After many months of partisan debate, Congress has enacted and the President has signed the Y2K Act (HR 775). The Act provides some modest protections for parties that experience Y2K failures, changes the liability of parties that cause such failures and seeks to restrict Y2K litigation As such, it re-allocates the risk of Y2K failures between the affected parties. It does not create any new “causes of action” and does not apply to actions for personal injury or wrongful death.
Protections
The Act offers three new protections to entities that experience a Y2K failure. First, the Act protects entities that experience a “Y2K upset” which is a temporary non-compliance with federally enforceable measurement, monitoring or reporting requirements, caused by a Y2K failure. A party claiming a Y2K upset must have made a reasonable, good-faith effort to avoid the Y2K failure. If the defense is granted by the agency, it is a complete defense to the imposition of penalties. However, it does not excuse non-compliance with the underlying requirements for which the monitoring was required.
The second, related protection prohibits the imposition of penalties by federal agencies on “small business concerns” (fewer than 50 employees) for “first time violations” that result from Y2K failures that are corrected within one month. Again the agency is directed to look at whether the entity made good-faith efforts to avoid the Y2K failure.
The third protection prohibits foreclosure of a consumer’s mortgage if a Y2K failure results in an inability to process a mortgage payment transaction. Inexplicably, the Act requires the consumer to notify its mortgage servicer in order to take advantage of this protection.
Limitations of Liability
The Act imposes caps on punitive damages in certain circumstances, imposes proportionate liability, imposes certain limitations on damages in tort claims and requires a party to “mitigate” its damages.
Punitive damages against small businesses are capped by the Act at the lesser of three times the compensatory damages or $250,000. Although earlier versions of the Act included caps on punitive damages against larger companies, the final version does not. An explicit rule of proportionate liability is stated in the Act: A defendant is liable solely for that portion of a judgment that corresponds to its “relative and proportionate responsibility” as found by the jury or by the court.
Damages in tort claims are also restricted by the Act. A plaintiff may recover damages for economic loss (such as lost profits or sales, business interruption or third party claims) only if the loss results directly from damage to tangible real or personal property, excluding the component that failed, caused by the Y2K failure.
Finally, the Act contains an explicit statement of a party’s duty to mitigate damages. A plaintiff may not recover damages that could have been avoided in light of disclosures or information “of which the plaintiff was or reasonably should have been aware, including information made available by the defendant to purchasers or users” of its products or services about means of avoiding or remedying Y2K failures. Thus if the vendor makes information available on its web site, it may not be a defense for the plaintiff to claim that it never saw the information.
Y2K Litigation
Prospective plaintiffs in Y2K litigation will have to adapt to several dramatic changes wrought by the Y2K Act. Most significant is the requirement of a 30-day notice before commencing suit.
The notice must contain explicit information about the alleged failure, the loss suffered by the plaintiff and the desired solution. The defendant must respond within the 30-day period and may seek an additional 60 days to resolve the problem, including the use of alternate dispute resolution.
Unlike other suits, the Act requires that the complaint contain extensive detail as to the alleged claim.
Finally, the Act imposes restrictions on the availability of class actions in cases involving Y2K failures. Generally these requirements are very technical; however, they will make it more difficult for parties affected by a Y2K failure to maintain a class action.
Enactment of the Y2K Act by Congress has shifted the responsibilities for damages resulting from Y2K failures. However, the Act reinforces in a number of respects the importance of seeking information from one’s vendors and reviewing one’s own computer and other systems to ensure that they are or will be Y2K compliant before the end of 1999.
Peter V. Lacouture is a partner in the law firm of Nixon, Peabody, L.L.P.
