By John Rogers
Although much has been written about how much the Year 2000 issue will cost to fix, the legal implications and costs have thus far been largely relegated to the background. According to technology attorneys at the law firm Sonnenschein, Nath & Rosenthal Y2K may create the biggest litigation wave the US has ever seen and could cost more than $1 trillion.
Kirk Ruthenberg, a partner at the firm, said that litigation is inevitable and insisted that no one is immune. Ruthenberg feels that as problems continue to surface, the situation will degenerate into a blame game, with much of the activity lawyer-generated. Although there have been a handful of publicly-documented lawsuits concerning Y2K issues, Ruthenberg said that there is already a lot more than meets the eye.
Attorneys that represent corporate clients in many fields have already begun forming task forces and are either currently involved in confidential Y2K legal action or are targeting potential defendants that could be found liable for Y2K-related problems. State attorneys general are beginning to gather evidence for consumer protection litigation and plan to bring broad cases against the computer industry, similar to current litigation against the tobacco industry. The state of North Carolina is already involved in a $130m suit against various hardware and software vendors to recover the money it has spent thus far to remedy its Y2K exposure.
Ruthenberg insisted that there are many more cases out there – and that his firm is presently involved in some – but that many disputes are being resolved without litigation. Potential targets for litigation include just about everyone: hardware and software vendors, third-party vendors manufactures of equipment with embedded chips (which should hit the biomedical industry hard), insurance companies, banks and financial service companies, securities brokerages and even accountants, auditors and lawyers themselves. Officers and directors of companies may also end up as defendants if it can be reasonably asserted that not enough was done to avoid potential problems.
The first publicized Y2K suit was filed last July, when supermarket chain Produce Palace sued systems vendor Tec-American Corp after a customer attempted to pay with a credit card carrying the expiration date 00 brought their entire point-of-sale computer system down and effectively shut the store down for a couple of days. That brief shutdown is expected to result in a settlement for about $1.0m within a few weeks.
There are currently eight cases against software vendors – all class actions – four of which have been brought against Intuit Inc, makers of the popular financial software program Quicken (CI No 3,411). The cases against Intuit concern the product’s online banking functionality, which is alleged to be non Y2K-compliant. Intuit is telling the plaintiffs to hold on for now, as it promises a solution to the problem well before any potential faults may occur.
According to Ruthenberg, there are several causes of action for a suit. Breach of express warranty can be asserted when a hardware or software vendor makes specific claims about Y2K compliance in a product’s warranty that are later found to be untrue. Legal action may also arise from breach of implied warranty, where the plaintiff has interpreted loose wording to guarantee a certain level of performance.
Ruthenberg pointed to claims that were brought against vendors which marketed products as software you’ll never outgrow and a solution for this century and beyond. That kind of marketing language could end up as the basis for such an implied warranty suit. Fraud and deceit is another basis for legal action, although it is much more difficult to prove on a class action basis. Suits may also be filed on the simple basis of alleged unfair business practices.
Various defenses are available to vendors that find themselves facing such legal action. A statute of limitations on products sold will typically void a vendor’s liability, and four years is a standard period for the industry. Vendors can also include disclaimers in written contracts or provide warranties with a limitation of remedies, which in some cases could leave them liable for simply replacing some purchased software regardless of the fact that it may have caused a client to lose millions of dollars due to failure.
The cornerstone of any litigation is ultimately the jury that will decide on the questions of liability. Attorneys have already been assembling mock juries to gauge existing views on the Y2K issue and research firms have been conducting surveys. When asked if insurance companies and banks have a responsibility to fix the Y2K problem before the year 2000, 86% of respondents in one survey answered yes.
About half of those asked said a software vendor should be required to provide free upgrades to fix Y2K problems even if there was no warranty to begin with. Almost 50% also agreed that if a company fails to adequately address the Y2K issue and people are affected negatively by a system crash, the company should be punished. Perhaps even more frightening is that 44% of those surveyed said that in the above instance, if the software was to blame, then both the company and the software vendor should be punished.
Potential jurors also drew various parallels between the computer industry and the tobacco industry without any mention of it by those conducting the polls. What all this means, according to Ruthenberg, is that soon there will be a maelstrom of legal activity in an unforgiving landscape. His advice to any company with year 2000 exposure is to work hard on the problem and communicate as openly as possible to partners, vendors, suppliers and customers, as they are all potential foes in court. And start building your case now.
