On October 19, 1998 President Clinton signed the Year 2000 Information
and Readiness Disclosure Act.
It should help. But it is in no way a panacea for the impending Y2K
bug, which some fear will wreak havoc on our economy and spur a run of
costly lawsuits. Published estimates of a multi-billion dollar impact on
the United States economy have been widely circulated. And some industry
experts estimate the worldwide cost may range from $300 to $600 billion.
The principal purpose of the Readiness Disclosure Act is to encourage
companies to share information about the status of their Y2K compliance
efforts. To reach that goal, the Act limits certain potential
liabilities of companies with respect to disclosures about their Y2K
program.
But, according to Brobeck, Phegler & Harrison LLP, a San Francisco-
based law firm with offices throughout the country, “the Act does not
insulate companies from liability for Year 2000 processing failures in
their products or services. Indeed, rather than providing comprehensive
immunity, the Act is more of a technical tinkering with the legal
standards and evidence rules that will apply in any future Y2K lawsuits.
As a consequence, many potential defendants will be disappointed that
they still face expensive lawsuits, although the ‘rules of engagement’
in those disputes may now be more favorable for the defendants.”
Larry Engel, a partner in the financial services group of Brobeck,
Phegler & Harrison, suggests that businesses hire outside counsel to
deal specifically with the Y2K dilemma.
“If you don’t go outside, it’s hard to figure what everyone else is
doing,” Engel said. “That shared experience can’t be
duplicated.”
Engel suggests selecting legal counsel proficient in the areas
affecting your business. Privately owned companies don’t need legal
advice in the area of SEC disclosure and reporting requirements, and
only financial institutions need to concern themselves with the Office
of the Comptroller of the Currency and the Federal Reserve, he said.
In selecting Y2K counsel, Engel suggests asking the following
questions:
Have you handled SEC disclosure issues?
Are you familiar with the pertinent regulatory authorities?
Have you represented corporate officers and directors?
Have you handled complex class action litigation?
What is your experience with the UCC, unfair business practice laws
and consumer protection laws?
Have you assisted policyholders in obtaining insurance coverage?
Can you handle financial, credit and insolvency issues?
What is you intellectual property, tax and real estate experience
that may be brought to bear on Year 2000-related issues?
Peter Lacouture, a partner with the Providence law firm of Peabody &
Brown, has been working with clients for months to prepare them for the
potential Y2K crisis. Lacouture agrees that securing proper legal advice
is critical. But that advice doesn’t necessarily have to come from an
outside source, he said.
“As important as getting outside counsel — is getting somebody who
understands the issues, ” said Lacouture. “There are some very serious
legal issues – including warranty issues that companies need to look at.
For example, a company must ask if they can get a vendor to fix what
needs to be fixed?”
As for the Information and Readiness Disclosure Act itself, Engel said
that businesses would be short-sighted to expect it to shield them from
Y2K related liabilities.
“It changes the standards that are applied and hopefully, it will weed
out some of the less meritorious cases,” said Engel. “But the Act is by
no means an immunity.”
Lacouture expects that the Act will make more companies “willing to
share information with their business partners.”
Y2K, according to Engel, encompasses a broad range of legal quagmires.
Included among them are:
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SEC and other regulatory disclosure and reporting requirements
Corporate, director and officer fiduciary duties
Contract, warranty, consumer and product liabilities
Intellectual property protection
Financial, credit and insolvency issues
Insurance coverage issues
Tax issues
Real estate issues
Labor and employment issues
Documentation creation and retention issues
Privilege issues
“You are going to have niches in the economy that are going to be hit
very hard,” said Engel.
While the Y2K Act may not be a panacea, it does provide advantages to
companies. Providence law firm Edwards & Angell, in a Year 2000 client
bulletin, suggests that to take advantage of the Act’s safe harbors,
companies should take the following actions:
When sharing information concerning a company’s Year 2000 status
with third parties, companies should create a paper trail to show that
the statements, when made, were not made with knowledge of falsity,
intent to deceive or reckless disregard as to their truthfulness.
Whenever possible, companies should designate statements about their
own products and services as “Year 2000 Readiness Disclosures.”
What is expected to be a stream of Y2K-related lawsuits has already
begun. As of late this summer, Brobeck, Phegler & Harrison reported that
it has been involved in over a dozen Y2K lawsuits. All but one of those
cases are brought as class actions.
The class actions, according to the law firm, focus on the issue of
whether customers who purchased software programs or systems that were
not Y2K ready should have to pay the cost of replacement systems, or
whether the developers or vendors of those programs should provide free
replacements or upgrades.
