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Beat the Clock
Faced with the prospect of computers' internal calendars wiping out data worldwide when the year 2000 hits, lawyers and corporate executives are scrambling to minimize the damage and figure out if anyone is at fault
BY JON NEWBERRY
Los Angeles lawyer Vito Peraino is hardly a cheerless guy, but when he looks into the future he sees dark clouds massing. He can talk for hours about it--how in the twin ciphers that end the date "Jan. 1, 2000" he can make out the contours of massive litigation arising out of a disaster of unimaginable proportions. It will come, he says, "like a fireball, from all directions." And, he adds, most lawyers will be blindsided.
The problem giving rise to the litigation that Peraino and a growing cadre of like-minded lawyers, consultants and information professionals predict is very simple: The date fields in most computer programs and microprocessors are limited to two digits--those denoting the decade and the year ("97," for example, for this year). The century designation, which has held steady at "19" since computers were born, is simply assumed. This means that computers worldwide--from simple desktop to massive megamainframe--will be unable to recognize dates beyond the millennium.
That could spell big trouble. Dire predictions include chaos on air-traffic routes and rail arteries, a banking meltdown that will impair the ability to make or collect payments, elevators that will stop running, welfare payments that won't go out, and people dying because medical and pharmaceutical records cannot be accessed.
Can't Something Be Done?
While logic might suggest that any problem programmed into computers can be programmed out, that isn't the case with the year 2000 problem. No universal software fix exists, and the solutions available tend to be labor-intensive and expensive.
In terms of desktop computers--the ones most lawyers use--numbers experts put the likely failure rate of IBM-compatible machines at 80 percent to 90 percent. The figure is even higher for mainframe computers, in which huge and often indis- pensable databases reside.
Assuming Peraino and others are on target, what is of particular relevance to the legal profession--beyond implications for most law offices--is the fact that the millennium bug will keep legions of lawyers busy for years litigating suits brought by and against its victims. For many companies, awareness of the problem is only just dawning; for many it is already too late because there simply is not enough time to fix it before Dec. 31, 1999.
Locating the date fields in complicated systems among countless lines of computer codes --in programming languages that in many cases few people understand anymore--is making the process enormously difficult. And all of this must be done well in advance of the millennium to ensure that proper testing can be completed.
A commonly cited estimate of the cost to fix the year 2000 problem worldwide--calculated by the Stamford, Conn.-based Gartner Group, an international information technology consulting firm--is around $600 billion, more than three times the 1995 federal budget deficit. Many multinational corporations have budgeted hundreds of millions of dollars to fix the problem.
Forget the savings and loan crisis, the environmental movement and the tobacco wars--for lawyers, this could be bigger than any of them, or even all of them combined.
"This is a litigation catastrophe waiting to happen," Peraino says. "I firmly believe it's just a matter of time. Too many companies are spending hundreds of millions of dollars. There's no way lawyers aren't going to jump on that."
Those who have jumped are offering their services to conduct legal audits for clients to determine where they may be vulnerable to liability claims, as well as to assess rights of recovery. In fact, a number of firms nationally have set up special practice groups to handle year 2000 matters.
It's Happening Already
Some financial institutions, because of the large number of date-sensitive calculations their information systems perform, haven't been afforded the relative luxury of waiting for the 1990s to end before their year 2000 problems begin.
Tab for year
2000 system
failure could
easily exceed
a trillion dollars.
Steven Hock
Unum Corp., a Portland, Maine, insurer, for example, suffered a failure of its system when it began deleting active policies from its files in 1995. It was programmed to remove dormant policies, which it identified by taking the date of the last activity, adding five years, and then calculating whether that date was prior to the then-current date. If a payment had been made in 1994, for example, it would add 5 to 94 and get 99, representing 1999. As long as that resulting date was beyond the then-current date, the system took no action.
When payments began to be entered into the system for active policies in 1995, however, the system added 5 to 95 to get 100, which it registered as "00." That yielded the conclusion that the last activity had occurred in 1900, prompting the computer to delete those files from the system. Thousands of policies were zapped in 1995 and early 1996 before the error was caught.
Peraino, who heads a year 2000 practice group in the Los Angeles office of Hancock Rothert & Bunshoft, sees all sorts of similar failures occurring in the coming years. In March, he spoke to a House of Representatives subcommittee on technology looking into implications of the problem:
"At its most basic level, the year 2000 problem threatens the integrity of financial information ... because so much financial information is date-dependent. Our system of contract law, the basis of our securities law, the premise of accounting and the functioning of federally regulated businesses are all premised to a significant degree on the fact that accurate and reliable financial information underlies transactions. A threat to the integ- rity of financial information presents significant and potentially staggering liability exposures."
In Panama City, Fla., plaintiffs lawyer Wes Pittman has been considering a consumer class action lawsuit against computer manufacturers and some software developers. The suit would explore the validity of potential legal claims, how much his firm can afford to take on, and whether it is in the public interest to bring an action now.
"The problem is so vast," he says. "How much of a chunk can a law firm afford to bite off in going after the industry?"
Magnitude of Problem Disputed
Harris Miller, president of the Information Technology Association of America, a trade group whose members include software developers, consultants and providers of related services, rejects the notion that the year 2000 problem is akin to mass torts such as the environmental problems caused by asbes- tos, oil spills or hazardous waste.
"When I talk to people," Miller says, "unless there's a lawyer in the room who's trying to make some money out of it, nobody's talking about legal liability." He says his association is doing as much as it can to educate and raise people's awareness of the problem.
"We think that's how you deal with this issue. You get it solved rather than hypothesizing about liability issues," he says.
Peter de Jager, an internationally recognized expert on year 2000 issues who runs an Internet home page (www.year2000.com) and a mailing list that serves as a global clearinghouse for information on the millennium bug, agrees that the response of the legal community to the pending crisis has been too slow and decidedly wrongheaded.
He received an e-mail message this spring from a lawyer asking, in de Jager's words, to "please tell us who we can sue."
"It is the essence of what everybody hates about lawyers," he says. "They want me to point to the carcass they can feed on."
Lawyers should urge their clients to face their responsibilities, fix the problem and avoid the harsh legal consequences of failing to act, de Jager says. "I don't see any of that going on. The lawyers seem to be much more interested in letting you fail, then suing."
Peraino takes exception to that characterization. "My No. 1 piece of advice to a client is fix the problem and avoid lia-bility," he says. "The No. 2 piece is that there are people who caused the problem and it may be appropriate to seek recompense from them. But clearly, No. 1 is fix it."
Steven Hock, a San Francisco lawyer who heads a practice group of more than a dozen lawyers at Thelen, Marrin, Johnson & Bridges dedicated to year 2000 issues, projects that business disruptions and legal costs arising from year 2000 system failures "could easily exceed a trillion dollars."
"This is a litigation
catastrophe waiting
to happen. It's just a
matter of time."
Vito Peraino
He bases that projection on what he calls a conservative 5 percent failure rate in the private sector and government. It assumes that only a quarter of those failures precipitate lawsuits, and it does not include costs being incurred to fix systems to make them year-2000 compliant.
Skeptics who regard Peraino's and Hock's predictions as exaggerated point to a number of factors that will tend to lessen the severity of the problem and its attendant legal consequences:
* Noncompliant software is in many cases being made compliant as part of routine upgrades. Businesses are taking the opportunity to replace older systems with advanced and more ef- ficient systems that are fully year-2000 compliant.
* For companies considering suing to recover the costs of making their systems compliant, it may not be worth the effort. With so many potential claimants looking to recover such expenses--usually from small vendors, some of which may have gone out of business or be unable to pay--damage awards may be very small.
* Many lawyers believe that most disputes over the cost of fixing systems will be settled out of court based on contract terms and the application of well-established legal principles.
"I think they've got an uphill battle on the basis of foreseeability," says Stanley Chesley, a well-known class action lawyer at Waite Schneider Bayless & Chesley in Cincinnati.
Moreover, after all the publicity the problem has been getting, anyone who has sat idly by may have a tough time arguing that an outside software provider should pay for a problem they themselves willfully ignored.
"There's an awful lot of energy and attention being paid to it," says Chicago lawyer Barry D. Weiss of Gordon & Glickson, who thinks concerns are overblown. His practice focuses on legal issues pertaining to information technology and transactions. He says most issues related to the year 2000 problem are simply matters of allocating and documenting responsibilities.
That, however, requires foresight that many parties are not exercising. Even at this late date, vendors are still shipping--and users are still buying--software that is not year-2000 compliant. The foreseeability defense may protect vendors of systems that were installed 20 or 30 years ago, but it's unlikely to carry much weight in regard to recent installations.
Moreover, no matter how well-settled the issues of law may be, nettlesome issues of fact will likely feed the litigation boom, particularly in cases where year 2000 compliance is not explicitly addressed.
Those who are warning of wide- spread and potentially devastating repercussions contend that what may appear to be a stable and controllable situation now is destined to deteriorate as the deadline closes in. Hock notes that the companies offering the best solutions are rapidly becoming booked, leaving procrastinators fewer options.
Pushing the Panic Button
Perry Visounty, part of a 12-lawyer year-2000 practice group at Sheppard, Mullin, Richter and Hampton in Orange County, Calif., predicts that as cost projections mount due to shortages of qualified personnel to fix the problem, and as time runs out and more failures kick in, the legal issues will become fuzzier--such as liability for damages caused by third-party failures--and more conflicts will come to a head.
At the moment, there is some agreement that shortcuts (short of replacing systems or rewriting code line by line) are possible, but are limited in their applicability and require extensive, time-consuming testing and debugging. For that reason, unless the process is well-along at this point, it's deemed already too late to fix many systems.
Year 2000 expert de Jager compares the situation to being in a car traveling at 100 mph, heading straight toward a brick wall. It's now only 100 yards away, he says, and people want to engage in leisurely discussions about whether it will take 75 yards or 50 yards to bring the car to a halt. His advice: Hit the brakes now, then go back and measure the skid marks.
Peraino contends that even optimistically assuming that 90 percent of companies are able to successfully correct their codes, the implications of 10 percent not being able to function are staggering. Hence, damage claims will be flying in all directions.
Even Chesley, a year 2000 skeptic who regards the whole issue as "a lot of media hype," acknowledges that he could be wrong.
"I may eat my words," he says. "I'm the guy who said six years ago that I'd never get involved in a tobacco case--and [now] we're knee- deep in it."
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How to Mitigate the Fallout
Along with technical and management problems, the millennium bug poses myriad legal issues that individuals and organizations must confront to avoid liability for damages.
The key for lawyers is to realize that almost any client that relies on computers in its business could face significant problems. Confronting the legal issues now may head off many of them or, at the very least, mitigate the fallout.
To be fully protected, year 2000 legal specialists urge organizations to conduct comprehensive legal audits to avert potential troubles. Some of the key legal issues are:
* Copyrights: Modifying a software program to make it year- 2000 compliant might constitute the preparation of a derivative work, subjecting a client to liability for infringement. A license agreement could permit modifications by a licensee yet prohibit the same work by an outside consultant.
* Contracts: The obligation of a software vendor to fix a program that is not year-2000 compliant may depend on warranties or maintenance agreements. Implied warranties of merchantability and fitness may apply, depending on buyer expectations or a seller's knowledge of why software was bought. Disclaimers might limit the applicability of warranties, as might statutes of limitations.
* Financial disclosure and corporate governance requirements: Companies that expect to incur significant costs to fix year 2000 problems or that face potential liability from system failures may be required to disclose them in financial statements and regulatory filings. Failing to disclose may subject the company to fines, and executives and directors might face claims from investors.
* Insurance: Existing policies may cover the cost of making systems year-2000 compliant. Additional coverages may be needed for possible year 2000 failures and for resulting damages to third parties. "That is going to be difficult for many companies because as the insurance industry focuses on it, you're going to see exclusions for year 2000 problems," says Steven L. Hock, a year 2000 specialist with the law firm of Thelen, Marrin, Johnson & Bridges in San Francisco. Several companies have policies tailored to year 2000 risks.
* Labor and employment: Clients need to plan carefully how they staff up and staff down to avoid employment claims. Because qualified people are in short supply, poaching of personnel will almost certainly occur, giving rise to issues of employment contracts and trade secrets.
* Mergers and acquisitions: Companies might decide to unload operating assets that are beset with year 2000 problems, as the cost of fixing problems could be more than the assets are worth. If someone makes an acquisition without doing proper due diligence concerning year 2000 issues, "It's a beautiful way to acquire a huge liability instead of an asset," Hock says.
* Supplier certification: Suppliers should be asked to detail in writing how they are addressing year 2000 compliance and to certify that they will be able to meet their obligations.
* Taxes: A Financial Accounting Standards Board task force recommends expensing the costs of fixing year 2000 problems, but it's not binding on tax authorities. The IRS has not taken a position. Hock says permissible treatment may depend on how contracts are structured, how costs are documented and other factors. "The result can have a huge impact on a company's bottom line," he says.
* Tort Liability: Parties to an agreement could be subject to tort liability under various causes of action, including fraud, misrepresentation, professional malpractice or negligence.
Jon Newberry
Jon Newberry writes frequently for the ABA Journal.