Y2K Act Designed to Fend Litigation

Controversial act limits protections for businesses affected by Y2K failures

As the millennium nears, businesses must consider not only whether their computer systems will be ready for the computer Y2K bug, but also whether they are prepared for possible lawsuits should they, or companies with which they do business, experience Y2K failures.

As part of their Y2K contingency planning, businesses should familiarize themselves with the recently enacted Y2K Act and consider how its limited protections and provisions might affect them. Everyone from businesses to consumers who might experience Y2K related disruptions in utilities, transportation, and other services could be affected by the Y2K Act.

"The Y2K Act is designed to mitigate the expected flood of lawsuits over various Y2K problems after the new year," Susan Geiger, partner with Washington D.C. based Preston Gates Ellis & Rouvelas Meeds says in a press release.

"Among other things, it will preserve existing contract terms between parties, establish safe harbors from certain enforcement actions, and cap punitive damages awarded against small businesses and individuals. Perhaps most importantly, the Y2K Act allows companies and individuals to remedy alleged Y2K problems within 90 days before a lawsuit can be filed against them," says Geiger.

The Y2K Act is in effect until the end of 2002, and governs certain civil actions brought after January 1, 1999, for a "Y2K failure" prior to January 1, 2003. It applies to civil actions in federal or state court related to a Y2K failure. Lawsuits related to a product's failure to recognize or accurately process a specific date in 1999, 2000 or 2001 will also be governed by the Y2K Act, even though such a failure could be due to a non-Y2K processing problem.

Key provisions of the Y2K Act according to Geiger:

-- Existing contract terms not affected: Rights and responsibilities under an existing contract between two parties are not affected by the Y2K Act. In a Y2K action for contract breach or repudiation, damages can't be claimed or awarded unless allowed by the terms of the contract. If the contract is silent on the issue of damages, they will only be awarded if allowed under applicable law when the contract was in effect.

-- Safe harbor from certain enforcement actions. In some instances, a company may not be held liable for temporary non-compliance (15 days or less) with federal measurement, monitoring, or reporting requirements before June 30, 2000. To be protected by the safe harbor, non-compliance must be related to a Y2K failure beyond a defendant's reasonable control and the defendant must prove it took precautions to prevent or mitigate impact. The safe harbor doesn't apply when non-compliance creates a threat to public health, safety or the environment; when the underlying federal regulation is violated; or when a company's error or negligence, or a lack of reasonable preventative maintenance caused the non-compliance.

-- 90-day pre-litigation window. Before a Y2K action can be filed, a defendant must be given a chance to correct the Y2K problem at issue. To take advantage of this pre-litigation window to head off a lawsuit, a defendant must notify the plaintiff within 30 days about how it will solve the problem, and whether it is willing to settle the issue out of court. Then, a defendant has 60 days to fix the alleged Y2K problem or to resolve the dispute.

-- Punitive damages capped for small businesses and individuals. Punitive damages are capped against small businesses (corporations or organizations with fewer than 50 employees) and individuals whose net worth is $500,000 or less. In these cases a plaintiff must meet a heightened burden of proof to obtain punitive damages against any defendant in a Y2K lawsuit.

-- Economic losses generally not recoverable. Addressing a major concern of businesses that supported Y2K legislation, the Y2K Act restricts the types of damages that may be awarded. In general, damages can't be recovered for "economic loss," including lost profits, business interruption and losses arising from claims of third parties.

-- Defendant generally only liable for its share of plaintiff's injury. Fearing an unreasonable burden on "deep pocket" companies, business representatives wanted to limit liability to their share of the responsibility for the alleged Y2K failure. In most Y2K cases, this will be the "rule of thumb." However, if the court finds that a defendant intended to injure the plaintiff or knowingly commit fraud it will be jointly and severally liable.

Businesses did not get everything they wanted out of the Y2K Act. "Businesses sought wide-ranging protections against Y2K lawsuits, including limits on director and officer liability, a punitive damages cap, and a 'reasonable efforts' defense to limit or eliminate liability," says Geiger.

"These protections were ultimately removed from the Y2K Act or, in the case of the cap on punitive damages, limited to small businesses," says Geiger. However, the legislation does include some important protections for businesses by pre-empting state law claims and preserving any stricter limits on damages and liabilities established by state law.

In certain respects, the Y2K Act's protections are a double-edged sword for businesses and other organizations, many of which may end up on both sides of Y2K litigation. On the one hand, the Y2K Act provides important protections for businesses sued over actual or potential Y2K failures associated with their products or services, including the opportunity to fix Y2K problems to prevent a lawsuit from being filed.

On the other hand, the Act also limits actions in which a business or organization can bring a Y2K claim against another party. Exactly what impact the Y2K Act will have remains to be seen, but as the clock clicks down to January 1, 2000, new protections and requirements are in place to govern litigation over certain Y2K failures.

Source: Preston Gates Ellis & Rouvelas Meeds Press Release

DATE: 10/11/99

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