happened before and they are never going to
happen again.
I think that caps on punitive damages can in some instances
be helpful in limiting frivolous litigation filed solely to
force a quick settlement. Is the Administration opposed to all
punitive damage caps, or are you willing to discuss narrow or
limited caps in some circumstances?
Ms. Acheson. Senator, we are willing to discuss that and
anything else about this bill. One thing that I want to make
very, very clear--in fact, a couple things I want to make very
clear; one is we just saw this bill on Wednesday. Two, we have
done our level best, working very, very hard since then to look
at it from the perspective that we must as the Department of
Justice.
I am afraid maybe I have spent too many late nights on it
and needed to sleep for 3 days and then read it because I don't
think any of us intended it to sound as negative as apparently
the committee thinks it does, and we regret that. We very much
want to work with the committee on the bill and we want to keep
talking about the nature of the problem that people see coming,
that your constituents, that the computer industry does, what
are the States doing, what do they think. Those are the kinds
of things that we want to explore, but we are absolutely open
to discussing every aspect of this.
Senator Feinstein. Just one quick question. I would think
the fundamental points are the provision for an arbitration
process, the 90-day cooling off period. Of course, we don't cap
attorneys fees, but we do cap, as Senator Sessions and Senator
Hatch have said, the punitive damages. And the other big issue,
I would think, for you is the proportionate liability. That is
very hard for me not to see the justice in some proportionate
liability, as opposed to allowing the person sometimes with the
least liability but the deepest pockets getting the greatest
penalty, which to me has always seemed like a very unfair part
of the law.
And I say this as a non-lawyer. It seems to me that your
liability--or excuse me--your responsibility really ought to
relate to your degree of liability. And in this case, you can
see some of the larger companies really having to absorb
tremendous losses if there isn't some protection against that.
Ms. Acheson. And it seems to me, Senator, that is a very
good example of looking to some positions about proportionate
liability that are somewhere in between joint and several, on
the one hand, and strict proportionate on the other. States
have looked at this in other contexts and some have made the
joint and several tag or responsibility come in when there is a
certain level of responsibility. Others have had different
approaches to it. There are a lot of different approaches out
there, and we would be happy to look at any of them against the
emerging nature of the problem and work with the committee on
those and other aspects.
Senator Feinstein. I thank you very much. And, Mr.
Chairman, I want to thank you very much for your help and
working together on this. And I think we both said we would be
happy to receive amendments and take a look at them, but this
is a very important bill.
The Chairman. Well, thank you, Senator Feinstein. It is
reciprocal. I really appreciate your going on the bill. We all
know that when we file these bills, it is to create the
controversies, and hopefully we have got it right the first
time. But if we haven't, that is why we have a Justice
Department to help us and aid us. And we are gratified that you
are willing to reexamine this bill and look at it carefully and
to give us your best suggestions on how we might make it more
acceptable to the Administration, and hopefully to everybody
concerned.
We do appreciate that kind of cooperation and we will look
forward to having it in the future. And if you could get back
to us--this is on a kind of a fast track, so if you can get
back to us within a relatively short period of time, we would
appreciate it.
Ms. Acheson. Absolutely, Senator.
The Chairman. And we will just work with you and see what
we can do to refine this bill and make it even better than it
is. But something has to be done. We can't ignore these
problems any longer, and everybody knows this is going to be an
awfully expensive process if it devolves to a pure litigation
process. And we can't allow that to happen if we have a
reasonable way of preventing it.
So thank you so much for being with us and taking the time.
Ms. Acheson. Thank you.
The Chairman. Good to have you here.
Senator Bennett is not here yet, but when he comes in, we
will interrupt whatever testimony is being given, unless it
takes a sentence or two to finish, and let him give his
testimony.
We will introduce our second witness panel and we are very
happy to welcome all of you here today. It consists of a
variety of members from the technology industry and consumers.
Addressing the committee first will be Harris Miller, President
of the Information Technology Association of America, the ITAA.
ITAA is the largest and oldest information technology trade
association. It represents 11,000 software services, Internet,
telecommunications, electronic commerce, and systems
integration companies.
Our second witness is Laurene West, from my home State of
Utah. Ms. West has more than 20 years of health care
experience. We are happy to have you here today. Not only is
she a registered nurse, but she has also gained experience in
medical informatics, designing, developing and implementing
medical information systems. Ms. West has recently started a
year 2000 consulting firm, so we are very interested in what
you have to say here today.
Senator Leahy. And, Mr. Chairman, you know I always listen
to registered nurses.
The Chairman. That is good. His wife is a registered nurse,
and I listen to her, too, by the way.
Our third witness is Mark Yarsike. Mr. Yarsike is a small
businessman from Warren, MI. He is co-owner of Produce Palace
International, a gourmet produce market in the Detroit suburbs.
He is also the first person to ever file a Y2K suit.
Our fourth witness is B.R. McConnon, President of Democracy
Data and Communications, DDC, which is a grass-roots database
management and communications firm. Mr. McConnon provides
oversight of grass-roots technical activities for several
leading corporate and association grass-roots programs.
Our fifth witness is Harris Pogust. Mr. Pogust is the head
of the Sherman, Silverstein year 2000 litigation group and is
co-chairman of the Association of Trial Lawyers of America's
Year 2000 Litigation Group. That is a very prestigious group.
Mr. Pogust is an attorney with the law offices of Sherman,
Silverstein, Kohl, Rose and Podolsky, located in New Jersey.
Our sixth and final witness is Stirling Adams. As in-house
counsel with the software company Novell, Mr. Adams works with
technology license agreements and is a member of the Novell
team that oversees the company's year 2000 preparation efforts.
He is also the Chair of the Software and Information Industry
Association's Year 2000 Committee, and is a member of the
Business Software Alliance's Year 2000 Committee. So we are
happy to welcome you as well.
We are happy to welcome all of you here today and we will
look forward to taking your testimony. Please understand that
if Senator Bennett comes in, because of the pressures on him
and others in the Senate, we will probably interrupt you to
allow him to present his testimony.
So we will start with you, Mr. Miller. Now, we would like
you to watch the lights. We are giving each of you 5 minutes.
When that red light goes on, I would sure appreciate it if you
would just really wrap up very quickly.
PANEL CONSISTING OF HARRIS N. MILLER, PRESIDENT, INFORMATION
TECHNOLOGY ASSOCIATION OF AMERICA, ARLINGTON, VA; LAURENE WEST,
YEAR 2000 HEALTH CARE CONSULTANT, MIDVALE, UT; MARK YARSIKE,
CO-OWNER, PRODUCE PALACE INTERNATIONAL, WARREN, MI; B.R.
McCONNON, PRESIDENT, DEMOCRACY DATA AND COMMUNICATIONS,
ALEXANDRIA, VA, ON BEHALF OF THE NATIONAL FEDERATION OF
INDEPENDENT BUSINESS; HARRIS POGUST, SHERMAN, SILVERSTEIN,
KOHL, ROSE AND PODOLSKY, PENNSAUKEN, NJ; AND STIRLING ADAMS,
CORPORATE COUNSEL, NOVELL, INCORPORATED, OREM, UT
STATEMENT OF HARRIS N. MILLER
Mr. Miller. Well, thank you, Chairman Hatch, and thank you
and Senator Feinstein and Senator McConnell for introducing
this bill.
Revolution is about change, about new ideas and new
challenges and new opportunities, about responding to the
unknown, the unanticipated, and oftentimes the unbelievable.
Who, for instance, would believe that in just a few short years
the Internet would reach into every school, that E-mail would
become just as important as telephones to business
communications, that computers would cost less than the desk
they sit on, or that two zeroes, or the absence thereof, could
trip up our digital planet?
Today, this information revolution, bringing education,
health care, political empowerment and numerous other economic
benefits to billions of people, and valued at almost $2 million
worldwide according to a recent study by the World Information
Technology and Services Alliance, is threatened by those two
zeroes.
That great philosopher, Yogi Berra, once said, I came to a
fork in the road and I took it. The year 2000 software
challenge is a fork in the road, presenting society with a
choice about its immediate future. Unlike Mr. Berra, however,
this committee and this Congress has to choose one of the
forks. Down one path, we work together to correct our systems,
assure uninterrupted consumer access to a very high level of
products and services, maintain our business relationships and
preserve stockholder values. The other way, however, systems
are left unfixed because companies look to the courts to make
things right or to recover damages that need not have occurred.
Product and service delivery goes haywire, company reputations
plummet, and we enter a lose/lose outcome. Not a difficult
choice really, Senators.
The Year 2000 Fairness and Responsibility Act of 1999 is
legislation which rightly recognizes that remediation is vastly
preferable to litigation. And although the clock is ticking,
time remains to assess, fix and test many systems, and to
develop contingency plans to prevent business disruption due to
Y2K. Addressing the Y2K challenge will be difficult, but as
Senator Hatch said, it is not an option.
So how do we create the environment that encourages fix
over fight? The simple answer is we create incentives to repair
systems and remove disincentives to do so; remediate, not
litigate. ITAA believes that following key principles are
essential to any bill addressing year 2000 liability, and they
produce the incentives and remove the disincentives needed.
First, the language and the commitments of the contract
will be the first point of reference to define the parties'
rights and obligations. Second, we must have a uniform Federal
approach to the resolution and litigation of problems
attributed to year 2000 and making it the most equitable and
predictable way to resolve Y2K disputes.
Third, a vendor-supplier must have the opportunity to
effect a cure of the Y2K problem before a lawsuit is filed.
Fourth, the parties must be encouraged to seek to resolve
remaining disagreements through non-litigation alternative
dispute resolution, such as non-binding mediation.
Next, defendants should be permitted to enter into evidence
and use reasonable efforts in the circumstances to achieve year
2000 readiness not only as a defense to allegations of
negligence, but to serve to mitigate contract and statutory
suits in any action to recover economic damages resulting from
a year 2000 problems and as a means of encouraging--and this is
very important--businesses to invest in fixing systems today.
Next, all parties should mitigate their potential Y2K
problems this year, and if a Y2K failure does occur, recovery
in suit must focus on material defects and then should be
limited to direct damages, except in cases of physical injury
or fraud.
Next, abusive and frivolous class action litigation should
be eliminated. Parties with legitimate claims, however--and
there will be some--must have their rights protected and the
courts unclogged to handle those claims. And, last, legislation
should be industry- and organization-neutral, with no sector of
the economy or level of government obtaining special treatment
or special exemptions not available to other entities.
Critics of the eight principles I have just outlined and
the legislation embodied in the bill that Senator Hatch and
Senator Feinstein introduced usually trot out one of three
arguments against it; No. 1, that taking legislative action now
will encourage companies to stop fixing systems. Or, No. 2,
they say just the opposite that legislation is not needed
because fixes are going on. Or, No. 3, in logic which I find
truly defies reason, they say we don't have to worry about it
because the disease this legislation is meant to prevent, a
tidal wave of lawsuits, has not presented itself yet.
None of these arguments is in touch with reality. First,
the bill creates incentives to fix the system because it says
by taking action, you are going to be rewarded should you get
into disputes. The incentives are to take action, not to not
take action.
Second, they argue that the Y2K problem is solved. Well,
unfortunately, members of the Senate, that is not true. And
Senator Bennett can talk to you more about that, but certainly
more and more data is coming in indicating that while a lot of
progress is being made, the problem is far from being solved.
So the idea that we don't need legislation because the problem
is solved is also inaccurate.
The third issue which I have heard, and the Administration
witness also raised, is we don't know how big the problem
should be. Well, I did a simple Internet search recently and I
typed in the words ``Year 2000 plus Attorneys.'' I got 11,000
hits. There are a lot of lawyers out there who think they are
going to make a lot of money out of this. Lloyd's of London as
estimated $1 trillion in litigation.
I don't mean to suggest that all year 2000 problems will be
solved and there will be no personal injury or other cases
which warrant litigation if this bill passes. But I do suggest
that unless Congress acts now, many suits will be launched on
frivolous or speculative grounds, tying up the courts and
companies in an exercise which is as unnecessary as it is
unproductive.
Chairman Hatch, the legislation that you and Senator
Feinstein introduced has incredibly broad support from all
aspects of business--IT companies and their customers, small
and large businesses, and companies across all sectors of our
economy. I urge this committee to support the legislation. I am
prepared to answer questions you may have.
Senator Leahy [presiding]. Thank you, Mr. Miller.
[The prepared statement of Mr. Miller follows:]
Prepared Statement of Harris N. Miller
introduction
I am Harris Miller, President of the Information Technology
Association of America (ITAA), representing over 11,000 direct and
affiliate member companies in the information technology (IT)
industry--the enablers of the information economy. Our members are
located in every state in the United States, and range from the
smallest IT start-ups to industry leaders in the custom software,
services, systems integration, telecommunications, Internet, and
computer consulting fields. These firms are listed on the ITAA website
at www.itaa.org.
ITAA appreciates the opportunity to express our industry
association's strong support for the legislation being considered today
on the Year 2000 (Y2K) software challenge. I am here to offer our
perspective on the pressing need for Congress to pass this legislation
and for businesses across the entire spectrum of our society to take
advantage of and utilize its provisions so that our nation can take the
responsible steps necessary to meet the challenge head on. In order
successfully to make the transition to the new millennium, the Y2K
challenge must be effectively addressed by all the affected
stakeholders--governments, businesses, users and suppliers across all
industries and enterprises around the globe. Though the clock is
ticking, there is still time to assess, fix and test systems, as well
as develop contingency plans to prevent business disruption.
Almost every sector of American industry--small business and large
companies alike--is already making massive investments to prepare for
Y2K. An onslaught of unnecessary, costly, and time-consuming litigation
at the turn of the century will, however, hinder rather than help
efforts to cure potential Y2K problems. Rather than focusing on whom to
sue, organizations should be in a partnership enterprise--working with
key suppliers and customers, finding the answers, fixing any problems,
and settling disputes quickly in order to prevent business disruption.
our common goal: remediation not litigation
Our common public policy goal should be to continue encouraging Y2K
remediation, not litigation. While the Y2K technical challenge cannot
be solved by legislation, well-conceived legislative initiatives, which
implement a set of key principles, can play a constructive role. We
believe that the Federal legislation introduced by you and Senator
Feinstein and in the House of Representatives last week will achieve
precisely that. This legislation is supported by a truly amazing
coalition of trade associations and companies, representing the broad
spectrum of the U.S. economy, because it is a fair, reasonable and
necessary approach to the Y2K challenge. This coalition of interested
parties includes potential Y2K plaintiffs, defendants and those that
believe they could be BOTH!
When passed into law your bill will (1) create incentives to
assess, fix, and test systems before problems develop; (2) provide
business certainty through a uniform Federal approach; (3) encourage
contracting parties to resolve Y2K disputes-- particularly where there
is only an economic loss--without litigation; and (4) screen out
insubstantial lawsuits and actions not based on material defects, while
preserving the rights of parties that suffer real harm. If there is
personal injury or fraud or recklessness, this bill will NOT prevent
the recovery of damages or reparations.
I am not a lawyer, so my comments will not attempt to analyze the
specific aspects of the proposed bill defining plaintiff rights or
defendant responsibilities. Rather, what I can tell you is why our
members, their customers and suppliers, the broad spectrum of companies
and associations that have come together in support of your bill, and
how our overall economy NEEDS and DESERVES this legislation.
itaa on y2k
Over the past four years ITAA has been the leading trade
association voice on the issue of successfully confronting the Year
2000 challenge. We have long advocated that vendors and users become
aware of and actively develop response mechanisms to identify the
problems and remediate their systems. Our goal has been to make sure
the parties receive the necessary information they require. We
developed our own Y2K Product and Service Compliance Questionnaire over
two years ago. In response to a specific request from Congress we
established the first of its kind Y2K certification program for IT
companies and enterprises that utilize IT to provide some certainty in
a crowded and often confused marketplace. In the past two years, more
than 100 user and provider organizations have successfully gone through
the ITAA*2000 Certification Program. We have published and distributed
free of charge a Y2K Solution Providers Directory--the 9th edition of
which will be out next month. Our Internet website is the only place
where the public and public policy makers can look to find all of the
Federal and State bills on Y2K, and--unfortunately--all of the Y2K
litigation.
ITAA worked closely with the House, this Committee and the
Administration, to write and unanimously get passed into law the
Information and Readiness Disclosure Act because we and Congress were
convinced that the threat of lawsuits was hampering the sharing of
vital Y2K information between business partners. Organizations were
afraid to provide and could not receive the information needed to
successfully approach resolution of Y2K issues to ensure a seamless
transition into the next century. Since the passage of the ``Good
Samaritan'' law, which came about in large part through the yeoman
efforts of your chairmanship, ITAA has produced a set of special Y2K
Guidelines and has sponsored an Internet webcast explaining how to take
advantage of the Act's provisions. Companies across the country now
have a tool that allows them to share company-to-company information.
At the same time, the rights of consumers remain protected, and the law
did nothing to limit any cause of action that may grow out of actual
Y2K-related losses.
The legislation you and Senator Feinstein have introduced will
broaden the protections contained in last year's information-sharing
bill and will continue to keep organizations focused on the fix--not
downstream litigation. This bill will serve to encourage vendors of all
types to continue to put the time and resources into Y2K remediation
and testing efforts in 1999. It will also serve to provide protection
to those enterprises that are impacted by Y2K glitches even though they
attempted to get their systems on track, by mandating, for example, an
``opportunity-to-cure'' period before a Y2K lawsuit can be filed, and
discouraging the award of consequential damage penalties against
businesses impacted by events outside of their control. By focusing
their time, energy and resources on fixing systems, rather than
litigating lawsuits, business partnerships will continue and
disruptions will be minimized.
Inevitably, even if parties do everything possible between now and
the Year 2000 to prevent disruptions, failures and resulting disputes
will occur. Business relationships can survive these challenges,
however, as long as the contracting parties work together towards a
solution and approach the Y2K challenge as partners, realizing that the
problems encountered should not lead to contract termination or
litigation.
bill criticisms turn blind eye to reality
Let me take a moment to address three principle objections made by
critics of this legislation. Contrary to logic and business practice,
some have charged that legislation which gives companies a cure period
is essentially an opportunity to delay, defer or deny that Y2K problems
exist. Such a viewpoint turns a blind eye to the very nature of most
business relationships, which is to do everything possible to assure
customer satisfaction and a predictable revenue stream into the future.
Meanwhile, bill provisions create clear incentives for both potential
defendants and plaintiffs to take affirmative action on Year 2000--not
hang back waiting for courtroom settlements. I refer here to the
responsibility placed on companies to make reasonable efforts in
anticipation of contractual or tort claims as well as the requirement
to mitigate the likelihood of Y2K risks for those who might raise such
claims. Buyers and sellers responding to these key provisions of the
bill will implicitly reduce the size of exposures as well as actual
damages and, as a result, minimize the need for lawsuits.
Other critics are pointing out that we have not yet seen evidence
of the prognosticated flood of litigation, and therefore we are
developing a cure in search of a disease. Again, I am not a lawyer, so
I can only report what I read and see. What I see is a stable of
salivating legal factories gearing up. I am in the ``Internet
business'' so-to-speak, so I used my trusty web access search engine
last week and found 11,051 `hits' when I typed in the subject: ``Year
2000 + Attorneys.'' My General Counsel is invited to speak at or is
invited to attend two to three Y2K Litigation Seminars and Conferences
a day. Is it prudent or responsible for Congress to wait for the
inevitable flood or do what it can to provide sandbags now?
There are some critics who contend that this legislation is
unnecessary because companies, thank you, are moving ahead on a
remediation path just fine without the bill. I have been traveling
throughout the country and the world for four years--speaking to every
private sector group and government agency you can think of--and we are
not even close to full remediation.
A recent ITAA Y2K contingency planning survey found that 87 percent
of respondents, representing a wide cross section of industries, call
Year 2000 a crisis for the nation and the world. Over half said Y2K
will hurt their companies. Over one-third reported actual Y2K related
failures.
Our research is supported by other studies and analysis:
In the government sector, the GAO reports 39 percent of
federal systems are yet to be made Y2K ready. The National Association
of State Information Resources Executives says that of 46 states
included in a recent survey, most are not close to being compliant. A
recent report from the National Association of Counties found 50
percent of its survey base do not have a Y2K plan.
A National Federation of Independent Business survey of
small business owners in January 1998 found that 37 percent of those
polled have either taken no Y2K action or do not plan to.
A survey released in January by the Media Studies Center
found that 53 percent of Americans agree that the Y2K problem is one of
the most important problems facing the country--one percentage point
more than had heard about the recent U.S. military action against Iraq.
A January 1999 USA Today/Gallup Poll found 34 percent of
respondents predicting major problems from the date bug generally and
14 percent saying they expect to experience major problems personally.
A Cap Gemini/Industry Watch Survey conducted late last
year found on-time completion schedules for Year 2000 projects slipping
for 90 percent of those polled. An October 1998 survey conducted by CIO
Communications, Inc., found over two-thirds of the CIO's polled
indicated that the job of the century will not get done on time, and
that government officials and consumers should be getting prepared to
cope with the consequences. Those consequences could include an
economic slow-down in the U.S. Seventy three percent of respondents
said Y2K has the potential to cool the economy. Over 50 percent thought
Uncle Sam should be creating a disaster recovery fund and emergency
management agency.
The nation's Year 2000 glass is not half empty, but I think it is
equally fair to conclude that much work and many risks to success
remain.
Protracted court action will not fix a single system. Litigation is
not a Y2K remedy. It will merely clog the court system; keep truly
harmed plaintiffs from getting quick redress; expose companies to
public criticism; damage reputations; destroy supplier relationships;
and divert attention and energy from technical corrections.
It is for all of these reasons that large and small businesses--
suppliers and customers, vendors and users, plaintiffs and defendants--
have come together and urge you to pass this legislation as soon as
possible.
essential bill components
Let me briefly highlight a few of the key principles contained in
the bill, which are essential components of any legislative framework
seeking to encourage continuing remediation efforts, to resolve the
disputes that may arise and to discourage unnecessary litigation.
American businesses operate with the underlying
expectation that they will be held to their contractual and statutory
commitments, and expect their vendors, suppliers and customers to do
likewise. Courts should not turn away from basic contract law
principles and make new law because of Y2K. Contracts should not be
``tortified'' and should remain the first point of reference to define
the parties' rights and obligations in Y2K disputes. Where parties have
negotiated contract terms and conditions that limit their respective
obligations and liabilities, those limitations should be strictly
enforced.
Vendors of products or services must be given an
opportunity to respond to the problem identified by the prospective
plaintiff and to cure a Y2K problem before a lawsuit is filed. A 90-day
notice period is already embraced in existing contract law and the
Universal Commercial Code. It is in the overall interest of our society
to provide the tools that will solve problems and disputes, not
encourage litigation, which will not fix a single system.
We welcome the provision in this bill that encourages
parties to resolve disagreements through non-litigative means, such as
non-binding mediation and other alternative dispute resolution (ADR)
methods. It is in the long-term best interest of contracting parties to
maintain an ongoing business relationship, and ADR, rather than
litigation, maximizes resolution chances and minimizes transaction
costs.
The President told the nation last July that our nation's
ability to respond successfully to the Y2K challenge requires sharing
the responsibility of fixing the systems. All parties are encouraged by
this legislation to continue their remediation efforts and to develop
contingency plans because they will have a duty to mitigate Y2K damages
they could reasonably have avoided.
In any Y2K claim to recover economic damages resulting
from a Y2K problem, a defendant should be permitted to plead and prove
that it used reasonable efforts or due diligence in light of the
circumstances to achieve Year 2000 readiness. While this is already an
accepted standard in negligence or tort actions, we strongly support
the inclusion of this evidentiary showing in contract actions: that in
light of the efforts made by the defendant, the plaintiff's economic
damages were not damages that the defendant could have reasonably
anticipated or prevented. This provision will encourage continued
remediation efforts because the supplier of goods or services will know
THIS YEAR that all of the time, resources and money that it puts
towards fixing its systems and the efforts made to contact its
suppliers can be entered into evidence if--for reasons outside of its
control--a Y2K problem does occur NEXT YEAR and a lawsuit is filed. And
that if no such efforts are made, no such defense is available.
Except in cases of personal injury or fraud, recovery in
Y2K lawsuits should be limited to actual direct damages, and only when
the defect is deemed to be material. Punitive damages have historically
been given to deter the defendant or like defendants from engaging in
similar behavior in the future. This is a unique situation which will
not occur again, and a higher negligence standard should be required if
awards beyond actual damages are to be provided.
This legislation will not prevent parties with legitimate
claims to have their rights protected, but abusive and frivolous class
actions by opportunistic plaintiff attorneys will be discouraged.
conclusion: working towards a constructive solution to a difficult
issue
I will conclude by observing that the century date change challenge
is formidable, and our attention and resources should be trained on
developing solutions. Relying on lawyers and the courts to solve the
problem is certainly not the answer. The IT industry is committed to
helping the marketplace work through this difficult issue in a
positive, constructive manner. This bill recognizes that establishing
and maintaining partnerships with everyone in the `supply chain'--
upstream and downstream--will allow us to be able to confront the issue
successfully and find ourselves enjoying January 1, 2000, rather than
facing it with dread and trepidation.
Thank you very much for this opportunity to appear before you
today.
Senator Leahy. Ms. West, it is good to have you here. The
chairman had to step out just for a moment. You are going to
think we are doing tag team here. He will come, I will leave.
But please go ahead with your testimony.
STATEMENT OF LAURENE WEST
Ms. West. Thank you. Members of the committee, and Mr.
Chairman at the moment----
Senator Leahy. I am not the chairman. I am just filling in
for him.
Ms. West. My name is Laurene West. I reside in Salt Lake
City. I would like to ask that my full statement be inserted in
the record of this hearing.
Senator Leahy. It is so ordered.
Ms. West. I am here today not as a spokesperson for any
organization and not as a lobbyist for any company that is
paying me to be here, but as an example of the situation being
faced by millions of Americans as we move toward the year 2000
event.
I have been a registered nurse for 20 years. I have worked
within all critical care areas of the hospital, including
surgery and recovery. And I am also a deputy sheriff with Salt
Lake County Search and Rescue. But my perspective on the crisis
looming in health care does not derive from being a trained
clinician, but from being a patient, perhaps a better informed
patient than most other people in the United States.
And as members of the committee are already aware, I suffer
from a combination of disease processes. Specifically, I have a
brain tumor that, without a daily supply of medication which is
imported from a single factory in Sweden, my life expectancy is
quite short. I have tried some kind of strategy to protect
myself. That is because I am an informed consumer, but my
strategy depends on everything happening at exactly the right
time and a coordinated effort among the health care community,
and also a significant amount of just plain good luck.
After the first surgery on my head, I acquired a staph
infection. I have had 13 surgeries since, and that staph
infection is no longer susceptible to any known oral
antibiotics. So I am completely dependent on an IV antibiotic.
So if there are significant year 2000-related failures as far
as distribution of any kind of drug that I am on, I will be a
casualty. I will die.
I am here representing 40 million medication-dependent
patients, and I found that number a bit staggering when the
Department of Health and Human Services gave me that number.
That number represents one member of every family in the United
States being at risk to year 2000-related failures, to the
supply and distribution of medication.
And I am here representing those that are on chemotherapy,
those who are cardiac patients, those who are asthmatics, those
who are epileptics, insulin-dependent diabetics who do not have
any time to wait if they do not have access to their drugs, and
also end-stage cancer or end-stage disease process patients who
know they are dying and need a continual access to narcotics
for pain relief. And I fall in that category. If there are not
significant changes in the way that we are headed within the
health care community, combining industry with government
efforts, my death will be very slow, very painful, and I will
not make it past March of the year 2000.
I also am here representing those patients that are device-
dependent, those that have pacemakers, internally implanted
defibrilators, neural stimulators, PCA pumps, insulin pumps.
Most of those devices--the only option there is for those
patients as far as testing is that the companies that produce
those devices have said that they have done their own testing.
There is no third-party testing.
As a legal layperson, I can only conclude that the single
greatest impediment to an aggressive program to assure the
availability of all the products necessary to supply me and my
40 million friends is the threat that whatever extraordinary
steps the industry takes to attempt to assure the availability
of their products will be viewed somehow by some lawyer as a
confession of the inadequacy of their business model.
Clearly, I don't want to die, and I am sure that my 40
million friends don't want to die either. I have taken what I
believe to be prudent steps in this regard, but I also realize
the complexity of the manufacturing, distribution, ordering of
raw materials, making sure that distribution cycles are changed
to accommodate the increased needs.
Am I suppose to stop or can I keep going?
The Chairman. Keep going. If you can, wrap up.
Ms. West. I will hurry.
The Chairman. But I am going to give you some leeway here.
Ms. West. OK, thank you.
We know that the year 2000 is coming. We know that the
medication supply, that the biomedical device supply will be
affected. And we have the responsibility to help 40 million
people so that they do not have to painfully die within the
next year. That is our responsibility, that is my
responsibility, that is the responsibility of industry, and
that is your responsibility.
Suing someone in the drug supply chain after my death only
makes health care costs rise, and those people who are still
living after me may not even be able to have access to health
care because it will be so expensive. Any legislation which
discourages that sort of economically irrational, opportunistic
lawsuit I support, and I am confident that I can get 40 million
other people to support that legislation as well.
In my estate management documentation, I have had for years
an express clause that says when I die, no one is to sue
anyone. And I recently updated that so that that clause
includes that if I die of anything related to year 2000
failures that no one is to sue anybody over that as well.
Legislation that discourages lawsuits against those who have
used their best efforts, without malice, to fix year 2000
problems, whether in health care or any other environment, I
support, especially if it will, by easing fears of litigation,
allow the specialists in every field to spend more of their
energy remediating the problem and educating the public.
And I know there are skeptics who do not believe that there
is a tie between year 2000 liability legislation and my ability
to get medicines. But I have worked in the health care field
long enough that I have seen--I have actually for my own self
experienced that litigation, the threat of litigation, has
always driven a great deal of medical decisions. My fear of
losing my malpractice insurance has made me make decisions that
I would have preferred not to make.
And in this case, most importantly, as I understand it, the
liability legislation being discussed among you does not even
apply to suits involving wrongful death. So there will be no
impact on the rights of individuals to recover in the event of
such a loss. And this gives us--by passing this legislation, it
gives us the freedom to get back to work fixing the problem,
making sure that those of us who need help, who know that if
there is not significant intervention that we will not survive
past first quarter of the year 2000--I support.
I want to thank you especially for going over time, and
also thank the members of the committee, and I am happy to
answer any questions that you may have.
The Chairman. Well, thank you. I think your testimony is
very dramatic and it may bring home to people more than any
other testimony I have heard just how important this year 2000
problem is. So your traveling back here and helping us to
understand this better is really a worthwhile thing, so we
appreciate your being here.
Ms. West. Thank you.
[The prepared statement of Ms. West follows:]
Prepared Statement of Laurene West, R.N.
Mr. Chairman, members of the Committee, my name is Laurene West. I
reside in Salt Lake City, Utah.
I am here today not as the spokesperson for any organization, not
as the lobbyist for any group that is paying me to be here, but as an
example of the situation being faced by millions of Americans as we
move towards the Year 2000 ``event.''
I am an experienced health care professional. I have been a
registered nurse since 1976, practicing in the Intensive Care, Surgery
and Recovery. Also, I served as a Deputy Sheriff for Salt Lake County's
Search and Rescue/Special Forces team.
But my perspective on the crisis looming in health care does not
derive from being a provider or trained professional, but from being a
patient--albeit perhaps a better informed one than many.
For as members of the Committee already are aware, I suffer from a
combination of disease processes, most significantly a brain tumor
which requires the daily administration of a pharmaceutical product
which is imported into the United States from a single factory in
Sweden.
If my access to this medication is interrupted, I will die.
As an informed patient, I have a strategy for attempting to assure
that my access to the drugs, which keep me alive, is uninterrupted by
Year 2000 events.
But that strategy is complex, depends on many events happening in
just the right sequence, and also not an insignificant amount of plain
good luck. And it would be easy for you--or the Administration, or the
Y2K experts to say ``see, this person is taking care of her own
problem, we don't need to do anything special for her.'' But that would
not be correct.
Because I am not typical of the nearly 60,000,000--yes SIXTY
MILLION Americans who are dependent on ready access to daily
administration of medicine or procedures to stay alive.
The number is indeed staggering--I was astonished when I first
learned that the Department of Health and Human Services has itself
estimated the number of dependent patients to be over 40,000,000. At
least one member of every family in the United States will be at risk
if Year 2000 related failures cause disruptions to the supply of
medications.
Start with those who are receiving antibiotics in post-operative
care. Cancer patients receiving chemotherapy. Nitroglycerine for
cardiac patients. Insulin for diabetics. Broncialdilators for
asthmatics, Cyclosporin and Immuran for transplant patients. Hundreds
of thousands who, like me depend on uniquely prescribed sole source or
``orphan'' drugs for rare illnesses. Ambulatory individuals who are on
oxygen on a daily basis. Dialysis patients. End-stage cancer patients
who are on narcotics for pain relief as they painfully wait to die. The
list goes on.
Then there are those who are device dependent. Adults who require
ventilators (12-20 breaths/minute) or preemie babies on jet ventilators
(250-300 breaths/minute), sleep apnea monitors with embedded
microprocessors. Those utilizing feeding devices for monitored
intravenous or groshong catheterization. People with implants, such as
pacemakers, internally implanted defibrilators, Insulin pumps or other
devices where the Y2K readiness reports from manufacturers to date are
based only on self certification, rather than actual documented third
party testing.
Clearly, the universe of individuals affected by continuing access
not only to a reliable supply of prescription medications and electro-
mechanical medical devices is large. And while the risk to the entire
population of medically dependent individuals is perhaps relatively
small, who among us would want to sentence any one of these individuals
to most likely a painful death because of a problem that can be
anticipated, planned for, and corrected?
I have had an extensive conversation over the past year with
members of both the patient advocacy community, the health care
providers and producers, and the government payors.
As a LEGAL lay person, I can only conclude that the single greatest
impediment to an aggressive program to assure the availability of all
of the products necessary to supply me and my 60,000,000 dependent
friends is the threat that whatever extraordinary steps the industry
takes to attempt to assure the availability of their products will be
viewed somehow by some lawyer as a confession of the inadequacy of
their existing business model, and result in a lawsuit on behalf of any
and every individual who might suffer in some way--no matter how
modest--from a failure of the system to work as expected.
Clearly, I do not want to die, and do not want my supply of
Synthroid, Vancomycin and Vasopressin to become the decisional factor
about whether I live or die. I have taken what I believe are prudent
steps to protect myself. But I also recognize what the reality of the
complex production and delivery cycle is for the products on which I
and others depend. And based on my own moral system, I can not find it
a good decision to ask that, should I die, my trustees sue my
Physicians, the Hospital or the drug company because my supply of
Synthroid, Vancomycin and Vasopressin did not arrive in time. No, we
know Y2K to be an issue, so we can plan to make sure that the supply is
available, that the raw materials are ordered, that the production
cycles are adjusted, that contingency plans are put in place so that
the supply of my drugs and the drugs required by millions of others
will be available without interruption.
That is our responsibility, that is the industry's responsibility,
and, that is your responsibility.
Suing someone in the drug supply chain after my death is certainly
shutting the barn door after the horses have left. And legislation
which discourages that sort of economically irrational opportunistic
lawsuit makes good sense to me.
In my estate management documents and letter of instructions to my
executors, I have for many years had an express instruction that NO ONE
BE SUED after my death. Unless it was plainly a criminal act that
caused it, God's decision to take me can not be redressed by moving
money around.
I believe that legislation which discourages lawsuits against those
who have used their best efforts to fix Y2K problems, whether in health
care, or any other environment, makes good sense, especially if it
will, by easing fears of litigation, allow the specialists in every
essential field to spend more of their energies remediating their Y2K
problems.
I know there are skeptics who don't see the link between Y2K
liability legislation and access to medicines. But I have been around
health care delivery long enough to know that the threat of litigation
has always, unfortunately, driven a great deal of medical behavior.
And I am confident that as government agencies have begun to send
questionnaires asking pharmaceutical companies about their Y2K
readiness, as clinics have asked distributors to certify as to their
Year 2000 delivery schedules, as the President's Council has asked
industry associations to poll their members about Y2K readiness,
concerns about that one-and-only what if situation becomes the tail
that wags the dog, to coin a phrase.
And most importantly, as I understand it, the liability legislation
being discussed among you does not even apply to suits involving
wrongful death or serious physical injury, so there will be NO IMPACT
on the rights of individuals to recover in the event of such a loss.
But in the business-to-business transactions that make up the
complex food chain of drug and device delivery, a great deal of
pressure and concern about the distraction of lawsuits could be
relieved, allowing members of the industry to focus on the important
job of figuring out how to assure continuing uninterrupted access to
these critical medicines and tools.
This freedom to get busy putting plans in place and practicing them
to keep the delivery of critical medicines on track is the core of what
is needed. And if that is one of the things the legislation you are
considering will do, then I am all for it, and I think millions of
others will be as well.
I want to thank the members of the Committee for allowing me to
appear today, and I will be happy to answer any questions you may have.
The Chairman. Mr. Yarsike.
Mr. Yarsike, Senator Bennett is here and I don't want to
interrupt you in the middle of your remarks. Why don't we allow
you to start over again and take Senator Bennett's testimony at
this time?
If you care to, Bob, you could do it right here beside me,
if you would like, or you can go down there, either way.
STATEMENT OF HON. ROBERT F. BENNETT, A U.S. SENATOR FROM THE
STATE OF UTAH
Senator Bennett. I can't avoid sitting where it says ``Mr.
Kennedy.'' [Laughter.]
Senator Feinstein. Welcome to our side.
The Chairman. I am sure that will be a matter of great
remembrance to him.
We are happy to welcome Senator Bennett here today. Senator
Bennett, more than any other person other than Senator Dodd, in
my opinion, in the Congress has done more to try and resolve
the Y2K problems. He is probably, in my opinion, more up on it
than any other Senator, and so we are very honored to have him
take time from his busy schedule and come here today to help us
along the path of trying to get some sort of legislation that
will help to resolve these problems.
So we are very appreciative to have you here, Senator
Bennett, and we look forward to taking your testimony.
Senator Sessions. Mr. Chairman, I would like to join in
these remarks, and say to Senator Bennett--I expressed to him
personally just a few days ago how much I appreciate his
leadership on this. I think it has helped move our Government
forward.
I will have to go to another appointment and I wanted to
say to you I am sorry I will not be able to hear your remarks,
but again to say how much I appreciate your leadership on this
issue.
Senator Bennett. Thank you. You will get a chance to hear
them again tomorrow, and again and again and again.
The Chairman. I don't want you to get too comfortable on
that Democrat side of the table is all I can say.
Senator Bennett. Don't worry.
Thank you very much, Mr. Chairman. I appreciate it, and I
apologize to the witnesses for barging in in this fashion. The
schedule that we keep sometimes does this to us, but it can be
rude and I assure you no offense was meant.
I appreciate the opportunity of testifying. As you know, I
have been studying this problem since 1996, when I first became
aware of it as chairman of the Senate Banking Subcommittee on
Financial Services and Technology; more recently, in my
capacity as chairman of the Special Committee on the Year 2000
Technology Problem. And along with Senator Dodd, who was on
that subcommittee of banking and is now the ranking member and
vice chairman of the Senate Special Committee, I have presided
over 20 hearings on the Y2K problem. Ms. West has testified
before our Special Committee during our hearing on
pharmaceutical problems.
We have looked at the effects of this on such disparate
sectors as financial services, utilities, telecommunications,
transportation, health care, general business and, of course,
general government. Now, as widespread as these sectors may be,
they all have one thing in common, and that is a fear of
massive litigation as a result of Y2K-related failures.
The Judiciary and the Commerce Committees are to be
commended for acting quickly to address these legal issues
created by Y2K because the problem will be upon us. If we wait
for the next half of this session of this Congress, we will be
too late. I told the Commerce Committee 2 weeks ago it is
important that we find a reasonable and just means of handling
the potential Y2K tidal wave of litigation because it threatens
to overwhelm our judicial system--remember, all of these
lawsuits will be triggered within a 30-day period of time and
the courts are just not prepared to handle that compact a wave
of litigation. Also, of course, it is because the time and
money spent on preparing for endless lawsuits and counter-suits
is time and money that is not invested in the research and
development of Y2K solutions.
We learned last year that one aspect of the fear of
litigation involved the disclosure and exchange of information.
And strange as that may seem to those of us who aren't trained
to think like lawyers, the very commodity that could avert a
Y2K crisis, information related to readiness, was being
withheld because different sectors of the industry feared
lawsuits if their disclosures proved ineffective.
The Congress moved toward solving that problem when it
passed the Year 2000 Information and Readiness Disclosure Act
last year to promote free disclosure and exchange of
information related to Y2K readiness. I am interested, Mr.
Chairman, that among those who came to me and said thank you
for passing this legislation were not only commercial
enterprises and firms, but also government entities, cities,
and counties, who came and said as a result of this
legislation, we can now exchange information. I wasn't aware
that they were afraid of litigation, but at that level, too,
the passage of that Act has elicited some favorable response.
Since the bill was signed into law in October of 1998,
industry has told our committee that the logjam of readiness
information has been broken. The Act has enabled businesses
from all sectors--and as I say, I add to that small government
entities as well--to make significant progress not only with
their remediation efforts, but also with their contingency
plans, and being able to share what one entity is doing with
another has been helpful.
But, unfortunately, disclosure of year 2000 readiness
information is only part of the problem. The fear of litigation
that lingered in the shadows for much of last year has now
stepped forward, and it is shouldering aside what should be the
overriding goal of everyone involved with this problem, which
is remediation. The committee maintains its belief that
remediation and contingency planning are of paramount
importance. But our findings over the last year suggest that
the fear of litigation is real and justified.
Now, the Special Committee plans to set forth its findings
in a report to be issued tomorrow, and I actually have a copy
of it somewhere that I can hold up. You can read all about it
in last week's Washington Post, but here it is, and this will
be formally issued tomorrow and is available today.
A quarter of all companies worldwide have yet to start any
Y2K effort. According to the Gartner Group report, which is
included in ours, between 30 and 50 percent of all companies
worldwide will have at least one mission-critical failure. Now,
that figure drops to 15 percent for companies in America, but
that is still a very high figure. Fifteen percent of the
companies in a country that is tied together with just-in-time
interdependability having a mission-critical failure could be
very serious.
It is estimated that the correction of these failures will
take at least 3 days in most cases, maybe longer in some, and
that the cost per incident will run into the millions, which
means that the total cost will run into the billions. This is
only where the problem begins because no business operates in a
vacuum in this day and age. Our economic sectors are
inextricably bound together. The financial services sector
depends on its ability to exchange electronic information
between its members and with government agencies, and that
means the telecommunications sector is involved.
The manufacturing sector depends on just-in-time inventory
and the exchange of electronic information to create a tight
chain between suppliers, processors, manufacturers,
distributors, retailers and consumers. And this linkage extends
far beyond our shores to encompass international trading
partners, creating a gigantic worldwide web of commerce. We
have all gained from this interconnectivity. We have things
available to us we never had before, and we have them at
cheaper prices than we ever had before.
But the price is that one company's inability to fulfill
its contracts open it and all the companies that depend on it
to liability. As a result, the Y2K failures of one company can
set in motion the unraveling of all of its business partners.
In a best-case scenario, a Y2K disruption will only last a few
days. Even so, a few days is more than enough time for a vast
array of businesses and individuals to suffer some kind of
economic injury.
All too often in this country, our first stop on the way to
recovering our losses is at the courthouse. If litigation
resulting from Y2K-related failures is anything like we are
predicting, up to $1 trillion worth--I frankly think that
number is a little high, but the experts keep giving it to us--
the courthouses will be standing room only and the Y2K
litigation will last for years into the next millennium.
Now, as much as I am concerned about the $1 trillion
estimate, I am even more concerned about the cost to the
economic infrastructure. Companies that have made every
reasonable effort to become Y2K-compliant but experience
failures anyway could end up in court and be put out of
business by the cost of litigation. Critical suppliers to key
industries might be lost altogether. Entire industries might be
set back, causing an economic downturn with repercussions well
into the millennium.
If the lifeblood of our economy, which is capital, is
diverted to support litigation, it cannot nourish the start-up
enterprises that represent our future. If our technological
industries are bombarded with litigation, they cannot afford to
invest in the research and development essential to maintain
our competitive position in the world. The question for
Congress is whether or not there is an alternative.
Now, Senator Hatch, you and Senator Feinstein have
introduced legislation that may represent such an alternative,
as has Senator McCain. I have not been able to study your bill
closely enough to comment on the specifics of it. And lacking a
legal education, my comment probably wouldn't be too helpful to
you anyway, but I would ask that the following issues be
carefully considered.
Do not reward or encourage irresponsible behavior. There
are some people who say, well, you pass this bill and that
means people will say failure is an option; I am covered, I am
protected. We cannot craft legislation that does that. The best
deterrent to litigation is remediation, so we cannot consider
any measure that would be interpreted as an excuse to stop the
remediation efforts they have already begun. For many
businesses, there is still time to fix the problem. Congress
should not make inaction an attractive option by limiting the
liabilities of the companies that are not responsible enough to
take care of their own business.
We also cannot consider any measure that could be
interpreted as an excuse to stop disclosing their readiness
status. As I said earlier, one of the big problems we have is
getting information about how ready people are, and we must
make sure that disclosure continues and increases. These
disclosures force businesses to focus on their Y2K problems,
and more importantly the information in these disclosures helps
everyone prepare for Y2K remediation and contingency planning.
We must take care to craft legislation that fully preserves
the Government's right to bring action against business
entities that have not complied with their requirements to
report their Y2K readiness status. This goes to the heart of
the SEC and what they are trying to do.
Now, companies that have made reasonable efforts to
remediate their Y2K problems ought to get credit for having
done so. One way of doing that is to limit their liability if,
despite all their efforts, they do have a Y2K-related failure
that causes economic injury to another party. When I say limit
their liability, I am talking about limit it to actual damages.
It is counterproductive to punish a company that has acted
responsibly and nonetheless experiences a failure with punitive
damages. Punitive damages are meant to discourage similar bad
behavior in the future. You are not going to have a future
example like this one. It is a one-time event, and for that
reason, for those who act responsibly and still experience a
failure, punitive damages, in my view, are inappropriate. What
is more, when responsible businesses have to pay damages that
exceed the cost of the actual harm, their products, of course,
end up costing more, and risky but vital services that they
perform simply may stop. We all pay a price for unnecessary
punitive damages.
Now, as I said, I am not a lawyer. I can't help you with
the details on legal concepts, but I do know that existing and
hard-won statutes should not be altered by or confused with new
Y2K provisions. The use of valuable enforcement tools should
not be inadvertently curtailed by Congress' well-intentioned
efforts to address the Y2K problem.
We are not that far from Abraham Lincoln's birthday. Let me
end with a Lincoln quote that I think is appropriate here. He
said, discourage litigation. Persuade your neighbors to
compromise whenever you can. Point out to them how the nominal
winner is often a real loser in fees, expenses and waste of
time. I think that applies to what we are dealing with here,
Mr. Chairman. I salute you and Senator Feinstein for your
efforts, and thank you again for allowing me to intrude in this
fashion.
The Chairman. Well, thank you, Senator Bennett. We
appreciate you taking time from your busy schedule to be with
us and we are grateful to have your statement. And we will look
forward to everybody's suggestions on how we might improve this
bill and make it even more effective than it is. Thank you.
Senator Bennett. If I may now be excused, I have to go
prepare my Y2K presentation to the entire Senate which is
scheduled for tomorrow.
The Chairman. We will be happy to excuse you and wish you
luck there.
[The prepared statement of Senator Bennett follows:]
Prepared Statement of Senator Robert F. Bennett
Thank you, Mr. Chairman, for asking me to testify on the subject of
the Year 2000 technology problem. As you know, I've been studying this
problem since 1996, in my capacity as the chairman of the Senate
Banking Subcommittee on Financial Services and Technology and, more
recently, in my capacity as the chairman of the Special Committee on
the Year 2000 Technology Problem. Along with my esteemed colleague
Senator Dodd, I've presided over almost 20 hearings on the Y2K problem
and its effects on such disparate sectors as financial services,
utilities, telecommunications, transportation, healthcare, and general
business. As disparate as these sectors may be, they all have one thing
in common: A fear of massive litigation resulting from Y2K-related
failures.
The Judiciary and the Commerce committees are to be commended for
acting quickly to address the legal issues raised by the Y2K problem.
As I told the Commerce committee 2 weeks ago, it is important that we
find a reasonable and just means of handling the potential Y2K tidal
wave of litigation not only because it threatens to overwhelm our
judiciary system, but because time and money spent on preparing for
endless lawsuits and counter-suits is time and money not invested in
the research and development of Y2K solutions.
We learned last year that one aspect of the fear of litigation
involved the disclosure and exchange of information. Strange as it may
seem to those of us who aren't trained to think like lawyers, the very
commodity that could avert a Y2K crisis--information related to Year
2000 readiness--was being withheld because different sectors of
industry feared lawsuits if their disclosures proved inaccurate.
The Congress went a long way toward solving that problem when it
passed the ``Year 2000 Information and Readiness Disclosure Act'' to
promote the free disclosure and exchange of information related to Year
2000 readiness by providing, as an incentive, some liability protection
for the release of certain types of information. Since the bill was
signed into law on October 19, 1998, industry has told us that the
logjam of Year 2000 readiness information has been broken. The Act has
enabled businesses from all sectors to make significant progress not
only with their Y2K remediation efforts, but with their contingency
plans as well.
Unfortunately, disclosure of Year 2000 readiness information is
only one part of the problem. The fear of litigation that lingered in
the shadows for much of the last year has now stepped forward,
shouldering aside what should be the overriding goal of everyone
involved with this problem--remediation. The Committee maintains its
belief that remediation and contingency planning are of paramount
importance, but our findings over the last year suggest that the fear
of litigation is real and justified.
The Special Committee plans to set forth its findings in a report
to be issued tomorrow, but I can tell you now that it will not be a
happy New Year for many businesses. Almost a quarter of all companies
worldwide have yet to start any Y2K effort. According to the Gartner
Group report, between 30 and 50 percent of all companies worldwide will
have at least one mission critical failure; that figure drops down to
15 percent for companies here at home. It is estimated that correction
of these failures will take at least 3 days in most cases, and that the
cost per incident could soar into the millions.
This is, I'm afraid, only where the problems begin. No business
operates in a vacuum in this day and age. Our economic sectors are
inextricably bound together. The financial services sector depends on
its ability to exchange electronic information between its members and
with government agencies. The manufacturing sector depends on just-in-
time inventory and the exchange of electronic information to create a
tight chain between suppliers, processors, manufacturers, distributors,
retailers and customers. This linkage extends far beyond our shores to
encompass our international trading partners, creating a giant web of
commerce. We have all gained from this interconnectivity, but its price
is that one company's inability to fulfill its business contracts opens
it and ALL the companies that depend upon it to liability. As a result,
the Y2K failures of one company can set in motion the unraveling of all
its business partners.
In a best-case scenario, Y2K-related disruptions may last only a
few days. Even so, a few days is more than sufficient time for a vast
array of businesses and individuals to suffer some kind of economic
injury. All too often in this country, our first stop on the way to
recovering our losses is the courthouse. If the litigation resulting
from Y2K-related failures is anything like experts are predicting--up
to $1 trillion worth--the courthouses will be at standing room only and
Y2K litigation will last for years into the next millennium.
The trillion dollar estimated cost of litigation is of great
concern to me, but a far greater cost of this litigation is the cost to
the entire economic infrastructure.
Companies that have made every reasonable effort to become Y2K
compliant but experience failures anyway could end up in court and be
put out of business by the costs of litigation. Critical suppliers to
key industries might be lost altogether, and entire industries might be
set back, causing an economic downturn with repercussions lasting well
into the millennium. If the lifeblood of our economy--capital--is
diverted to support Y2K litigation, it cannot nourish the start-up
enterprises that represent our future. If our technology industries are
bombarded with litigation, they cannot afford to invest in the research
and development essential to maintain our competitive position in the
world. If businesses across the country are struggling to pay their
legal bills, they cannot also pay to retain quality personnel or to
expand into new markets. The U.S. economy and the American people
simply cannot afford to pay the price of a litigation explosion. The
question for the Congress is whether there is an alternative.
Chairman Hatch, you and Senator Feinstein have introduced
legislation that may represent such an alternative, as has Senator
McCain. I have not been able to study your bill closely enough to
comment on it directly, but I would like to make some observations that
apply not only to your bill, but to any legislative proposals
concerning Y2K litigation.
Do not reward or encourage irresponsible behavior. Since the best
deterrent to Y2K litigation is remediation, we cannot consider any
measure that could be interpreted by businesses as an excuse to stop
the remediation projects they've already begun. For many businesses,
there is still time to fix the problem. Congress should not make
inaction an attractive option by limiting the liability of companies
that have not been responsible enough to take care of their own
business. We also cannot consider any measure that could be interpreted
by business as an excuse to stop disclosing their Y2K readiness status.
These disclosures force businesses to focus on their own Y2K problems
and, perhaps more importantly, the information in these disclosures
helps everyone prepare for Y2K remediation and contingency planning. We
must take care to craft legislation that fully preserves the
government's right to bring action against business entities that have
not complied with their requirements to report their Y2K readiness
status.
Companies that take reasonable efforts to remediate their Y2K
problems ought to get credit for having done so. One way of doing that
is to limit their liability if, despite all their efforts, they have a
Y2K-related failure that causes economic injury to another party. It is
counter-productive to punish a company that has acted responsibly--and
still experiences a failure--with punitive damages. Punitive damages
are meant to discourage similar bad behavior in the future. Since Y2K
is a one-time event, punitive damages are inappropriate. What's more,
when responsible businesses have to pay damages that exceed the cost of
the actual harm, their products end up costing more and the risky but
vital services they perform may simply stop. In the end, we all pay the
price for unwarranted punitive damages.
Any legislation that imposes new legal concepts onto our existing
framework must be scrutinized with great care to avoid unintended
consequences. I'm not a lawyer, and I'm afraid I can't help you with
the details. I do know that existing and hard-won statutes should not
be altered by or confused with new Y2K provisions, and the use of
valuable enforcement tools should not be inadvertently curtailed by the
Congress' well-intentioned efforts to address the Y2K litigation
crisis.
Finally, we need to do everything we can to encourage companies to
take proactive measures to avoid litigation in 1999 before they are
pulled into litigation in 2000. We ought to consider providing
incentives for people to put off taking that trip to the courthouse so
they can talk to each other first. As Abraham Lincoln said,
Discourage litigation. Persuade your neighbors to compromise
whenever you can. Point out to them how the nominal winner is
often a real loser--in fees, expenses and waste of time.
Again, Mr. Chairman, thank you for moving on this issue, and for
inviting me to testify.
The Chairman. Mr. Yarsike, we will go back to you.
STATEMENT OF MARK YARSIKE
Mr. Yarsike. Chairman Hatch, Senators, my name is Mark
Yarsike.
The Chairman. Just because I gave some leeway to Ms. West.
[Laughter.]
OK, go ahead.
Mr. Yarsike. I will move along very speedily.
Chairman Hatch and Honorable Senators, my name is Mark
Yarsike and I am a co-owner, with Sam Katz, in a small business
from Warren, MI. I am also the first person in the world to
ever file a Y2K suit. It is an honor for me to appear before
you today and I appreciate you allowing me to testify on the
Y2K issue.
I am grateful to you, Mr. Chairman, for wanting to hear
from a real businessman from outside Washington as to how this
legislation would affect me, and I suspect thousands of other
small businesses in the country. I see that I am sitting next
to some very distinguished individuals. Unlike these people,
however, I do not have a team of analysts and specialists at my
disposal, but I do have my story and it is a story that seems
at odds with what they are saying about the interests of small
business.
I own a gourmet produce market in the Detroit suburbs. The
produce business is in my blood. My parents and partner fled
Europe and the Holocaust and came to this country from Poland
after the Second World War. Taking advantage of the wonderful
opportunities that America offers new citizens, within a few
years they had managed to open their own small produce store in
Detroit. My parents worked 7 days a week and instilled in me
the values of hard and honest work. I grew up helping run the
store, and I finally decided 13 years ago that it was time for
me to follow in their footsteps.
Four years ago, I found a great partner in Sam Katz and we
opened a store in Warren. It is not easy these days being a
small, independent grocer in an industry totally dominated by
huge corporate chains, but I still believe there is opportunity
for little guys like us who can offer our customers
unparalleled service, who can adjust quickly to changes in the
market, and who can treat our employees like family. However,
it was not a large chain store which nearly destroyed my
business a few years back. It was a year 2000 computer problem,
and that is what I am here to talk about this morning.
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 is needed
today. I spent almost $100,000 for a high-tech computer system.
My computer system was top-of-the-line, or at least that is
what we thought. They could process credit cards, keep
inventory, and control cash. 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, but the credit cards with the expiration date of
2000 or later blew up my computer, the one that I spent
$100,000 on. The entire computer system crashed.
Lines were 10 to 20 people deep. People were waiting with
full carts of groceries and couldn't pay. We could not process
a single credit card, could not take cash or checks. We could
not make a sale. People began drifting out, leaving full carts
of groceries behind. As my partner and I darted around the
store trying to calm people down, we heard constant comments
like, I will never come back here; who needs to wait in lines
this long only to find that you can't even buy what you want.
People walked out in droves. Many, I venture, have never
returned. This happened over and over.
We did not know what to do. We called TEC America, who had
sold us the computer system. We called them over 200 times in 2
years. Everyday, there were problems, lost sales, aggravation.
We were struggling to keep afloat week to week. 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 my 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 disaster and a
nervous breakdown. The company was still promising every day
that they had the problem licked, and every day they continued
to refuse to give me new registers. I could not focus on the
day-to-day operations of my business. I was consumed with
making sure the 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. But the huge cost
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.
I imagine that if I was one of those big corporate chains,
I could have used my market power to compel the computer
company to work out some sort of resolution. But being the
owner of just one store, I did not have that option, so I
turned to the court system. I approached an attorney and we
filed a case in Macomb County. The system worked for me. The
company who caused all this grief finally settled with me 2\1/
2\ years later. I was able to recoup some of my losses, but I
will never get those hundreds of customers back or be able to
rid the store of the reputation that it got for those long
lines. In fact, if any of those customers are watching these
proceedings today, I hope you will come back and give us a
second chance.
I am just a businessman. I am no expert on the legislation
before the committee today, but my lawyer tells me that had
this bill or others like it in Congress been in effect when we
had our problem, the computer company never would have settled.
If we were lucky, we would still be in litigation, but more
likely my store would be out of business. I would not be a
small businessman today; I would be a former small businessman.
One hundred twenty families would be out of work, my landlord
would have a ``for lease'' sign on the building, 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 is a Warren, MI, 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 wasting time trying to get Congress
to protect them.
There are a number of very disturbing pieces in this bill
which would quite literally have put me out of business had
this law been in effect when I had my Y2K difficulties. I fear
that many other small businessmen will suffer that fate if this
committee does not step back for a minute and carefully
consider what this bill would do.
First, this 90-day waiting period. Take it from a real
small businessman who works day to day in order to make ends
meet. This will put thousands of people out of business.
Waiting three full months to have the ability to even begin to
bring a claim would have put me out of business. Every single
day, I was losing money. Every single day, I came close to the
point where I could not open my doors anymore. Ninety more days
would have been too much.
Also, realistically, any small businessman is going to try
to get the company to fix the problem before they turn to an
attorney. Lord knows, we called 200 times to give them a chance
to fix it and they couldn't. Why would I hire and pay for a
lawyer to take a simple step of making a phone call to a
company? The problem is that some companies don't do the right
thing once you call. I called over 200 times and they still
couldn't fix my problem. Now, you want to add an additional 90
days. Why? That has only one effect, to put me out of business
and allow them to stall more.
Next, why is everyone so worried about the software and
hardware companies? What about the little guy who is the end
user of the software product? I see that they get all the
breaks in this bill. They get to ignore the State law
provisions that protect me against the unscrupulous in all
other industries, implied warranties, and State fraud statutes.
They also get limitations on damages, limitations on joint and
several liability. What do I get, besides a more difficult
standard to prove if I finally manage to jump through the
procedural hoops to get to court?
Third, I would love to see legislation that holds the
companies that are profiting off this problem responsible. The
company that I bought my system from got away intact. If a
company sells a faulty product and doesn't fix it, they should
be held responsible, period. It seems like common sense to me
and every other small businessman I talk to. Let's get some
common-sense things like that into law. Let's actually do
something that fixes the problem.
All 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 for another
$130,000. Give me a tax credit for those purchases; help me get
SBA loans. Those are the kinds of things that will help, not
this ``we have got to do something, so let's get with
protecting a powerful set of lobbying groups who organize
quickly to seek protection for themselves.'' I thank God I had
a partner with some deep pockets or I would be out of business.
Finally, if Congress is hell-bent on passing some kind of
liability protection bill for large software manufacturers, 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 the new scheme if
they want, but not us who have to make payrolls and who need
protection of State laws.
Long ago, while sitting in this 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 this legislation 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 to answer any of your
questions.
Thank you, Mr. Hatch.
The Chairman. Thank you, Mr. Yarsike. We are grateful for
your testimony and we will certainly look at it very carefully.
I might add that the 90-day period, had it been in effect in
your case, would have been a tremendous incentive for them to
get that problem solved in 90 days rather than the 2 years it
took for you to finally win in litigation. That is the goal
here. Now, we are going to look at this and we are going to
look at all aspects of it. And, of course, one of the things we
want to do is protect people just like you.
Mr. Yarsike. May I say something?
The Chairman. Yes, so you are just not limited to
litigation.
Mr. Yarsike. I don't think a small business can afford or
will run straight to an attorney when they have a problem. They
are going to call that company and say, help me out, I am in
trouble here.
The Chairman. Well, that is right, and the 90-day period
may get you some help that you would not otherwise get because
it is a solid notice to these companies, you better do what you
can in 90 days.
Mr. Yarsike. In 90 days, I couldn't afford to hire an
attorney either at that point of the game. So I needed their
help. I needed them to help me get my business going. And on
top of it, they sold me a system in 1996 knowing that it wasn't
Y2K-compatible, and that is another thing that is not in this
bill. There are a lot of companies that still have items on the
shelf for the next 10 months and will be selling these systems
to businesses and they are not Y2K-compatible. And they are the
ones that are defrauding our businesses in this country right
now, and nothing in this bill--this bill protects those people
who are selling these systems today, not being Y2K-compatible,
and they should have known this 5, 10 years ago.
The Chairman. Well, let me just say nothing in this bill
would stop you from being able to sue for intentional actions
of the company, at least the way I view it. And if that is not
so, then we will try and change that.
Second, the 90-day period is to get all these companies to
realize you have got 90 days to remediate, you have got 90 days
to get this thing straightened out. If you straighten it out,
your damages are going to be much less. We are certainly going
to pay attention to your testimony and see what we can do to
resolve problems like yours because it is not fair for you to
have to put up with 2 years of litigation in order to get a
settlement that didn't even make you whole, according to your
testimony here. So we will certainly take that into
consideration. We appreciate you being here.
[The prepared statement of Mr. Yarsike follows:]
Prepared Statement of Mark Yarsike
Chairman Hatch, Senators, my name is Mark Yarsike, and I am a small
businessman from Warren, Michigan. I am also the first person in the
world to ever file a Y2K suit. 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 grateful to you, Mr. Chairman, for wanting to hear from a real
businessman from outside Washington as to how this legislation would
effect me and I suspect thousands of other small businesses in this
country. I see that I am sitting next to some very distinguished
individuals. Unlike these people, however, I do not have a team of
analysts and specialists at my disposal. But I do have my story, and
it's a story that seems at odds with what they are saying about the
interests of small business.
I own a gourmet produce market in the Detroit suburbs. The produce
business is in my blood. My parents and partner fled Europe and the
Holocaust and came to this country from Poland after the Second World
War. Taking advantage of the wonderful opportunities that America
offers new citizens, within a few years they had managed to open their
own small produce stores in Detroit.
My parents worked seven days a week and instilled in me the values
of hard and honest work. I grew up helping run the store, and finally
decided 13 years ago that it was time for me to follow in their
footsteps. I found a great partner, Samuel Katz, and we opened a store
in Warren.
It is not easy these days being a small, independent grocer in an
industry totally dominated by huge corporate chains. But I still
believe there is opportunity for the little guy like us who can offer
our customers unparalleled service, who can adjust quickly to changes
in the market, and who treat our employees like family.
However, it was not a large chain store which nearly destroyed my
business a few years back--it was a Year 2000 computer problem, and
that is what I am here to talk about this morning.
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 was the top of the
line--or at least that is what I thought. They could process credit
cards, keep inventory. 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 year 2000. 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 the credit
cards with the expiration 2000 or later that blew up my computer--the
one which I spent $100,000 on.
The entire computer system crashed. Lines were ten to twenty people
deep. People were waiting with full carts of groceries to pay but
couldn't. We could not process a single credit card or could not take
cash or checks. We could not make one sale.
People began drifting out, leaving full carts of groceries behind.
As my partner and I darted around the store trying to calm people, we
heard constant comments like ``I'll never come back here,'' ``Who needs
to wait in lines this long only to find you can't even buy what you
want?'' People walked out in droves. Many, I venture, have never
returned. This happened over and over.
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.
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 disaster and a nervous breakdown. The company was still
promising every day that they had the problem licked, and every day
they continued to refuse to give me new registers. 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.
But 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.
I imagine that if I were one of the big corporate grocery chains, I
could have used my market power to compel the computer company to work
out some sort of resolution. But being the owner of just one store, I
did not have that option.
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 2\1/2\
years later. I was able to recoup some of my losses.
But, I'll probably never get those hundreds of customers back, or
be able to rid the store of the reputation that it got for long lines.
In fact, if any of those customers are watching these proceedings
today, I hope you will come back and give us a second chance.
I'm just a businessman. I am no expert on the legislation before
the Committee today. But my lawyer tells me that had this bill--or
others like it in Congress--been in effect when we had our problem, the
computer company would have never 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. One hundred twenty 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.
There are a number of very disturbing pieces of this bill which
would quite literally have put me out of business had this been the law
at the time I had my Y2K difficulties. I fear that many other small
businessmen will suffer that fate if this Committee does not step back
for a minute and carefully consider what this bill would do.
First, this 90 day waiting period. Take it from a real small
businessman who works day to day in order to make ends meet. This would
put thousands of people out of business. Waiting three full months to
have the ability to even begin to bring a claim would have put me out
of business. Every single day I was losing money. Every single day I
came closer to that point where I couldn't open my doors anymore.
Ninety more days would have been too much. Also, realistically, any
small businessman is going to try and get the company to fix the
problem before they turn to a lawyer. Why would I hire and pay for a
lawyer before taking the simple step of making a phone call to the
company? The problem is that some companies don't do the right thing
once you call. I called over 200 times and they still didn't fix the
problem. Now you want me to wait an additional 90 days? Why? That has
only one effect--to put me out of business and allow them to stall
more.
Next, why is everyone so worried about the software and hardware
companies? What about the little guy who is the end user of a software
product? I see that they get all the breaks in this bill. They get to
ignore the state law provisions that protect me against the
unscrupulous in all other industries--implied warranties, state fraud
statutes. They also get limitations on damages, limitations on joint
and several liability * * * what do I get, besides a more difficult
standard to prove if I finally manage to jump through the procedural
hoops and get to court?
Third, I would love to see legislation that holds the companies
that are profiting off of this problem responsible. The company that I
bought my system from got away with their profit intact. If a company
sells a faulty product and doesn't fix it, they should be held
responsible. Period. Seems like common sense to me and every other
small businessman I talk to. Let's get common sense things like THAT
into law.
Let's actually do something that FIXES the problem. All 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, not this
``we've got to do something so let's start with protecting a powerful
set of lobbying groups who organized quickly to seek protection for
themselves.''
Finally, if Congress is hell-bent on passing some kind of liability
protection bill for large software manufacturers, 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.
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 this legislation 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.
The Chairman. Mr. McConnon, we will go to you.
STATEMENT OF B.R. McCONNON
Mr. McConnon. Thank you, Mr. Chairman. Good morning. My
name is B.R. McConnon and I am from Alexandria, VA. I am the
president and owner of Democracy Data and Communications, a
grass-roots database management company located in Old Town. We
currently have 18 full-time employees who manage a variety of
databases for our clients, which include many of the Nation's
largest corporations.
I am pleased to be here today testifying on behalf of the
National Federation of Independent Business regarding potential
problems resulting from year 2000 failures. NFIB is the
Nation's largest small business advocacy organization
representing more than 600,000 small business owners in all 50
States and the District of Columbia. The typical NFIB member
employs five people and grosses $350,000 in annual sales.
Nationwide, the small business community is making progress
toward inoculating itself against the millennium bug. A recent
NFIB Education Foundation study found that as of November 1998,
1.9 million small firms have addressed their Y2K problems. I am
proud to say that I am among them. Considering that I am a
computer-based business, it should come as no surprise that
becoming Y2K-compliant was important to the survival of
Democracy Data.
We have nearly 30 computers that run dozens of software
packages simultaneously everyday. I depend on these systems to
store and process data, and to make it accessible to clients
through the Internet. Because I was concerned about their
operation after the millennium date change, my chief technology
officer and I initiated a series of intricate tests to ensure
that each of our systems and software packages would continue
to operate without Y2K problems. Although it cost my company
several thousand dollars and took several days, it was worth
it, considering my business would fail to operate if not Y2K-
compliant.
Like most businesses, however, Democracy Data does not
operate in a vacuum. I am dependent upon numerous vendors and
suppliers who provide my company with the input data necessary
for us to create several of our core products. These vendors
include commercial data providers who supply geographic
information systems or electronic mapping data, State
governments who supply us with a range of geographic and other
data, and other commercial vendors who rely on the U.S. Postal
Service and the Census Bureau as primary data sources. I also
rely on our clients' information system staff to supply us with
the data that we store and manipulate, an absolutely essential
function if we are to be able to do our part.
Without the services these vendors provide and the data
provided by the companies themselves, I would not be able to
serve my clients as they expect. At the end of the day, their
failure is my failure. In spite of all my efforts, however, I
am still at risk should Y2K problems afflict my suppliers,
clients, or financial institutions. In a perfect world, every
business would take steps to fix their problems now, but that
is not happening. There will be failures. There will be late
shipments, damaged goods, and failed data delivery.
For example, should the Postal Service fail to supply
current, accurate data to our commercial vendor, that vendor in
turn could not add their critical component to the data that we
use. Consequently, Democracy Data would not be able to supply
our clients with the data and services that they expect and
need.
While it is impossible to know the extent to which any one
of us will be impacted, I do believe that we must prepare to be
affected. That is why I am so pleased to see Congress taking
action on this issue. I work hard everyday to deliver on my
promises to clients. If one of my vendors has a Y2K failure
that impacts my ability to serve clients, I could have serious
problems on my hands, possibly even a lawsuit. I could be used
by a client who is displeased with my services. If the
situation could not be resolved any other way, I may have no
choice but to sue my vendor. I have worked hard to build good
relationships with my clients and the other businesses I depend
on. Therefore, going to court against them is the recourse of
last resort.
Now, I am not a lawyer, but I do know from my own
experience that it wouldn't take much of a lawsuit to knock a
small business out of business for good. Two years ago, I was
involved in a lawsuit that was not only expensive, but took up
valuable time and kept me from running my business. Although
that suit that was brought against me was ultimately dismissed,
the lost revenue during the time that I spent with lawyers on
interrogatories and depositions far exceeded legal fees. My
experience just goes to show that lawsuits can seriously burden
small businesses, regardless of whether you are plaintiff or
defendant and regardless of whether the suit is legitimate.
The emphasis should be on quick resolution of disputes, not
on expensive and time-consuming litigation. For these reasons,
I believe that any legislation Congress enacts should do three
things.
First, Congress must create incentives to mitigate, not
litigate. It is essential that businesses of all sizes are
urged to address their Y2K problems now. Otherwise, 2000 will
go down in history as the year of the lawsuit. Every business
depends on other businesses. The more problems we can
anticipate and fix, the better it will be for everyone.
Second, Congress must encourage the settlement of Y2K
disputes to happen as quickly as possible. For a small
business, it all comes down to the bottom line, cash flow. If
my vendors do not provide me with the data and access I need, I
cannot operate. If my clients aren't satisfied with the service
I provide, they will stop using my company. It doesn't take
long for a company operating in a competitive environment such
as ours to go out of business. Disputes should be settled as
quickly as possible and outside of the court, when feasible.
Getting a court date can take months, if not years. What it may
cost small business owners is their livelihood.
Third, Congress must curb the desire to file frivolous
lawsuits by placing limits on punitive damages. Ninety-three
percent of NFIB members support capping damage awards for this
very reason. Limiting punitive damages will keep unnecessary
lawsuits to a minimum, but would not keep businesses from going
forward with legitimate lawsuits in order to recover their
actual damages.
I believe the bill introduced by Senators Hatch and
Feinstein, the Year 2000 Fairness and Responsibility Act, will
accomplish these three important goals. Although some may argue
that we don't need Federal legislation to address these issues,
I disagree. Businesses need a push to get their own Y2K house
in order, and the reward should be quicker dispute resolution
and fewer lawsuits.
I would like to thank the committee for the opportunity to
testify before you today and hope that you will act quickly on
this bill. I would also be pleased to answer any questions that
you might have.
The Chairman. Thank you, Mr. McConnon.
[The prepared statement of Mr. McConnon follows:]
Prepared Statement of B.R. McConnon
Good morning, Mr. Chairman and members of the Committee. My name is
B.R. McConnon and I am from Alexandria, Virginia. I am the President
and owner of Democracy Data and Communications, a grassroots database
management company located in Old Town. We currently have 18 full time
employees who manage a variety of databases for our clients, which
include many of the nation's largest corporations.
I am pleased to be here today testifying on behalf of the National
Federation of Independent Business regarding potential problems
resulting from Year 2000 failures. NFIB is the nation's largest small
business advocacy organization, representing more than 600,000 small
business owners in all 50 states and the District of Columbia. The
typical NFIB member employs five people and grosses $350,000 in annual
sales.
Nationwide, the small business community is making progress towards
inoculating itself against ``the millennium bug.'' A recent NFIB
Education Foundation study found that, as of November 1998, 1.9 million
small firms have addressed their Y2K problems. I am proud to say that I
am among them. Considering that I am in a computer-based business, it
should come as no surprise that becoming Y2K compliant was very
important to the survival of Democracy Data. We have nearly 30
computers that run dozens of software packages simultaneously every
day. I depend on these systems to store and process data and to make it
accessible to clients through the Internet. Because I was concerned
about their operation after the millennium date change, my chief
technology officer and I initiated a series of intricate tests to
ensure that each of our systems and software packages would continue to
operate without Y2K problems. Although it cost my company several
thousand dollars and took several days, it was worth it, considering my
business would fail to operate if not Y2K compliant.
Like most businesses, however, Democracy Data does not operate in a
vacuum. I am dependent upon numerous vendors and suppliers who provide
my company with the input data necessary for us to create several of
our core products. These vendors include commercial data providers who
supply Geographic Information Systems (GIS) or electronic mapping data,
state governments who supply us with a range of geographic and other
data, and other commercial vendors who rely on the United States Postal
Service and the Census Bureau as primary data sources. I also rely on
our clients' information systems staff to supply us with the data that
we store and manipulate--an absolutely essential function if we are to
be able to do our part. Without the services these vendors provide and
the data provided by the companies themselves, I would not be able to
serve my clients as they expect. And at the end of the day, their
failure is my failure.
Though my own systems and software may be ``bug-free,'' I am still
at risk should Y2K problems afflict my suppliers, clients or financial
institutions. In a perfect world, every business would take steps to
fix their problems now, but that is not happening. There will be
failures. There will be late shipments, damaged goods and failed data
delivery. For example, should the Postal Service fail to supply
current, accurate data to our commercial vendor, that vendor in turn
could not add their critical component to the data we use.
Consequently, Democracy Data would not be able to supply our clients
with the data and service that they expect and need. While it is
impossible to know the extent to which any one of us will be impacted,
I do believe that we must prepare to be affected.
That is why I am so pleased to see the Congress taking action on
this issue. I work hard every day to deliver on my promises to clients.
If one of my vendors has a Y2K failure that impacts my ability to serve
clients, I could have a serious problem on my hands--possibly even a
lawsuit. I could be sued by a client who is displeased with my
services. If the situation could not be resolved any other way, I may
have no choice but to sue my vendors. I have worked hard to build good
relationships with my clients and the other businesses I depend on.
Going to court is the recourse of last resort--especially since Y2K
problems can most likely be avoided.
Now, I am not a lawyer, but I do know from my own experience that
it wouldn't take much of a lawsuit to knock a small business out of
business for good. Two years ago, I was involved in a lawsuit that was
not only expensive, but took up valuable time and kept me from running
my business. While I ultimately triumphed, the lost revenue during the
time that I spent with lawyers on interrogatories and depositions far
exceeded the legal fees. My experience just goes to show that lawsuits
can seriously burden a small business, regardless of whether you are a
plaintiff or defendant and regardless of whether the suit is
legitimate. The emphasis should be on quick resolution of disputes, not
on expensive and time consuming litigation.
For these reasons, I believe that any legislation Congress enacts
should do three things:
First, Congress must create incentives to mitigate, not litigate.
It is essential that businesses of all sizes are urged to address their
Y2K problems NOW. Otherwise, 2000 will go down in history as the Year
of the Lawsuit. Every business depends on other businesses. The more
problems we can anticipate and fix, the better it will be for everyone.
Second, Congress must encourage the settlement of Y2K disputes to
happen as quickly as possible. For a small business, it all comes down
to the bottom line--cash flow. If my vendors do not provide me with the
data and access I need, I cannot operate. If my clients aren't
satisfied with the service I provide, they will stop using my company.
It doesn't take long for a company operating in a competitive
environment such as ours to go out of business. Disputes should be
settled as quickly as possible and outside of court when feasible.
Getting a court date can take months if not years. What it may cost
small business owners is their livelihood.
Third, Congress must curb the desire to file frivolous lawsuits by
placing limits on punitive damages. Ninety-three percent of NFIB
members support capping damage awards for this very reason. If I am
forced to enter into Y2K legal action with one of my vendors, I would
do so only to recover what is owed to me. I don't want to ``punish'' my
vendors--I want to continue working with them! The relationships I have
built over time are essential to the operations of my business and no
Y2K glitch should endanger them. Limiting punitive damages will keep
unnecessary lawsuits at a minimum, allowing businesses to recover their
actual damages more quickly.
I believe the bill introduced by Senators Hatch and Feinstein, the
Year 2000 Fairness and Responsibility Act, will accomplish these three
important goals. Although some may argue that we don't need federal
legislation to address these issues, I disagree. Businesses need a push
to get their own Y2K house in order, and the reward should be quicker
dispute resolution and fewer lawsuits.
I would like to thank the Committee for the opportunity to testify
before you today and hope that you will act quickly on this bill. I
would be pleased to answer any questions you might have.
The Chairman. Mr. Pogust, we will turn to you now.
STATEMENT OF HARRIS POGUST
Mr. Pogust. Thank you, Chairman Hatch. It is an honor to
appear before you today. My name is Harris Pogust and I am an
attorney from Pennsauken, New Jersey. I work at a small firm
which represents over 2,000 small businesses in the
Philadelphia and southern New Jersey area. My firm's focus has
always been on representing small business and their issues--
contract disputes, insurance issues, litigation, permit
problems.
It is only because the Y2K problem began to threaten the
very existence of many of my small business clients that I
became aware of the issue at all. I am here today, Senator,
because many of those small businessmen just couldn't be here.
As small businessmen, they could not leave their business on
short notice. As doctors, they cannot reschedule their
patients' appointments. But I have spent a great deal of time
talking to them, however, and I am here to tell their story.
They come from all over. They come from Pennsylvania, New
Jersey, Delaware, Ohio and California, just to name a few. They
all own different types of businesses--cleaning supply stores,
furniture retailers, community hospitals, doctors, medical
schools, just to name a few. They asked me to pass their names
to you, if you are interested in hearing their stories in
person.
Beginning in 1998, one after another of my small business
clients began to tell me horror stories about being taken
advantage of by companies who sold them non-compliant software
and hardware for thousands of dollars, only to turn around
months or even weeks later and demand thousands more to make
the product functional. It is only by being able to turn to a
jury of their peers that they were able to obtain justice.
My basic message to you, the message of all small
businessmen who have faced this issue head-on and have been
forced to deal with it, is that the current system works. The
fundamental precept that has dispensed justice in this country
for hundreds of years remains true today. If all else fails, a
business knows that they can turn to the court system to obtain
justice and to get resolution by a jury of their peers.
Altering the system in any way will only hurt these small
businessmen, who after all just want to sell furniture, treat
their patients, and teach their students.
I would quickly like to share some representative stories
from my clients. In one case, two small business people who
owned furniture stores down at the Jersey shore came into their
business on January 3rd of this year, 1999, and tried to turn
on their computer systems. For some reason, nothing happened
and the system didn't work--a blank screen; they couldn't run
their business. Those computers ran the whole 9 yards--lay-away
plans, inventory. Everything that these furniture stores needed
to run their business was contained on these systems. They
called the vendor and the vendor said, sure, I will help you,
but you have to pay me $10 or $15,000; if you don't, I can't
help you. This would wipe them out. They are still today trying
to fix this problem with that vendor and are looking elsewhere
to solve the problem.
Another situation: We represent a doctor from Atlantic
County, Dr. Robert Courtney, who purchased a medical management
software. The doctor is a sole practitioner, is a classic
doctor that only exists in the movies. He is an ob-gyn. He has
delivered generations of babies in some families, makes house
calls, gives out his phone number, treats indigent patients,
knowing full well that the practice will have to swallow these
expenses.
In 1996, he purchased this software package from the
Medical Manager Corporation for $13,000. A year later, November
of 1997, he gets a letter from Medical Manager saying, we are
sorry to inform you, but the system that we sold you a year ago
is not year 2000-compliant. But we are going to take reasonable
efforts to fix it for you, but it is going to cost you $25,000.
So he spent $13,000 in 1996 and now they are asking for $25,000
a year later.
The doctor wrote to Medical Manager, made calls. They
ignored him. He called me. I wrote to them, told them the
situation, and they turned around and said, sorry, we can't
help you. So we filed suit in June of 1998. Within 60 days,
Medical Manager invited us down to their offices in Florida to
resolve the situation. And, thankfully, in December of this
year we resolved the situation for 50,000 physicians across the
country who now have saved between $20 and $30,000 apiece and
can put that toward providing more care and better care to
their patients instead of giving it to a software manufacturer
who was trying to extort the money from them.
One final situation. A small college in Philadelphia
recently called me and told me they were being charged over
$100,000 to repair their Y2K problem, despite the fact that
they had in place a full and in-force maintenance agreement
which provided for such repairs. The software company is
totally ignoring that contract, basically saying we can't
afford to do it, so you have to pay us. So, accordingly, the
school doesn't know what to do, but what we know is that
students will lose their scholarships, research won't be done,
the library will have to do with old books, and only because a
company didn't do what was right. Now, these are just three
examples of the hundreds of phone calls I have received in the
last 3 months, and I could tell you more if you would like to
hear them.
The problems that we see with this bill, just to scratch
the surface, is, first, the 90-day waiting period. As Mr.
Yarsike said, some of these small businesses can't handle the
90 days. Many of these doctors, many of these furniture
stores--in 90 days, they will be out of business by that time.
The system works as it is now. We send letters, the clients
send letters, and if they are ignored, then we file suit.
Second, the bill contains a broad escape hatch to companies
who supposedly do their best to fix the problem they caused in
the first place. All a company apparently needs to do is make a
few trips to the site and claim that they put forth their best
effort to fix the problem. Then they can as Medical Manager did
and say, well, we put our best efforts, but it is going to cost
you $25,000.
Now, who should pay for this problem? Should the small
businessman who is just trying to run a business pay for this
problem, or the companies who knowingly and intentionally put
out defective products throughout this country and throughout
the world?
Further, such legislation would preempt existing
protections of State law and the UCC. Businessmen entered into
contracts knowing that the UCC and State fraud statutes were
going to provide them with the necessary protections from
faulty products. Businessmen, even those with only little
stores, know that the products sold in commerce are required
under the UCC and all 50 States to be fit and functionable and
merchantable. These fundamental safeguards are wiped out if the
proposed initiatives, and thus the victims, are left without
the basic consumer protections that distinguish American
markets from those around the world.
This bill would also swoop in and declare one Federal,
often heightened standard that must be shown by the innocent,
injured victim. That is fundamentally unfair. Also, with the
bill's various limitations on damages, joint liability and
other areas of liability, the legislation favors defendants
over plaintiffs at every turn. Why is this? Since personal
injury cases are excluded from the legislation, then the bill's
focus is on business suing business. Why would Congress want to
favor one group of businessmen, the manufacturers who produced
and distributed defective software, over a small businessman
who is just trying to run his day-to-day operation? That is
exactly what this bill does. Just ask the small businessmen who
have been affected by these problems. They can tell you the
reality, not the theory that others supposedly representing
them might espouse.
Mr. Chairman, I want to thank you again for letting me
appear today. I know that everyone on this committee is seeking
in good faith to help solve this problem. But what I think we
are seeing out in the real America is that job one for the Y2K
problem should be fixing the problem. That we seem to be
approaching the issue by protecting those who are responsible
rather than creating incentives for remediation is worrisome.
If the pressure is building on Congress to take away some of
the rights and remedies available in our court system, then
please do not inflict this scheme on small business.
I would be honored to answer any questions that you may
have. Thank you very much.
The Chairman. Thank you, Mr. Pogust. Just one question. I
have been led to believe that in the Medical Manager case that
there were out-of-pocket losses of about $1.45 million.
Mr. Pogust. Medical Manager stood to make over $100 million
if every doctor was forced to spend $20,000.
The Chairman. I understand, but as I understand it, when
the case was settled, you settled it for about that much and
about $600,000 went to the class of businesses and about
$800,000 to the attorneys. Am I wrong on that?
Mr. Pogust. Well, that is just a small portion of the
settlement. There are approximately 17,000 offices out there
that had the product; 10 to 12,000 hadn't upgraded to the new
version, so they were still not compliant.
The Chairman. Did they agree to upgrade everybody?
Mr. Pogust. They agreed to upgrade all those people.
The Chairman. That was worth a lot more than the actual
cash settlement?
Mr. Pogust. No doubt. The number that you are throwing out
or that you are discussing just deals with people who have
already upgraded to the year 2000-compliant version. One of the
options they had was to receive a cash rebate or to get more
software from Medical Manager. So that was only 2 to 3,000 out
of the 17,000 clients.
The Chairman. It wouldn't have been that tough for the
Medical Manager people, once they got the basic plan written,
to cure the 2000 problem----
Mr. Pogust. No doubt.
The Chairman [continuing]. To have sent out a disk to every
one of those people.
Mr. Pogust. That is exactly right, but they chose not to do
that until we filed our lawsuit. They ignored Dr. Courtney,
they ignored my letters. We filed suit in June. By August, I
was sitting in their offices in Florida and they are saying,
let's resolve this, you know. I mean, one doctor bought the
software in October of 1997 and gets a letter a month later. He
spent $20,000 in October of 1997 and specifically asked whether
it was compliant and they told him it was. And then he gets a
letter the next month saying, whoops, it is not going to work,
give us another $25,000. And it is just not Medical Manager.
That case got a lot of publicity. It was written up in the Wall
Street Journal. I get calls daily with the same story.
The Chairman. This is very interesting to me. We have got
to figure out a way to resolve these problems and make sure
that justice is done here, and you make a pretty interesting
case. So did you, Mr. Yarsike, I think. We are certainly going
to look at what you have to say, and give us any other help you
can. We would be glad to consider it.
Mr. Pogust. Today, in 1999, these software companies are
making trillions of dollars by forcing everybody to upgrade. So
they are not the poor software company out there who is hurting
and is being threatened. It is a gold mine for them, this year
2000 problem. Everybody has to go out and fix their product.
They are charging everybody. There are some companies that are
doing the right thing and providing free fixes, but the
majority of those are charging us.
Thank you.
[The prepared statement of Mr. Pogust follows:]
Prepared Statement of Harris Pogust
Chairman Hatch, Senator Leahy, distinguished Senators it is an
honor to appear before you today.
My name is Harris Pogust, and I am a lawyer from Pennsauken, New
Jersey. I work at a small firm which represents over 2,000 small
businessmen in the Philadelphia and Southern New Jersey areas. My
firm's focus has always been on representing small businesses and their
issues: contract disputes, insurance issues, and permit problems. It is
only because the Y2K issue began to threaten the very existence of many
of my small business clients that I became aware of the issue at all.
I am here today, Senators, because those small businessmen could
not be. As small businessmen, they could not leave their businesses on
such short notice. As doctors, they could not reschedule their
patient's appointments. I spent a great deal of time talking to them,
however, and I am here to tell their stories. They come from all over--
Pennsylvania, New Jersey, Delaware, Ohio, California. They own all
types of businesses: cleaning supply stores, furniture retailers,
community hospitals, and doctors. They asked me to pass on their names
and phone numbers to any of you who expressed an interest in hearing
their stories--the real story behind the Y2K issue and what legislation
like this would do to them. They are not represented by any large
Washington, D.C. organizations. But they are what they are--America's
small businesses.
Beginning in 1998, one after another, my small business clients
told me horror stories of being taken advantage of by companies who
sold them non-compliant software and hardware for thousands of dollars,
only to turn around months or even weeks later and demand thousands
more to make the products functional. It is only by being able to turn
to a jury of their peers, or the threat of this, that they were able to
obtain justice.
My basic message for you--the message of all of the small
businessmen who have faced this issue head on and been forced to deal
with it--is that the current system works. The fundamental precept that
has dispensed justice in this country for hundreds of years remains
true today: if all else fails, and a business feels that they need to
turn to the court system to get justice, to get deadlines, to get
resolution by a jury of their peers. Altering the system in any way can
only hurt these small businessmen who, after all, just want to sell
furniture, treat their patients, or teach students.
I would like to quickly share three representative stories that I
have heard from my clients. Please remember, these are just a few of
the many that I have heard. There are thousands--thousands--more horror
stories like this.
In one case, two small businesspeople who own furniture stores at
the New Jersey shore faced severe financial hardship because of their
systems crashing due to the Y2K problem. Like most furniture stores,
they allow people to purchase products on lay-a-way plans. Someone buys
a dining room set and has two years to pay it off. This software was
supposed to track those payments and keep the accounts. The software
cost $10 to $15,000--a huge outlay for a business of that size.
One day, the computers were turned on and--nothing happened. The
system was dead, due to a Year 2000 problem. They immediately called
the company for help, since they stood to lose thousands--without the
system, they would have no idea who owed them money, what their
inventory status was, or who they owed money to. This could wipe them
out. They called the company that sold them the software--and the
company said, sure, we'll fix it--for ten thousand dollars. Ten
thousand dollars these small businessmen simply couldn't afford,
especially since they had paid that amount for the system in the first
place.
In another situation, a doctor in Atlantic County, New Jersey,
purchased medical management software. The doctor, a sole practitioner,
is the classic doctor that you think only exists in movies. He is an
ob-gyn. He has delivered generations of babies in some families; makes
house calls, gives out his home phone number. He treats indigent
patients, knowing full well that his practice will have to swallow the
expense. It's just him and Diane, his nurse/receptionist. He made a
huge outlay of $13,000 to purchase this software, which was supposed to
help him track his patients appointments, keep track of their medical
records, and generally help him improve his patients health.
The salesman for the company came to his office and promised him
when he purchased the software that it would last for years. The doctor
believed him. Twelve months later, the doctor received a letter from
the company telling him what it had known when it sold him the
software: it wasn't Y2K complaint. In order to make it complaint, the
doctor was asked to pay $25,000--almost double what he spent on the
original system! That's real money to a real small town doctor. It
threatened to take him away from what he loves: being a sole
practitioner who is a part of his patient's lives. Senators, if you do
anything at all to address the Y2K problem, please deal with the Y2K
profiteering issue. It's nowhere to be found in any of the bills I've
seen to date.
Finally in another situation, a college in Philadelphia is being
charged over $100,000 to make their computer systems Y2K compliant.
This is despite the fact that they initially paid $100K for the system,
and paid thousands of dollars every year for a maintenance contract
that supposedly provides for such services. What that means in
practical terms to this small school is this: students will lose their
scholarships. Research that could otherwise have been conducted will
remain as theories in a notebook. The library will have to make do with
books that are decades old. All because one company didn't do what was
right.
These are three of many examples of the real problems faced by real
small businesses in the real world. Now, as an attorney who has been
able to help those facing these situations, I would like to make the
following points about why this bill, and those like it, would have
devastated and probably forced these businesses to close their doors
forever.
First, the 90-day delay period built into this bill would be
devastating to the small businessmen out there. If the furniture store
has its computers fail on January 1, 2000, it faces immediate damage.
Every day it has to continue meeting payroll. It has to pay the
electric bill. It has to pay taxes. If they are forced to wait 90 days
to even have the opportunity to do anything about it they would simply
go out of business. Ninety days to a company like AT&T is nothing; to
Jim's Furniture Store it is everything. For example, these furniture
stores contacted the company involved and were told that they would not
fix anything unless they paid $10,000. The furniture store simply
couldn't afford that much. They were at a dead end. Not only does it
make no sense to force that company to wait 90 days to do anything--it
would push the company over the edge. I know this to be true--the
businessmen I speak to tell me, and would tell you this too. Senators,
the 90-day waiting period may be one thing if you're talking about a
lawsuit between American Airlines and Intel. It means something
entirely different for small companies who can barely make a payroll
every week.
Second, these bills all contain broad escape hatches to companies
who supposedly do their best to fix the problem they caused in the
first place. All a company apparently needs to do is make a few trips
to the sites and claim that they did their best to fix the problem. Or,
they can say ``I have a fix--it'll cost you $25,000, though.'' Or they
can claim that they didn't have enough opportunity to fix the problem.
Does the furniture store, for example, need to allow the company to
come into their store as many times as they want--even into the
hundreds--or face a claim that they did not provide an adequate
opportunity to fix the problem? Moreover, precisely because many
important terms are not defined, parties might well have to
``litigate'' over the meaning of these terms rather than moving forward
to have an expeditious resolution of the underlying problem itself. I
assure you that this bill will create far more litigation than it will
eliminate.
Further, such legislation would preempt existing protections of
state law and the UCC. Businessmen entered into contracts knowing that
the UCC and state fraud statutes were going to provide them with the
necessary protections from faulty products. Businessmen, even those
with only their own little store, know that products sold in commerce
are required under the UCC of all 50 states to be ``fit'' and
``functional'' and ``merchantable.'' These fundamental safeguards are
wiped out in the proposed initiatives, and thus the victims are left
without the basic ``consumer'' protections that distinguish American
markets from all others in the world. These bills would also swoop in
and declare one federal, often heightened standard that must be shown
by plaintiffs. That is fundamentally unfair.
Also, with the bill's various limitations on damages, joint
liability and other areas of liability, the legislation favors
defendants over plaintiffs at every turn. Why is this? Since personal
injury cases are excluded from the legislation, then the bill's; focus
is on businesses suing other businesses. Why would Congress want to
favor one group of businesses (manufacturers) over small business end-
users--the very group that can least economically sustain delay and
commercial loss? That is exactly what this bill does--just ask the
small businessmen who have been effected by these problems. They can
tell you the reality--not the theory that others supposedly
representing them might espouse.
Mr. Chairman, I want to thank you again for letting me appear
today. I know that everyone on this Committee is seeking in good faith
to help solve this problem. But what I think we are seeing out in the
real America is that Job 1 for the Y2K problem should be fixing the
problem. That we seem to be approaching the issue from protecting those
who are responsible rather than creating incentives for remediation is
worrisome. If pressure is building on Congress to take away some of the
rights and remedies available in our State court system, then please do
not inflict this new scheme on small business.
I would be honored to answer any questions that you may have.
The Chairman. Mr. Adams, we will finish with you.
STATEMENT OF STIRLING ADAMS
Mr. Adams. Thank you, Mr. Chairman. Good morning. I am
Novell's attorney for year 2000 issues, and for several years I
have been part of our company-wide team that oversees our Y2K
preparations. Today, I would like to describe those
preparations to kind of give a face to what it means for a
software company to do that. I would like to thank this
committee for exercising leadership in facing the Y2K
challenge. I would particularly like to thank Senator Hatch and
Senator Feinstein for their leadership with the Year 2000
Fairness and Responsibility Act.
Novell is the world's largest network software company, and
over 70 million users worldwide are connected to networks
running on Novell software. For the software products that we
license, we have spent thousands of painstaking hours
conducting tens of thousands of performance tests. Our purpose
in doing this is to ensure that Y2K problems do not occur. If,
after further testing or use, Y2K issues are discovered, we
have a worldwide services organization that provides technical
support in all of the world's major languages and they are able
to create and distribute patches.
We have placed an emphasis on communicating about Y2K with
our customers. One way we accomplish this is through posting
information on our Y2K web site. We have had this site up for
several years, and I would like to thank the Senators for
passing the Year 2000 Readiness and Information Act which has
made us feel more comfortable about posting even more
information on this site to help the customers.
Through mass mailings, we have mailed to over a million
customers free software tools to help them in their year 2000
efforts. As a free service, Novell will provide to customers an
individualized report on the Y2K status of products. We also
include specific information on how, if needed, a product can
be updated or how to install patches or upgrades. Thousands of
businesses, representing tens of millions of users, have taken
advantage of this service.
We also provide a free subscription list of Y2K information
updates. We have 60,000 businesses on this list; thousands more
join each week. And for those who don't have Internet access,
we provide information through toll-free phone lines and we
have distributed tens of thousands of CD's containing the
information on our web site.
Despite our preparations and despite our communications,
one of Novell's major concerns is that the normal market forces
that encourage cooperative problem-solving are being
overwhelmed by a fear of Y2K litigation. We believe the Year
2000 Fairness and Responsibility Act would promote Y2K
cooperation and preparation, and help restore the normal market
forces in America.
For example, section 201 ensures that terms agreed to in a
contract are enforceable. This follows the intent of business
partners and would remove some of the uncertainty businesses
feel today when entering into contracts to perform Y2K
services. Today, we are not sure what our risks are.
Section 301 states an entity would be responsible for the
proportion of harm caused by its actions, but not for the
actions of others. With this, consultants would be more willing
to work on the complex systems of companies that need
assistance. Also, the codification of the duty to mitigate in
section 104, along with section 202 and 303's ``reasonable
efforts'' provisions, would have the definite effect of
providing express incentives for technology users and
distributors to resolve Y2K issues before they occur.
We believe the notification requirements in section 101
provide a simple mechanism to encourage cooperative problem
resolution. Before filing a Y2K suit, a plaintiff would need to
provide notice of the problem experienced. This makes good
sense. Probably the least efficient way to notify someone of a
problem is in a complaint filed in court.
A significant benefit of the bill is that it would create
uniform substantive and procedural guidelines for Y2K
litigation. This would lead to outcome predictability and would
have the direct result of facilitating quick settlements and
efficient case management.
The serious concern of Novell is the Y2K class actions that
have been filed where class members have experienced little or
no harm. Some of these suits have been dismissed because no
harm had occurred, but the litigation costs were still very
high. As should be clear, $500,000 spent in obtaining dismissal
of a suit is money diverted from productive uses.
The bill provides that a Y2K class action can only be
brought if a majority of the class experience a material
defect. This would help ensure that class actions are motivated
by a legitimate injury to the plaintiff class. Let me emphasize
that I do not mean to suggest that plaintiffs with legitimate
claims should be prevented from having their day in court.
Novell believes that the proposed Year 2000 Fairness and
Responsibility Act strikes a fair balance to preserve
legitimate rights to sue while implementing reasonable
provisions to encourage preventive problem-solving.
In summary, Novell shares the perspective of the broad-
based coalition in support of this bill, whose members notably
include defendants or plaintiffs in Y2K litigation. This bill
can help restore the normal market conditions of our Nation
that assume as a starting point not expensive litigation over
the slightest problem, but an environment of professional,
cooperative problem-solving and service.
Thank you for your time.
[The prepared statement of Mr. Adams follows:]
Prepared Statement of Stirling Adams
Mr. Chairman, Senators, good morning. My name is Stirling Adams. I
am an in-house counsel for the networking software company Novell. I am
Novell's lead attorney for year 2000 issues, and for several years I
have been a member of the Novell team that oversees our Y2K preparation
efforts, both for technology Novell uses internally, and for technology
we license to others. Additionally, I chair the Year 2000 Committee of
the Software & Information Industry Association, and I am a member of
the Year 2000 Committee of the Business Software Alliance.
I would like to thank this Committee for exercising leadership in
facing the challenge the advent of the year 2000 presents. Novell
believes the Year 2000 Fairness and Responsibility Act is a positive
move in addressing this challenge, and I would like to especially thank
Senator Hatch and Senator Feinstein for their leadership with this
proposed legislation.
I will first describe Novell's Y2K preparation efforts to give a
face to what it means for a company to ``prepare for the Y2K.'' Then I
will describe some concerns we have, despite our extensive
preparations, about the litigious environment that is building in
anticipation of the Y2K. I will explain how we feel provisions in the
proposed Year 2000 Fairness and Responsibility Act address these
concerns, to the benefit of both technology consumers and technology
distributors.
broad support for y2k legislation
While I am here to provide the perspective of and specific examples
from a large high-tech company, first I would like to emphasize that
the ideas behind the proposed Y2K legislation are supported by an
exceptionally wide-spread coalition led by entities such as the
National Association of Manufacturers and the U.S. Chamber of Commerce.
The coalition included the National Retail Federation, the National
Association of Wholesalers and Distributors, and the International Mass
Retail Association, among many others. Note that just one of the
coalition members, the U.S. Chamber of Commerce, represents over three
million businesses and organizations in every business sector--96
percent of these business are small businesses.
Though members of this coalition have the potential to be either
plaintiffs or defendants in Y2K-related litigation, the coalition has
reached a consensus that this legislation would benefit its members
generally. I think the reason for this is that the legislation would
encourage cooperative efforts to reduce the total number of Y2K
problems that occur, and while the legislation would place restrictions
on litigation based on claims where no injury has occurred, it would
also preserve the rights of entities to sue if they have experienced
legitimate harm.
novell's y2k preparations
Novell is the world's largest network software company, and over 70
million users worldwide are connected to networks running on Novell
software. Novell, like all other companies, is also a technology
consumer. We have thousands of employees distributed throughout dozens
of locations across the world. From our telecommunications and security
systems to our accounting and payroll systems we use technologies with
date functionality.
Testing
We have carefully tested and re-tested these technologies. With
some upgrading that we have largely completed, we believe our internal
systems are in good shape. We are working directly with our suppliers
and we are preparing and revising preparations and contingency planning
to deal with unexpected Y2K issues that either we or our suppliers may
face.
As a developer and distributor of software products, we have
obvious additional Y2K issues to prepare for. For the dozens of
software products we are currently licensing, we have spent thousands
of painstaking hours conducting tens of thousands of performance tests.
We have also spent significant resources testing older products that we
continue to support for date issues. These efforts are dedicated to
preventing the occurrence of Y2K performance issues in our products.
If despite these extensive efforts an issue is discovered, either
by additional Novell testing, or by a customer, we have a large
worldwide technical support organization that provides technical
support to customers in all of the world's major languages, and where
needed, we can quickly create and distribute software fixes.
Additionally, we have a Critical Problem Resolution (``CPR '')
organization that focuses on high priority support issues--this is
essentially a software SWAT team that, if needed, can rush to provide
maximum effort to resolve any serious technical issues.
Communicating with customers
We are putting significant resources into providing our customers
information and tools to help them prepare for their potential Y2K-
related problems. We have a Y2K web site that provides extensive
information about our Y2K efforts and status. This site (http://
www.novell.com/year2000) has been visited by millions of customers.
Just today, Monday, March 1, several thousand businesses will use this
site to collect Y2K information on Novell products.
We also provide a free e-mail subscription list through our Y2K web
site. The 60,000 customers who have joined this list receive free
mailings of significant issues relating to Y2K issues and Novell
products. Thousands more subscribers join this list each week.
For Customers without internet access, we also have toll-free phone
numbers through which customers can call service representatives for
Y2K information. And, we have created CD's that contain our Y2K web
site contents. Tens of thousands of these CD's are distributed free of
charge through Novell's reseller channels, sales force, through trade
shows and other events attended by Novell customers.
Free Y2K tools and information resources
Additionally, we have created information and software tools that
can assist customers in Y2K remediation efforts. We make these tools
available for free, and they can identify the specific versions of
Novell software running on a customer's systems. As a free service,
Novell will provide the customer an individualized report identifying
which software versions the customer is running are supported for Y2K
issues, and which older products may need a patch or upgrade, with
specific information on how to obtain a patch or upgrade.
Thousands of customers have downloaded these tools from our web
site, and through direct mailings or hand distribution we have
distributed over a half a million of these free information or tool
mailings. We expect to mail, in total, over a million. To date,
thousands of businesses representing over 10 million end users have
taken advantage of this service.
the need for y2k legislation
The Year 2000 Fairness and Responsibility Act addresses many of
Novell's core concerns about Y2K litigation. To those who say it is not
fair or appropriate to pass legislation that favors industry over
consumers, or that protects businesses from accepting proper
responsibility for their actions, let me be clear that Novell agrees
wholeheartedly. Let's not pass a bill that does that.
Instead, let's work with a bill that does something very
different--that would be the Year 2000 Fairness and Responsibility Act.
This bill encourages cooperative problem prevention, it preserves the
rights of those with legitimate claims to sue, and it places
restrictions on frivolous litigation.
One might ask, with all of our preparations, what is Novell worried
about? As an introduction to the answer, consider the various analyst
estimates that the volume of Y2K claims will dwarf that of all civil
litigation filed annually in the U.S., or that Y2K litigation costs
will reach $1 trillion. I do not know if these figures will be
accurate: I hope they are gross overestimates. But, as evidenced by the
lawsuits that have already been filed prior to the plaintiffs
experiencing damages, and by the law firms that have dedicated entire
departments to preparing for and filing Y2K litigation, it seems
completely reasonable to anticipate that Y2K claims could have an
overwhelmingly negative impact on our court system and our economy.
restoring the normal cooperative business environment
What is industry worried about? As individuals, businesses, or
governments, we all participate in a sophisticated economy based on a
complex technology-based infrastructure; occasional hiccups and
difficulties are a normal and accepted part of this complexity. One of
our major concerns is that the normal market forces that encourage
cooperative problem-solving in this environment will be overwhelmed by
a hysteria driven by mass Y2K litigation.
The following is a practical example of how this hysteria works to
the detriment of technology users. There is a huge need for consultants
to assist organizations in performing internal Y2K testing and
remediation efforts. This need is so large because most organizations
do not have either the internal resources or the expertise to perform
these tasks. Though many individuals and companies offer such
consulting services, some industry analysts are predicting there will
not be enough Y2K consultants to meet the market need. One contributor
to this lack is likely to be concerns about Y2K litigation.
As an industry participant, Novell has seen specific cases where
entities that do offer general consulting services have been extremely
wary of widening their offerings to provide complete Y2K services. The
concern is that even if top-quality consultants provide services in the
most professional manner, because of system complexity, there may be
some hardware, firmware, or software component in the system that may
not react perfectly to the Y2K. Some companies and consultants are very
definitely factoring into their business analyses the strong
possibility that the risks of being sued for Y2K problems may outweigh
the benefits to be earned.
Parties to contracts need to be confident that their agreements will
stand
The above situation is a concrete example of a need addressed by
the proposed legislation. Today, could a consultant worried about Y2K
litigation reasonably limit its liability using standard liability
limitations in the consultant's contract? The hope is that contractual
limitations will be honored by courts, but enough questions exist in
this area that the uncertainty has a direct impact on companies'
decision-making processes. The end result is that fewer resources are
available to the technology consumer who is preparing for the Y2K.
Section 201 of the proposed legislation would ensure that the terms
agreed to in a contract are enforceable. This is what business partners
generally expect when they agree to a contract, and it is what the
coalition, from small to large businesses across the business spectrum,
is supporting. And, it would have a very real effect on Y2K
preparations because people could reliably know what their risks and
obligations will be.
Proportionate liability rules would facilitate cooperative Y2K efforts
Some consultants shy away from performing complete Y2K services
because they fear that if a Y2K problem occurs, even if the consultant
is only partially responsible for the problem, it may be found liable
for all of the damages. Section 301, Proportionate Liability, states
that a party would only be liable for damages it was responsible for
causing. This would allow entities to worry less about the litigation
risks and more about how to fix Y2K problems. It's important to note
that companies would still be expressly liable for their own
responsibilities, and that this provision would not affect claims
involving personal injury.
reigning in unnecessary or frivolous litigation
Another element of normal life in America has been that people are
unlikely to engage in costly litigation over minor or non-existent
harms, especially where market forces exist that encourage product
suppliers to provide continually better products to meet competitive
demands. This is changing. As you may be aware, some Y2K class actions
have been filed based on situations where the user has experienced
little, or in some circumstances, no harm.
Such class actions are a serious concern to Novell. Some of these
lawsuits have been dismissed exactly because no actionable harm had
occurred to the plaintiffs. But notably, dismissal may not occur until
after the defendant has spent hundreds of thousands of dollars in
defending the claims. In case it is not clear, let me inform you that
such an outcome has a direct negative impact on a company's productive
output. $500,000 that is spent in defending a class action law suit is
money diverted from hiring employees that could be placed on projects
to develop new technology, or to enhance or support products. This
works to the detriment of a defendant, of the technology users, and
offers no benefit to the class of plaintiffs.
Notification requirements provide a mechanism to encourage cooperative
resolution without litigation
Provisions in the proposed legislation address the concern of such
non-productive litigation. For example, section 101 states that before
filing a Y2K suit, a plaintiff would need to provide a defendant notice
of what problem was experienced, what injury occurred, and what remedy
is sought. If the defendant doesn't respond appropriately, then a suit
may be filed; this provision does not apply to a plaintiff seeking
injunctive relief. What this provides is a mechanism to encourage
cooperative resolution without litigation. If a resolution is not
reached, the plaintiff still has complete freedom to sue in court. The
legislation also provides that a Y2K class action can only be brought
if a majority of the members of the class meet a minimum injury
requirement of having experienced a material defect. This would help
insure that any Y2K class actions filed are motivated by legitimate
injury to the plaintiff class.
Let me emphasize that I do not mean to suggest that plaintiffs with
legitimate claims should be prevented from having their day in court.
Novell believes that the proposed legislation strikes a fair balance to
preserve legitimate rights to sue while implementing reasonable
provisions to encourage resolution without litigation.
additional benefits to technology users
As I mentioned earlier, the proposed contract enforcement and
proportionate liability provisions would facilitate cooperation by
businesses in working together to accomplish Y2K preparations. The
proposed legislation includes other provisions that would benefit
technology users.
The Duty to Mitigate and Reasonable Efforts sections would encourage
preventive actions by all parties
As an example, section 104 states an entity cannot recover for
damages it could have reasonably acted to avoid. This codification of
the duty to mitigate, along with section 303, which provides that an
entity's reasonable efforts to prepare for the Y2K can offer some
protection against liability, are express incentives for all members of
the technology community, from users to suppliers to developers, to
resolve Y2K issues before they occur. Obviously the more issues that
are resolved before the Y2K, the less technology users will experience
Y2K problems.
Uniform Y2K liability guidelines would increase the efficiency of
pursuing claims in or out of court
In case litigation is warranted, a significant benefit of the
proposed legislation is that it would create uniform substantive and
procedural guidelines for Y2K litigation. Uniform guidelines lead to
outcome predictability and would have the direct result of making it
easier for entities to decide whether or not to sue. If they choose to
do so, uniform guidelines are more likely to facilitate quick
settlements or more efficient trial processes. Obviously, the more
quickly a case is resolved, the more judicial and litigant resources
are preserved for other matters.
conclusion
Novell shares the perspective of the broad-based coalition in
support of the Year 2000 Fairness and Responsibility Act. The
likelihood of an unparalleled surge of litigation represents a serious
threat to U.S. resources. The proposed legislation would address this
threat by encouraging cooperative efforts to prevent Y2K problems
before they occur. And while the bill would place reasonable
restrictions on litigation based on claims with little or no injury, it
would preserve rights to sue for legitimate harms. The bill would also
wisely establish uniform guidelines that would lead to more efficient
resolution of Y2K claims that are filed.
The Chairman. Thank you very much.
Now, I have got to leave, but I want to ask just a couple
of questions of you, Mr. Miller. Mr. Miller, you have heard the
testimony of Mr. Yarsike and Mr. Pogust. Do you have any
comments with regard to how this bill will actually affect the
problems that they have raised here today?
Mr. Miller. As I understand Mr. Pogust's situation, nothing
in this bill would have restricted him from taking exactly the
actions that were taken, except maybe at the end of the day
there would have been less money going to the attorneys and
more money going to the companies.
The Chairman. Well, the one thing this bill would do is it
would require a 90-day cooling off period where any company
that doesn't utilize that time isn't going to be in business
very long because they are stupid.
Mr. Miller. Exactly. I think Mr. Yarsike obviously was
getting the run-around, it sounds like, and this bill would
give a very strong incentive from the vendor to respond
quickly. And if the vendor did not respond quickly, he would
basically be laying himself open for much more serious
problems. I think you have crafted it very well, Senator.
The Chairman. Nothing in this bill would prevent Mr.
Yarsike's litigation, or Mr. Pogust's.
Mr. Miller. Absolutely not.
The Chairman. Do you disagree?
Mr. Pogust. I would disagree with that. The ``reasonable
efforts'' seems to be--section 303--a complete defense. It says
it in section 303.
The Chairman. It is not, though. It is not meant to be, and
if it is, we will change it so that it is not. But what it
becomes is it becomes an incentive to the companies to make
reasonable efforts so that Mr. Yarsike doesn't have to go
through what he went through and your clients don't have to go
through what they went through.
Mr. Pogust. With all due respect, Senator, it says, ``The
party against whom the claim is asserted shall be entitled to
establish as a complete defense to the claim that the party
took measures that were reasonable.'' Mr. Yarsike had them in
hundreds of times.
The Chairman. Yes, but you are reading a paragraph--we have
rewritten that where it is not an absolute defense.
Mr. Pogust. I don't have that, so----
The Chairman. We apologize to you for that.
Mr. Pogust. I understand.
The Chairman. But we have taken that into consideration
because we think you make a good point.
Let me just ask you this, Mr. Miller, because I am
concerned about Mr. Yarsike's case. I am concerned about Mr.
Pogust. I think that attorneys do a lot of good in this country
by making sure that people do live up to contracts, do live up
to their obligations. Product liability suits are suits that
make companies make even extra efforts to try and make sure
their products are safe, but there is an astonishingly broad
coalition that supports this bill as it is currently written.
Could you identify the main companies and associations that
support this bill? And while I am at it, isn't it true that
potential plaintiffs in Y2K claims, as well as defendants, are
represented in the coalition that supports this bill as well?
Mr. Miller. Absolutely, Senator. We have organizations such
as the National Association of Manufacturers, the United States
Chamber of Commerce, the American Insurance Association. Mr.
McConnon testified on behalf of the National Federation of
Independent Business; the National Retail Federation; Edison
Electric Industry. We can supply the complete list of 90
organizations and associations for the record, Senator.
Clearly, we would not have had this broad-based coalition
supporting the bill that you and Senator Feinstein have
introduced unless they believed that this was going to protect
all business organizations in business-to-business
transactions. Several of the witnesses have focused only on the
software and services industry and the hardware industry. In
fact, there could be a trucking company that could be not only
a plaintiff, but could also be a defendant if they can't
deliver a product on a certain date.
There could be a business that has nothing to do with
producing products and services in the year 2000--Mr. McConnon
addressed that--who could find himself sued by his customers
not because he is a software company, but because he can't
deliver. So I think what you have got here, Senator--it took 4
to 5 months to put this coalition together--is a very, very
broad-based coalition supporting this bill.
The Chairman. Well, a very important provision of the bill,
as has been raised, is the ``reasonable efforts'' provision.
Now, this section allows the evidence to be presented by
companies that acted with due diligence in attempting to
resolve the problem. You state that this section acts as an
incentive for a supplier of goods or services to fix the
problem this year and not wait until litigation is commenced.
Could you explain that to us?
Mr. Miller. We are afraid, Senator, today that too many
lawyers are advising their clients, don't go out of your way to
try to be helpful because you are exposing yourself to
liability and problems. We think your bill, if it is enacted,
turns that around because, coupled with the commercial
responsibility provision, the ``reasonable efforts'' section
sends a strong message to all potential defendants.
It says if you continue remediation efforts, following
necessary elements of due diligence, take all the actions you
possible can, and even notwithstanding all that there are still
problems, the court must at least allow you an opportunity to
present that evidence. So the incentive now shifts to having as
much information forthcoming, being as helpful as you can. Just
as you did with the Disclosure Act last year which was to
incent people to give information, this incents people to take
action because should there be a failure, they will be able to
present that as one piece of evidence in any kind of legal
dispute.
Mr. Pogust. Mr. Chairman, can I just respond to this?
The Chairman. Sure, of course.
Mr. Pogust. I have never heard--I obviously don't talk to
every lawyer in the country, but who would counsel their client
not to fix a year 2000 problem because of the threat of being
sued? It is the opposite, it is the opposite.
Mr. Miller. Absolutely, Mr. Pogust. Even Mr. Koskinen, the
President's Y2K czar, stated that publicly before this
committee.
Mr. Pogust. So they are telling them don't fix the problem
so you won't be sued. If you don't fix the problem, you are
going to be sued. That is the point.
Mr. Miller. I defer to Mr. Koskinen and Senator Bennett.
They will tell you that.
The Chairman. Well, let me just say this, Ms. West. I was
intrigued by your use of the metaphor of shutting the barn door
after the horses have left to describe the practical results of
suing someone in the drug supply chain after someone dies.
By that, did you mean that we would better serve drug-and
medical device-dependent people if we could provide a legal set
of incentives for companies to fix their Y2K problems, and
thereby ensure that they can make their deliveries in time to
help them, than if we simply went after them after the fact?
Ms. West. We need to put them in the position now where
they are not continually looking over their shoulder wondering
who is going to sue them next and allow them to get their
operations and their medications and their procedures ready. As
a nurse, I have looked over my shoulder many times and made
decisions because I was afraid that what I charted would be in
court.
The Chairman. Well, let me just say this. Your testimony is
very important here today because, naturally, I don't want you
to die; neither does anybody else. Nor do I want those 40
million people to suffer unduly or to die, so this is
important.
Look, there is no pride of authorship in this legislation.
We have worked hard to try and come up with something we think
will work and that will help to resolve these problems. I don't
think it interferes with Mr. Yarsike's ability to sue in his
case, or yours, Mr. Pogust, in your case. But there may need to
be further changes and we would love to have you help us make
them. I am open to that.
I never think that what we do here is absolutely perfect.
In fact, I think, to the contrary, many times we have to work
within the framework of compromise and bringing people
together. I have got people on the other side of the table who
will never vote against anything the trial lawyers want. I have
got people on my side of the table who will vote against
everything they want. And I have got to find some way of
bringing people together, so it is always somewhat imperfect,
although I have to say I have gotten a few things through that
I think have darn well been perfect. [Laughter.]
Quite a few, as a matter of fact. I have to say when
Senator Kennedy and I put it together, everybody kind of gets
out of the way, but they all think it is as imperfect as it can
be on both sides. It is a terrible thing to have the leading
liberal and a conservative like myself get together on some
matters. It so seldom happens, and occasionally it is a
wonderful thing.
Mr. Yarsike, I have great respect for you and what you have
gone through in your troubled business life. No question about
it, your testimony here is very important to me. I just want it
to be made clear that Senator Feinstein's and my bill would not
have prevented you from recovering compensation.
As I understand it, you settled after 3 years of
negotiation, and this bill does delay litigation for 90 days
and requires the vendor to fix the system within that time. If
that vendor doesn't, you have got a better case than before, in
my opinion. Your case took 2 or 3 years, as I understand it, so
this legislation might actually have helped you, at least the
way we view it today.
Now, help us to know; write to us. I am going to keep the
record open for questions from all Senators on the committee. I
would like to have you answer those within 2 weeks, earlier if
you can, but you can help us to maybe find the flaws that do
exist in this legislation. And we will do our best, you know,
to help the companies who act in good faith to fix the systems
to do so. Without legislation, these companies could stall in
doing the things that you feel are critical to your industry
and so many others as well.
Mr. Yarsike. I just want to say in my case, this is the
first lawsuit I have ever had in 41 years in America. I am not
a suing type of person. We still ended up losing a couple
hundred thousand dollars, but we were able to put it behind us
and get on with our business.
The Chairman. Right.
Mr. Yarsike. But we feel we recouped some of our losses.
There was no profit or extra.
The Chairman. No, nobody is suggesting that there was.
Mr. Yarsike. The other side of the coin is no matter what
this bill passes, the way I read it there will still be hoggish
attorneys out there trying to push lawsuits.
The Chairman. Really? [Laughter.]
Mr. Yarsike. But I feel that mainstream America, the small
businessman like myself, just wants to get it down, get it
done, and get moving on with business.
The Chairman. Well, I am with you because I believe that
legislation like this may prevent frivolous litigation, which
is what we are trying to do. Important litigation like you have
had to go through--of course, we don't want to interfere with
that when clearly you were in the right.
I also respect Mr. Pogust for the work that he is doing to
try and represent small business people. I mean, I might
disagree on individual cases because I might have to defend
them or something like that if I were out in private practice.
But the fact of the matter is that he does a service. Not all
attorneys are voracious--well, almost not all attorneys. I am
just kidding. Attorneys are essential to our society. Our
litigation system is essential, but we also have to continually
work on it so it is fair to everybody, and that we solve
problems in advance, which is what this bill is aiming to do.
Mr. McConnon, you have testified as a small businessman,
and it seems to me you would rather, wouldn't you, get notice
of a Y2K problem through a simple communication, which our bill
would allow to happen, instead of hearing about it for the
first time in a lawsuit?
Mr. McConnon. Without a doubt, yes.
The Chairman. And if you had a problem as a vendor and
somebody notified you that, hey, they are having a problem, you
would want to get it solved in this 90-day period, wouldn't
you?
Mr. McConnon. Absolutely. I would say one thing that I am
struck by with both of these stories is that if I attempted to
do to my clients, most of whom are considerably larger than I
am, what people have attempted to do to this gentleman and this
gentleman's client, I would be out of business much faster from
market forces than from legal forces.
The Chairman. Well, you spoke about how your relationships
with your vendors and clients are the key to your survival as a
small business. As a result, it seems that you already have a
natural market incentive to settle a dispute as quickly as
possible and, when feasible, outside of the litigation process
or outside of court.
Mr. McConnon. Absolutely. Having been through the process I
was through a couple of years ago, again, even though that suit
was dismissed, our goal in that litigation wasn't really to get
justice because had justice been done, it would have ended more
in my favor than it did. It was just to get out of the
litigation because of the amount of time and expense that it
was taking.
The Chairman. Now, having expressed respect for you, Mr.
Pogust, and attorneys like you who fight for small business
people, you assert that the 90-day cooling off period could
bankrupt small businesses. But most civil actions take a year
or more to resolve and someone who brings suit immediately
obviously is not going to obtain money damages for many months
or years to come.
Surely, you cannot suggest that it is a good thing for
people to sue without first contacting the potential defendant
to try and get it worked out. Now, in your case they didn't do
it and they deserved to be sued.
Mr. Pogust. Every case I have, I send a letter. I think
everybody tries to resolve it without suing.
The Chairman. Right.
Mr. Pogust. And the UCC requires you to--if you have a
breach of warranty, you have to send notice to the defendant
anyway and give them a reasonable time to fix it. So it is
already there, and all these are going to be breach of warranty
claims. The lawsuits, the majority, that will be one of the
counts, and if you want to have that in your lawsuit, you are
required under existing law to give them notice and opportunity
to repair and to fix the problem.
The Chairman. Well, but they also know that it can take 1
to 4 years, depending on the jurisdiction, before they have to
comply or before a court might find them guilty or responsible.
And that gives them more time to delay and to not do the things
they should. See, I believe that the cooling off period will
act as an incentive to fix Y2K problems, avoiding the need to
hire expensive lawyers, and that it will be corrective to the
system, which seems to me makes a lot of sense.
But we will get you a copy of the current draft.
Mr. Pogust. I appreciate that. Thank you.
The Chairman. I would like you to look it over carefully
and give us your considered suggestions as to what you think
would make it better because, after all, it would help your
clients, if Senator Feinstein and I are right on what we are
trying to do here.
Now, let me just end with you, Mr. Adams. The ATLA, or
American Trial Lawyers Association, president, Mark Mandell,
criticized the bill even before it was introduced in the
Senate. And part of the problem is we have had various drafts,
and you have had an earlier draft yourself, Mr. Pogust. But he
criticized the bill because the bill allegedly creates a
disincentive for companies to fix Y2K problems. According to
Mr. Mandell, whom I respect, companies will wait for complaints
to be filed before they fix any Y2K glitches. Do you agree with
him on that?
Mr. Adams. I don't, and if I could I would like to answer
first with an example of how that wouldn't be the case.
The Chairman. Well, I think you state in your written
testimony that the bill encourages, to use your words,
``cooperative problem prevention.''
Mr. Adams. Right. A lot of small businesses, especially,
but also governments and large organizations, don't have the
internal resources to perform their own Y2K preparations or
remediation efforts. So how do they get that done? They want to
bring in another company, a consultant, to do that.
There are specific cases where consultants are saying, you
know, we provide a lot of services, but unfortunately we are
not able to provide you year 2000 services because it is just
too risky. There aren't the number of resources out there to do
all the remediation that needs to occur. This type of bill sets
up an environment where that consultant company can say, OK, I
am going to follow the normal market forces. Is there a
business opportunity for me? Am I going to make a profit? And
then the legal consideration will be there, but it will be the
normal consideration that we think about in our normal business
operations. It won't be worry over being sued over the
slightest problem.
The Chairman. You also contended in your written statement
that the bill preserves the rights to sue for legitimate
claims, but places restrictions on frivolous claims. Could you
explain how the bill can do both?
Mr. Adams. Certainly. A couple of examples of the
restrictions that we feel are reasonable on frivolous claims
would be section 401, which is the minimum injury requirement.
It says the class action can't be brought unless a majority of
the class has a minimum injury. That helps ensure that
frivolous litigation doesn't occur. And the less frivolous
litigation that occurs, the more legitimate claims are brought
quickly to resolution. If the courts are jammed with frivolous
litigation, the legitimate claim may take an additional year to
get recovery. That is one example.
The pre-trial notice period which we have talked about
quite a bit I feel is very important. Note that the plaintiff
is required to give 90 days' notice, and then the bill as
written would say that the defendant company needs to respond
within 30 days. So that is the real time frame that we are
talking about. You are going to get a response in 30 days.
Nothing that happens during this period is going to diminish
somebody's rights.
If damage is occurring during that 90-day period, you are
still going to be able to sue for that. What it is it sets up
the 90-day period so that if companies are inclined to work
things out without pursuing it through inefficient, often,
litigation, there it is. It is an automatic time where you can
work things out. If you choose not to do that, if a company--
today, a company can say, you know, go ahead and sue me, I am
not going to provide you a solution. I think we have seen a
couple of examples of that.
If this legislation is passed, that could still happen. A
company could say, you know, I am not going to provide you the
response; I think I have got a claim. But what this legislation
will do is it sets in a couple of standards that make it more
likely for perhaps the defendants in the cases we have heard to
say, wow, under these uniform guidelines I can see that, you
know, if I haven't acted reasonably, if I haven't performed
these particular operations, I am going to be liable. This is
the time frame. It is going to make more sense for me to settle
now. We feel it would lead to cooperative solutions.
The Chairman. Well, this has been a most interesting panel.
I want to thank all of you for being here. I think each one of
you has added to our knowledge here today. Again, I will keep
the record open because I want members of the committee--this
is a Monday and sometimes it is very difficult to have
everybody here on Monday, but I want members of the committee
to have the opportunity to provide questions to you, which I
will insist you answer within two weeks from this date.
Each one of you has enlightened me here today and I am very
grateful to have you all here, and I appreciate the effort that
you have made to be here and the good testimony that you have
given. So the last thing I am asking is that you and everybody
else who is concerned about this matter read this bill, look at
it, see how we can make it better. I will do my very best to
try and bring both sides together and make it better and see if
we can do something that literally pushes us down the road
toward having a much more compatible system in the coming year
2000 and other years as well.
And if we work together, we might be able to solve some of
these problems without having all the money go down the drain
in litigation and courtroom costs and fees. And it would be
better to do that, in my opinion. As much as I love my
profession, it would be better to do that because there is
still going to be lots of litigation out there, no matter what
we do. And there will be people who will not act responsibly
who should be sued, and I am sure that my colleagues in the
profession are going to make sure that happens.
But in any event, I want to thank each of you for being
here today. You have been great. If I can limit the answers to
the questions to a week from today, but they should get the
questions in right away. If we can do that, we do want to move
ahead with this.
So with that, we will recess until further notice.
[Whereupon, at 12:37 p.m., the committee was adjourned.]
A P P E N D I X
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Questions and Answers
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Responses of Eleanor Acheson to Questions From Senator Hatch
Question 1. As I understand at least part of your testimony, a
criticism of this bill is that certain provisions may have ``unintended
consequences.'' Well, I guess that all legislation has some degree of
unintended consequences. What I think we can agree to is the intended
consequences of this bill. It is the intent of Senator Feinstein and
myself that this legislation reduce frivolous litigation and create a
strong incentive for industry to fix the Y2K problem. I believe that
you share our goals. Will you work with us to refine the language of
the bill to minimize unintended consequences?
Answer. I do share the goals that both you and Senator Feinstein
have stated should underlie any legislation aimed at Y2K litigation--
that is, reducing frivolous lawsuits and preserving (or increasing)
incentives to correct Y2K errors before they cause malfunctions. The
Justice Department is committed to working with you and this Committee
to create a bill that advances these goals in a manner that is fair to
persons with legitimate Y2K lawsuits and that has few unintended,
collateral consequences.
Question 2. I also understand that the Administration has
consistently opposed certain civil justice reform measures, such as
caps on punitive damages. Of course, the purpose of punitive damages is
to deter future bad behavior. But punitive damages is most effective in
intentional tort cases and in personal injury suits. In general, the
justification for the caps here is that in many cases the Y2K problem
was the result of neither negligent nor wrongful behavior. As such,
punitive damages if applied would have little deterrent effect. Are you
aware that personal injury cases are exempt from this bill and that
caps on punitive damages do not apply to those tort actions? Do you
agree that caps on punitive damages--particularly in breach of contract
cases--in which historically punitive damages did not even apply--
create an incentive for companies to fix Y2K problems because
litigation costs would be less likely to soak up capital needed to
remediate the problem?
Answer. The Justice Department's primary concern with punitive
damages caps in this bill is based on our preliminary analysis of how
such caps would affect Y2K readiness efforts. We believe that capping
punitive damages may be both ineffective and unnecessary. As you note,
some number of Y2K malfunctions will not result from wrongful behavior,
but punitive damages will not be available in those cases in any event
under current state law. The same is true in contract actions. Even
malfunctions resulting from negligence would not be subject to punitive
damages because the standard for punitive damages is well above
negligence.
We appreciate that your bill exempts personal injury cases from its
operation, but even here we have some concerns. The bill limits the
definition of personal injury to claims for physical harm. Other kinds
of harm--emotional, pain and suffering--are excluded from the
definition. We are not sure how this provision will work in practice
because any personal injury suit is likely to include claims relating
to non-physical injury, but presumably punitive damages would be capped
for those parts of personal injury cases relating to non-physical
injury. Thus, while perhaps not intended, it appears that the bill
effectively limits punitive damages even in personal injury cases.
Moreover, we are concerned that legislation in this area be based
on solid evidence of a problem requiring an appropriate solution. Your
primary concern and ours is that businesses take the necessary steps in
the remaining months to fix, in advance, Y2K problems so that they
either do not occur or their effect is minimized. Accordingly, we will
work to encourage incentives to correct Y2K errors and avoid frivolous
lawsuits.
__________
Responses of Mark Yarsike to Questions From Senator Hatch
Thank you again for allowing me to testify before the Judiciary
Committee on March 1, 1999 concerning the Y2K bill that you and Senator
Feinstein have introduced. It was an honor to appear before your
committee. That you spent so much time listening to my concerns speaks
well of both you and the Committee's desire to insure a fair process.
With all due respect, I remain convinced--utterly, without a
glimmer of doubt--that this bill would have devastated my business,
probably forcing me to shut my doors. It was only the threat of facing
a jury of my peers in Macomb County, Michigan that forced TEC to settle
with me. This bill's new scheme would have provided them with so many
loopholes to hide behind--for example, the 90 day waiting period and
the ``good faith exception'', just to name a few--that I would have had
to give up. I'm just a small businessman--I can't fight the big
companies.
I remain anxious to work with you in order to help solve this
problem. If I may make two suggestions:
Create an anti-profiteering provision--Many companies,
including the one that I dealt with, are simply using the Year
2000 scare as a way to make money. If I am sold a faulty good
and then the company tries to charge more money to fix it (when
it should have worked in the first place), they shouldn't be
allowed to get away with it. Let's make it the law that if a
company sells a good that they know is faulty, and then
attempts to make money off of upgrading that product, they will
face civil and criminal penalties.
If I sold a product--say a box of oranges--knowing that they were
spoiled, I would be responsible for refunding the customer's
money or replacing the faulty good. The idea that I could
charge the customer to make the box of oranges ``fit'' for what
they paid for in the first place is obscene--and yet that is
what these companies are doing on a daily basis! Let's not let
them get away with it.
Sadly, this bill seems to provide protections at every turn for
these bad actors, but doesn't hold them accountable. If
anything, by heightening the burden that people like myself
have to face to prove wrong-doing, it makes it less likely that
these companies will ever face justice. That can't be what was
intended.
Exempt Small Businesses from the bill--The bill and its
proponents claim to want to help small businesses survive the
Y2K crunch. I--and every other small business owner I speak to
about this new scheme--are convinced that the bill will do the
complete opposite. This bill should have an ``opt-out''
provision for small business.
I signed my contract with TEC knowing that state fraud and UCC
statutes protected me. I know those laws, I trust those laws,
and I expected those laws to work on my behalf should a bad
actor ever threaten my business. I don't want this new bill,
with its Federal preemption of state law and UCC provisions and
new procedural hurdles. If you are really trying to help me,
let me decide what's best for me. Allow me to take my chances
under state law as I always have, or allow me to use the new
law (I suspect no small businesses ever would make this second
choice--mark my words!)
Below are my answers to your questions:
Question 1. Mr. Yarsike, I have great respect for you and what you
have gone through in your troubled life. I just want it to be made
clear that Senator Feinstein's and my bill would not have prevented you
from recovering compensation. As I understand it, you settled after
three years of negotiations. The bill delays litigation for just 90
days and requires the vendor to fix the system. This legislation may
have actually helped you in that companies must act in good faith to
fix the system. Without the legislation they could stall. Do you want
to comment?
Answer. With all due respect, the basic assumptions in this
question do not mirror business reality. First, TEC was dying to
litigate this case for years. They made clear that they wanted to drag
this out for as long as possible, knowing full well that at a certain
point I could no longer absorb the cost and would have to give up. This
bill would have been their dream--it provides them with dozens of
escape hatches to hide behind. They'd say I didn't provide adequate or
``particularized'' notice. They'd argue that they made a ``reasonable''
and ``good faith'' effort to fix my problem. They'd spend months or
years litigating over the meaning of every new word and phrase.
Meanwhile, each day I am losing money and customers.
Any business will attempt to solve a problem without turning to
lawyers and litigation. I made over two hundred phone calls to the
company trying to get them to fix it. Two hundred! They professed to be
doing their best--they would arrive at the store, tinker a bit, declare
the problem fixed. Minutes later the system would crash again. Each
crash cost me time and money. I still kept trying to turn to them for
help. They simply would not fix the problem. Worse, they refused to
provide me with new registers or a new system so that I could function
while they fumbled around trying to ``fix'' the problem.
I spent all that time trying to allow them to fix the problem. When
I finally decided that I had enough--when I decided that 200 calls and
200 chances for them to fix the problem were sufficient--I then turned,
with great hesitation and sorrow, to the court system. That's not the
way I am--I work on handshakes and honor. I didn't want to have to sue
someone. It became necessary, however.
So, 200 calls--200 notices--after the problem was first brought to
the attention of the company, I decided to file suit. Almost
immediately after that, the company decided to settle. They did so
because they feared facing a jury of my peers and knew that if they had
to defend themselves under normal contract and state fraud laws, they
couldn't possibly win.
What possible reason can you give me for the concept that, after
making all of those calls and waiting all of those months for the
company to fix the problem, I should have to give them yet another 90
days to fix the problem? That's just 3 more months of delay--of loss of
business and money--that you are providing to the company. I made a
business decision on the day I filed suit that no other option was
available to me. This tells me that my decision was wrong and forces me
to put up with another three months of torture. Then another month for
them to respond. Then more delay when they file a motion to dismiss.
Then more delay as they litigate over the new terms and phrases and
hide behind the new defenses which aren't defined.
All of this adds up to one thing: My being forced out of business.
I simply could not have waited another 90 days. If the company was
going to do the right thing and fix the problem, they would have done
so long before I filed suit.
The idea that the legislation would prevent the company from
stalling is quite frankly without any basis. This would permit them to
do just that. Don't tinker with a system that worked perfectly for me--
once I filed suit they settled. Period. This would change that. Period.
Senator, thanks again for the opportunity to respond to your
questions and make my views known to the Committee. Feel free to call
upon me in any way. I and all of the employees of this one produce
store in Warren, Michigan hope that you will hear our voices and help
us. This bill is not the way to do that.
______
Responses of Mark Yarsike to Questions From Senator Leahy
Question 1. Please elaborate on why you think this bill benefits
big business to the detriment of small businessmen and women?
Answer. This bill provides countless opportunities for delay and
enhances the likelihood that big companies will litigate instead of
settling these Y2K claims. The bill takes away the state provisions
which normally provide protections to small businessmen like myself in
one fell swoop--the UCC and its protections, gone. The state fraud
statutes, gone. The other various protections each state has carefully
legislated over the years in order to protect small business and
consumers, gone.
The bill creates a new scheme. It preempts all state law that I and
other small businessmen counted on when we signed contracts. More
importantly, it creates ambiguities and unclear defenses that create
the opportunity for delay--just what big business wants and small
business simply cannot afford. What is describing a problem with
``particularity?'' Nobody knows. What is a ``good faith effort'' to
solve a problem? Again, it is unclear. What is clear is that this
legislation takes away all incentives to settle. That hurts small
business, who cannot afford delay and litigation.
Question 2. What do you think of the provisions in S. 461 that
would have required you to give ``notice'' and then give TEC America an
opportunity to fix the non-complaint problem?
Answer. Those who argue that this is necessary are showing a
fundamental misunderstanding of how the small business world works.
First of all, the term is not defined. What is ``notice?'' Are the 200
service calls I placed to TEC enough? Apparently not, because although
I spoke with them over 200 times I never put anything in writing.
More fundamentally, any business will attempt to solve a problem
without turning to lawyers and litigation. I made over two hundred
phone calls to the company trying to get them to fix it. Two hundred!
They professed to be doing their best--they would arrive at the store,
tinker a bit, declare the problem fixed. Minutes later the system would
crash again. Each crash cost me time and money. I still kept trying to
turn to them for help. They simply would not fix the problem. Worse,
they refused to provide me with new registers or a new system so that I
could function while they fumbled around trying to ``fix'' the problem.
I spent all that time trying to allow them to fix the problem. When
I finally decided that I had enough--when I decided that 200 calls and
200 chances for them to fix the problem were sufficient--I then turned,
with great hesitation and sorrow, to the court system. That's not the
way I am--I work on handshakes and honor. I didn't want to have to sue
someone. It became necessary, however.
So, 200 calls--200 notices--after the problem was first brought to
the attention of the company, I decided to file suit. Almost
immediately after that, the company decided to settle. They did so
because they feared facing a jury of my peers and knew that if they had
to defend themselves under normal contract and state fraud laws, they
couldn't possibly win.
What possible reason can you give me for the concept that, after
making all of those calls and waiting all of those months for the
company to fix the problem, I should have to give them yet another 90
days to fix the problem? That's just 3 more months of delay--of loss of
business and money--that you are providing to the company. I made a
business decision on the day I filed suit that no other option was
available to me. This tells me that my decision was wrong and forces me
to put up with another three months of torture. Then another month for
them to respond. Then more delay when they file a motion to dismiss.
Then more delay as they litigate over the new terms and phrases and
hide behind the new defenses.
All of this adds up to one thing: me being out of business. I
simply could not have waited another 90 days. If the company was going
to do the right thing and fix the problem, they would have done so long
before I filed suit.
Question 3. Why do you think that TEC America finally settled with
you after refusing to successfully fix your Y2K problem after hundreds
of service calls?
Answer. Simple. TEC settled only when they faced the real
possibility of having to justify their actions before a jury of my
peers in Macomb County, Michigan. Knowing that I could easily meet the
required burdens under the state UCC and fraud statutes, they quickly
settled once I took the last-ditch effort of filing suit.
This bill would have changed that calculus and encouraged TEC to
litigate. I'd still be in litigation--if I wasn't out of business. This
bill makes it more difficult to make my case against TEC by raising the
burdens I must prove almost impossibly high. Why should it be more
difficult for me to make my case--I was the one who was harmed! Why
isn't Congress trying to help me--the innocent small businessman--
instead of helping those who caused this problem in the first place?
The settlement occurred because the current system works. When
people commit fraud, or act in a commercially unacceptable matter, they
are forced to right their wrongs. That's exactly what happened with me,
and that's what happens with others in my situation. This bill will
change that and change everything to the benefit of those who caused
the problem in the first place. That makes no sense, and it isn't fair!
Question 4. What would have been some of the consequences to your
business had you been required to wait 90 days to file your lawsuit
against TEC America under the provisions of S. 461?
Answer. Simple--I would have gone out of business. Maybe waiting an
extra 90 days is not a big deal to AT&T or other large corporations,
but I run my business month to month. Each month I have to pay my
electricity bill. I have to pay my employees. I have to pay my
suppliers. Waiting three months to get any recovery would be deadly to
me and thousands of other businesses like me.
Don't forget--every day that I had to wait was lost income, lost
standing in the community, lost time. Ninety days of this--deadly! Why
should I have to shoulder this additional burden? My case shows the
unfairness of this--I provided months of notice and opportunity to fix.
I only turned to litigation as a last result. Why, at that point in
time, should I have to wait 90 MORE days? All rational businesses would
try to get the problem fixed before having the expense of going to
court. The 90 day provision is nothing but another 90 days of delay for
big business at my expense.
Question 5. What would have been some of the consequences to your
business had your rights to sue TEC America been limited under the
provisions of S. 461?
Answer. Again, the answer is simple. S. 461 would have put me out
of business. After long efforts to try everything else, my attorney and
I decided that recourse to the court system was all that was left to us
due to the company's refusal to do what was right. This bill makes that
more difficult. The process is difficult enough on small businessmen.
This makes it that much harder--and would be the last straw. I would
have either gone out of business completely or had to cut expenses to
continue the fight against TEC. That means failing to give my employees
raises, or failing to pay for their health care, or refusing to
contribute money and services to charities for years. That may not be
the intent of this bill, but it is without a doubt its consequence.
Question 6. As a small business owner, what do think Congress
should do to address the Y2K problem?
Answer. This is one of the most remarkable things about this bill:
it does not do anything that will fix one computer, one software
program, or one system. However, there are some great proposals out
there that actually help small business to fight this problem. Senator
Bond's S. 314 is a perfect example. Give me tax credits that help me
absorb my expenses for dealing with the Y2K. Make it easier for me to
get SBA loans. Those are the kind of actions that Congress should take.
If you must pass this new scheme, however, exempt small business
from this bill--we don't want any part of it! The bill and its
proponents claim to want to help small businesses survive the Y2K
crunch. I--and every other small business owner I speak to about this
new scheme--are convinced that the bill will do the complete opposite.
This bill should have an ``opt-out'' provision for small business.
I signed my contract with TEC knowing that state fraud and UCC
statutes protected me. I know those laws, I trust those laws, and I
expected those laws to work on my behalf should a bad actor ever
threaten my business. I don't want this new bill, with its Federal
standards and new procedural hurdles. If you are really trying to help
me, let me decide what's best for me. Allow me to take my chances under
state law as I always have, or allow me to use the new law (I suspect
no small businesses ever would make this second choice--mark my words!)
Question 7A. Why are you so certain that S. 461 would have resulted
in protracted litigation instead of a speedy settlement?
Answer. This bill would have discouraged a speedy settlement and
encouraged litigation by making it very difficult for me to bring a
successful suit. I'm not a lawyer, but the bill seems filled with
chances for these companies to delay: the 90 day waiting period; the
redundant notice requirements; the good faith provisions; the
heightened proof requirements. All of these cause delays and hurt small
business--those very people who were wronged in the first place. They
allow big business to drag out the expense of the litigation, either
putting the small businessman out of business or causing them to give
up out of business necessity. They provide secret loopholes that nobody
understands--but I'm sure the big companies will find ways to exploit
them all--at my expense.
Question 7B. Why would TEC America have wanted to use protracted
litigation instead of simply settling with you?
Answer. Just like me, the people at TEC are businessmen. If they
know that I have to prove very difficult standards, that they have
scores of new defenses to hide behind, and that it will be more
difficult and take me longer to reach a jury of my peers (all reality
in this bill) then they will choose to litigate rather than settle.
They know that the longer they drag this out the more strain I am
under, and the more likely I will either go out of business or give up.
By creating this new scheme, and all of its attendant protections for
these bad actors, this bill encourages massive litigation and
discourages the settlements that occur when a business has to actually
face up to what is has done before a jury of normal folks.
Question 8. The Chamber of Commerce, the National Federation of
Independent Business, and other groups that claim to represent small
businesses support S. 461. Do you agree with their stance? Why do you
think they support this bill? Do you think that other small business
owners agree with you or with them?
Answer. Quite simply, I think these guys have been in Washington
too long. They've forgotten what it is like to be a small businessman,
juggling loans, meeting a payroll, waking up at four each morning to
open the store and closing its doors at ten that night. If they were
still in touch with that, they wouldn't stand where they do on this
bill.
They are not in touch with their membership. Every small
businessman I speak to about this is shocked that these groups which
supposedly represent them are acting as they are. I don't know why they
are saying what they say--maybe they really are out of touch, maybe
they have another agenda. They sure don't represent me, though.
I'm actually a member of the Chamber of Commerce. Or, I was. When
they recently called to renew my membership, I refused. I'm through
with them. They are supporting a bill that would quite simply put me
out of business. I won't allow them to say they represent me, because
they don't. They have reduced the world into an almost ridiculous
simplistic theory: plaintiffs are bad and any defendants are good. How
can legitimate business interests stand behind such a proposition when
it arbitrarily punishes small businesses like me, who have a terrible
Y2K problem that someone else caused, and had to become a ``plaintiff''
when the manufacturer refused to fix the problem?
Every small businessman I have spoken to, here in Warren and around
the country, seems to agree with me. I guess that I would encourage the
heads of these groups to spend a day with me hauling boxes and dealing
with customers and vendors. Then I guess they may remember what it's
really like out here in the trenches. Then I'm guessing they'd
reexamine their support for this bill.
__________
Responses of B.R. McConnon to Questions From Senator Hatch
Question 1. As a small businessman, wouldn't you rather get notice
of a Y2K problem through a simple communication, which our bill would
allow to happen, instead of hearing about it for the first time when
served with a lawsuit?
Answer. As a small businessman, I would most certainly prefer being
served with a notice of a Y2K problem to being served with a lawsuit.
The last place a small business owner wants to end up is in the
courtroom. The defendant's focus should be on fixing the problem, not
dealing with attorneys and depositions. Every moment spent on the legal
process is a moment not spent on fixing Y2K problems.
Question 2. Speaking from personal experience with the lawsuit with
which you were involved, wouldn't a 90-day cooling-off period have
given you the option of, focusing your resources, in your words, on
anticipating and fixing a potential Y2K problem and resolving the
dispute out of court instead of causing you automatically to focus your
resources on preparing your legal defense?
Answer. My personal experience with the legal process would compel
me to do everything possible to address problems and implement fixes
during that 90-day ``cooling-off'' period. My suit was so incredibly
wasteful and kept me from running my business. While it was eventually
dismissed, there was no real winner. I can never recover the lost time
and effort. Knowing I was facing a hard deadline to avoid a Y2K lawsuit
would crystallize what already is a powerful incentive to address
client Y2K concerns.
Question 3. You spoke about how your relationships with your
vendors and clients are the key to your survival as a small business.
As a result, it seems that you already have a natural market incentive
to settle a dispute as quickly as possible and, when feasible, outside
of court. Assuming this, wouldn't it be good for small business if we
could provide a legal incentive to make sure this natural market
incentive doesn't get overwhelmed by an avalanche of frivolous
lawsuits?
Answer. I most certainly have a market incentive to address client
problems. If I do not, I will not be in business for long. The biggest
disruption to business that I can imagine would be ``an avalanche of
frivolous lawsuits.'' Lawsuits would immediately make the nature of my
relationships with vendors and clients adversarial, instead of the
partnerships that they are now. Keeping us all out of court and focused
on fixing problems is the best course of action for everyone, and the
direction that Congress should guide us with legislation.
We all are likely to be affected by Y2K issues. Small business
owners will want rapid resolution of problems so that we can resume
normal business operations. If we do nothing to encourage resolution of
these problems, we cannot accomplish this goal.
__________
Responses of Harris L. Pogust to Questions From Senator Hatch
Question 1. You ask in your initial question the following: If this
legislation is so harmful to small businesses why would the trade
associations which represent those businesses support the legislation.
You then go on to allege that my motives for testifying are based upon
my own selfish reasons and that I have no concern for my client's well
being.
Answer. With all due respect, the very premise of this question
that I am nothing but an advocate for litigation is incorrect. I invite
any one of your staff members to come to my office and review the files
that I am currently handling and the clients that I represent. More
than 90 percent of my active files involve a small businessperson who
has been taken advantage of or injured by the wrong of another and is
seeking redress through the court system. Additionally, you will see in
each and every file a letter, sent prior to litigation, which attempts
to amicably resolve the matter. I serve my clients, the small
businessperson who depend upon me to steer them through extremely
difficult and challenging times and I do so with honor and with only
their interests in mind. Any suggestion to the contrary, for example,
that I would file a suit when a mere phone call providing notice will
do, is unfair and untrue.
You ask why the groups that supposedly represent small business
don't seem to agree that the Act is harmful to the small businesspeople
they represent. I would suggest that they are simply out of touch with
their membership. The small businessman, Mark Yarsike, who sat on the
same panel as I did, didn't seem to agree with the lobbyist who
supposedly represent him. Neither do any of the small businesspersons I
represent. Perhaps the leadership of these groups spend too much time
in Washington and have forgotten what it is like in the trenches. I
simply reiterate what I said in my testimony, I have the names and
addresses of hundreds of small businesspeople who will tell you that
the Act would harm them.
As to Mr. McConnon's testimony, I would venture to guess that Mr.
McConnon had not read the Act prior to testifying. Even if he had, he
would not have understood or comprehended the broad and far reaching
implications that the Act has. In his testimony Mr. McConnon emphasized
three points. First, Congress must create incentives to mitigate the
Y2K situation. He stated that ``it is essential that businesses of all
sizes are urged to address their Y2K problems NOW.'' I agree
wholeheartedly with this statement by Mr. McConnell. Unfortunately, I
fail to see how the proposed legislation in any way helps us address
the current Y2K situation. The Act's purpose is to limit lawsuits that
occur after 1/1/00 and in no way creates an incentive for businesses to
correct their Y2K problems today. To the contrary, common sense
dictates that if the threat of litigation exists, a company will do
more to correct the situation. I cannot comprehend the argument that
has been expounded that companies are being counseled to be less active
in solving their Y2K problems due to the threat of litigation. Such an
argument defies all logic.
I also agree with the second point made by Mr. McConnell that
``disputes should be settled as quickly as possible and outside of
court when feasible.'' As we well know, more than 90 percent of
lawsuits which are in fact filed never of to trial. Additionally, it
cannot be disputed that every individual would rather settle their
disputes than litigate them. In each case I handle, as well as those
handled by other members of my firm, we always attempt to amicably
resolve disputes prior to resorting to litigation. Unfortunately, an
amicable resolution is not always possible.
The third and final point made by Mr. McConnell dealt with the need
to curb the filing of frivolous lawsuits. I am still at a loss as to
why there is this misconception that there will be such an increase in
the filing of ``frivolous'' lawsuits resulting from the Y2K problem.
While there indeed may be many lawsuits resulting from the Y2K problem,
they are not the making of the trial lawyers but are the result of
companies knowingly and intentionally selling defective software and
products with embedded chips. By attempting to shift the focus of the
Y2K problem from the party truly responsible to the trial lawyers is
clearly unjustified and unfair. Furthermore, there are currently many
safeguards in place which deter the filing of frivolous lawsuits. These
include Federal Rule 11, as well as similar state statutes.
These are the three areas addressed by Mr. McConnell. He concluded
his remarks by stating: ``I believe the bill introduced by Senators
Hatch and Feinstein, the Year 2000 Fairness and Responsibility Act,
will accomplish these three important goals.'' He may be correct, but
what he fails to understand is that the Act does much more than that.
It will close the courthouse door to thousands of small businesspeople
throughout this country who will lose their businesses if this Act
becomes law.
Question 2. You assert that the 90 day cooling period will act as
an incentive to fix Y2K problems, avoiding the need to hire
``expensive'' lawyers like myself. You further assert that this will
correct the current system.
Answer. In my ten years of practice, I have never instituted a
commercial litigation without first contacting the other party in an
attempt to try to amicably resolve the matter. I am quite sure that
this is the practice of the vast majority of attorneys in this country.
Everyone would like to resolve their disputes in the most expeditious
fashion possible. Accordingly, I adamantly believe that your premise,
that in most instances, lawyers file lawsuits prior to trying to
amicably resolve their disputes, is flawed.
The Act allows a responsible party to sit on their hands for 90
days while the injured businessperson is left holding the bag. It is
common knowledge, and has already been seen in the Produce Palace
situation, that the Y2K problem could cause the total disruption and
inability of a small businessperson to conduct business. If a business
was required to wait 90 days, 90 days in which no business at all is
being conducted, it would forever shut down many small businesses. As
evidenced by Medical Manager's conduct, defendants in many situations
do not appear anxious to resolve disputes until litigation is
commenced.
The Medical Manager is a classic example of how the 90 day waiting
period would have caused massive damage to thousands of medical
practices throughout this country. If the physicians were required to
wait 90 days after Medical Manager was notified of the problem,
thousands of practices would have been spending enormous sums of money
unnecessarily upgrading to the Year 2000 compliant version of the
software since Medical Manager was telling these practices that was the
only way to become Year 2000 compliant. This is money which otherwise
could have been used to create superior health care for the millions of
patients instead of lining the pockets of a company that knowingly and
intentionally sold a defective product and then attempted to make
hundreds of millions of dollars from their own misdeeds.
Furthermore, the filing of a lawsuit does not prolong the possible
resolution of the matter. If anything, it speeds up the process due to
the fact that clients would rather spend their money settling a matter
than paying their attorney. The cases that drag on for years obviously
had no possibility of settling early and the 90 day period would do
nothing to help those situations.
Question 3. You assert that the Medical Manager case, in which I
was lead counsel, provided more benefit to the attorneys than to the
class members.
Answer. You seem to take the position that the settlement was
unfair since the Company's out-of-pocket expenses were only $600,000 to
the customers while paying $825,000 to the attorneys. Pursuant to this
line of reasoning, if we were able to get everybody the free upgrade so
that Medical Manager would have had $0 out-of-pocket expense to the
customer, I assume that you would contend that the attorneys should not
receive any attorney's fees at all. Unfortunately, you fail to see the
benefit which was received by the thousands of physicians across the
country in this case. Prior to my involvement in this matter, Medical
Manager was charging its customers between $10,000 and $25,000 to
upgrade their systems to become Year 2000 compliant. This was so even
though Medical Manager had sold some of these non-compliant systems
within weeks of announcing that these systems would not operate after
12/31/99.
Instead of Medical Manager pocketing approximately $225,000,000
(15,000 customers x $15,000 per customer) from their own misdeeds, we
allowed the physicians to keep this money to be used to improve health
care in this country. I am very proud of the result. I wholeheartedly
disagree with your assertion that the lawyers profited far more than
their clients in this matter. You should also note that this settlement
was entered into with the assistance of a Federal Magistrate.
To clarify your question regarding the attorney's fees, as you are
aware, there were four additional actions brought against Medical
Manager in California, New York, Pennsylvania and Florida. The $825,000
figure is to pay the attorneys in all of these cases. Additionally, the
expenses that all of these attorneys incurred must be paid out of this
lump sum. Although we are still calculating that number, it will be
approximately $75,000. Accordingly, after expenses we will be left with
approximately $750,000 to be divided between the various attorneys in
this matter. I have reviewed the time expended by each of these firms.
Multiplying that number by the attorney's hourly rate you arrive at a
number which is extremely close to the $750,000 figure. Additionally,
although the settlement was entered into in December of last year, work
continues on this matter today. Notice of the settlement was sent to
the approximately 15,000 members of the class. I receive several calls
a day from physicians across this country discussing the settlement and
thanking me for helping them in this situation. I personally respond to
each one. Not one of these physicians has ever complained about the
attorney's fees in this case. I myself have spent in excess of 500
hours litigating and resolving this matter.
Finally, I disagree with your statement that this case is ``a model
of the abuse of class action procedures''. To the contrary, I believe
the Medical Manager case is a model to be used to show the benefits of
class actions. Here, without the class action mechanism, we would not
have been able to obtain the outstanding result due to the prohibitive
cost factors in bringing each case individually. Class action
provisions exist because they have been found to bring justice to
diverse and dispersed individuals or businesses who have been
aggrieved. Had a class action suit not been filed in the Medical
Manager case thousands of doctors would individually have had several
options: (a) pay the upgrade fee of over $15,000 because it just didn't
make economic sense to spend tens of thousands of dollars on a lawsuit
for that sum; or (b) each doctor would have had to file an individual
suit. Thousands of cases, all with the same operative facts, would have
been filed in state courts throughout this country. Talk about clogging
the system!
Instead, what happened? Only a handful of cases were filed. All
interested parties were contacted. Thousands of physicians got free
upgrades or rebates. The system wasn't clogged, to the contrary, a
quick settlement resulted. Efficiency ruled the day, and all involved,
including the defendant, agree that the result was a win win for all
parties involved.
Question 4. This question deals with how the Act would have
affected the Medical Manager case. Please note that my response deals
with the Medical Manager case as well as how the Act would affect
similar actions.
Answer.
Sec. 101
First, in my initial contact with Medical Manager, I requested a
response to my demand that they fix Dr. Courtney's system within
several weeks. I did in fact receive a response within that time in
which Medical Manager refused to fix Dr. Courtney's problem.
Accordingly, I filed suit. If I was required to wait an additional 75
days, hundreds of physicians across this country would have been
damaged by unnecessarily paying tens of thousands of dollars for
upgrades to the Y2K compliant version of the Medical Manager system
since they would have been unaware that an action had been instituted
against the company. Additionally, the 90 day waiting period would have
made no sense since Medical Manager refused to fix the problem well
prior to the 90 day period. The Act does not take this into account.
According to the Act, if the defendant responds within the 30 day
window and says it won't fix the problem or responds with a totally
inadequate response, you still need to wait an additional 60 days to
file suit. An example of such a response may be that the company
attempted to fix the Y2K problem during the course of the previous year
and that it does not plan to do anything further. In such a case,
making a plaintiff wait until the expiration of ninety days makes no
sense.
Sec. 103(c)
In the Medical Manager case we set forth a count under the New
Jersey Unfair Trade Practices Act, N.J.S.A. 56:8-1, et. seq. Many
states have similar statutes in which the state of mind of the
defendant is a critical element in proving a deceptive or fraudulent
act. In many actions, although you are quite sure that such a state of
mind is present, the evidence of such is not revealed until discovery
is taken. Under the Act the plaintiff is required to ``state in detail
the facts giving rise to a strong inference that the defendant acted
with the required state of mind.'' If a plaintiff fails to do so the
defendant can file a motion to dismiss pursuant to Sec. 103(d)(1).
Furthermore, Sec. 13(d)(2) further prolongs the litigation process and
further increases the damages which are being sustained by a plaintiff
whose business is shut down by a Y2K problem, by staying discovery
during the pendency of such a motion. This could unnecessarily add an
additional 30-60 days to the litigation process.
Sec. 201
Every piece of software, as well as many products sold today,
contain contractual terms which limit the manufacturers' liability as
well as limit those damages which are recoverable in case of a product
failure. In the Medical Manager case, we set forth a claim for breach
of implied warranty of merchantability in order to overcome the
limiting language in the software license agreement. In other similar
cases, a claim for breach of express warranty has also been made.
Pursuant to Sec. 201, such claims would be totally extinguished as
long as the defendant places in the software license agreement or other
similar document, language which limits or excludes liability or
disclaims any and all warranties. According to the proposed
legislation, if a manufacturer makes certain representations concerning
the nature and character of its product and those representations turn
out to be completely false, a plaintiff will be unable to recover under
either a breach of contract or breach of warranty theory as long as the
limiting language is contained in the contract. Such a result is
patently unfair.
Sec. 302
As previously stated, many consumer fraud statutes require that the
plaintiff prove defendant's state of mind as an element of the cause of
action. Here, instead of having to prove this element by a
preponderance of the evidence, which is the standard of almost all
other civil causes of action, the burden of proof is raised to clear
and convincing evidence. Additionally, the burden of proof is
inexplicably raised in sections (b) and (c) which pertains to
negligence actions. I fail to see how this promotes the purpose of the
Act, that being, the prevention of the filing of frivolous lawsuits and
the solving of the Y2K problem. If every other civil cause of action
requires only that it be proven by a preponderance of the evidence why
should this be any different?
Sec. 303
Section 303(2) may have totally extinguished Dr. Courtney's tort
claims in this matter. This section provides, as a complete defense,
that the party took measures that were reasonable under the
circumstances to prevent the Year 2000 failure from occurring. Medical
Manager did indeed take certain steps but were charging exorbitant sums
to implement those steps.
I appreciate you giving me the opportunity to take part in this
process. I feel an obligation to reiterate my position and the position
of the hundreds of small businesspeople who I represent regarding the
Act. I have serious doubts concerning the stated purpose of the Act
which I understand to be the prevention of the filing of frivolous
lawsuits and the need to focus on solving the Year 2000 problem prior
to January 1, 2000. The Act goes much farther than preventing frivolous
lawsuits and in essence extinguishes the rights of many small
businesspeople who have legitimate and proper claims. Additionally, it
seems that the Act's focus is not on how to fix the problem prior to
the next millennium but only how to prevent lawsuits due to a problem
which was foreseeable and totally ignored by individuals in the
computer industry. In your opening remarks at the hearing you stated
that you and Senator Feinstein have ``sought to produce a bill 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.'' Unfortunately, I believe that this Act could have just
the opposite effect. It would discourage such problem solving due to
the fact that the threat of litigation has all but been extinguished.
The companies who created this problem would not be held responsible
and the burden of dealing with the repercussions from the Y2K problem
would be thrust upon the shoulders of the small businessperson.
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Responses of Harris L. Pogust to Questions From Senator Leahy
Question 1. Are you aware of any instances where manufacturers or
vendors have tried to profit from Y2K problems of their own making?
Answer. Sadly, the answer to this question is a resounding ``yes.''
It is ironic to me that this bill would provide protection to those
very companies who have improperly profited off of the Year 2000 issue
while limiting remedies of those who have already been hurt--the small
business owners who are end users of non-compliant software and
hardware. Examples of this ``profiteering'' abound--each small business
person that I speak with has their own horror story.
The companies that are profiting are almost breath-taking in their
opportunism. First, they sell goods that they know are non-compliant
while promising that the goods will last ``well into the future'' or
``into the 21st Century.'' Then, often only months later, they demand
thousands of dollars to make these very goods Y2K compliant. This bill
would not only fail to punish such behavior but shield these companies
from liability! If a car dealer sold a car knowing it had a defect and
then demanded a month later thousands of dollars to make it functional,
they would be roundly chastised--rightly so--and subject to liability
based on fraud statutes, the UCC, and various other state laws
protecting consumers from such behavior. For some reason, however, when
the good involved is software or hardware, Congress seems poised to
give these companies a free ``get out of jail'' card.
The case of Dr. Courtney, a small town OB/GYN doctor from southern
New Jersey, is a typical--and sadly not unusual--example of the type of
profiteering that is occurring every day in the marketplace. Dr.
Courtney purchased Medical Manager software for $13,000.00 in 1996--a
huge expenditure for his sole practice. He did so only after a sales
rep from the company came to his office and extolled the software,
promising that it would last for over ten years.
One year later, he received a letter informing him that the
software would not last ten years--it would not even be functional
within months--unless Dr. Courtney spent another $25,000.00 to upgrade
the system. Within a year of paying $13,000.00, he was asked to spend
another $25,000.00 just to make the software work as the company had
promised it would! Dr. Courtney was not alone--at least 15,000 other
doctors had purchased the software and were asked to pay for the
upgrade. By selling non-compliant software and then charging each of
these doctors at least $15,000.00 to upgrade, only months after paying
the original purchase price, the company stood to gain $225,000,000.
This is fraud of the highest magnitude--and yet such a company would be
protected by this bill while the doctors would find it harder to recoup
their losses. This cannot possibly be what Congress intends.
The above example is not the only one I know of hundreds of such
stories--for example, the medical school in Philadelphia that paid
$100,000.00 for a system and was asked to pay $100,000.00 even though
they had a software maintenance agreement which they paid thousands of
dollars each year to keep in force and which covered such repairs.
That's $100,000.00 that should go to scholarships, or textbooks, or
treating indigent patients, not to a profiteering seller taking
advantage of the Y2K scare.
An anti-profiteering provision should be a prominent feature of
this bill--where is it?
Question 2. In your experience representing small businesses: (a)
What would be the real world, practical effect of requiring small
businesses to wait 90 days before pursuing legal claims against
manufacturers, service providers, and suppliers for a Y2K problem? (b)
Is it your experience representing small businesses that they try to
solve their problems without spending the time and incurring the
expense of litigation?
Answer. The answer to the first question is simple: such a waiting
period will cause businesses to either go bankrupt or descend further
into debt as a result of the unfair situation they are placed in by
unsavory retailers. The proposal is being touted as nothing but a
benefit to small businessmen, but such a view shows a fundamental lack
of understanding of how small business operates and the difficulties of
surviving in today's competitive marketplace.
First, before hiring an attorney and turning to the expensive
justice system, any business will call the company who sold them the
goods. To suggest otherwise is utterly lacking in any grasp of business
reality. Any businessman will pick up the telephone, call the seller,
and demand help in fixing the problem. It's a simple business
decision--a call costs twenty-five cents, and hiring a lawyer costs
more. Only if the businessman has tried and failed, after all possible
efforts, to get a suitable response on their own will they turn to the
court system. Therefore, a waiting period is already built into the
system both in business reality and in state codes i.e., In UCC
provisions requiring notice before filing suit).
Second, once a company does all that they can to get the product
repaired, and finally decides that there is no other recourse than to
turn to a lawyer, that lawyer will almost certainly write a letter to
the company, giving them yet another chance to fix the problem. This
process will often provide months or even years of time to fix the
defects. If all else fails, and the company has shown no willingness to
fix the problem, why cause the small businessman to wait another 90
days? It makes no sense--and is unfair.
Ninety days to AT&T or Intel is perhaps not a difficulty. For my
client's however--the furniture retailers, the dry cleaners, the auto
repair shops--a 90 day wait, during which their systems do not work, is
often a matter of business' life and death. I hear this from them every
day--they react in horror when I tell them of this provision. The
Committee heard this from Mr. Yarsike, the small produce store owner
from Michigan, who testified alongside me at the committee.
Bottom line--90 days of waiting equals a death sentence for too
many businessmen.
Bottom line--every small businessman I know already provides the
company with notice and an opportunity to fix their faulty products.
Nobody wants to be tied up in litigation--least of all a small business
man with limited resources. Litigation should be, and is, a last resort
for small businessmen. But providing for such a long waiting period is
simply anti-business and provides more opportunity for wrongdoers to
stall and delay doing the right thing.
Question 3a. What would be the consequences to small business if S.
461's provisions limiting Uniform Commercial Code remedies becomes law?
Answer. When businessmen like Dr. Courtney sit down and sign a
contract, they know that certain business fundamentals will protect
them. If the person on the other side of the table commits fraud, they
can be held accountable. If the other party sells a good promising that
it is fit for a particular purpose but it ends up the good actually
cannot perform that task, there is recourse for the wronged party. This
bill takes that away from the very people who rely the most upon such
laws. Withdrawing the protection of the various state's UCC is unfair
and fundamentally against longstanding American ideas of justice.
When two parties sign a contract, they do so knowing that these
laws exist in the background. Dr. Courtney, for example, signed his
contract for Medical Manager software back in 1996, knowing that the
UCC and other state laws in New Jersey protected him from unsavory
business practices. This bill would reach back three years and withdraw
those protections from him--just at the time he needs them most! The
implied warranties--all gone. The standards of proof he expected to
have to prove in case he did need to bring suit--all altered to his
disadvantage.
If Dr. Courtney had agreed in the contract to five yearly payments
to pay off the cost of the software and he failed to pay last year's
amount due, he would be held responsible under the terms of the
contract and pursuant to New Jersey state law. If Medical Manager
breached the same contract and delivered goods that violated the UCC,
however, Dr. Courtney would have to prove this case under the new
Federal heightened standards--standards that didn't exist when he
signed the contract. How can this be just?
Business count on certainty. The UCC provides that certainty, and
the popularity of the UCC in all 50 states has been a fundamental part
of the economic vitality in our economy. All businessmen know that the
UCC exists and will protect those who play by the rules and provide
remedies against those who don't. Taking away the UCC--as the bill
does--creates uncertainty. Businessmen may hesitate before signing a
contract, knowing that in two years Congress may alter the terms of the
contract, or withdraw the safety and certainty provided by the UCC.
As the Justice Department noted at the hearing, this legislation is
a massive, unprecedented departure from the norms established by years
of contract, UCC, and state laws. This departure can only harm business
and the economy, and ought to be considered in intricate detail before
being passed into law. The small businessmen of our country deserve no
less.
Question 3b. In your opinion, what incentives does S. 461 provide
for businesses to address their Y2K problems now?
Answer. This bill provides NO incentives to address Y2K problems.
As a matter of fact, it provides an incentive to do exactly the
opposite. This is apparent on so many levels that it is difficult to
know how to begin to describe the negative incentives.
First, this bill makes it procedurally more difficult to hold bad
actors accountable. New delays--for example the 90 day waiting period--
provide more time to stall. New procedural hoops to jump through--for
example, the heightened notice requirements for class actions--make
bringing these actions more costly, time-consuming, and challenging.
The stay of discovery during the pendency of a motion to dismiss can
cause months of delay. If a court fails to rule on such a motion for
six months, for example--a not uncommon occurrence--no discovery can
occur. Only after such a motion is disposed of can discovery begin. All
of these delays hurt those who were wronged in the first place. They
allow big business to drag out the expense of the litigation, either
putting the small businessman out of business or causing them to give
up out of business necessity.
Second, the bill makes it more difficult for a plaintiff to prove
their case by heightening the standards that must be proven. This
provides an incentive to litigate instead of fix a problem. By raising
these standards, the bill makes a bad actor's chance of success at
trial more likely--making the choice to litigate instead of remediate
or settle more attractive. The delays make it less likely that they
will face a jury--again, providing an incentive to delay and then
litigate.
Third, the bill provides unfair loopholes for businesses to hide
behind. This will effect the ability of businesses who have been
wronged to get justice in several ways. First, the new absolute
defenses and reasonable efforts provisions will provide yet more
incentives to litigate--a company can make half-hearted plays at fixing
a problem and go to trial, knowing it can claim a ``reasonable effort''
to fix the problem. Next, the bill creates undefined and previously
unknown provisions of law for companies to litigate over. What is a
``reasonable effort?'' What is ``commercial impracticality'' in the
Year 2000 realm? Nobody knows, but the bad actors are sure to litigate
every word of this bill, dragging out cases for years on such issues as
what the definition of ``mitigation'' is or what ``commercial
impracticability'' stands for. More delay, more likelihood that the
small businessmen will go out of business to have to give up the suit.
The negative incentives go on. The positive incentives are
remarkably absent. Why not create a bill that helps those who are
wronged instead of protecting those that created the problem in the
first place? Such bills exist--S. 314, Senator Bond's recently passed
bill which actually does positive things to help business deal with
this problem is a perfect example. That's what businessmen need more
of.
Question 4. If the Senate Judiciary Committee were to decide to
exclude small business plaintiffs from the scope of this bill, or were
to give them the option of utilizing the features included in S. 461,
what would be your response?
Answer. Now that makes sense! Small businessmen stand to lose the
most from this problem--they stand to go out of business. The large
corporations can afford to take a one-time charge of $25,000 to upgrade
their software. The small businesses I represent imply cannot afford
such charges--it would mean laying off an employee, deciding not to
provide health care to their workers that year, or shutting their
doors.
Congress should do everything possible to help these small
businesspeople survive these problems which they didn't create. Allow
them to rely on a jury of their peers without waiting extra months.
Permit them to prove the same standards that they would need to meet in
any other case where they are sold faulty goods. Allow them to turn to
the locally crafted state law protections enacted on their behalf. And,
if they decide that this new scheme can help them, allow them that
choice.
I'm not worried about the big businesses. I represent small
businessmen, and that's what makes the South New Jersey economy run.
Let the big businesses fight this out under this new scheme. Protect
the small businessmen--let them opt out of this otherwise disastrous
bill.
Question 5a. What do you think of the provisions in S. 461 that
requires plaintiffs to give ``notice?''
Answer. As with the 90 day waiting period, this already happens as
a simple business practice. When a computer crashes, the first call a
company will make is to the people who sold them the software. They
will call as many times as needed, until the problem is solved or until
it is clearly futile to call anymore. Why require still further notice
after that? A businessman will only turn to the courts after trying
every other option. Notice was thus provided in every case I have ever
heard of. This provision is a perfect example of a procedural loophole
that benefits only the bad actors.
Say, for example, that a company has their software fail. They call
the company over 200 times to fix it. Two hundred calls later, the
problem persists. Under this bill, the aggrieved party with the faulty
software would have to provide still more notice--nonsense! Such
additional notice is not required in the case of a faulty auto sold to
a small businessman. It isn't required in a faulty piece of machinery
it sold. Why should faulty software or hardware be any different? More
delay, more chance for the bad actors to hide, more harm to the small
businessman who is caught in the middle!
Question 5b. In your experience, do most small businesses provide
``notice'' to a manufacturer of a defective product before commencing
legal action?
Answer. Of course. As noted above, any businessman weighing the
options will do so. Paying a lawyer versus making a phone call--no
contest. A businessman wants one thing--to get functional again so he
can do what he does best--sell furniture, treat patients, or train
students. They don't want litigation, or legal fees, or the expense of
a trial. They will do everything to avoid it--including, without fail,
notifying the manufacturer of the problem and asking them to fix it.
Suggesting that a businessman would do otherwise ignores the cost-
benefit analysis that all businesses would undertake in such a
situation.
Question 5c. Is it likely that there could be litigation over the
operation of this provision?
Answer. Yes. Like other provisions, this provides yet another tool
for the at fault companies to litigate well into the future--instead of
fixing the problem or facing justice under the normal. current system.
The meaning of notice, the question of whether the notice is
sufficient, and countless other issues provide pitfalls to small
businessmen seeking to get reimbursed for their losses.
For example, take the requirement that the notice identify and
describe the problem ``with particularity.'' What does that mean? If I
own a furniture store, I walk in one day, and my accounts receivable
software no longer works, what do I have to say to meet this
requirement? I don't know computers, I don't know what the problem is
with ``particularity''--I just know that I suddenly have no ability to
collect what is owed to me. The software was purchased from experts who
have the knowledge to describe the problem ``with particularity.'' Will
that furniture store be unable to satisfy this provision if their
notice is simply that ``my computer software stopped working one day?''
Nobody knows--but you can be sure that the company who sold that faulty
software will do their best to use that provision to try and argue
such! More delay, more chance that justice is circumscribed.
Question 6. Would this legislation be more likely than the current
civil justice system to cause protracted litigation or speed resolution
of disputes?
Answer. This legislation, for the many reasons articulated above,
will delay justice and do more to clog the court system than almost
anything else imaginable. The bill creates vast new territory--new
standards, new procedural requirements, preemption of state law * * *
The current system has been tested. Procedural requirements are clear
and precise in both state and federal courts. This new scheme creates
uncertainty. Each term, each provision, each new loophole, each
definition--all will be litigated for years. Why not let the current
UCC, fraud, and contract laws deal with the problem?
To date, the court system has shown a remarkable ability to handle
these cases. Of the many dozens that have been filed, some cases have
settled. Others are proceeding to trial. Still others have been
dismissed by judges. The current system is working.
Take Medical Manager and Dr. Courtney. Dr. Courtney filed suit in
state court in New Jersey after all other options proved unfruitful.
Within months, the company settled. It was without a doubt the threat
of facing a jury in southern New Jersey, and defending their actions
under well-settled provisions of state law, that forced them to settle.
Nothing else. This bill would provide loopholes, escape hatches,
heightened standards--all inducements to litigate for years, not to
settle.
Question 7. Do you think defendants will ever be held accountable
under the bill given the way the good faith defense is currently
structured?
Answer. No--this provision will allow even the worst of actors to
escape with their ill-gotten gains intact. What is a ``good faith
effort?'' Apparently, a company can say ``We'll fix your problem
immediately--just give is $100,000'' and that will suffice as a good
faith effort. What if a company comes to the stores and tries over 200
times to fix the problem--but fails to do so? They will argue ``good
faith''--``hey, we came out 200 times!'' Lost is the fact that the
problem was never solved, the business is disrupted for months, and the
small business is still left holding the dysfunctional software.
This creates an incentive to make the smallest possible efforts
possible to satisfy this ``good faith escape hatch'' instead of
actually fixing the problem. Defendants will hide behind this broad
provision. Why solve the problem--just visit the site a few times,
tinker a bit, and declare that you tried your best!
Question 8. Why do you think that conclusions you have reached
about this litigation differ so much from those of the technology
companies that appeared at the hearing?
Answer. Quite simply, the technology companies know that this
problem is of their making. Software developers have warned these
companies for years about the impending Y2K problem--since the 1960's!
The technology companies stand to make millions on upgrades and new
purchases as businesses and consumers are forced to upgrade their
systems. Incredibly, there are still non-compliant goods being sold
today!
Of course, the software companies support this bill--they are the
ones that are protected by it! They face profits--not bankruptcy like
those who bought their products. And may I be so cynical as to suggest
that this is seen as the first step toward product liability reforms
that Congress has seen fit to defeat year after year?
Question 9. If Congress were to enact legislation providing special
legal protections to manufacturers of non-Y2K complaint software and
hardware, would that be fair to those manufacturers who did the right
thing and in vested the time and money to develop, manufacture, and
market Y2K compliant software and hardware?
Answer. Of course not. The responsible companies who did what they
should have--and indeed were required to under the law!--deserve
commendation for making their goods and products compliant. Those that
didn't--those that sold non-compliant goods on purpose, knowing that
the problem existed--deserve to face the consequences of their actions.
This bill provides the promise of a free ride to the guilty!
Many--indeed, hopefully most--companies did what any other industry
or company would do. They learned of the problem and complied with the
UCC. Before they sold the goods, they made sure that they would do what
they were built to do, that they were fit for the purpose they were
purchased for, and that they would not harm the very people who bought
them. Before they sold their products and promised that they would take
their customers into the next century, they made sure that those
statements were actually true. Why protect the few who did not do what
was right?
If auto manufacturers learned that a certain defect would arise in
all cars on a date certain in the future, they would be expected to
sell no cars which had that defect. If 9 out of 10 companies took the
time and money to fix the defect, they would face no threat of
liability--they did the responsible and legal thing. The one bad actor
should--and would--face liability if they knew of the defect but sold
the good anyway. Why should the computer industry be any different? It
isn't fair to those 9 responsible actors to swoop in just before the
defect manifests itself and provide protection for their inaction. To
do so would provide unfair profits and creates a future incentive to
likewise not do the right thing. But that's exactly what this
legislation does. Why? Nobody can seem to answer that simple question.
Question 10. How likely are small businesses to recover damages in
any legal proceeding if the heightened provisions in S. 461--requiring
the plaintiff to show with clear and convincing evidence that the
defendant actually knew or recklessly disregarded a known and
substantial risk that a Y2K failure would occur--is enacted into law?
Answer. These are incredibly high standards to meet, and few--if
any--small businesses could meet such a burden. I cannot for the life
of me understand why the wrong-doers here should benefit from such a
rigorous standard of proof--at the expense of small business! It makes
no sense.
I know, as an attorney who litigates cases for small businessmen
ever day, that meeting this burden will likely never happen. It's just
too high. It's certainly not the standard that small businesses
expected to face in such a situation when they signed their contracts!
Talk about a free ride--this amounts, in practice and in reality--to an
almost complete ``pass'' on all liability for any Y2K related wrongs.
Question 11. Does this bill provide incentives for businesses to
address their Y2K problems now?
Answer. No. This bill provides every incentive for bad actors to
delay indefinitely ever fixing their defective products.
We know how to fix this problem--let's provide incentives to
business to make the expenditures needed to keep their small businesses
afloat. S. 314 does that. This bill does the opposite--its says to the
high tech industry that they can delay forever--why fix the problem?
Just litigate, and the little guy will be unable to afford protracted
litigation.
This bill will not fix one computer. It will do only one thing--
destroy thousands of small businesses while allowing those responsible
for this mess to emerge with more profits than ever.
______
Responses of Harris L. Pogust to Questions From Senator Torricelli
Question 1. At the Judiciary Committee's March 1, 1999 hearing on
the Year 2000 Fairness and Responsibility Act, you testified that the
Medical Manager Corporation attempted to charge doctors for making
their software Y2K complaint, even though the doctors purchased this
software after Medical Manager represented that their product was Y2K
compliant. Do you consider this to be profiteering? Do you have other
similar examples of companies using their product's Y2K defects as a
way to make a profit at the expense of their customers?
Answer. As a result of the extensive publicity which resulted from
the Medical Manager case, I have received hundreds of phone calls from
small businesses across this country who are being charged thousands of
dollars to correct their Year 2000 problems. In many situations the
systems which need to be made compliant were purchased in the very
recent past. These businesses range from physicians offices who are
using software other than Medical Manager as well as physicians offices
who are being charged to fix medical equipment which is not Year 2000
compliant; municipalities who are being charged to fix their 911
systems; furniture stores; medical schools; cleaning supply vendors;
and law firms just to name a few. It is hard to believe that these
software companies have the gall to charge thousands of dollars to fix
systems which they knew were defective when they were originally sold.
In the Medical Manager situation the company anticipated making in
excess of $225,000,000 15,000 customers x $15,000 per customer) from
their own misdeeds. Fortunately, they were stopped and as a result of
our lawsuit the physicians were allowed to keep this money to be used
to improve health care in this country. Unfortunately, millions of
Americans are indeed paying these software companies thousands of
dollars to fix systems which were knowingly and intentionally
manufactured and sold in a defective condition. Why is the consumer so
willing to make these payments? There are several reasons. First, they
are unaware of their legal rights. They do not know that they have
recourse for such conduct through our system of justice. Second, they
are afraid to ``upset'' their software vendor since they need these
computer programs to run their businesses. Once a business becomes
comfortable with a software program they are very reluctant to change
software companies since it means significant down time for
installation and training as well as significant inconvenience. The
comfort level they have obtained is great disincentive to demand that
these companies fix the problem for free. Accordingly, although they
don't feel that they should pay for these repairs, they feel they have
no choice if they want to keep using the system.
As a result, software manufacturers are making billions of dollars
from the Year 2000 problem. Unbelievably, they are now asking the
government to protect them from the monster they have created and from
which they are profiting at the expense of the American public. This
profiteering will continue next year when these same companies will
charge exorbitant fees to fix the Year 2000 problems which undoubtedly
will result.
Question 2. Do you have suggestions on what could be done to
improve the Year 2000 Fairness and Responsibility Act with respect to
companies profiting by charging its customers for fixing Y2K defective
products that they originally marketed or sold as Y2K compliant
products?
Answer. The main problem with the Act as it pertains to the issue
of profiteering is that it fails to deal with the issue at all. There
is no recourse against a company who tries to extort thousands of
dollars from innocent consumers. The Act favors the manufacturer at
every turn. It provides no protection for the consumer who is being
asked to pay exorbitant fees to fix a problem which was knowingly
thrust upon them. Such a result is patently unfair.
The second problem with the Act is contained in Section 303. This
section provides, as a complete defense, that the party took measures
that were reasonable under the circumstances to prevent the Year 2000
failure from occurring. Medical Manager did indeed take certain steps
but were charging exorbitant sums to implement those steps. Such
conduct cannot be condoned and certainly cannot be used as a defense in
a lawsuit resulting from a Year 2000 failure.
I appreciate the opportunity to express my views and the views of
the hundreds of small businesspeople with whom I have discussed this
issue. We must remember that although the Year 2000 problem has also
been called the ``millennium bug'' it is not a computer bug. A computer
bug is a software defect which resulted from an unintentional act on
the part of the programmer. The problem that we are facing today did
not result from the unintentional acts of the software companies. The
Year 2000 problem has been discussed extensively throughout the IT
community for the last 20 years. It is not a surprise. What has
occurred is that these same companies saw the Year 2000 situation as an
opportunity to greatly increase revenues. As John Kang, the President
of Medical Manager, stated when commenting on the November 1997 release
of Version 9.0 of the Medical Manager software: ``This important
upgrade will be highly beneficial for our existing customers and will
also provide us with new sales opportunities to those physician groups
currently using legacy systems which must be replaced by Year 2000.''
Accordingly, it is clear that companies such as Medical Manager see the
Year 2000 situation as an opportunity to greatly increase revenue. Such
profiteering cannot be allowed to continue at the expense of the
American public.
__________
Responses of Stirling Adams to Questions From the Senate Committee on
the Judiciary
Question 1. ATLA President Mark Mandell criticized the bill--even
before it was introduced in the Senate--because the bill allegedly
creates a disincentive for companies to fix Y2K problems. According to
Mandell, companies will wait for complaints to be filed before they fix
any Y2K glitches. Could you please comment on this allegation?
Answer. The bill provides some liability protections for a company
that exercises ``reasonable efforts'' in preventing a problem (see Sec.
303, Reasonable Efforts Defense). This is a strong incentive for
companies to work to proactively prevent problems in order to receive
this protection.
If the legislation is passed, and if material Y2K problems occur,
this bill does not prevent suits based on legitimate claims for
damages. Therefore, companies also have the incentive to limit risk
from such claims by acting proactively to prevent problems or minimize
potential damages caused by Y2K problems.
And, the 90 day pre-trial period outlined in section 101 of the
bill does not provide protection from liability, it only provides a
mechanism for parties to try to resolve issues before the expensive
process of litigation is at full speed. Note that probably the most
economically inefficient way to notify someone of a Y2K problem is to
first file a law suit in court. Instead, section 101 encourages simple
communication of Y2K problems before a costly suit is filed.
Addtionally, the bill does not remove the normal market incentive
for companies to work to prevent problems before they occur; within the
competitive market environment, if a company doesn't provide timely
service and thorough customer satisfaction, it is less likely to be
successful.
Question 2. You stated in your written testimony that the bill
encourages, in your own words, ``cooperative problem prevention.'' What
does that mean? You also contended that the bill preserves the right to
sue for legitimate claims, but places restrictions on frivolous claims.
Could you please explain how the bill can do both? What provisions of
the bill deter frivolous claims and exactly how does the bill affect
legitimate claims?
Answer. Cooperative problem prevention is encouraged by section
104, which states an entity cannot recover for damages it could have
reasonably acted to avoid. This is an express incentives for all
members of the technology community, from users to suppliers to
developers, to resolve Y2K issues before they occur.
And, as explained further in Response 3, provisions such as 201,
Contract Preservation, and 301, Proportionate Liability, would help
create an environment where companies can assist others in performing
Y2K remediation or preparation efforts without fearing they will be
held responsible for damages they did not cause or for liability they
did not contractually agree to. Provisions such as these would help
restore the normal market forces that encourage companies to identify
technical needs and rapidly develop solutions to meet these needs.
Right now, these cooperative market forces are diminished because of
the fear of a wave of Y2K litigation.
Frivolous litigation would be discouraged by, for example, Section
401, requiring that a majority of the members of a plaintiff class must
have experienced a material defect, and by Sections 101, Pre-trial
Notice, and 103, leading Requirements, which require complaints to
specifically identify harms caused by a Y2K problem. Additionally, the
fact that the legislation would provide uniform substantive and
procedural guidelines for Y2K-related suits would diminish the
incidence of frivolous claims. Because litigants and courts would be
better able to quickly establish whether a legitimate claims exists, it
would be easier for courts to dismiss improper claims, and for
defendants to fight frivolous claims.
Legitimate claims are preserved in Titles I, Prelitigation
Procedures, and IV, Class Actions. These titles set up a process to
efficiently resolve claims, but do not prohibit claims from being filed
as long as actionable damage has occurred. For example, the pre-trial
notice and pleading requirements of Sections 101 and 103 do not
restrict claims, but do require that Y2K complaints describe the Y2K
problems giving rise to the suit and identify what resolution is
sought. This would allow all parties to understand up-front what
damages are alleged and what resolution is requested.
Question 3. Cannot parties accomplish the goals of this legislation
through private contractual terms? In other words, why is this
legislation necessary? More specifically, how would this bill spur
consultants to fix the Y2K problem?
Answer. So many small businesses, governments, and even large
businesses need technical assistance in performing Y2K preparation
efforts that analysts are predicting there will not be enough
consulting resources available to meet this need. Because our legal
system hasn't dealt with the Y2K problem before, significant
uncertainty exists as to whether courts will honor terms agreed to in
contracts relating to Y2K-related services or liability. This
uncertainty works to diminish the level of resources available for Y2K
remediation.
For example, we are aware of companies that provide general
computer and system consulting services that either refuse to offer Y2k
system preparation/remediation services or significantly limit such
offerings, specifically because they are worried that contractual
liability limits may not be honored by a court. Section 201 of the bill
would ensure contractual terms are enforced. This would help
consultants decide to offer Y2K services because they could contract to
perform services with confidence that they understand what their
resulting risks and obligations will be.
Additionally, these consultants are most needed in working on
complex systems made up of numerous hardware, software, and other
system components. Some consultants don't offer complete Y2K services
because they fear being held liable for all damages that occur on a
system which they have worked on, even if they had little
responsibility for, or only a minor role in preparing, the entire
system. The bill's Section 301, Proportionate Liability, addresses this
concern by stating a party would only be liable for damages it was
responsible for causing. This would allow entities to worry less about
the litigation risks and more about how to fix Y2K problems.
Question 4. Would you care to comment on anything you heard today?
Answer. We see two major objectives this bill seeks to accomplish.
The first is to facilitate cooperative problem prevention so that fewer
Y2K problems occur in the first place. The second is to establish an
efficient legal framework so that frivolous claims are avoided or
quickly dismissed, and where legitimate Y2K claims do occur, they are
efficiently processed and resolved. The testimony from the witnesses at
this hearing suggests that these objectives are widely shared, and we
encourage you to proceed towards passing legislation that meets these
goals.
______
Responses of Stirling Adams to Questions From Senator Leahy
Question 1. You mention a number of committees on which you serve
and organizations to which Novell belongs in the course of your
testimony. Did you, in fact, testify on behalf of Novell or are you
also representing those other committees and entities, as well?
Answer. I testified on Novell's behalf only.
Question 2. Your testimony indicates that you think that the reason
Senator Hatch's bill is broadly supported is because ``the legislation
would encourage cooperative efforts to reduce the total number of Y2K
problems that occur.'' Please explain, and be as precise as you can,
the factual basis and your reasoning that lead you to that conclusion.
Answer. The broad support of the bill is shown by the coalition
supporting it, which is made up of over 80 organizations and
associations, and includes entities such as the National Association of
Manufacturers, the National Retail Federation, the National Association
of Wholesalers and Distributors, and the International Mass Retail
Association, among many others. Just one of the coalition members, the
U.S. Chamber of Commerce, represents over three million businesses,
over 90 percent of which are small businesses. Notably, most coalition
members have the potential to be either plaintiffs or defendants in
Y2k-related litigation.
Cooperative efforts that would decrease the incident of Y2K
problems are encouraged by section 104, which states an entity cannot
recover for damages it could have reasonably acted to avoid. This is an
incentive for technology users and suppliers to resolve Y2K issues
before they occur. With this provision, an entity would be much less
likely to avoid fixing a problem it was aware of because it felt it
could just go to court after the advent of the Y2K to seek compensation
for any damages that might occur.
Additionally, as is discussed further in the responses to questions
7-9, provisions such as 201. Contract Preservation, and 301,
Proportionate Liability, would help create an environment where
companies can assist others in performing Y2K preparation efforts
without undue fear of being held responsible for damages they did not
cause or for liability they did not contractually agree to.
Question 3. Your testimony indicates that the legislation ``would
place restrictions on litigation based on claims where no injury has
occurred.'' Is it not true that the legislation would also place
restrictions on litigation based on claims where injury does occur and
even after injury has occurred?
Answer. Yes. As discussed in the previous answer, for example, if
injury occurs that could have been avoided by reasonable actions,
section 104 would place limitations on recovery.
Question 4. Your testimony includes a general description of the
testing and customer communications Novell has undertaken in
preparations for Y2K. Although you are Novell's ``lead attorney for
Year 2000 issues'' you do not discuss the legal preparations that the
company has made and is making. Would you describe in detail those
preparations. In particular, include a complete description of the
types of contractual arrangements in which Novell engages, the
insurance arrangements Novell have made, the indemnification
arrangements to which Novell is a party, and the legally-required
disclosures Novell has made or is making.
Answer. One element of our preparations for the Y2K has involved
how much information about our Y2K testing processes we should make
available. One factor in our decision-making process had involved the
legal risks, some related to anti-trust issues, some related to
providing fodder for frivolous claims. With the passage last year of
the Year 2000 Information and Disclosure Act we have felt a little more
free in making public Y2K information. As a result, we have released
additional information about Y2K testing processes.
Novell's Y2K preparations have addressed both our internal Y2K
readiness, and the Y2K readiness of products we license to others. In
both of these areas, our preparations have included reviewing our
contractual arrangements with suppliers to verify whether the suppliers
are obligated to provide Y2K-ready services or supplies. Beyond
contract review, our effort has also included a technical review of
many of our major suppliers. In situations where our testing has
disclosed non-Y2K ready internal systems, we have generally chosen to
upgrade that technology or we have installed a different system that is
Y2K ready.
Some of the types of contracts we sign that might be implicated by
Y2K issues are contracts to purchase food services, telecommunications
services, security services, utility services, package and mail
delivery services, audit and accounting services, and information
systems services. Other relevant contracts includes purchases of
buildings, building systems such as elevators of HVAC, insurance
policies, vehicles, and computers or software supplies. Contracts we
make that involve our provision of licenses to someone else include
contracts with original equipment manufacturers, distributors, software
or service resellers, technical education centers, and end users. For
contracts that we enter to purchase supplies for our use, we typically
seek language that offers some guarantee against a failure to perform
due to Y2K issues. In these contracts we do not typically seek
indemnification for any damages that occur, but we do seek a commitment
that the item is Y2K ready, and that if any issues come up, the
supplier will address them promptly. In most of our contracts under
which we sell licenses or services, we provide performance warranties,
in some cases these spell out Y2K issues as a specific category covered
by the performance warranty.
Regarding our insurance policies, we have reviewed each of them to
evaluate our coverage regarding Y2K issues. Regarding required
disclosures, Novell has disclosed in its annual reports and quarterly
10Q filings to the SEC information about our Y2K efforts; please see
question 26 below for more information on these.
Question 5. Please provide a thorough description of each legal
action to which Novell has been a party that involves Y2K concerns.
Answer. There are none.
Question 6. Please provide a thorough description of each Y2K-
related claim or demand of dispute to which Novell has been a party
that has not yet resulted in litigation. Include, if the claim, demand
or dispute was against Novell how Novell responded and whether the
matter has been resolved.
Answer. While answering this question in detail might reveal
business-sensitive information, please see the response to question 4
for some information about Novell's approach to addressing Y2K
readiness with other entities.
Question 7. Please provide the factual basis and specifics for your
testimony that ``Novell has seen specific cases where entities that do
offer general consulting services have been extremely wary of widening
their offerings to provide complete Y2K services.'' Be specific and
complete and provide all documentary support for this statement.
Answer. Here is a restatement of this issue from another source,
the NACCB: The National Association of Computer Consultant Businesses
is an industry association representing hundreds of companies that
provide computer and engineering consulting services. The NACCB has
previously provided the following testimony to the Senate to describe
that organization's experience with this issue:
NACCB member firms supply frontline technical experts that
provide a number of computer related services to clients on a
contract basis, including Y2K remediation services and
typically, these experts follow the specifications outlined by
the client.
NAACB firms are in a unique position in that they provide the
necessary services to remedial the Y2K problem, but they
typically do not write the specifications for the remediation
process. We often refer to our businesses and their remediators
as the ``Good Samaritans'' in that they have the expertise and
knowledge to remediate the problem. Yet, our members are very
concerned about possible Y2K-related liability, especially
where they follow the specifications the client provides and
make a good-faith effort to fix the problem pursuant to these
client specifications.
NACCB member firms may avoid Y2K remediation projects rather
than risk costly potential litigation in situations where
needed the staffing firm nor the computer consultant provide
the work specifications. This avoidance of Y2K remediation
projects by staffing companies in computer consultants will
further compound the Y2K problem. (mail [email protected] for
more info on this statement).
And the following is a specific example of how the current
environment can discourage companies from providing resources to remedy
Y2K issues: In addition to the free Y2K information and tools Novell
provides that inventory Novell products for software issues, Novell
also licenses software that helps customers in surveying and managing
all of their networked software to resolve Y2K issues. And, Novell has
a large consulting services organization that assists customers
assessing their Novell products for Y2K issues.
Over the last year, we have had discussions with various companies
about working to provide additional services to assist customers in
evaluation or remediation of non-Novell products for Y2K issues. And,
with at least one company we have struck a deal that allows us to
distribute a technology that inventories numerous types of products and
provides Y2K information about these products.
However, as we have participated in these discussions, one factor
that has dampened companies' enthusiasm in collaborating to provide
full Y2K services across an end-user's system is the significant legal
risks involved. This legal risk does not always prevent companies from
choosing in the end to provide the service or collaborate with a
product or service offering, but the risk is a definite factor in the
analysis of whether to pursue the business opportunity. The concern by
such companies is that even if they provide their products or services
in a professional manner, because of the complexity of today's
networks, there may be some system component that experiences a problem
and subjects the Y2K services company to liability for damages to that
component or to the entire system.
Question 8. Please describe in detail and provide relevant legal
authority regarding your statement: ``Today, could a consultant worried
about Y2K litigation reasonably limit its liability using standard
liability limitations in the consultant's contract? The hope is that
contractual limitations will be honored by courts, but enough question
exists in this area that the uncertainty has a direct impact on
companies' decision-making processes.''
Answer. For example, a consultant might agree in a contract with a
company that needs Y2K remediation services that:
Customer recognizes that Consultant will provide the testing
and evaluation services described in this contract, but agrees
that due to the complexity of Customer's systems, Consultant
does not guarantee that Customer's systems will not experience
any Y2K problems. Consultant shall not be liable for Y2K
problems in Customer's system that were not caused by
Consultant.''
The concern of businesses today is that despite such contractual
language, if Y2K problems occur and a lawsuit is filed, the plaintiff
might successfully avoid the disclaimer above, either by making the
claim ``outside of the contract'' as a negligence claim, or by claiming
that because of the consultant's position of superior knowledge, or
superior bargaining power, the disclaimer is not valid.
Question 9. You argue that section 201 of the proposed legislation
would ensure that the terms agreed to in a contract are enforceable. Do
you interpret the bill to change the law with respect to adhesion
contracts or the doctrine of unconscionability? If a contractual
liability limitation was a matter of adhesion or would be found
unconscionable under State or federal law could section 201 nonetheless
require its enforcement?
Answer. If a contract were to be found unenforceable as a whole,
section 201 would not apply. Section 201 would apply if only an
individual liability limitation were determined to be unenforceable by
otherwise applicable law.
Question 10. You argue for proportionate liability as a matter of
federal law. If defendants are found jointly and severally liable is it
not true that they can still legally determine their respective
liability among themselves? The purpose of the doctrine of joint and
several liability is so that the injured, innocent plaintiff not be
left holding the bag. Is that not correct? Are you opposed to the
traditional doctrine of joint and several liability in all legal
contexts or any other legal contexts beyond that of consultants
performing remedial Y2K services?
Answer. While defendants may seek to determine respective liability
among themselves, this may not be possible or practical where a
defendant (perhaps the one chiefly responsible for damages) has no
assets or no longer exists (due to bankruptcy or other reasons). Also,
if $100,000 of damages occur, and a defendant is found 1 percent
responsible, she may need to spend $300,000 establishing that someone
else should cover the other 99 percent. So, the situation still exists
where there is significant concern about a company being held
responsible for damages beyond the degree of its involvement in the
problem that caused the damages. Our testimony in support of a uniform
principle of proportionate lability is limited to the context of Y2K
actions, on the assumption that the Y2K presents a unique challenge to
our court system that can be more efficiently addressed with specific
modifications to that system.
Question 11. You oppose frivolous lawsuits. We all do. The
difficulty is in finding a process to separate frivolous lawsuits from
those with merit without prematurely curtailing peoples' rights to
relief. You argue for an extended notification period. What has
Novell's experience been in this regard? Is Novell usually sued before
there is more informal contact about the dispute? Does Novell sue first
and ask questions later? Is the typical dispute scenario one in which
there is contact before litigation is commenced?
Answer. Our typical experience is that parties communicate with
each other prior to litigation. Our support of the pre-litigation
notice period is based on our view that the Y2K presents our economy
with a very non-typical experience, as evidenced by suits that have
been filed without prior meaningful discussions, or where no damage has
been experienced.
Question 12. Is there anything in the rules of State courts or
federal courts that prevents parties to a lawsuit from ending such
actions quickly if all is resolved to their mutual satisfaction?
Answer We think a relevant issue here is how quickly a stage can be
reached where parties can know their rights and the potential outcome
of litigation well enough that they are satisfied with the potential
results. Uniform procedural and substantive guidelines can make the
process more efficient so that this result is reached more quickly,
often before litigation occurs.
Question 13. Is there currently any prohibition from parties to a
Y2K dispute seeking to resolve their dispute by arbitration if they
mutually agree to do so?
Answer. No.
Question 14. Is there any legal prohibition in State or federal law
from doing everything possible to assure customer satisfaction by
Novell?
Answer. While there are no express ``prohibitions,'' we feel the
benefit of legislation like this is that it helps create an environment
where companies feel they can work together without experiencing a
higher level of risk due to an anticipated wave of litigation, some of
which, if the past year has been an accurate harbinger, will not be
based on reasonable claims.
Question 15. Does anything prevent Novell from seeking agreement
from companies to adhere to mediation or arbitration of disputes?
Answer. No.
Question 16. Specifically, what has Novell's experience been to
date with Y2K-related disputes?
Answer. To this date, Novell has been able to resolve Y2K issues
with its suppliers and customers. See the response of question 4 above
for more information on Novell's efforts in working with its suppliers
and customers.
Question 17. You note that section 104 adds a federal statutory
codification of the general duty to mitigate harm and damages. What
justifies this particular federal statutory provision and what change
and effect is intended?
Answer. The benefit we perceive in this provision is the proactive
action it can encourage. Though many companies and governments are on
track for Y2K readiness for their own systems, all institutions depend
to some degree on supplies or information from other entities. In this
context, Y2K problems experienced within individual entities can be
magnified by their effect on other entities in the same supply chain.
This problem, and its unique context given the effect of the Y2K on
most members of the economy at the same time, justifies federal
legislation.
Question 18. You indicate that you believe the bill creates
``uniform substantive * * * guidelines for Y2K litigation.'' What are
those guidelines?
Answer. Uniform substantive guidelines include the codification of
the duty to mitigate in section 104, the contract preservation
provision in section 201, section 301's proportionate liability
provisions, and the reasonable efforts provision of section 303. Also
fitting in this category are the minimum injury or material defect
provisions in sections 101, Notice Period, 103, Pleading Requirement
section, and 401, Minimum Injury Requirement.
Question 19. Does the Uniform Commercial Code already provide
``uniform substantive guidelines'' for contract claims in State courts?
Answer. To some degree, yes, but the UCC has not been adopted by
each state in the same manner. To the extent that it does offer uniform
guidelines, it helps facilitate commerce as entities feel more
comfortable doing business in a greater number of jurisdictions.
Question 20. John Koskinen the Chair of the President's Council on
Year 2000 Conversion notes that he ``believes it would be
counterproductive to establish a minimum standard of performance or
activities after which legal protections are provided.'' He says: ``I
would like to encourage leaders of every organization in the United
States to keep asking if there is anything more they can do rather than
seeking advice from their lawyers about when they have done enough and
can move on to other issues.'' Do you agree? If not, what is your
response?
Answer. We agree that the focus of efforts regarding Year 2000
issues should be based on problem solving, and not on a lawyer-based
analysis of the risks posed by the threat of a historically large crush
of litigation. We believe that appropriate Year 2000 litigation can
facilitate such a focus on problem solving.
Question 21. I saw that in a recent column in Computerworld Paul
Gillin wrote that ``Vendors have had plenty of time to prepare for
2000. The fact that some were more preoccupied with quarterly earnings
and stock options than in protecting their customers is no excuse for
giving them a get-out-of-jail-free card now.'' How do you respond?
Answer. Regarding the time to prepare, from our corporate
experience to the experience of the U.S. Government in pursuing its own
remediation efforts, it appears that the task of preparing for the Y2K
is so complex that there is not ``plenty of time.'' Each technology
process or product in use needs to be tested on its own and with other
technologies with which it interacts. This is a tremendously difficult
and resource-intensive task. As discussed further in our responses to
questions 2 and 24, we agree with members of the coalition that the
bill offers benefits that are not unique to a particular industry.
Question 22. Please give examples of a ``material defect, in a
product or service as defined by S. 461. Please give examples of
defects in a product or service that would not be ``material'' under S.
461.
Answer. If an elevator in a 10-story building would not rise above
the 3rd floor, that would be a material defect. If a fully automated
time-stamp machine required an initial manual advance of a lever or
data element so that is would subsequently stamp the correct date, that
would not be a material defect.
Question 23. If Congress were to enact legislation providing
special legal protections to manufacturers of non-Y2K compliant
software and hardware, would that be fair to those manufacturers who
did the right thing and invested the time and money to develop,
manufacture and market Y2K compliant software and hardware?
Answer. As discussed further in questions 2 and 24, we, with the
broad coalition in support of Y2K litigation, believe that it provides
benefits across industries and supply chains.
Question 24. This is a circumstance in which business is coming to
Congress asking for a special federal law to be enacted to provide
special legal protections for them in connection with potential Y2K
liability. Last year the tobacco industry came to Congress demanding
special legal protections. At that time I urged that Congress insist
first on full disclosure so that we could have a sense of what claims
were being compromised. In this circumstance involving Y2K liability,
should Congress insist on full disclosure in order to have a better
understanding before passing special legal protections?
Answer. We agree that legislation should be passed based on the
best available information. The coalition that supports this bill runs
horizontally across industries and vertically up and down the spectrum
of company sizes. And, coalition members have the potential to be
either plaintiffs or defendants in Y2K-related litigation. The reason
for this, we perceive, is that coalition members believe Y2K
legislation offers benefits that are not industry or business-size
specific.
Question 25. Do you think special legal protections should be
granted to companies that have not complied with current legal
requirements by making full and fair disclosure of their readiness,
costs, risks and contingency plans?
Answer. We do not advocate legislation to create special
protections for companies that do not comply with current statutory
requirements.
Question 26. Please provide copies of all public disclosures that
Novell has made about Y2K compliance.
Answer. Our web site at www.novell.com/year2000 contains most of
our publicly available Y2K information: this site is updated frequently
with new or updated information. Please find attached a copy of most of
this information. These documents include, Year 2000 Q & A, Year 2000 Q
& A (Internal Business Systems), Year 2000 Status of Novell Products,
Novell's Project 2000 White Paper, Novell Year 2000 Testing Criteria,
and Year 2000 Web Resources. Also, we have made Year 2000 disclosures
in our annual reports and quarterly SEC filings. The most recent of
these was in our 1998 Annual Report, which can be accessed on our web-
site at http://www.novell.com/corp/ir/annual/financials/mda.html. Past
disclosures are also found on our web site.
Question 27. Please provide copies of all analyses and notes of
conversations regarding Novell's Y2K compliance.
Answer. Our web site at www.novell.com/year2000 contains
information we have made public. Also, please see the response to
question 26 above.
Question 28. Do you think special legal protections should be
granted to companies that have withheld information from a customer
about their own Y2K problems?
Answer. In the example of a trucking company, or a software
company, that contracts to make deliveries that it knows it will not be
able to make because its delivery system will be down for a time period
to address Y2K testing or remediation, we do not favor a mechanism that
would relax the company from its contracted obligations.
Question 29. Do you think special legal protections should be
granted to companies that have analyzed the costs and potential risks
of Y2K noncompliance and made the calculated business decision not to
make the investment needed to come into compliance? Might that type of
calculation, the type of calculation apparently made by Ford in the
exploding gas tank case, be affected by changing the law to make it
harder for customers to seek legal redress for wrongs?
Answer. The Ford case is an appropriate example for showing what
this proposed legislation does not do. It generally does not apply to
cases involving personal injury. And, as discussed above, we believe
that the legislation will offer benefits to companies and industries
generally because it facilitates a focus on providing solutions and
because it discourages frivolous suits. We believe that can be
accomplished without decreasing incentives for entities to prepare for
Y2K issues.
Question 30. Section 304 of S. 461 limits punitive damage award to
``3 times the amount awarded to the claimant for actual damages'' or a
dollar threshold depending on the status of the defendant as a company
or individual as defined by the bill. Why are these limits in punitive
damage awards tied to ``actual damages'' as defined in S. 461 instead
of ``economic loss'' as defined in S. 461? Under what circumstances, if
any, could a plaintiff receive damages for ``economic loss'' as defined
in S. 461 under its provisions?
Answer. It is our understanding that the concept behind limiting
punitive damages in the Y2K arena is that this is a one-time event and
so awards of large punitive damages over and beyond compensation for
damage experienced would be less likely to serve the public policy
objective of punishing defendants in order to increase incentives by
that defendant and other entities to avoid similar harms in the future.
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Additional Submissions for the Record
----------
Prepared Statement of Hon. John Ashcroft, a U.S. Senator
From the State of Missouri
Mr. Chairman, I want to take an opportunity to thank you for
holding this hearing and congratulate you and Senator Feinstein for
introducing the Year 2000 Fairness And Responsibility Act. Your bill
represents an important step in Congress' ongoing efforts to limit the
scope and impact of the Year 2000 problem before it is too late. Last
year, we passed the Year 2000 Information and Readiness Disclosure Act,
which was an important first step in removing any legal barriers that
could prevent individuals and companies from doing everything possible
to eliminate Year 2000 problems before they happen. I was particularly
gratified that I was able to work with you and others on the Committee
to include the provisions of my temporary antitrust immunity bill, S.
2384, in last year's bill. However, as I said at last year's mark-up,
the Disclosure Act must be understood as only the first step in our
efforts to deal with this problem. Your bill and Senator Bond's Small
Business Year 2000 loan guarantee bill, which we will consider on the
Senate Floor tomorrow, are the next logical steps in this ongoing
effort.
Countless computer engineers and experts are busy right now trying
to solve or minimize the Year 2000 and related date failure problems.
Part of what makes this problem so difficult to address is that there
is no one Year 2000 problem. There are countless distinct date failure
problems, and no one silver bullet will solve them all. Nonetheless,
information relevant to solving one date failure problem may help solve
other problems and eliminate date failure problems before they happen.
We cannot allow concerns over frivolous litigation to chill the
exchange of vital information.
At the same time, we must ensure that those who do not make
adequate efforts to address the Year 2000 problem are held to account.
Real harm from inadequate efforts to address this problem must be
compensated, and individuals must retain their capacity to receive
compensation for injuries. However, we cannot allow the prospect of
frivolous litigation between businesses to block efforts to avoid such
injuries before they occur. We also must ensure that frivolous
litigation over the Year 2000 problem does not consume the lion's share
of the next millennium. While it is not possible for Congress to
guarantee that private individuals and companies will be able to solve
the Year 2000 problem, Congress can eliminate legal obstacles that
stand in the way of private solutions. Information regarding existing
software and known problems must be shared as completely and openly as
possible. The current fear of litigation and liability that imposes a
distinct chilling effect on information sharing must be alleviated.
The Year 2000 Fairness And Responsibility Act appears to provide
some much needed relief from the threat of frivolous litigation. The
Act provides some important procedural innovations, such as the waiting
or cooling off period, that may help avoid costly and drawn-out
litigation battles. I am looking forward to today's hearing, which
should help us fine-tune our approach. One principle that I suggest
will be important in fashioning successful legislation is that we try
to keep the legislation focused on what is unique about Year 2000
litigation. There are many aspects of our civil justice system that are
in desperate need of reform. However, if we attempt to address all
those ills in a single bill, we may endanger a bill that could provide
targeted relief to address the Year 2000 problem.
Resources to address the Year 2000 problem, particularly time, are
finite. They must be focused as fully as possible on remediation,
rather than on unproductive litigation. Moreover, the availability of
adequate development and programming talent may hinge upon a working
environment that protects good faith remediation efforts from the
threat of liability. Congress must prevent a fiasco where only lawyers
win.
Prepared Statement of Thomas J. Donohue, for the U.S. Chamber of
Commerce, and U.S. Chamber Institute for Legal Reform
introduction
Mr. Chairman and members of the committee, I am Thomas J. Donohue,
President and Chief Executive Officer of the United States Chamber of
Commerce and Chief Executive Officer of the U.S. Chamber Institute for
Legal Reform. The U.S. Chamber is the world's largest business
federation, representing more than three million businesses and
professional organizations of every size, in every business sector, and
in every region of the country. The central mission of the Chamber is
zealously representing the interests of its members before Congress,
the Administration, the independent agencies of the federal government,
and the federal courts. The mission of the Institute for Legal Reform
is to reform the nation's state and Federal civil justice systems to
make them more predictable, fairer and more efficient while maintaining
access to our courts for legitimate lawsuits.
Given the diversity of our membership, the U.S. Chamber of Commerce
is well qualified to testify on this important topic. We are
particularly cognizant of the problems that small businesses may face
as the Year 2000 approaches because more than 96 percent of our members
are small businesses with 100 or fewer employees and 71 percent have 10
or fewer employees. I welcome this opportunity to provide testimony on
the critical issue of Year 2000 (Y2K) reform and the urgent need for
prompt action by Congress.
I would also like to point out that I have unique distinction in
that I represent the interests of both potential Y2K plaintiffs and
defendants. Certainly under these conditions, you can appreciate the
challenge at hand to bring about effective Y2K reform and yet preserve
the interests of those whom I represent.
I want to take a moment to recognize the tremendous work of
Chairman Orrin Hatch, Senator Feinstein and the rest of this committee
on the Y2K issue. This hearing and your legislative efforts, including
last year's Information Readiness and Disclosure Act are critical as we
all seek to move quickly to address the Y2K problem. I also want to
express my appreciation for the leadership and commitment to the Y2K
issue by Chairman John McCain of the Commerce Committee, Chairman Kit
Bond of the Small Business Committee and Co-Chairman Robert Bennett and
Christopher Dodd and the Senate Special Committee on the Year 2000
Technology Problem. All of us owe you a great debt of gratitude for
your efforts to work with us to address the Y2K problem quickly, fairly
and in a bipartisan manner.
During the next year, the world community will face the possibility
of a very serious threat to the global economy caused by the transition
of computing systems to Y2K compatibility. This is a challenge not only
to our technical ingenuity, but also to the public's faith in our
leading technology industries, the American business community, and
government in general and our legal system.
And the United States is not alone. All around the world, leaders
are grappling with addressing the Y2K problem and its impact on their
economies. This is particularly daunting given the U.S. leadership in
the global economy and the implications due to our relationship with
our trading partners abroad.
the y2k problem
The Year 2000 computer problem started decades ago when, in an
effort to conserve memory and time as well as to be cost-effective,
programmers designed software that recognized only the last two digits
of dates. Thus, when ``00'' is entered for the Year 2000, a computer
may process the date as the year 1900. This can cause the computer to
produce erroneous data or to stop operating, both of which have far-
reaching implications.
No one knows for certain what the scope of the problem may be.
However, our economy is critically dependent on the free-flow of
information. If this flow is disrupted or halted, our nation's economy
could be seriously damaged. Indeed, the Federal Reserve Bank of
Philadelphia recently predicted that while the Year 2000 computer
problem may boost the gross domestic product in 1999 by 0.1 percent, or
$8 billion, due to the massive influx of resources to fix the problem,
in 2000, however, the problem could shrink GDP by 0.3 percent due to
Y2K disruptions. In fact, some estimates are that that the Year 2000
computer problem could cost an estimated $119 billion in lost output
between now and 2001.
What will be the final impact of the Y2K problem on our economy is
unknown. But we do know that it poses a very real and serious threat.
business awareness and commitment to solve the problem
To that end, American businesses have committed hundreds of
billions of dollars and the extraordinary intellectual resources of its
employees to meet the challenges we face as computer systems make the
transition to Year 2000 compatibility. From laboratories to offices to
other workplaces throughout the country, businesses are working
diligently to ensure that America is prepared to address the challenges
of the new millennium with as little disruption as possible to our
economy and every day lives. This will be a tough and costly challenge.
The Gartner Group, a technology consulting firm, estimates that
software remediation alone will cost between $300 and $600 billion.
This amount does not include the cost of repairing other factors, such
as hardware, end-user software, embedded systems or litigation.
According to the Cap Gemini Millennium Index released on November 10,
1998 major Western economies have made progress in addressing the Y2K
problem. Year 2000 spending nearly doubled in the six months before the
report, and climbed 93 percent from $256 billion in April to $494
billion by October. Projected cost estimates for software, hardware and
labor expenses increased 20 percent from $719 billion to $858 billion.
Furthermore, as of November 1, 1998, U.S. firms had expended 61 percent
of their estimated Y2K budgets.
While businesses are working diligently, cooperatively and
responsibly to meet this challenge, we must still acknowledge and
prepare for the likely possibility that some problems may occur.
Unfortunately, even under best-case scenarios, we will not be able to
find and fix every single Y2K problem. This includes the Federal
government as well. In fact, the General Accounting Office (GAO)
reported recently that the Federal government is having difficulty in
meeting a March 31, 1999 deadline to find, fix and test all of its
computer systems. Only 11 departments were given satisfactory progress
ratings, seven were making slow progress and seven more were making
unsatisfactory progress.
But even if we fix most of the computer system problems, the Y2K
problem is still expected to cause some disruptions. Some problems will
not be fixed because of technical difficulties, some because of not
starting soon enough, and some because of indifference.
concerns about litigation
The true tragedy, however, is that some problems will not be fixed
because of a fear of litigation or the transfer of resources from
actually fixing the problem to defending lawsuits. While business is
working to fix the problem, there are those in our society who are
planning to exploit it. Unless steps are taken soon, we could
experience an explosion in litigation. In fact, Giga Information Group,
a technology-consulting firm, has estimated that the amount of
litigation associated with Y2K will be $2 to $3 for every dollar spent
actually fixing the problem. If this is allowed to proceed, guess who
will bear the cost? It will ultimately be consumers. Obviously, this
scenario would be a monumental tragedy for American businesses, workers
and consumers.
Business has good reason to be concerned. A report from the
Newhouse News Service quoted a participant in the American Bar
Association's most recent annual convention as describing Y2K as ``the
bug that finally provides lawyers the opportunity to rule the world.''
In addition, at a seminar held at the ABA's convention, a team of
lawyers estimated that the amount of legal costs associated with Y2K
could exceed all the money spent on asbestos, breast implants, tobacco
and Superfund litigation combined.
Clearly, America has a choice. It can adopt a legal environment
that encourages the sharing of information, the fixing of the problem,
and the fast, fair and predictable resolution of legitimate claims for
compensation. Or, it can allow a potential litigation explosion that
could be very costly to American consumers. Just think of the impact
this would have on our economy, job creation and maintenance, and the
average American family. Can we run the risk of quashing those historic
years of economic expansion with the lowest unemployment rate in three
decades? Mr. Chairman and members of the Committee, this is a very real
scenario and a very serious challenge that we have before us.
business' recommendations
But something can be done and your bill. The Year 2000 Fairness and
Responsibility Act does so. The business community and other
organizations have worked with Chairman Hatch and Senator Feinstein to
fashion legislation that directly addresses the Y2K problem. This bill
encourages remediation, precludes exploitive and costly litigation
while continuing to allow those with legitimate claims access to our
legal system in addition to giving the courts the means to efficiently
resolve Y2K-related disputes. In developing this bill, the coalition
was happy to see that all interests were listened to and compromise and
concessions from all the participants was required.
The coalition represents a cross-spectrum of various industries and
interests. It includes the U.S. Chamber of Commerce, the National
Association of Manufacturers, the National Retail Federation, the
National Federation of Independent Business, the National Association
of Wholesalers and Distributors, the Edison Electric Institute, the
American Insurance Association, the International Mass Retail
Association, among many others. It is important to note that some
members of this coalition represent both potential plaintiffs and
defendants in Y2K-related litigation.
Passage of S. 461, or one of the other similar bills currently
pending in the Congress would accomplish several things. It would
encourage remediation and minimize costs, thereby protecting the
economy, jobs, taxpayers and consumers. Our national infrastructure and
national security would also benefit.
Before turning to the specifics of what S. 461 does, it is
important for me to emphasize what it will not do. This legislation
does not alter the rights of persons who are physically injured or
otherwise truly harmed by a Y2K failure. It specifically excludes from
its purview claims for personal injury. It allows those who experience
harm because of a Y2K problem to have access to the legal system and to
be fully compensated for their real losses.
Over the past five years, most large and mid-size American
companies have taken steps to address their Y2K problems. The anecdotal
reports we are receiving indicate that the computer systems of most of
these companies will be Y2K compliant and that during the next few
months most of them will be testing their systems and preparing for
January 1, 2000. Much work, however, must still be done--especially in
the small business community.
The consensus proposal is supported by large, mid-size and small
businesses because it will both help and encourage them to address
their Y2K problems. Passage of S. 461 or other similar legislation in
the remaining months of 1999 would accomplish several things:
Business and consumers will be encouraged to fix their Y2K
problems because they will not be compensated for damages they
could reasonably have avoided;
Businesses will be encouraged to make efforts to fix Y2K
problems because those efforts will be made admissible in
contract cases and would be an absolute defense in non-personal
injury tort actions; and
Consultants and other solution providers will know that the
terms of their contracts will not be altered if Y2K problems
occur, so they will have a greater incentive to take on
additional Y2K remediation work.
If Y2K problems begin to materialize, S. 461 encourages both
potential claimants and potential defendants to resolve their disputes
without burdening the court system with expensive litigation:
Before suing, potential plaintiffs will be required to give
potential defendants an opportunity to fix the Y2K problem by
giving written notice outlining their Y2K problem. The
potential defendants would then have 30 days to provide a
written response to this notice describing what actions they
have taken or will take to fix the problem. If not satisfied
with the response, potential plaintiffs may initiate a lawsuit
60 days after the receipt of the potential defendants'
response. This provision will accelerate the remediation
process if failures occur, eliminating the need for most
lawsuits and preventing the diversion of precious time and
resources from remediation to litigation.
The legislation also encourages parties to resolve their Y2K
disputes through voluntary alternative dispute resolution
mechanisms.
An important aid in discouraging litigation and encouraging
settlement is a set of ``ground rules'' which ensures fairness to both
parties and brings some certainty and predictability to the process. It
is important to remember that S. 461 does not cover claims for personal
injury. Some of the essential points of the bill are:
It ensures that the terms contained in written contracts are
fully enforceable except in cases where a court finds that the
contract, as a whole, is unenforceable.
To minimize the ``lottery'' aspect of litigation surrounding
Y2K, the imposition of punitive damages is limited. Any
punitive damages that can be assessed against a defendant are
limited to the greater of three times actual damages or
$250,000, or for small companies (those with less than 25
employees), to the lesser of three times actual damages or
$250,000.
In tort actions, each defendant will only be liable for the
amount of damage in direct proportion to the defendant's
responsibility. This provision is modeled on the Private
Securities Litigation Reform Act of 1995.
If Y2K failures lead to disputes that cannot be resolved without
litigation, S. 461 provides additional procedural and substantive rules
that small and large plaintiffs and defendants in the business
community believe are fair and will promote efficiency. This includes
expansion of Federal class jurisdiction for Y2K class actions and no
strict liability for a Y2K problem.
I must restate that this legislation does not alter a plaintiff's
right to recover actual or consequential damages, bring claims for
personal injury, nor does it unduly burden a plaintiff's access to the
courts. In other words, the ability of any plaintiff to be made whole
from losses resulting from a Y2K failure is not altered.
Finally, I believe that a provision should be included that would
reduce the likelihood of frivolous litigation by placing reasonable
limits on the fees that attorneys stand to gain from this problem that
threatens our national economy and national security. Such a provision
should require that an attorney in a Year 2000 action not earn a
contingency fee greater than the lesser of the attorney's hourly
billings (not to exceed $1000 per hour) or an agreed upon percentage of
the total recovery (not to exceed one third of the recovery). In
addition, that provision should require that the presiding judge in a
class action determine, at the outset of the lawsuit, the appropriate
hourly rate (not to exceed $1000 per hour) and the maximum percentage
of the recovery (not to exceed one third of the recovery) to be paid in
attorneys fees. Such a provision would serve to both fairly compensate
an attorney who takes on a meritorious claim while reducing the
incentives for frivolous, speculative and exploitive litigation.
conclusion
Unlike other national emergencies that hit without any warning, we
now have an opportunity to directly address the Y2K problem before it
hits. The business community is willing to do its part in fixing the
Y2K problem, and to compensate those who have suffered legitimate
harms. All that we ask is that Congress, the Administration and the
courts work with us to ensure that our precious resources are not
squandered and that our focus will be on avoiding disruptions. We look
forward to working with you, the full Congress, and the Administration
to pass a common-sense proposal for Y2K reform.
Prepared Statement of David C. Crane on Behalf of the Semiconductor
Industry Association
the y2k challenge--a semiconductor industry perspective
An introduction to the issue
The Year 2000 (``Y2K'') issue has emerged as perhaps the single
most critical challenge facing today's business community. The Y2K
challenge stems from a decades-old practice--that emerged at a time
when conserving computer memory was considered essential because of its
high cost--of storing and processing dates in a two-digit format. 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 1900 or
2000. This confusion may cause such products to malfunction or shut
down on January 1, 2000. Another date-related issue that companies are
confronting arises from the practice of some computer programmers who
use ``dummy dates'' such as ``99'' and ``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.
While the Y2K issue may seem relatively simple, the solution is
not. Basically, an electronic product can be considered Y2K ready if,
when used properly, it is capable of correctly processing, producing
and/or receiving dates in and between the years 1999 and 2000--
including leap year calculations--provided that all other products (for
example software, hardware and firmware) used with the product properly
exchange accurate date data with it. But evaluating whether an
electronic 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. And, evaluating that is
further complicated by the fact that many such elements 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
programs that perform these functions are 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. Examples of
chips that may be capable of generating or processing date information
are non-volatile memory devices, real-time clocks and certain
microcontrollers.
In general, the semiconductor manufacturer does not design or
develop the programming for the semiconductors that is sells. In the
vast majority of instances, distributors, electronic product
manufacturers or other entities or persons who buy and use
semiconductors create the programming. In such instances, this
programming is almost always the proprietary material of these third
parties, not the semiconductor manufacturer. Because of the proprietary
nature of this programming, a semiconductor manufacturer is not
permitted to and therefore cannot verify that programming provided to
it is Y2K ready, even in those instances in which it adds programming
provided by the customer to its chip prior to shipment. For similar
reasons, if a semiconductor manufacturer has been asked to manufacture
to a design supplied by a customer, the semiconductor manufacturer
cannot determine whether the semiconductor is Y2K ready.
Further complicating this issue is the fact that semiconductors are
an integral part of a larger ``embedded'' system that controls,
monitors or assists the operation of a myriad of electronic products.
Embedded systems provide control functions in numerous products, from
the family VCR to microwave ovens to cars. They are also used in
airplanes, medical equipment, electrical utility systems, manufacturing
equipment and elsewhere. Embedded systems have the ability to compute.
Typically, these systems also contain instructions (usually software)
that determine how the end product operates and what it computes.
Again, these instructions are in the vast majority of instances not
developed by the semiconductor manufacturer, 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 VCR or 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 it is the
function of the product as a whole that determines whether a particular
electronic product is Y2K ready, the manufacturer--or in some cases the
distributor or owner--of the finished electronic product, whether that
be a VCR or a computer, is the only appropriate entity able to fully
test and evaluate whether that particular product is Y2K ready .
The industry's response
Semiconductor manufactures are conducting extensive research and
evaluation programs to resolve the Y2K issues within their control. As
part of this comprehensive effort, manufacturers 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, which
encourages companies to disclose vital information about Y2K issues so
that they can work together to solve common issues.
This statement is intended to help explain the relationship of
``embedded systems'' to the Y2K issue. The ultimate solution to this
question is beyond the control of the semiconductor supplier, who
cannot identify Y2K readiness issues caused by circuitry or programming
that was specified by others. 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.
Prepared Statement of Melissa W. Shelk on Behalf of the American
Insurance Association
The American Insurance Association is grateful for the opportunity
provided by the Senate Judiciary Committee to offer testimony in its
efforts to minimize the adverse economic impact of the Year 2000. The
AIA represents more than 300 property and casualty insurers across the
nation, insuring millions of families and large and small businesses.
Our members are leaders in advocating loss prevention measures for our
individual and business policy holders, and we're proud to say that AIA
companies have worked diligently, some for as long as a decade, to
ensure our systems are Y2K compliant to better serve our customers. Our
industry has devoted real resources to facing this challenge; it's been
estimated that insurers will spend between $6-8 billion for readiness
efforts. Our customers expect us to fulfill this obligation, and we are
doing exactly that.
The Year 2000 computer challenge is a result of the dynamism and
entrepreneurial spirit of the American high-tech industry. It is a
tribute to this segment of our economy that in just a few short
decades, everything from airplanes and automobiles to kitchen toasters
is safer, more reliable, and longer lasting because of computer
technology. The so-called ``Year 2000 glitch,'' where computers read
only the last two digits of a year, was a decision made not of
negligence but of the desire to push technology as far as it could go,
as fast as it would go. And it is with this spirit that American
businesses are working to solve this problem--hundreds of billions of
dollars are being spent to solve potential problems before they occur.
The business community is facing the Y2K challenge head-on.
Even with this commitment and dedication to minimizing Y2K
disruption, we can expect problems to occur. We conduct business in a
global economy, and not every nation has matched our dedication and
commitment to managing Y2K. And the pervasiveness of computer chip
technology in our businesses and daily lives suggests that some
problems will be undetectable until they arise. Estimates of economic
loss range from the negligible to the catastrophic, we simply don't
know. This lack of knowledge demands that we must be prepared as a
nation to solve problems quickly, fairly, and with a minimum amount of
discord.
Last year, a bipartisan majority in Congress recognized that too
often in our nation, the fear of frivolous lawsuits can jeopardize
cooperative solutions to the Y2K problem. The Y2K Information and
Readiness Disclosure Act of 1998 took steps to allow businesses to
share information without fears that this cooperation would lead to
courtrooms. We supported last year's efforts, and we're thankful that
Congress is set to take the next step, in the form of discouraging
litigation and encouraging remediation. The bipartisan commitment shown
by Members of this committee was crucial to our success in 1998, and
we're delighted that same spirit is shown on the issue of limited
liability reform.
The American Insurance Association has spent the last few months
working with a coalition of more than 85 trade associations, individual
corporations, and other business interests. These organizations--the
Year 2000 Coalition--represent large and small businesses, technology
producers and consumers, retailers, financial services, to name just a
few. We represent both potential plaintiffs and defendants in Y2K
litigation, reflecting a consensus desire to work together to avoid
lawsuits. We are determined to fix problems, not profit from them.
Members of the Year 2000 Coalition understand that the unknown
extent of the Year 2000 and the fear of lawsuits can actually inhibit
solutions, multiplying the disruptive impact of any systems failures.
Those who would exploit the problem for personal gain are doing our
nation a great disservice. Congress is to be commended for seeking
reforms to minimize the economic costs arising from this once-in-a-
millennium event.
The Year 2000 Coalition has crafted principles for limited Y2K
liability relief legislation, many of which are reflected in S. 461,
the Year 2000 Fairness and Responsibility. Our priorities are simple,
and common-sense.
We agree with sponsors of the legislation that contracts must be
respected, and the legitimate ability to seek redress should not be
impeded in any way. Nor should any liability reform adversely impact
personal injury or wrongful death claims. Our goal is simply to
streamline and expedite an often unruly, costly, and time-consuming
system to protect the heath of our economy, while ensuring that
fairness and predictability govern the process.
In that spirit, the AIA supports:
Legal incentives for businesses and contractors to fix Year
2000 problems before they arise, and without fear of frivolous
lawsuits,
Limits on punitive damages to keep frivolous lawsuits out of
court,
Limits on liability proportional to the defendant's
responsibility, and,
Opportunities to settle disputes before they're litigated.
Key to fairness, predictability, and speed is keeping disputes out
of courtrooms such as the 90-day cure or cooling off provision that
would encourage pre-trial solutions. We hope the Senate considers such
a provision as part of any liability legislation, and are gratified the
Hatch-Feinstein bill includes a similar measure. This 90-day ``cure''
period is critical to keeping parties' energies focused on solutions
rather than litigation.
The AIA and the Coalition also support other important reforms to
encourage prompt resolutions. We are encouraging our members to promote
alternative dispute resolution methods and remediation and we hope any
legislation offers incentives to stay out of the courts.
We believe that, because of the extent of date chip technology in
our homes and businesses, class action reforms must be enacted to
discourage predatory lawsuits. Reforms can restore some balance and
fairness to a growing trend in our legal system, and again, ensure that
legitimate claims are heard in a timely fashion.
Our priority is to encourage a legal environment where problem-
solvers compete for business, not fear frivolous lawsuits, legitimate
claims are resolved promptly, and where legal profiteering cannot take
advantage of a once-in-a-millennium problem.
These modest reforms, designed to focus on a unique and predictable
event, will focus our energies on solving problems. They are not, as
some have already suggested, ways to escape responsibility. The Year
2000 Coalition and the American Insurance Association believe any
package must respect negotiated contracts, grant no immunities, offer
no excuses to businesses that refuse to address potential Y2K problems,
and in fact expedite payment of legitimate claims.
The Year 2000 Coalition is a result of the business community's
desire to minimize economic costs and disruption from the Year 2000
problem. This legal liability coalition is unique in that the reforms
represent the consensus desires of both potential plaintiffs and
defendants, and are focused on fixing the problem. American business
has, through its investments to date, shown its commitment to avoiding
disruptions. We ask that Congress and the administration join us in
creating a legal climate that reinforces that commitment. Only then can
we be sure we're doing everything possible as a nation to be ``Y2K
OK.''