The definition of a Y2K failure could be construed broadly or narrowly in the Act. Until the courts give guidance on the scope of the Act, litigation is likely to be filed concerning the Act's application.
The Act applies to any Y2K action brought after January 1, 1999 for a failure occurring before January 1, 2003 (Section 4(a)), yet the Y2K upset defense may not be asserted for a Y2K upset occurring after June 30, 2000 in actions brought by a government entity. The limitations period on the defense is not explained in the Act but is almost certain to be explained in court decisions after lengthy litigation.
Exposure for Y2K testing
Apart from the foregoing federal legislation that, in effect, creates new bases for potential exposure to officers and directors, there is an additional potential vulnerability related to Y2K remediation and testing. This latter exposure was highlighted by recent news reports about the adverse consequences that occurred when a corporation attempted a Y2K test and experienced adverse yet unforeseen consequences. During a Y2K test at the Department of Public Works for Playa Del Rey, California, there was a four million gallon sewage spill when the bypass gate closed and dumped the sewage into the public waterway. This was not a Y2K problem but was unsurfaced as a result of Y2K testing. In short, the testing discovered a programming error that had been built into the program but had not surfaced until the Y2K test had been undertaken.
To the extent officers and directors fail to respond to programming errors or computer system problems that can affect mission-critical functions of the corporation, and, therefore ultimately affect the value of the corporation, the directors and officers are vulnerable to litigation involving such failures. Like the situation in Playa Del Rey, California, the adverse consequences, if they occur, are likely to be blamed on the Year 2000 date change. Closer scrutiny will reveal that the problem is unrelated to the Year 2000 problem but merely discovered as a result of attending to the Year 2000 problem. If the directors and officers do not appropriately respond to these unrelated but consequential results, they are likely to find themselves explaining their decisions and thought processes to a jury.
Conclusion
If and when computer systems fail or malfunction due to the Year 2000 technology problem, it is reasonable to expect that directors and officers will be among the most frequently sued defendants for recovery of Year 2000 losses. Indeed, numerous Year 2000 actions have already been filed against directors and officers for alleged insufficient disclosure and investigation issues. In the public mind and in law, directors and officers are conceived to be in control of the information and resources necessary to avert Year 2000 losses. The central issues in almost all Year 2000 actions against directors and officers will be what they knew and when they knew it. The efficacy of what the directors and officers did or failed to do with respect to the Year 2000 challenge will, by the time the suits are filed, be painfully evident.
Year 2000 D & O exposures are potentially large, because the potential Year 2000 losses are large and ultimate responsibility rests with the directors and officers. It is important to remember, however, that directors and officers are not guarantors of the continued financial well-being of a corporation. At bottom, what is required of these individuals is simply reasonable conduct. Claiming ignorance of the Year 2000 threat will not provide much of a defense. However, directors and officers may escape liability for Year 2000 failures and malfunctions, if they can show that they took timely and reasonable efforts to avert the loss.
_______________
Author: Lori Iwan is a principal in the firm of Iwan Cray Huber Horstman & VanAusdal LLC, in Chicago. Ms. Iwan's practice is concentrated in complex commercial and product liability cases, including electrical control equipment, and business interruption claims, for a number of corporations and insurance companies on a national basis. She is a frequent speaker and author of numerous articles on Year 2000 issues, including "The Standard of Care for Year 2000 Remediation: How Will You Be Judged?" BNA Year 2000 Law Report, Vol. 1, No.6, September, 1998.
Author: James K. Horstman is a principal in the firm of Iwan Cray Huber Horstman & VanAusdal LLC, a Chicago-based law firm where he concentrates his practice in Year 2000 and coverage litigation. Mr. Horstman filed the country's first Year 2000 coverage action, Cincinnati Insurance Company v. Source Data Systems, Inc., and he has an active national practice involving Year 2000 liability and coverage issues. He frequently speaks and writes on Year 2000 and coverage issues nationwide.
Year 2000: The business interruption & legal malpractice risks for every lawyer
By Annie E. Thar
Let's put aside all of the apocalyptic predictions of planes falling out of the sky and global economic collapse. Do lawyers truly face any risks from the year 2000 problem ("Y2K")? Yes, whether you are a personal injury lawyer or a small firm general practitioner, you face two broad concerns with respect to Y2K: business interruption and legal malpractice. The time is now to assess your practice's vulnerability to these problems and take action to minimize the risks.
The business interruption threat
The first concern that Y2K raises for lawyers is that their day-to-day business operations will be interrupted by Y2K glitches. In some cases, the business interruption will be minor and result in only a few hours' lost work. In other cases, the interruption may affect a lawyer's ability to serve her clients for days or even weeks.
Computers
The most likely business interruption risk posed by Y2K is that you will discover that your computer system has malfunctioned on Monday, January 3, 2000. So, what's the big deal? Just call the software manufacturer and find out how to fix it. Yeah, you and thousands of other callers who are experiencing the same simple problem.
Telephones
Now suppose that you pick up the phone to rent new computer equipment and discover that your telephone and voice mail systems are down. No problem. You use your cellular phone to call for assistance. A perky customer service representative informs you that a repairperson will be able to correct that little problem--in about five weeks. Get the picture?
Office equipment
Besides computers, other equipment and office systems that may fail as a result of Y2K problems are fax and copy machines, security systems, elevators, and HVAC systems (heating, ventilation, and air conditioning). Widespread power outages may also occur, rendering most office equipment, even if it is Y2K compliant, useless.
The financial impact
In addition, lawyers should consider the financial impact that Y2K may have on their practices. Will you have the financial resources necessary to rent or buy Y2K-compliant computer equipment? Some lawyers may also experience a slow-down in receivable collections and new business matters as clients struggle with their own Y2K costs and headaches.
The small business client
The financial impact of Y2K may hit law firms with small business clients the hardest. Some analysts are predicting that small businesses generally will be the least prepared to handle Y2K obstacles.
"Is your law firm Y2K compliant?"
Finally, don't be surprised if your clients start inquiring as to whether your law office is "Y2K compliant." As clients become aware of their own susceptibility to Y2K issues, they will want assurances from their legal counsel that the clients' matters will not be impeded by Y2K problems at the lawyer's end.
The legal malpractice threat
Missed deadlines
The second source of concern for lawyers with respect to Y2K is legal malpractice claims. The most predictable cause of Y2K malpractice claims will be critical deadlines that are missed due to Y2K malfunctions in computerized calendaring systems. This could include, for example, a statute of limitations date for a plaintiff's lawyer, or a UCC filing deadline for a corporate lawyer. Fortunately, this type of Y2K malpractice is easily preventable. In addition to testing their calendaring systems in advance for Y2K errors, lawyers can follow standard risk management procedures by maintaining a duplicate "paper" calendar and backing up databases once a day.
Clients who purchase businesses
The gravest threat of legal malpractice claims, however, involves legal advice rendered to clients purchasing businesses. If there is a hidden Y2K time bomb lurking in the weeds for lawyers, this is it.
Assume that Lawyer currently represents Client in the purchase of a small manufacturing business ("Company"). A few months down the road, Client discovers that it will cost between $500,000 and $750,000 to make Company Y2K compliant. Without these technical modifications, the business will shut down on January 1, 2000. The purchase agreement drafted by Lawyer contains no representations or warranties concerning Company's Y2K compliance. Client is left with no other remedy but to sue Lawyer for negligently drafting the agreement. This scenario may become more frequent as corporations rush to sell off subsidiaries or divisions for which the cost of Y2K compliance is deemed too high.
Let's change the facts a bit, with the same result. Under this scenario, Seller represents to Client that Company's internal operations will be Y2K compliant by the Year 2000. Nonetheless, Company comes to a virtual standstill in January of 2000. Although Company's own operations are fine, Client learns that its suppliers and distributors are in total chaos due to Y2K malfunctions. Client cannot make new products without the necessary parts and cannot sell its finished products without viable distributors. Client again turns to Lawyer for redress.
This time Client's malpractice complaint against Lawyer contains allegations that Lawyer should have recommended a Y2K due diligence check of Company's suppliers, distributors and customers. Client may also allege that the purchase price formula should have included adjustments for future Y2K costs or that the contract should have allowed for consequential damages.
Third party actions against businesses and their lawyers
Similarly, lawyers can expect to see third party actions brought by shareholders against both management and its legal advisors when such losses occur. Because directors and officers liability policies may exclude or deny coverage for Y2K losses, outside consultants such as lawyers will be hot targets.
Know your Y2K issues
In summary, lawyers who provide legal advice to corporate clients or business purchasers should familiarize themselves with Y2K issues from the client's standpoint. Without this knowledge, the lawyer may miss an issue that is critical to the client. Lawyers who are fully informed about Y2K issues will also be in a better position to assist clients who are considering legal action to recoup Y2K losses. Other issues that lawyers may need to consider include: potential copyright infringement in the context of Y2K fixes; tax and accounting treatment for Y2K expenses; insurance coverage; and whether the client is complying with new Y2K regulations in such industries as banking, insurance and securities.
The lawyer-turned-Y2K-expert
The final malpractice risk posed by Y2K involves lawyers offering their services as Y2K consultants. There is a big difference between providing general corporate advice on Y2K issues and holding oneself out as a Y2K expert. Clients who suffer damages as a result of Y2K glitches will undoubtedly attempt to hold professionals who provided them with Y2K advice liable. The stakes are high, so don't call yourself a Y2K consultant unless you can really walk the walk.
An ounce of prevention
Will any of these problems occur? The simple answer is that no one knows what will happen as technology adjusts to the new millennium. The issue is whether you plan to take a "wait and see" attitude. The prudent lawyer will Y2K-proof her office systems, prepare a disaster recovery plan for the unexpected, and bone up on the Y2K issues affecting clients.
_______________
DISCLAIMER: This article includes recommendations designed to reduce the likelihood of being sued for legal malpractice. It is not the intent of these materials to suggest or establish practice standards or standards of care applicable to a lawyer's performance in any given situation. Rather, the sole purpose of these materials is to assist lawyers in avoiding legal malpractice claims, including meritless and frivolous claims. To that end, the intention is to advise lawyers to conduct their practice in a manner that is well above the accepted norm and standards of care established by substantive legal malpractice law. The recommendations contained in these materials are not necessarily appropriate for every lawyer or law firm and do not represent a complete analysis of Year-2000 related issues.
© 1999 Illinois State Bar Association Mutual Insurance Company
Author: Annie E. Thar is Vice-President and General Counsel of the Illinois State Bar Association Mutual Insurance Company www.isbamic.com . She received her undergraduate degree from Mount Holyoke College in South Hadley, Massachusetts in 1979 and her law degree from Northwestern University School of Law in 1983. Before joining ISBA Mutual, Ms. Thar practiced privately for several years, primarily at Hopkins & Sutter. Ms. Thar concentrated her practice at Hopkins & Sutter in insurance and corporate law, and was instrumental in the formation of ISBA Mutual. She is a prolific speaker and author on malpractice avoidance.
By Donna J. Cunningham
New Zealand will be first
While it is still 6:00 am in Chicago, the year 2000 will arrive in New Zealand, making its citizens first to learn what exactly the Y2K bug will do. Eighteen hours later, after most cities of the world have had their experiences, the year 2000 will arrive in Chicago.
How did this happen?
Lori Iwan, one of our authors (Directors & Officers At Risk for Y2K Liability) notes that the year's date was reduced from 4 digits to 2 digits in most software programs because of the shortage and expense of computer memory. As an example, a musical birthday card we might buy in a store today contains more memory than there existed in the whole world in 1950.
The kind of thing that can go wrong
On New Year's Eve 1996, the computer system in an aluminum refining plant in New Zealand crashed, resulting in the overheating of a smelting furnace, as reported in the Chicago Tribune. The system stopped functioning because it could not measure the 366th day of a leap year. And at noon on January 1, 1999, 300 taxi meters in Singapore stopped running. No one was sure why.
Large businesses prepared; small ones at risk
Most commentators agree that large businesses and industries are prepared for Y2K, but many small businesses have not completed their preparation, and some have not yet started. Nearly 40% of 16,000 small manufacturing companies in the Chicago area have decided to do nothing at all about the Millennium Bug, according to David Field, chief adviser for the Chicago Manufacturing Center. Small business suppliers who are unable to deliver may cause disruption in manufacturing. As a result, expect inventory stockpiling in the fourth quarter of 1999, and slow sales in the first quarter of 2000.
Medical community at risk
The Senate's Y2K Panel reports that many physicians' offices, nursing homes, and both inner-city and rural hospitals have high-risk exposure to Y2K disruptions. The average hospital has more than 3,000 diagnostic and treatment devices with embedded computer chips, including defibrillators, cat scans, and X-ray machines.
Y2K fatality
A Japanese computer programmer committed suicide after trying to make 600 pieces of software millenium compliant. The unidentified programmer thus became the first Y2K fatality.
Insurers will survive Y2K
The Insurance Information Institute of New York, an actuarial firm, reports that the insurance industry will pay between $15 billion and $35 billion for Y2K related claims. Comparing those figures to Hurricane Andrew, which cost the industry $15.5 billion, one spokesman said, "At the high end, it's two Hurricane Andrews."
Canadian Bar Association Website lists Y2K issues
The Canadian Bar Association Website, located at http://www.cba.org/Gate.asp has made available a copy of its publication called "Countdown to 2000," listing about 100 Y2K liability issues. Under publications, use key word "countdown." Among other things, this CBA notes that manufacturers who utilize "just in time" inventory, are at risk for disruptions unless they find alternate suppliers or stockpile inventory.
How to find your product manufacturer
For a clearinghouse site for manufacturers to post the status of their Y2K preparedness and fixes on everything from video cameras to computers, try http://Y2Kbase.com or http://www.year2000registry.com/.
A Y2K Website for business
Daily updates of Y2K news and strategies for businesses can be found at http://Y2ktimebomb.com.
Check before you travel
The U.S. State Department predicts power outages, telephone failures and water shortages are likely in China, Russia, and some other large nations because of Y2K. The Department predicts problems with power grids in India and Poland, with railroads in China, and with telephones and water supplies in Italy. While the Department is not issuing "travel warnings" at this time, the Department has published 196 country-by-country advisories on its internet site at http://travel.state.gov. See the consular information sheets, which will be updated periodically. Britain also plans to publish the results of its investigation into the Y2K preparedness of other nations.
International
Most commentators agree that the U.S. is prepared, more or less, for the millenium bug, but that most of the rest of the world is not. Consider, for instance, that in Russia, the military acknowledges that its systems that warn of incoming missile attack are vulnerable to the Y2K problem. However, they insist that no Y2K problem could launch an attack, as the system is simply not built that way. On the other hand, Thailand has reportedly announced plans to shut off its guided missiles a few minutes before midnight to guarantee that none of them launches and shoots down an innocent airliner.
Russia
Russia is deemed to be most "at risk" for Y2K disruptions. "Of almost any country in the world, Russia is possibly the most psychologically unprepared for confronting the Year 2000 problem," said Robert Farish of International Data Corporation in Moscow. There is a saying, "A Russian does not cross himself before the thunder claps."
Japan
Although large companies in the telecommunications and banking industries are working diligently on Y2K, there are two factors that make dealing with Y2K more difficult for the Japanese. First, part of the Asian culture is the reluctance to say anything that might cause a loss of face, and almost any response to aY2K inquiry may involve a possible loss of face. Second, Japan does not use the Western calendar system, but rather an imperial system based on the number of years the current emperor has reigned. Many Japanese software programs report the imperial calendar date, but the computer's internal clock could be running on Western time. Finally, Japan boasts so many "smart" buildings with climate control and security systems--all of them on embedded chips in automated systems, that Japan may be more vulnerable to Y2K than the U.S.
Britain
While Britains' major companies and industries generally appear to be on schedule for their Y2K preparations, the same cannot be said for about 60% of the UK's small to mid-sized companies.
European Union
At the beginning of 1999, the European Commission issued a report regarding the progress of its member states in their preparations. The report advised that while banking, telecommunications and most major industries on the continent were prepared, the health care sector and Europe's rail network were still vulnerable. The report also warned that even those countries that had prepared well couldn't consider themselves immune because they could easily be infected by member states who were not ready.
Latin America
The preparedness of air traffic control systems throughout much of Latin America remains an open question. The International Air Transport Association, which has collected Y2K information from Latin America's airports is forbidden by the airports from making it public, according to Tim Goodyear, a spokesman for the agency. While it's unlikely that planes will start falling out of the sky (they can fly independently of their computerized systems), air traffic control may not be able to tell them where to fly.
Brazil
Brazilian bank owners are so confident their systems will work perfectly that they have signed commitments to cover the cost of litigation caused by any failure. However, as is true of most countries, small and mid-sized businesses are most at risk. Small company failures could cause large industry failures. An example: Brazil's auto manufacturers fear that small-firm supplier shut downs could leave them without needed parts.
Venezuela
Venezuela is at high risk. If the country's crude oil exports are interrupted because of Y2K, expect higher prices at the gas pump.