U.S. GOVERNMENT PRINTING OFFICE

56-954 CC WASHINGTON : 1999

S. HRG. 106–97

Y2K IN THE COURTS:

WILL WE BE CAPSIZED BY A WAVE OF

LITIGATION?

HEARING

BEFORE THE

SPECIAL COMMITTEE ON THE

YEAR 2000 TECHNOLOGY PROBLEM

UNITED STATES SENATE

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

ON

THE SPECIFIC LIABILITY BILLS CIRCULATING IN THE SENATE AND POTENTIAL FOR COURT OVERLOAD, AND THE EFFECTS THAT Y2K LITIGATION MAY HAVE ON THE OPERATION OF BUSINESSES EITHER

FACED WITH LAWSUITS OR FORCED TO SEEK LEGAL RECOURSE

THROUGH THE COURT SYSTEM

MARCH 11, 1999

Printed for the use of the Committee

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/senate

For sale by the Superintendent of Documents, U.S. Government Printing Office

Washington, DC 20402
SPECIAL COMMITTEE ON THE

YEAR 2000 TECHNOLOGY PROBLEM

[Created by S. Res. 208, 105th Cong., 2d Sess. (1998)]

ROBERT F. BENNETT, Utah, Chairman

JON KYL, Arizona

GORDON SMITH, Oregon

SUSAN M. COLLINS, Maine

TED STEVENS, Alaska, Ex Officio

CHRISTOPHER J. DODD, Connecticut,

Vice Chairman

JOHN EDWARDS, North Carolina

DANIEL PATRICK MOYNIHAN, New York

ROBERT C. BYRD, West Virginia, Ex Officio

ROBERT CRESANTI, Staff Director

T.M. (WILKE) GREEN, Minority Staff Director

(II)
C O N T E N TS

STATEMENT BY COMMITTEE MEMBERS

Robert F. Bennett, a U.S. Senator from Utah, Chairman, Special Committee

on the Year 2000 Technology Problem ............................................................... 1

Christopher J. Dodd, a U.S. Senator from Connecticut, Vice Chairman, Special Committee on the Year 2000 Technology Problem .................................... 7

John Edwards, a U.S. Senator from North Carolina ............................................ 12

Jon Kyl, a U.S. Senator from Arizona ................................................................... 2

Gordon Smith, a U.S. Senator from Oregon .......................................................... 2

CHRONOLOGICAL ORDER OF WITNESSES

Orrin G. Hatch, a U.S. Senator from Utah, and Chairman, Committee on

the Judiciary, United States Senate, Washington, DC ..................................... 2

Michael C. Spencer, Milburg Weiss Bershad Hynes and Lerach, LLP, New

York, New York .................................................................................................... 15

Charles Rothfeld, Mayer, Brown and Platt, Washington, DC ............................. 17

Mark Yarsike, Co-Owner, Produce Palace International, Warren, Michigan .... 19

Howard L. Nations, Houston, Texas ...................................................................... 28

Hon. William Steele Sessions, Board Member, FedNet, Inc. ............................... 30

William Frederick Lewis, President and Chief Executive Officer, Prospect

Technologies, Washington, DC ............................................................................ 37

John H. McGuckin, Jr., Executive Vice President and General Counsel, Union

Bank of California, San Francisco, California, on behalf of the American

Bankers Association ............................................................................................. 40

George Scalise, President, Semiconductor Industry Association, San Jose,

California .............................................................................................................. 41

ALPHABETICAL LISTING AND MATERIAL SUBMITTED

Bennett, Hon. Robert F.:

Opening statement ........................................................................................... 1

Prepared statement .......................................................................................... 53

Dodd, Hon. Christopher J.:

Statement .......................................................................................................... 7

Prepared statement .......................................................................................... 54

Hatch, Hon. Orrin G.:

Statement .......................................................................................................... 2

Prepared statement .......................................................................................... 55

Responses to questions submitted by Chairman Bennett ............................. 58

Kyl, Hon. Jon:

Statement .......................................................................................................... 2

Prepared statement .......................................................................................... 59
Page

Lewis, Dr. William Frederick:

Statement .......................................................................................................... 37

Prepared statement .......................................................................................... 60

Responses to questions submitted by Chairman Bennett ............................. 62

McGuckin, Jr. John H.:

Statement .......................................................................................................... 40

Prepared statement .......................................................................................... 63

Responses to questions submitted by Chairman Bennett ............................. 72

American Bankers Association News ............................................................. 73

Nations, Howard L.:

Statement .......................................................................................................... 28

Prepared statement .......................................................................................... 74

Rothfeld, Charles:

Statement .......................................................................................................... 17

Prepared statement .......................................................................................... 80

Responses to questions submitted by Chairman Bennett ............................. 87

Sessions, William Steele:

Statement .......................................................................................................... 30

Prepared statement .......................................................................................... 89

Responses to questions submitted by Chairman Bennett ............................. 172

Scalise, George:

Statement .......................................................................................................... 41

Prepared statement .......................................................................................... 174

Spencer, Michael C.:

Statement .......................................................................................................... 15

Prepared statement .......................................................................................... 176

Responses to questions submitted by Chairman Bennett ............................. 180

Yarsike, Mark:

Statement .......................................................................................................... 19

Prepared statement .......................................................................................... 182

Note: Responses to questions submitted by Chairman Bennett to

George Scalise were not received at the time the hearing was published.

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Prepared Statement of Richard J. Hillman, Associate Director, Financial Institutions and Markets Issues, General Government Division ........................ 185
Y2K IN THE COURTS: WILL WE BE CAPSIZED

BY A WAVE OF LITIGATION?

THURSDAY, MARCH 11, 1999

U.S. SENATE,

SPECIAL COMMITTEE ON THE YEAR 2000

TECHNOLOGY PROBLEM,

Washington, DC.

The committee met, pursuant to notice, at 9:35 a.m., in room

SD–106, Dirksen Senate Office Building, Hon. Robert F. Bennett

(chairman of the committee) presiding.

Present: Senators Bennett, Kyl, Smith (of Oregon), Dodd, and

Edwards.

OPENING STATEMENT OF HON. ROBERT F. BENNETT, A U.S.

SENATOR FROM UTAH, CHAIRMAN, SPECIAL COMMITTEE ON

THE YEAR 2000 TECHNOLOGY PROBLEM

Chairman BENNETT. The committee will come to order, and you

will be pleased to know that the problem with the lights was not

caused by Y2K.

Today marks the 11th hearing of the Special Committee on the

Year Technology Problem, and we are very pleased to have Senator

Hatch with us here today. He and I have switched places. It was

a week ago I was testifying on Y2K liability legislation in the Judiciary Committee, which Senator Hatch chairs. Today, I am welcoming him to the Special Committee’s hearing on the same subject.

Obviously, both this committee and the Judiciary Committee

have an interest, the Judiciary Committee a certain obvious expertise in the area of Y2K liability. And this, of course, is true of every

sector of the Y2K challenge that we have investigated because Y2K

affects directly or indirectly virtually all organizations, whether

they are government or private businesses. It is a pervasive problem, so every committee in the Senate has an oversight in an area

that one way or the other will be affected by Y2K.

We are very encouraged on this committee, which started out

fairly lonely, to have other committees such as the Judiciary Committee recognize the potential impact of Y2K and to take efforts to

address it. Senator Hatch has certainly done that in his committee.

We applaud his efforts.

I have additional opening statements that I would like to make,

but I think to accommodate Senator Hatch’s schedule, I will stop

at that point.

[The prepared statement of Chairman Bennett can be found in

the appendix.]
Chairman BENNETT. Senator Kyl, if you have some comments,

we would be happy to hear from you, and then we will hear from

Senator Hatch.

STATEMENT OF HON. JON KYL, A U.S. SENATOR FROM

ARIZONA

Senator KYL. Thank you, Mr. Chairman, for holding this hearing

and thank you Senator Hatch for being here to discuss the legislation that will be before us. Clearly, last year’s legislation which encouraged information-sharing was a very good first step, but obviously inadequate. There are still companies who, fearing liability,

are being inhibited from getting done what is really necessary, and

that is remediation of their problems.

So, like the Year 2000 Information Readiness and Disclosure Act

of last year, it is my hope that we can visit the issue and develop

legislation this year which can ease the fears and really result in

remediation as a substitute for litigation. So I will look forward to

hearing Senator Hatch’s testimony, and again thank you for conducting this hearing today.

Chairman BENNETT. We should note, in the case there are any

who are not aware of it, that the legislation to which Senator Kyl

refers is a model that we hope to follow this year. Senator Kyl took

the lead on this committee in helping fashion the language of that

legislation and then worked very closely with the Judiciary Committee and its staff, the committee of jurisdiction through which

the legislation ultimately had to move. So we hope that is a model

of what will happen again, the cooperation between the two, recognizing that ultimate jurisdiction lies not with us, but with Judiciary, but that we do have some expertise. And Senator Kyl, on that

last piece of legislation, represented that expertise.

Senator Smith.

STATEMENT OF HON. GORDON SMITH, A U.S. SENATOR FROM

OREGON

Senator SMITH. Thank you, Mr. Chairman. I would simply echo

Senator Kyl’s comments and just express the sentiment that my

hope is this doesn’t turn into a partisan battle because what we

have here is a potential for a lot of people who were innocent in

the creation of this problem who could end up being victimized

twice if we can’t find some reasonable way to mitigate the litigation

potential. So I am hoping we can find that balance.

Chairman BENNETT. That is the concern and hope of all of us.

Senator Hatch, we are honored that you would be with us. We

appreciate your taking the time and we are delighted now to hear

what you have to tell us.

STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM

UTAH, AND CHAIRMAN, COMMITTEE ON THE JUDICIARY

Senator HATCH. Well, thank you, Mr. Chairman, Chairman Bennett, and Senators Kyl, Smith, and others on the committee. We

appreciate having this opportunity to appear before you today, before the Y2K Special Committee, on the problems posed by Y2Krelated litigation. All of you realize how important Y2K remediation is to consumers, business, and the economy. The problem is
of particular interest in my State of Utah, which has quickly become one of the Nation’s leading high-tech areas and States.

Building on the bipartisan efforts in the Judiciary Committee

last year in passing the Y2K disclosure law, our committee has

been studying the litigation problem in the hopes that we can pass

a bill that can avoid a potential catastrophic logjam of Y2K-related

cases. Working together, Senator Feinstein and I have produced a

bill, S. 461, the Year 2000 Fairness and Responsibility Act, that encourages Y2K problem-solving rather than encouraging a rush to

the courthouse. Now, it is not our goal to prevent any and all Y2K

litigation; it is simply to make Y2K problem-solving a more attractive alternative to litigation. This will benefit consumers, businesses and, of course, our economy.

The main problem that confronts us as legislators and policymakers in Washington is one of uniquely national scope. More specifically, what we face is the threat that an avalanche of Y2K-related lawsuits will be simultaneously filed on or about January 3 of

the year 2000, and that this unprecedented wave of litigation will

overwhelm the computer industry’s ability to correct the problems

that exist at that time. Make no mistake about it, this super-litigation threat is real, and if it substantially interferes with the computer industry’s ongoing Y2K repair efforts, the consequences for

our country, as well as the rest of the world, would be disastrous.

Most computer users were not looking into the future, while

those who did assumed that existing computer programs would be

entirely replaced, not continuously modified, as actually happened.

What this demonstrates is that the two-digit date was the industry

standard for years and reflected sound business judgment. The

two-digit date was not even considered a problem until we got to

within a decade of the end of this current century.

As the Legal Times recently pointed out, ‘‘the conventional wisdom [in the computer business was] that most in the industry did

not become fully aware of the Y2K problem until 1995 or later.’’

The Legal Times cited a LEXIS search for year 2000 articles in

Computerworld magazine that turned up only 4 pieces written between 1982 and 1984, but 786 pieces between 1995 and January

1999, in the last 4 years. Contrary to what the programmers of the

1950’s assumed, their programs were not replaced. Rather, new

programmers built upon the old routines, tweaking and changing

them, but leaving the original two-digit date functions intact.

As the experts have told us, the logic bomb inherent in a computer interpreting the year ‘‘00’’ in a programming environment

where the first two digits are assumed to be ‘‘19’’ will cause two

types of problems. Many computers will either produce erroneous

calculations—what is known as a soft crash—or shut down completely—what is known as a hard crash.

What does all this mean for litigation? As the British magazine

The Economist so aptly remarked, ‘‘many lawyers have already

spotted that they may lunch off the millennium bug for the rest of

their days,’’ unquote. That is a pretty interesting comment. Others

have described this impending wave of litigation as a feeding frenzy. Some lawyers themselves see in Y2K the next great opportunity

for class action litigation, after asbestos, tobacco and breast implants. There is no doubt that the issue of who should pay for all
of the damage that Y2K is likely to create will have to be sorted

out, often in court.

But we face the more immediate problem of frivolous litigation

that seeks recovery even where there is little or no actual harm

done. In that regard, I am aware of at least 20 Y2K-related class

actions that are currently pending in courts across the country,

with the threat of hundreds, if not thousands, more to come. It is

precisely these types of Y2K-related lawsuits that pose the greatest

danger to industry’s efforts to fix the problem. All of us are aware

that the computer industry is feverishly working to correct or remediate, in the historical aspects of this, in industry language, Y2K

so as to minimize any disruptions that occur early next year.

What we also know is that every dollar that industry has to

spend to defend against especially frivolous lawsuits is a dollar

that will not get spent in fixing the problem and delivering solutions to technology consumers. Also, how industry spends its precious time and money between now and the end of the year either

litigating or mitigating will largely determine how severe Y2K-related damage, disruption and hardship will be.

To better understand the potential financial magnitude of the

Y2K litigation problem, we should consider the estimate of Capers

Jones, Chairman of Software Productivity Research, a provider of

software measurement, assessment and estimation products and

services. Mr. Jones suggests that, quote, ‘‘for every dollar not spent

on repairing the year 2000 problem, the anticipated costs of litigation and potential damages will probably amount to in excess of ten

dollars,’’ unquote. In other words, for every dollar not spent on repairing the problem, then the litigation costs can amount to ten

dollars.

The Gartner Group estimates that worldwide remediation costs

will range between $300 billion to $600 billion. Assuming that Mr.

Jones is only partially accurate in his prediction, the litigation

costs to society will prove staggering. Even if we accept The Giga

Information Group’s more conservative estimate that litigation will

cost just two dollars to three dollars for every dollar spent fixing

Y2K problems, overall litigation costs may amount to more than $1

trillion. That is potentially catastrophic.

Even then, according to the Y2K legal expert Jeff Jinnett, quote,

‘‘this cost could greatly exceed the combined estimated legal costs

associated with Superfund environmental litigation . . . U.S. tort

litigation . . . and asbestos litigation,’’ unquote. Perhaps the best

illustration of the sheer dimension of the litigation monster that

Y2K may create is Mr. Jinnett’s suggestion that a $1 trillion estimate for Y2K-related litigation costs, quote, ‘‘would exceed even the

estimated total annual direct and indirect costs of all civil litigation

in the United States,’’ unquote, which he says is currently $300 billion per year.

Now, these figures should give all of us pause. At this level of

cost, Y2K-related litigation may well overwhelm the capacity of the

already crowded court system to deal with it. Looking at a rash of

lawsuits, we have to ask ourselves what kind of signals are we

sending to computer companies currently engaged in, or contemplating massive Y2K remediation. What I fear industry will

conclude is that remediation is a losing proposition and that doing
nothing is no worse an option for them than correcting the problem. This is exactly the wrong message that we want to be sending

to the computer industry at this critical time.

I believe Congress should give companies an incentive to fix Y2K

problems right away, knowing that if they don’t make a good-faith

effort to do so, they will shortly face costly litigation. The natural

economic incentive of industry is to satisfy their customers, and

thus prosper in the competitive environment of the free market.

This acts as a strong motivation for the industry to fix Y2K problems before any dispute becomes a legal one.

This will be true, however, only as long as businesses are given

an opportunity to do so and are not forced at the outset to divert

precious resources from the urgent tasks of the repair shop to the

often unnecessary distractions of the courtroom. A business and

legal environment which encourages problem-solving while preserving the eventual opportunity to litigate may best ensure that consumers and other innocent users of Y2K-defective products are protected.

There are now at least 117 bills pending in State legislatures.

Each bill has differing theories of recovery, limitations on liability,

and changes in judicial procedures such as class actions. This creates a whole slew of new problems. They include forum-shopping.

States with greater pro-plaintiff laws will attract the bulk of lawsuits and class action lawsuits. A patchwork of statutory and case

law will also result in uneven verdicts and a probable loss of industry productivity, as businesses are forced to defend or settle everincreasing onerous and frivolous lawsuits. Small States most likely

will set the liability standard for larger States. This tail wagging

the dog scenario undoubtedly will distort our civil justice system.

Some States are attempting to make it more difficult for plaintiffs to recover. Proposals exist to provide qualified immunity, while

others completely bar punitive damages. These proposals go far beyond the approach taken in the Judiciary and Commerce Committees’ bills of setting reasonable limits on punitive damages. Other

States may spur the growth of Y2K litigation by providing for recovery without any showing of fault. A variety of different and

sometimes conflicting liability and damage rules create tremendous

uncertainty for consumers and businesses.

If we want to encourage responsible behavior and expeditious

correction of a problem that is so nationally pervasive, we should

impose a reasonable, uniform Federal solution that substantially

restates tried and true principles of contract and tort law. If there

is an example for the need for national uniformity in rules, I think

this is it.

The most appropriate role we in Washington can play in this crisis is to craft and pass legislation that both provides an incentive

for industry to continue its remediation efforts and that preserve

industry’s accountability for such real harm as it is legally responsible for causing. This will involve a delicate balancing of two

equally legitimate public interests—the individual interest in litigating meritorious Y2K-related claims and society’s collective interest in remediating Y2K as quickly and as efficiently as possible. We

need to provide an incentive for technology providers and technology consumers to resolve their disputes out of court so that precious resources are not diverted from the repair shop to the courtroom.

And this is the need that our bill, S. 461, the Hatch-Feinstein

Year 2000 Fairness and Responsibility Act meets. The bipartisan

bill, among other things, does the following. It preserves the right

to bring a cause of action. It requires a 90-day problem-solving period which will spur technology providers to spend resources in the

repair room instead of diverting needed capital.

It provides that the liability of a defendant would be limited to

the percentage of the company’s fault in causing the harm. It specifically encourages the parties to a dispute to request alternative

dispute resolution, or ADR, during the 90-day problem-solving period, and prevents careless Y2K class action lawsuits, caps punitive

damages, and ensures that the Federal courts will have jurisdiction

over this national problem.

In conclusion, Y2K presents a special case. Because of the great

dependence of our economy, indeed of our whole society, on computerization, Y2K will impact almost every American in some way.

But the problem and its associated harms will occur only once, all

at approximately the same time, and will affect virtually every aspect of the economy, society and government. What we must avoid,

at least in my opinion, is creating a litigious environment so severe

that the computer industry’s remediation efforts will slacken and

retreat at the very moment when users and consumers need them

to advance with all deliberate speed.

Respectfully, I think that our bill strikes the right balance. Still,

I recognize that if we are to enact worthwhile Y2K problem-solving

legislation this year, we must all work together, Democrats, Republicans, and the administration, in a cooperative manner that produces a fair and narrowly tailored bill. Recently, the Judiciary

Committee initiated such an effort, to which both Senators Dodd

and Bennett have sent representatives. And I postponed a markup

of the Hatch-Feinstein bill originally scheduled for today. All of this

has been done in the hope that we can produce a measure which

has even broader political support, can pass the Congress, and can

become law.

Now, I hope this has been helpful to you, Mr. Chairman and

other members of the committee, Mr. Vice Chairman, and my fellow Senators. I really believe we have to do this. I think we have

to do it now and I think we have to do it in a way that basically

remediates and helps to resolve the problems that we all anticipate

will come.

Chairman BENNETT. Thank you very much, Senator Hatch. It

has been very helpful, and it is very gratifying to hear the detail

and the great care that has gone into the consideration of the various issues and the crafting of this legislation. Very often, we get

testimony that is quite general in nature. I usually give testimony

like that, seeing as how I don’t have a legal education and can’t

intelligently discuss these details in the way that you have. We are

very grateful to you for your diligence and your willingness to address this issue and give it top priority.

I have to go back to one of my first experiences here in the Senate when Senator Dodd was the chairman of the appropriate subcommittee in the Banking Committee, on which I sat as a very junior member. We took up the issue of strike suits, litigation in the

securities field that was not productive that damaged shareholders,

damaged investors, in the name of protecting them. And that is one

of my more satisfying experiences in the Senate, watching Senator

Dodd and Senator Domenici push that legislation through, and

being a very junior cosponsor of it, participating in the Senate debate. We passed the legislation ultimately over the President’s

veto. You talk about a bipartisan effort; that was a bipartisan effort

that garnered the necessary 67 votes.

So working with Senator Dodd on this issue, I know we can approach it in a bipartisan fashion. I know there are still disagreements on it and that there is not unanimity behind the Hatch-Feinstein approach. But I congratulate you on the thoroughness with

which you have gone after this, your willingness to consider every

aspect of it, and I think we are on the way. I agree with you absolutely that we have to do it, and we have to do it now.

If we let this one drag on—well, Senator Dodd has presented me

with a gift.

Vice Chairman DODD. Under $35.

Chairman BENNETT. It is under $35. This is a clock that says

‘‘Time Remaining, Year 2000,’’ and as of the moment there are 295

days, 13 hours, 3 minutes and 15 seconds. And in congressional

terms, that is no time at all; we can take much longer than that

to write legislation. But in terms of this particular challenge, that

reminds us that we have to act with uncharacteristic rapidity to

deal with this challenge.

Senator HATCH. Well, in legal terms, that is an eternity, as you

know.

Chairman BENNETT. All right.

Senator HATCH. Let me just say this. I am very proud of the

work that all of you are doing on this committee, and especially

you, Mr. Chairman, and Senator Dodd. You are approaching this

in the right way.

Now, the reason we have delayed this markup is because we

want this committee to give us some advice. We want as many

Democrats as we can to let us know how we can correct or make

this bill a better bill. We have taken into consideration almost everything we possibly can to get it to be a reasonable bill. And if

we don’t do this, then I think it is going to be a disaster in this

country. It would just be a disaster to have all these economic efforts diverted to courthouses in this country rather than to fixing

the problems. That is why I am very appreciative of the leadership

that this committee is providing to the Senate and to the world at

large, really.

Thank you for inviting us.

Chairman BENNETT. Senator Dodd, did you have an opening

statement or comment? And then we will go back to Senator Kyl.

STATEMENT OF HON. CHRISTOPHER J. DODD, A U.S. SENATOR

FROM CONNECTICUT, VICE CHAIRMAN, SPECIAL COMMITTEE ON THE YEAR 2000 TECHNOLOGY PROBLEM

Vice Chairman DODD. Well, first, let me thank again you, Mr.

Chairman. This is a very worthwhile and important hearing. And
my good friend and colleague from Utah, our witness here, with

whom I have worked on many issues over the years——

Senator HATCH. You sure have.

Vice Chairman DODD [continuing]. Dealing with children’s issues

and——

Senator HATCH. You are not speaking into the microphone

enough there, telling about all these things.

Vice Chairman DODD. Well, I am sorry. I apologize. [Laughter.]

I don’t want to ruin your career in Utah either. I want to be careful.

Senator HATCH. You have had that effect from time to time.

Vice Chairman DODD. I know; so they tell me, my spies out there

tell me.

But it doesn’t surprise me obviously that you are here either because you care about these issues and you have worked on them

over the years. And we appreciate immensely your willingness to

fashion a piece of legislation and try and come up with some answers here on this. And let me just share with you, because I have

been—Senator Hatch has talked with me, and I have talked with

Senator McCain, who has legislation they have marked up out of

their committee, as well. And I appreciate the comments of my

chairman here talking about the securities litigation reform bill

that Pete Domenici worked on for 7 years. That legislation was a

long time in coming, but we put together a good bill there, I think,

and it has been beneficial.

And then we did the uniform standards legislation, following on,

because of what we saw as a growing problem in the proliferation

of actions being brought at the State court level. And I am concerned about that issue here as well. But let me just share with

you a few thoughts, if I can, on this because in an anticipation of

your testimony here today, we have tried to do some work. And I

appreciate the fact that you are not having a markup today on this

to see if we can’t find some common ground with you.

I am concerned about the explosion here; they are talking about

$1 trillion. You may have mentioned that figure before I walked in.

Senator HATCH. Yes.

Vice Chairman DODD. And that may be a conservative estimate

here, depending upon what happens in this area. But in 1997, in

the State courts, there was one case filed for every three people in

the United States, to give you some idea of the magnitude of this

issue. A potential escalation of Y2K litigation obviously can further

impede the efficiencies of our court system. Aside from the problems it creates in and of itself, you end up with a unique explosion

of litigation because of this problem we have on our hands.

It makes it more difficult in a variety of other areas as well. You

crowd up the courts, obviously, with these kinds of lawsuits, costing the taxpayers billions of dollars in products, services, as well

as insurance premiums, shift of cost of burden to consumers and

the like. In the same spirit as has been noted here, we passed the

Year 2000 Information and Readiness Disclosure Act which acts, as

all of you noted, to encourage a steady flow of information regarding Y2K readiness. And we should proceed into a discussion of Y2K

litigation reform, obviously, as a follow-on to that.
The Year 2000 Information and Readiness Act brought about a

bipartisan compromise between Democrats and Republicans here,

with industry support, and we think it has made a significant contribution to businesses sharing information with one another about

this issue. I agree with my colleague and chairman that even with

this legislation, fears of Y2K litigation weigh heavily on the minds

of business owners. Yet, we hear rumors almost on a daily basis

of business enterprises which are doing relatively little, on the

other hand, here.

I was at a hospital, Mr. Chairman, in my State the other day,

Middlesex Community Hospital. We have 31 non-profit hospitals in

Connecticut. I am pleased to report that most of them are really

working very hard on this issue, but I was sort of surprised to have

the hospital administrators tell me the difficulty they are having

with suppliers and manufacturers of medical devices, of them sharing with the hospital the assurances on compliance.

In fact, they have even bought a couple of pieces of medical devices that have embedded chips that they have recently bought

that turned out not to be compliant. So there is still a problem out

here, even with our Disclosure Act, in getting that. So we need to

be careful. We are not going to be providing some blanket of security here for businesses, with all the knowledge they should have,

of stepping up and doing what they ought to be doing, placing people’s lives in jeopardy. I don’t think any of us want to be a part

of a system that would allow that to happen. So we need to be conscious of that.

After examining a number of the bills, I am very concerned that

we may go beyond—and this is where I would like to focus these

brief remarks—go beyond what is needed to address the valid concerns of Y2K litigation, the explosion of litigation in this area. As

I mentioned earlier, we drew the narrow bill on securities litigation

reform. I strongly believe that we must leave broad tort reform for

another day.

Now, there are going to be those who want to use this to drive

a truck through this thing, but I think it is a mistake if we do that.

If we seek through this legislation to achieve broad tort reform, we

run the risk that we will not have meaningful Y2K liability legislation. Therefore, I am going to introduce a piece of legislation that

is narrow in scope—I have mentioned this to the chairman already—and I don’t think overreaches. And I would like you, Senator Hatch, to take a look at this, along with Senator Feinstein and

others. There is nothing concrete here, nothing etched in marble at

all.

You asked me for some ideas a week or so ago——

Senator HATCH. Sure.

Vice Chairman DODD [continuing]. And I am trying to comply

with that suggestion to give you some sense of where I think we

ought to go here. And let me just mention a couple of the provisions. It sort of tracks, in a sense, what you and Senator Feinstein

have gone, and Senator McCain, in the general headings.

I would endorse the 90-day period where litigation would be

stayed, giving a defendant an opportunity to correct, and therefore

hopefully mitigate Y2K-related damages.
On the alternative dispute resolution, which I think is something

we ought to try, I believe that alternative dispute resolution, commonly termed ADR, is a very effective tool in avoiding the timeconsuming and expensive proposition of litigation for both plaintiffs

and defendants. Certainly, ADR could be an extremely useful tool

in delaying the complex and disparate claims.

Specificity in pleadings. Imbedded within the requirement for

specificity in pleadings is the proposition that Y2K suits should

definitely outline the causes of action which form the underlying

claim for damages. By requiring plaintiffs to detail the elements of

their claim, courts can more accurately judge and, if necessary, dismiss frivolous or legally insupportable suits.

During securities litigation reform, we worked to eliminate strike

suits and other attorney-generated class actions. Similarly, I am

concerned that we potentially face an onslaught of suspect Y2K

class action suits. By requiring any alleged defect to be material,

I think we help to ensure that superficial or frivolous claims would

not occur.

In contract preservation, in civil actions involving contracts, it is

the terms of these very contracts that should be strictly construed.

It is important, however, to evaluate whether this might eliminate

State law causes of action based on implied warranty. And I know

you do do that, and I think this is an area where we may have to

do some work.

Senator HATCH. Right.

Vice Chairman DODD. ‘‘Reasonable effort’’ defense in a claim for

money damages. Except in contract, a defendant should be entitled

to enter into evidence that it took measures that were reasonable

under the circumstances to prevent the Y2K failure from occurring

or causing the damages upon which the claim is based.

An overall discussion of negligence claims. It is our desire to

limit frivolous lawsuits. It is appropriate that we review the standards of proof and to determine whether those standards need to be

raised.

And, last, on the duty to mitigate, in the complex and unknown

world of potential Y2K failures I think it is important that perspective plaintiffs make all reasonable efforts to avoid damages in circumstances where information was readily available. Yet, we must

not obviously, in my view, bar plaintiffs from their fundamental

legal rights, and particularly when there has been abuse and fraud

and failure to comply when knowledge was available to do otherwise.

So those are just some broad outlines, Mr. Chairman. I mean,

again, there is nothing in concrete on this. But in response to Senator Hatch’s inquiry of a week or so ago, and Senator McCain’s

similar request, I think a very legitimate and proper one, to ask

those of us who have not signed on with your proposals here what

would we be willing to support—and we will get this to you, by the

way, in more detailed form, but I would hope that this might provoke some discussion in the coming days here, because I agree with

the chairman. This is not a time when we can wait around here.

We can’t go, obviously, 7 years or anything remote like it on this

issue here. We have got to deal with it very quickly, in my view,

in the next month or 6 weeks, if we are going to succeed. And so
we are going to have to find some common ground and it is going

to have to be narrow. It was hard enough even with the securities

litigation reform, which was pretty narrow, to get that through.

And as you point out, we had a veto and overrides, and so forth.

I don’t anticipate that here. I think the President and the administration are anxious, as well, to do something here that they can

support. So I think it is in our interest to work very hard now in

the next few days and see if we can’t fashion something here. It

may not satisfy the political appetites of some who see this as an

opportunity for getting a lot more in the area of tort reform. But

my message to them would be if that is what your purpose is here,

it is a purpose that is going to be achieved, or a result that is not

going to occur. This isn’t going to happen.

There is an opportunity to do something here in a narrow way

that I think addresses the very legitimate issues that Senator

Hatch, Senator McCain and others have raised. And if we work

hard at doing that, I think we can provide a valuable service. To

go beyond that here, I think, would be a mistake. It will not only

not do anything in this particular case, but probably create some

more serious problems. So I would urge that we try and find some

time here to work on this.

Senator HATCH. Well, let me just say that virtually everything

you have said we have in the bill, except on the issue of implied

warranties. And we do not intend to end those suits, so I think we

are probably in agreement with virtually everything you have said.

Vice Chairman DODD. We have some common ground here, then.

Senator HATCH. So those are good suggestions and we will do our

best to sit down and resolve them with you.

Vice Chairman DODD. Thanks very much. Thank you, Mr. Chairman.

Chairman BENNETT. Thank you. We want to formally welcome

Senator Edwards, a new member of this committee. We were

pleased with Senator Bingaman’s service on this committee. He

made a worthwhile contribution, and we were sorry that his elevation to the position of ranking member on the Energy Committee

made it impossible for him to have the time to devote to this committee and therefore necessary to resign. But we are delighted that

Senator Edwards has stepped in.

I warn you, Senator Edwards, you are now, if you are going to

fill Senator Bingaman’s slot, going to have to become an expert on

armed services issues and telecommunications issues as they relate

to Y2K. But every senator is expected to be a generalist and this

will be a good experience for you. We are delighted to have you

here and we now welcome your opening statement or any comments you might have for Senator Hatch.

Vice Chairman DODD. Mr. Chairman, I want to also welcome our

colleague from North Carolina, and it is a timely arrival here. Our

colleague, in addition to his committee assignments, is recognized

as one of the very fine attorneys in the United States prior to his

decision to join us here in the Senate—I should say the decision of

the people of North Carolina to have you join us here in the Senate. But he will bring a wealth of information and knowledge in

terms of litigation issues, and so it is an appropriate first hearing

for him to attend.
John, we welcome you to the committee.

Senator EDWARDS. Thank you, Senator Dodd, and thank you, Mr.

Chairman. Mr. Chairman, I do have an opening statement, but I

don’t want to interrupt the testimony of Senator Hatch. I don’t

know where you are in this process.

Chairman BENNETT. His testimony is completed.

Senator EDWARDS. OK. That is the last thing I would want to do

is interrupt Senator Hatch.

Senator HATCH. You are great. Well, if you will——

Chairman BENNETT. We can either excuse him, if you have an

opening statement that is not necessarily pointed to him, or if you

are addressing the very issues he pointed to, I am sure he would

be willing to stay.

Senator EDWARDS. I will leave that to Senator Hatch. He is more

than welcome to stay. But I certainly do not want to interrupt his

testimony, but I do have an opening statement.

Senator HATCH. Well, I thank you for your courtesy, Senator. I

think we will go, but let me just say this. I really appreciate what

this committee is doing, and I appreciate the help we had last year.

This committee deserves the credit for that bill, and we had help

from every one of you who were on this committee last year, particularly the chairman, vice chairman, and Senator Kyl.

And this bill isn’t going to go without your help either, so we

want your help. We want to be able to get this thing resolved in

the best possible way and in the quickest possible way. But we are

facing a tremendous disaster if we don’t pass this bill or something

very similar to it, and without any real just cause or reason. If

there was a good just cause or reason, that is another matter.

We will particularly look forward to hearing your ideas, as well,

Senator Edwards, because you do have a lot of litigation experience, especially on the side of plaintiffs. I have had both plaintiffs

and defense lawyer—did you start out as a defense lawyer, like I

did?

Senator EDWARDS. I did.

Senator HATCH. Well, see, then you have had both sides, so you

understand these issues very well. We have great respect for your

legal acumen, and so we will look forward to working with you and

see what we can do to get this thing put together so that it has

wide bipartisan support. But we have got to do it and we have got

to do it real soon.

Thank you.

Chairman BENNETT. Thank you very much, Senator.

[The prepared statement of Senator Hatch can be found in the

appendix.]

Chairman BENNETT. Senator Edwards.

Senator EDWARDS. Should I proceed?

Chairman BENNETT. Please.

STATEMENT OF HON. JOHN EDWARDS, A U.S. SENATOR FROM

NORTH CAROLINA

Senator EDWARDS. Mr. Chairman, let me thank you first for calling this hearing. As you know, this is my first hearing with this

committee, and I look forward to working with you and Senator

Dodd on all of the issues that surround the year 2000.
I do hope that this committee and the Senate as a whole will

carefully review all of these recent proposals that would restrict the

rights of American consumers and small businesses who seek redress for harms caused by year 2000 computer problems. I say this

because I am deeply concerned about attempts to deal preemptively

with a problem whose scope we can only guess at right now.

I do offer one simple suggestion. Our goal should be to encourage

real solutions, complete solutions, to the Y2K problem. This committee’s own report concluded, and I am quoting now, ‘‘A misconception pervades corporate board rooms that Y2K is strictly a

technical problem that does not warrant executive attention.’’ I

have to admit that it is hard for me to understand how lowering

the responsibility for this inaction and lax attitude could actually

encourage aggressive and complex solutions.

I want you all to know that I myself dislike frivolous litigation

as much as anybody else. I honor and respect the law, and like all

of you, I find nuisance suits an affront to our legal system. But I

am also all too aware that for every frivolous lawsuit, there are ten

or more legitimate suits brought by people whose livelihood has

been imperiled by corporate indifference.

In looking through many of the Y2K suits that have been filed,

I have been struck by how many times small businesses have

called their software vendors asking for a solution before they ever

file suit. And too many times these small businesses—grocers, doctors, interior decorators—were brushed off by the people who sold

them this product, or they were offered a fix at predatory prices.

So the sad fact is that sometimes suing is the only way to get a

recalcitrant company to come to the table.

Sweeping liability protection has the potential to do great harm.

Such legislation may restrict the rights of consumers, small businesses, family farmers, State and local governments, and the Federal Government from seeking redress for the harm caused by Y2K

computer failures. Moreover, it runs the risk of discouraging businesses from taking responsible steps to cure their Y2K problems

now before it is too late.

I believe we need to ask whether legislation to limit liability or

alter the legal system will support or undercut a company’s incentive to fix Y2K problems. Why should anyone act comprehensively

now if the law is changed to allow you to wait, see what problems

develop, and then use the 90-day cooling-off period after receiving

detailed written notice of the problem to think about coming into

compliance? Why not wait and see what solutions are developed by

others and draw from them later in the 3-month grace period after

the harm is done and only if someone complains?

The fact is that many major businesses should have known about

this problem decades ago. And certainly anyone in the business of

creating date-dependent software must have known about this

issue. As a result of this indifference, the Small Business Administration recently warned that 330,000 small businesses are at risk

of closing down as a result of Y2K problems, and another 370,000

could be temporarily or permanently hobbled. I don’t think we can

turn our backs on these people. And to me, that means that the

rule of law should not be tinkered with, absent overwhelming evidence.
Last year, we passed the Year 2000 Information and Readiness

Disclosure Act to encourage information-sharing and forthright disclosure. This year, we have already passed the Small Business

Year 2000 Readiness Act, S. 314, to offer help to small businesses

working to remedy their computer systems before the millennium

bug hits. In his prepared testimony, Mr. Nations has offered a

number of constructive suggestions that I think we should take

very seriously.

Let me say, last, I look forward very much to working with this

committee, to working with you, Mr. Chairman, to working with

Senator Dodd. And I thank you for this opportunity to speak.

Chairman BENNETT. Thank you very much. We will get into

these issues, and we welcome you to be here and appreciate your

contribution. I will resist any attempt to respond because we have

a panel here and presumably they will respond to some of the

issues.

I will make this one overall comment. We cannot consider legislation that would encourage anyone to slow down his or her Y2K remediation efforts. We cannot consider legislation that would say

failure is an option, or doing nothing is an option because Congress

is going to protect us.

At the same time, in the world in which we live where just-intime inventory creates an enormous chain of suppliers that run out

seven, eight, nine, into double digits. A failure in that chain that

is beyond one’s control could, in fact, make it impossible for a business to fulfill its obligations. The business should be held liable for

that failure. But, in my opinion, punitive damages in that situation

are inappropriate.

A business that has done everything it can to make sure that its

systems are operating that is nonetheless victimized by a failure

somewhere in the just-in-time inventory chain, who is then, because it has deep pockets, subject to serious litigation problems

even after having acted in a responsible manner itself, is one that

should merit receiving some kind of protection. And that, I think,

is the narrow nature of the legislation that Senator Dodd is talking

about and working with Senator Hatch on.

I am hoping that we can find some kind of carefully targeted relief that does not allow those who are irresponsible to go unnoticed

and unsued. At the same time however, relief that sees that those

who act in good faith and do everything they responsibly can are

not held to undue and improper levels of punitive damages.

So with that general comment, let’s turn to the people who really

understand this, the lawyer panel that we have set. We have four

lawyers—Michael Spencer, who is with the law firm of Milberg

Weiss; Charles Rothfeld, with the law firm of Mayer, Brown and

Platt. Mark Yarsike is the grocer. He is not a lawyer. He has been

added at the specific request of Senator Edwards. And Howard Nations has also been added at the request of Senator Edwards.

We will hear from the first three. Mr. Nations, we would ask

that you be available for questions, but given the fact that you

were added very, very late, after the witness list had been drawn

up, we would ask you to submit your statement to the record and

then just be available for questions from the panel, please.

Mr. NATIONS. Certainly, Senator. Thank you.
[The prepared statement of Mr. Nations can be found in the appendix.]

Chairman BENNETT. All right. Mr. Spencer, we will start with

you.

STATEMENT OF MICHAEL C. SPENCER, MILBERG WEISS

BERSHAD HYNES AND LERACH LLP, NEW YORK, NEW YORK

Mr. SPENCER. Thank you, Mr. Chairman and Senators. My name

is Michael Spencer. I am a partner in the law firm of Milberg

Weiss Bershad Hynes and Lerach, in New York City. I very much

appreciate the opportunity to be here today, Senators. I have never

given legislative testimony before. I agree that this is an important

issue, and I welcome the opportunity to share my views with you.

According to the invitation letter, I believe that I am here, Senators, because I have been the plaintiffs’ counsel in a small handful

of class actions that have been brought against Year 2000 defendants, that is software manufacturers whose products have had Year

2000 defects. And I know from the presentation of Senator Hatch

and the statements of several of the Senators on the Special Committee so far that my views are substantially different from what

Senator Hatch described as the conventional wisdom in this area.

I believe that my views derive primarily from the specific experience I have had in actually litigating these matters, and therefore

I would like to try to explain to you why that is.

In summary, Senators, my main views and main concerns are as

follows. First of all, I believe that an attempt to rewrite the laws

that apply to Year 2000 problems at this critical juncture with respect to this problem will exacerbate the problems, if they exist,

rather than solve them. And that is because we are already subject

to a very well-developed common law and statutory system and set

of legal procedures in our State and Federal court systems that

have over the years yielded very well-articulated, fair standards for

dealing with these problems.

And I do believe that it would be a large mistake to try to tinker

with that very delicate balance that has already been achieved.

That balance comes from a lot of practical experience with many

different fact situations that judges of all political and legal persuasions have dealt with over many years, both at the trial level and

the appellate level. And I think it would be true folly, gentlemen,

to attempt on a sort of wholesale basis, in response to a very particular situation, the Year 2000 defects, to rewrite those laws in a

way that might well exacerbate the exact problems that we are all

trying to address in a constructive way here.

My second point, Senators, is that the $1 trillion figure that has

been bandied about as an estimate for the cost of litigation to deal

with the Year 2000 problem cannot be supported by any intellectually honest observer. The figure, I am sure, came up as a round figure that sounded very large and was attractive to people who were

trying to gain attention for their statements on this a year or 18

months ago when the problem came into public view, but there is

no scientifically acceptable way to support that figure. By saying

that, I am not saying that the problem is minor. What I am saying

is that no one in this room or elsewhere has the faintest idea what
the extent of the litigation problem, or indeed the technology problem will be.

And, finally, Senators, my overall position is that your committee

title has it exactly right. The committee title is the Special Committee on the Year 2000 Technology Problem, and it is not primarily a legal problem at this point. And it would be folly to divert

our attention to these legal issues when it is really the technology

that deserves our attention.

What I would like to do very briefly, Senators, is give you a quick

perspective on one of the cases that is a class action that has been

filed so far. It teaches some lessons that I think are important to

your inquiry.

In mid–1995, a small business owner on Long Island bought an

accounting software package which he used to deal with the normal

accounting procedures in his business. In 1997, he read that his

system would be subject to Year 2000 defects. When he bought his

software, it was subject to an express 5-year warranty that it

would perform all of its functions in the way that was described in

the manual. It was clear from what this small business owner

learned in 1997, late 1997, that that was not going to be the case

with respect to his software.

Despite the 5-year express warranty, however, the manufacturer

of the software was not offering to fix that problem for this small

business owner for free. And, in fact, he would have been required

to spend about $2,500 to fix this system that he had bought for

about $12,000 just a couple of years before with an express warranty. Now, that put him in a difficult position because $2,500 for

a small business owner is not a insignificant sum of money, particularly when he had bought this envisioning that it would work

for him at least well into the future.

So what he did is he consulted a lawyer and he consulted my

firm about what to do in this situation. We confirmed with the

company that manufactured the software that a free fix was not

going to be available for this product, despite the warranty. And at

that point, Senators, we decided to bring a class action suit against

that company primarily to require them to honor their express warranty to make a free fix available to the customers who had bought

the software.

About 3 days after we filed that suit in State court, in California,

where the company was located, we got a call from the company’s

lawyer and the first thing that was said to us was that they were

offering a free fix to the people like our client who were in that situation, contrary to their position before the lawsuit was filed. And

that case has now been settled on that basis, and just yesterday

the State court judge out in California held a hearing on the settlement and indicated that he would approve the settlement on that

basis.

So, Senators, let me conclude by telling you the three or four

things that I think become evident from that situation. One is that,

unfortunately, some members of the high-tech community that

have manufactured software that has these Year 2000 defects—

some of them, not a majority of them, are attempting to use the

Year 2000 problem to make profits that they do not deserve, in this

case by charging people who should have been beneficiaries of an
express warranty to get a free fix, $2,500 on average per person—

and there are thousands of users of this software—to get the fix.

That is profiteering and it shouldn’t be allowed and it is what the

legal system and lawsuits in this case were able to prevent.

No. 2, the existing laws were capable to deal with this situation.

Therefore, Senators, I would conclude that the existing laws do not

need to be fixed in this case. The litigation concluded very promptly.

And, third, and last, Senators, there are no clear lines dividing

who might be a Year 2000 defect claimant from those who might

be defendants in these cases. The potential claimants or plaintiffs

are going to be individuals and small business owners across the

board. This is not a business-versus-consumer situation. It is certainly not a politically partisan situation. And I think that by tinkering with the legal system in a way that potentially causes legal

rights to be removed, it would be preventing many deserving claimants who would suffer economic injury from this situation from getting their day in court.

Thank you.

Chairman BENNETT. Thank you very much.

[The prepared statement of Mr. Spencer can be found in the appendix.]

Chairman BENNETT. Mr. Rothfeld.

STATEMENT OF CHARLES ROTHFELD, MAYER, BROWN AND

PLATT, WASHINGTON, DC.

Mr. ROTHFELD. Thank you, Mr. Chairman, members of the committee. My name is Charles Rothfeld. I am a lawyer in the Washington office of the law firm of Mayer, Brown and Platt. I represent

the Semiconductor Industry Association and the accounting profession, both of which are members of the Year 2000 Coalition, which

is a broad-based group of large and small companies that have

joined together to seek targeted Y2K legislation. I very much appreciate the opportunity to appear today to talk about an issue that

is of enormous importance and one that is of abiding interest to a

great many lawyers across the country.

The members of this committee know more than anyone about

the technical aspects of the Y2K computer glitch and the effect that

that glitch may have on the national economy. But it is important

to devote attention to a secondary effect of the Y2K computer problem that may ultimately have more destructive consequences and

longer-lasting consequences for the national economy than the computer failures themselves, and that is the threat of a tidal wave of

Y2K litigation, or an avalanche, as Senator Hatch described in his

statement this morning.

I would like to touch briefly on three points in my testimony

today. First, I will survey the kinds of litigation that we can anticipate arising out of Y2K. Second, I will address the question of the

quantity of litigation we can expect to materialize. And, third, I

will touch briefly on the subject that Senator Hatch and Senator

Dodd discussed, and that is what Congress can and should do

about this problem.

First, on the kinds of cases that are likely to arise, I could spend

5 hours rather than the 5 minutes I have this morning detailing
those because virtually any kind of claim is imaginable under Y2K.

My written testimony goes into more detail on the kinds of causes

of action that we can probably expect to see. For present purposes,

I will simply note that we can expect claims of the kind that Mr.

Spencer has described seeking remediation costs. We can expect

claims for damages that actually are caused by Y2K problems. We

can expect claims against fiduciaries. We can expect securities

fraud claims, and ultimately we can expect insurance claims.

Now, these different categories of suits will involve an enormously wide range of causes of action. People will invoke contract

remedies, warranty remedies, tort remedies of various sorts, statutory causes of action of all kinds, consumer protection statutes, unfair trade practices statutes, Federal RICO statutes, the securities

laws.

The availability of all of this law makes very pressing the , how

much litigation actually is going to materialize. Obviously, at this

point, again, as Mr. Spencer said, there is a speculative aspect to

that question. But I think all of the leading indicators tell us that

there is likely to be an enormous amount of litigation produced by

Y2K.

For one thing, the experts all agree that there will be a tremendous number of Y2K suits. Now, Senator Hatch anticipated much

of what I was planning on saying today. I will note only that the

$1 trillion figure which has received so much attention this morning—and I agree with Mr. Spencer that we can’t have any great

confidence in that figure—the fact that that has been produced by

the people who are most knowledgeable about this does suggest

that this is going to be a gigantic problem.

And perhaps more revealing is the behavior of the legal profession up until this point. As of last August, 500 law firms, my own

included, had created specialized Y2K practice groups. I think

that—and I should say I am confident that that number has increased dramatically in the intervening period. You could attend

probably every day between now and January 1st a seminar or

panel discussion or presentation on how to initiate and conduct

Y2K litigation.

There are specialized Y2K treatises and legal reporting services

that are sprouting up like toad stools all over, directed specifically

on how to engage in Y2K lawsuits. Lawyers across the country are

busy advising their clients on how to position themselves best to

begin Y2K litigation and to defend against Y2K litigation.

Now, it seems to me that this objective behavior in the legal marketplace is telling us something that is very significant. I would

find it very surprising if all of these sophisticated and intelligent

attorneys were completely off base in thinking that there was going

to be a wave of Y2K lawsuits in which they could participate. And

at this point, I think the preparation for Y2K litigation has taken

on a momentum of its own that will make an enormous number of

lawsuits inevitable.

As has been said in a different context, build it and they will

come. Well, the litigation framework for Y2K has been built and

the suits will come. I think that that is confirmed by our experience in other societal problems that have economic consequences

which also have generated a tremendous amount of litigation—
breast implants and asbestos, which have been mentioned. I think

I should add that those are not happy models for us to emulate in

the Y2K setting. And that, I think, suggests very strongly that legislation of the sort discussed by Senator Dodd, introduced by Senators Hatch and Feinstein, and by Senator McCain, would take a

valuable step in addressing this problem.

I was very gratified to hear the remarks of Senator Dodd this

morning because I think that he recognized the significant threat

posed by Y2K litigation and identified some very useful provisions

that would have the effect of focusing people’s attention on solving

Y2K problems rather than after-the-fact litigation.

I would like to just go on for one more minute, Mr. Chairman.

Chairman BENNETT. Yes, I will give you another minute or two.

I gave Mr. Spencer a minute or two.

Mr. ROTHFELD. I think that all the provisions that have been introduced thus far, and Senator Dodd’s suggestions, also, as I understand them, would, I think, fulfill three very important principles

that my clients regard as essential in this area.

First of all, they would encourage remediation by giving people

an incentive to take the steps that we would all reasonably want

them to take to become Y2K-compliant. Second, they would give

people an opportunity to solve their problems, if they do develop,

without litigation quickly and cheaply.

And in that regard, I should say to Senator Edwards that I think

that the 90-day period would not have the consequence that you

were concerned about of allowing people to wait and then take advantage of this period to fix the problem cost-free. As I understand

all of the provisions that have been introduced, they would delay

litigation, but they would not take away any rights on the part of

plaintiffs to engage in a lawsuit afterwards. And if a defendant

waited until the harm actually was inflicted, they would not get

any protection during the 90-day period.

Finally, I think that all of the bills that have been introduced,

and I think Senator Dodd’s proposal, as I understand it, would

have the effect of screening out insubstantial suits, while preserving the rights of people who actually have been harmed to go to

court. I think it would make sense for Congress to seriously entertain these proposals and to take these steps before it is too late.

Thank you, Mr. Chairman.

Chairman BENNETT. Thank you very much.

[The prepared statement of Mr. Rothfeld can be found in the appendix.]

Chairman BENNETT. Mr. Yarsike.

STATEMENT OF MARK YARSIKE, CO-OWNER, PRODUCE

PALACE INTERNATIONAL, WARREN, MICHIGAN

Mr. YARSIKE. Chairman Bennett, Co-Chairman Dodd, Senator

Edwards, my name is Mark Yarsike and I am a small businessman

from Warren, Michigan. It is an honor for me to appear before you

today and I appreciate your allowing to testify on the Y2K issue.

I am the first person in the world to ever file a Y2K suit. That

case, filed in Macomb County, Michigan, settled quickly and proves

that the current system works exactly as it should. I am here to

implore you to leave this system as it is. I will take a jury of my
peers in Macomb County under the current standards, system and

laws any day of the week. It is what worked for me, and I hope

you will let it work for the other small businessmen like me. We

are counting on that.

I am grateful to you, Mr. Chairman, for wanting to hear from a

real businessman from outside Washington as to how the court system will handle the Y2K cases that are sure to appear within the

next several years. Unlike some others who speak on this issue, I

do not pretend to be able to see into the future or forecast what

will occur several years from now. I do know, however, what happened to me. I am a perfect example of a simple truth: the current

court system can not only handle Y2K, but it does so quickly, with

justice.

I hear many heads of organizations that profess to know what is

best for me. I hear many representatives of big businesses telling

their side of the story. I look at who else is testifying and I see that

I am the only person who represents what I think makes America

work—the mom-and-pop little store. The bottom line is I and every

other small businessman that I have ever spoken to believe and

trust in the current court system. We know what to expect from

our local courts. We signed contracts knowing and relying upon

State laws protecting us—the UCC, State fraud statutes and the

like. We don’t want anything to pull away what is often our only

safety net—State laws which are carefully drafted by local elected

representatives who know what it is like for a small business to operate in Warren, Michigan; Valley Cottage, New York; or Broken

Bow, Oklahoma.

I would like to briefly tell you my story and explain how the

court system worked for me. My story proves, I think, what most

people instinctively know. The current system, with its ability to

offer a jury of our peers, is in the best interests of everyone. It vindicates the innocent, rights the wrongs committed by the guilty,

and allows small businessmen like myself to know that if we sign

a contract in Michigan, a Michigan jury will uphold that contract

under Michigan law.

Following in the steps of my parents, immigrants from Poland,

I own a gourmet produce market in the Detroit suburbs. My parents worked 7 days a week and instilled in me the values of hard

and honest work. I apply those values everyday. I, along with my

partner, Sam Katz, himself a survivor of the Holocaust, like my

parents, have managed to build a successful business. We offer our

customers unparalleled service, adjust quickly to changes in the

market, and treat our employees like family. All that was put in

jeopardy by a profiteering company trying to take advantage of a

Y2K problem. It is only the court system that saved me.

My parents had a cheap $500 register in their store. It was basic,

but it worked. When I opened my store, I decided to take advantage of the most current technology, which I needed at the time.

I spent almost 100,000 for a high-tech computer system. My computer systems were the top of the line, or at least that is what we

thought. The company that I purchased them from spent hours extolling the virtues of the system. They sent a salesman from Chicago, they sent me literature, they promised the system would last

well into the 21st century. I believed them.
Opening day was the proudest day of my life. As we opened the

doors to the store, we were thrilled to see lines of people streaming

in. The store was sparkling. Everything was ready, or so we

thought. As people began to choose their purchases, lines began to

form. Suddenly, the computer systems crashed. We did not know

why. It took over a year and over 200 service calls to realize that

credit cards with an expiration date of 2000 blew up my computer

system, the one which I spent $100,000 on.

The crash of the system was devastating. We had constant lines.

People walked out in droves day after day. We couldn’t take their

money. People were waiting with full carts of groceries, but

couldn’t pay. We could not process a single credit card, take cash

or checks. We could not make a sale. We did what anybody else

would do. We called TEC America, who sold us the registers. We

called them over 200 times and they came out with over 200 service calls. Everyday, there were problems, lost sales and aggravation. We were struggling to keep afloat week to week, day to day.

The company declared that it was doing its best to fix the problem, but refused to give us another system to use while they fixed

the broken one. Each time the technician visited the shop, the company insisted the problem was solved, only to have the registers

fail again hours later. I lost thousands of dollars and hundreds of

customers. I was on the brink of economic disaster. I could not

focus on the day-to-day operations of my business. I was consumed

with making sure this computer system functioned daily. I finally

had to go out and buy a brand new system. I should have bought

the $500 registers my parents used when they arrived from Poland.

At least those worked.

The huge costs of purchasing the first system and then replacing

it, on top of the lost sales and lost reputation, caused daily havoc

and stress on my partner, myself and all the employees. And I was

getting absolutely no satisfaction from the computer company

which put me in this fix in the first place, so I turned to the court

system.

I approached an attorney, who filed a case in Macomb County,

Michigan. The system worked for me. The company who caused all

this grief finally settled with me soon after I filed the suit, and I

was able to recoup some of my losses. It was only the fear of facing

a jury and explaining their inexcusable behavior that forced the

settlement.

I am just a businessman. I am no legal expert on the various

pieces of legislation before the Senate, but I do know enough to

know that adding more procedural hurdles for good-faith plaintiffs

and allowing defendants to have a ‘‘good faith’’ defense makes absolutely no sense. TEC would never have settled. If we were lucky,

we would still be in litigation, but more than likely my store would

be out of business. I would not be a small businessman today. I

would be a former businessman today. 120 people would be out of

work, my landlord would have a ‘‘for lease’’ sign on the building,

and I would be out looking for a new job.

One thing I know is that the so-called Y2K problem is not a Silicon Valley problem. It is a Warren, Michigan, problem. And it is

not so much a high-tech problem as it is a problem of getting companies to take responsibility for their products and the need to repair or replace them. What we need are responsible businesses to

take care of the problem now and not spend months and months

of wasted time trying to get Congress to protect them. What I don’t

understand from my vantage point in Warren, Michigan, is why

Congress is first turning to give liability protection to companies

rather than turning to ways to get companies to remediate the

problem now.

Since I had my problems, I have kept up with the cases being

filed concerning the year 2000 issue in order to see how things developed after I filed my case. I have seen exactly what I expected—

some meritorious cases like mine proceeding to settlement, others

proceeding to trial, and a few seemingly insufficient cases being

dismissed. The current system is working. The good cases are being

handled quickly. The wrongdoers are recognizing what they need

to do to make it right. People are getting patches for their computers so that they can go back and do what is best—sell stereos, deliver groceries, and clean clothes.

Let’s actually do something that fixes the problem. Many of these

bills, with all due respect, make the problem worse by discouraging

these companies from fixing the problem. I ended up having to replace my entire system. Give me tax credits, help me get SBA

loans. These are the kinds of things that will help small businesses

like myself. Knee-jerk efforts to revamp the entire system of justice

that businessmen rely upon is wrong.

Finally, if Congress is hell-bent on passing some kind of liability

protection bill for large software manufacturers or a bill that will

later alter the current court system, at least exclude from the legislation small businesses who may end up being plaintiffs because

they suffer commercial loss from software defects. Let the big guys

cope with this new scheme, if they want, but not us who have to

make payrolls and who need the protection of State laws under the

current system.

Long ago, while sitting in their little grocery store in Detroit, my

parents taught me that sometimes people with the best of intentions can try to make a problem better but end up making it worse.

I understand what they mean. I know that Congress is trying to

help, but before you act, I hope you will consider what altering the

court system would do to a small businessman. I know that is why

you have allowed me to share my story and I am grateful that you

provided me with this opportunity to testify today. I will be happy

to try and answer any of your questions.

Thank you, Senator.

[The prepared statement of Mr. Yarsike can be found in the appendix.]

Chairman BENNETT. Thank you very much. I can put your mind

at ease. All of the legislation for which I intend to vote would not

in any way interfere with the circumstance you have just described.

We are not aimed at solving that kind of problem because we agree

with you absolutely that someone who is damaged as you were

damaged should have access to the courts. Senator Dodd feels that

way, Senator Hatch feels that way. The legislation is not aimed at

dealing with that kind of behavior on the part of the supplier.

I think what you did is appropriate. I think the remedy that you

received is appropriate, and I don’t think you need to have any
worry that any of the legislation being passed would prevent someone in your exact situation from recovering as you recovered. Our

problem is not what is happening now because what is happening

now is not a prototype for what is going to happen.

What is happening now is that there are isolated Y2K problems

which we knew would happen as we got into this issue, and it is

a bell-shaped curve. We are at the bottom of the curve now. It is

starting to go up. The Y2K problems will peak in the year 2000,

then start to come down. They will not end in terms of their impact

until sometime in 2001, and according to the Gartner Group,

maybe even into 2002.

It is in the top of that bell-shaped curve that this wave of litigation that we are talking about will occur, not right now. You caught

the front end of the curve. Without knowing the exact situation, I

would speculate that the manufacturer with whom you dealt probably had never heard of Y2K and was unaware of the fact that the

2000 date on credit cards was going to have that effect.

We had evidence before this committee of that phenomenon of

people who were getting credit cards that were expiring in 2000 or

2001 causing their readers to fail. American Express recognized

that and stopped issuing cards with a 2000 expiration date until

they spent hundreds of millions of dollars fixing all of the terminals

all around the world. American Express now issues credit cards

with some degree of confidence that they will be taken care of. But

when the first glitch hit, no one was aware of it. No one had anticipated it.

Now, those who were responsible for it should pay, as they did

in your case. And if a manufacturer continued to ignore it, after he

had the first indication that the expiration date would cause this

kind of problem, he was being deliberately negligent, in my view,

and he should pay. But if you are a merchant and you have a problem that comes as a result of Y2K over which you have no control,

you should not be sued by virtue of your failure to deliver your

goods beyond your specific liability. You should not be sued, in my

view, for punitive damages because of a failure that passed on

through you to one of your customers.

Now, you are in a circumstance where that probably doesn’t

occur, but there are many small businesses of your size that are

in a supply chain where something happens to them because of

Y2K. Down the chain from them, it hits them and makes it impossible for them to service their customer. And some of the suits we

are hoping to avoid would be suits you would receive because of

your failure to provide services to which you had contracted because of somebody else’s failure. It is this bell-shaped curve that we

are worrying about.

Now, I agree with the $1 trillion figure being counter-intuitive.

The first time I heard it from the experts who talked to me about

it, I said that cannot possibly be true. Lloyd’s of London, not an insignificant organization, accepts it and is operating on the basis

that the trillion-dollar figure will be valid. My intuition still tells

me that it is too high. My intuition still tells me that we will fall

short of the $1 trillion for that amount. I just have a hard time visualizing that much money.
But make no mistake about it, we are going to have a wave of

lawsuits, even under the best of circumstances, even if the legislation that Senator Hatch and Senator Dodd and others are talking

about passes, that will put a tremendous burden on the courts, that

will make it very difficult, Mr. Yarsike, for you to get the kind of

relief you want because of the way things are jammed up.

It is an effort to clean that out, to make it possible for the legitimate claims like yours to go forward.

Mr. YARSIKE. May I interrupt?

Chairman BENNETT. Let me finish, sir.

It is our determination to make sure that the legitimate claims

like yours go forward and do not get jammed up in this wave of

lawsuits that is causing us to look at this. I assure you and any

who are listening that no one on this committee, and no one that

I know of in the Congress, is anxious to create legislation that will

allow wrongdoers to go free. No one on this committee is anxious

to create a safe harbor for anyone who will then say we will take

advantage of that safe harbor to avoid fulfilling our contractual responsibilities. That is not our motive, that is not our purpose, and

anyplace where that is demonstrated to be the consequence of the

legislation will produce on this Senator’s part opposition to that

part of the law.

But let us understand that this is a very real problem. It is

worldwide. It is not a matter of a few small businesses dealing with

a few software manufacturers. It is a major, major catastrophe in

the making, and it would be irresponsible of the Congress not to

make some attempt to try to deal with it.

Now, sir, I would be happy to hear your response.

Mr. YARSIKE. Well, I read Orrin Hatch’s bill and Senator

McCain’s bill, and I don’t see where it protects the citizen like myself from fraud. I do business with 1,200 companies in my business.

Four companies I do business with bought new systems in the last

2 years that are non-Y2K-compatible. Now, they knew about this

problem. That is total fraud.

There are still systems on the shelf being sold daily today as we

speak right now that are non-Y2K-compatible, pushed on by these

companies. Now, where is recourse for us? I don’t know how many

hundred-thousand-dollar bills you have, Senator. My hundred-thousand-dollar bills almost put me out of business. I didn’t sleep. I got

an ulcer. I got very sick, and they didn’t give a damn.

Chairman BENNETT. You are talking to the member of the committee who is unburdened with a legal education. I have run small

businesses, mom-and-pop businesses. I have run businesses with a

number of employees, in double-digits, not triple, as you have. I understand exactly where you are coming from.

Mr. Rothfeld, maybe you have a response to some of this.

Mr. ROTHFELD. Well, I do. I think it is important, if we are talking about the legislation, to focus on what the legislation actually

does and not on generalities and hyperbole. I have looked at the

complaint in Mr. Yarsike’s case, and obviously I am not as familiar

with the case as he is. But I don’t see anything in any of the bills

that have been introduced, and I didn’t hear anything from Senator

Dodd in his proposal, that would have affected his lawsuit in any

way.
I think everybody agrees that there are bad actors in the world,

and they will be in the Y2K situation, as they are everywhere. And

if those bad actors cause injury and that violates legal standards,

they should be held liable. But I think I am confident that Y2K

provides a very fertile ground for opportunistic, entrepreneurial, insubstantial litigation of the kind that Senator Dodd described in

the securities context some years ago. And it makes sense to screen

out, if we can, insubstantial suits, while preserving the substantial

rights of people like Mr. Yarsike who have suffered actual wrongs.

One additional point I would make. If we look at other areas

where huge waves of litigation have gone on—and asbestos comes

to mind; that is not a good model for anybody. In the asbestos context, courts were overwhelmed by lawsuits. More than 60 cents of

every asbestos litigation dollar went to transaction costs. There

were excruciating waits for plaintiffs before they could recover, and

defendants ultimately became insolvent.

Now, that is not, I don’t think, a model that is a happy one for

plaintiffs, and it is not something that we should wish on the hightechnology sector of our economy. So I think that looking actually

at what the bills do and making sure that they succeed in screening out the insubstantial suits, while allowing substantial rights to

be protected, is what the Congress should be trying to accomplish.

Chairman BENNETT. I have exceeded my time for my round of

questioning. I will come back to the panel.

Senator Dodd.

Vice Chairman DODD. Again, let me just underscore with our

witness here, Mr. Yarsike, just to say, look, I am tremendously

sympathetic to the kind of situation you find yourself in and others

may find themselves in, in that situation. And I think Mr. Rothfeld

here got it correct, in that when it comes to State contracts, for instance, I don’t want to see those preempted where State law applies in that situation.

Certainly, in the kind of fact situation you described, any legislation that I am going to support is going to be drawn in such a way,

I hope, that will allow for the legitimate lawsuits. One of the things

that Senator Bennett and I worry about is that there are those out

there who would see even the discussion of a limited liability as a

way to sort of back off meeting their responsibilities of becoming

Y2K-ready.

Obviously, Senator Bennett has spoken for himself very clearly

on this. I would just echo his comments. Any business or industry

that thinks that somehow this 106th Congress is going to develop

some sort of shield or protection for those businesses who fail to

take the kind of obvious steps, common-sense steps, to make sure

their equipment that they are selling to people like yourself or others is ready, and a failure to do so is going to not result in potential

serious exposure to them, is deluding themselves, absolutely deluding themselves.

I will tell you that even getting a limited, narrow bill through

Congress is going to be extremely difficult, extremely difficult. And

to the extent that people try and do something much broader than

that—as I described it, the political appetite to take advantage of

a legitimate situation to try and jam some larger bill through the

Congress on major tort reform legislation—they end up going nowhere, absolutely nowhere. And what it will do is create even more

confusion because I think what you will get is an industry and

business out there assuming that Congress is going to do something, not stepping up to the plate and doing what they ought to

do. And you will end up compounding the problem, in my view.

So it is going to be critically important that we draft, if we are

going to do something here, in a very narrow way. And anything

that I would support does not affect, or would not affect, your case,

Mr. Yarsike. And so I just want to make that case.

I thank you, Mr. Rothfeld, for your comments about the legislation. And as I said to Senator Hatch, we are going to put it in

today and invite people to comment on it and see what they think.

Obviously, Mr. Spencer, we would like your comments as well on

this. Obviously, my friend and colleague from North Carolina

knows a lot about this issue, has spent a career working on these

kinds of issues, and brings a unique perspective, as does the chairman.

In a sense, we have got a wonderful opportunity here. We have

got someone who has served as a very successful, and with a wonderful reputation as being an excellent plaintiffs attorney, as well

as a very successful person in the business community, sitting on

this committee, who has been involved with these kinds of issues

from different perspectives. And my hope is that with that kind of

involvement and comment, and so forth, we can get something

done in this area.

So, again, I thank all three of you. I would just ask—we will submit this to you—that you might take a look at it, the bill, and offer

whatever comments you would like to on it to us in the next week

or so rather than get into the specific questions of what you think

of the 90-day period and mitigation provisions, and so forth.

Our proposal is very different in many ways from what Senator

Hatch has proposed. There is a lot less in this proposal than what

he has in his, and so I would ask you to kind of look at that. We

don’t have a side-by-side-by side. We do for Senator Hatch and Senator McCain, but we will get one here with this provision, as well,

and then invite comments on it.

Thank you, Mr. Chairman.

Chairman BENNETT. Senator Edwards.

Senator EDWARDS. Thank you, Mr. Chairman. Well, Senator

Dodd, I haven’t seen your proposal yet either and I would very

much like to see it.

Let me say, first of all, that I think I have gotten to know these

two gentlemen sitting to my right over the course of the last 2

months of going through a fairly difficult, intense process, and I

know that they absolutely want to do the right thing. My concern

is, in the effort to do the right thing, that we don’t do things that

are unintended. And I only have Senator Hatch’s bill, so I want to

ask a few questions about that. And hopefully I can get a copy of

Senator Dodd’s proposed bill and see what the differences are.

But it appears to me, just having read through Senator Hatch’s

bill—and I would like to get a comment, Mr. Spencer, starting with

you on this. It appears to me that the negligence standard that applies in State courts all over this country to hold everybody responsible for their own conduct to behave like reasonable and ordinary
people would behave has been dramatically altered in that bill. In

fact, the standard has been raised to a standard that would justify

the award of punitive damages in most cases, which is reckless

conduct, a knowledge aforehand, instead of just the typical negligence standard that applies in courts all over this country. I wonder if I could get your comment on that.

Mr. SPENCER. I have looked at the legislative provision about

that. I think it is somewhat ambiguous in what it is trying to do.

But if it were interpreted to take disputes to which a negligence

standard would apply in State courts, or even in Federal courts,

and raise that standard—and those, of course, would be tort cases

as opposed to contract cases—that would be, in my view, a huge

mistake. It would act to restrict the ability of claimants in those

cases who, under normal State law, would have a negligence claim

that has been recognized by the courts for centuries, and turn it

into something with a stricter standard that might well preclude

deserving people from going into court.

The other aspect of it that I am even more concerned about is

that, of course, in our legal system we have contract claims where

the parties have pre-determined what their rights and responsibilities are, and then we have tort claims for other situations. And,

certainly, if any fault-based or even reasonableness-based standard

is wholesale imported into contract cases, that completely rewrites

our entire legal system for this category of cases.

And it really would frustrate the expectations of businesses and

consumers who have contracted to allocate these responsibilities,

and turn it into something that no one ever expected, again to the

detriment of people who have been harmed by these Year 2000 situations and who deserve some economic redress.

Senator EDWARDS. Mr. Nations, you haven’t had a chance to

speak. I wanted to ask you this question. One of the concerns I

have as somebody who has been involved in the court system for

a number of years, as I know you have, is that I think that sometimes when you tinker in what appear to be small ways with the

legal system—and these tinkerings, I might add, do not appear to

me to be small—but in ways that on the surface seem logical and

rational, there is an enormously important interaction between the

various contractual remedies, negligence remedies, the standards of

proof that apply.

I notice they raise the standard of proof to clear and convincing

evidence, as opposed to a preponderance of the evidence, things

that have been used by court systems here and in Britain for hundreds and hundreds of years. And I am just concerned about what

appear to be relatively minor changes and the effect that has on

the overall legal system, a legal system that we have depended on

in this country for an awfully long time.

I wonder if I could get your comment on that, No. 1. And, No.

2, I would also like to have your—I notice in reading your testimony that you had some very specific proposals which appeared to

me to be thoughtful addressing some constructive ideas about dealing with some of these issues.
STATEMENT OF HOWARD L. NATIONS, HOUSTON, TEXAS

Mr. NATIONS. Certainly, Senator. Thank you. First of all, the business rules that we have today, the business judgment rules,

the duty of due care, the UCC, the joint and several liability

rules—these are rules that have been very carefully honed over the

years, over the centuries, as you say, because most of them come

out of England, with the exception of the UCC. We have a set of

rules right now in place that will control Y2K, a standard set of

rules applicable in all 50 States.

The real gravamen of most of the complaints in Y2K is going to be breach of contract. It is going to be breach of implied warranty

of fitness for ordinary use. It is going to be breach of implied warranty of fitness for a particular purpose. Those are UCC issues.

They do not involve punitive damages. That is going to be the great

bulk of the litigation, and there is no recovery for punitive damages.

Senator EDWARDS. May I interrupt you just for a moment?

Mr. NATIONS. Certainly.

Senator EDWARDS. And this is in response to something Senator Bennett raised earlier. He had a concern, and I know it is heartfelt,

about the possibility of punitive damages in an unwarranted situation. And I have to add I share that concern. But are you aware

of anyplace in the country that punitive damages can be awarded

in a business context where there is not some outrageous, truly

egregious conduct on behalf of the defendant?

Mr. NATIONS. As a general proposition, punitive damages will only be awarded for highly egregious conduct. They will be awarded for wanton, willful disregard for the rights of others, and they

will be awarded only in a tort context, not in a contract context.

And the overwhelming percentage of litigation here is going to be

contract litigation. Punitive damages is not a major issue with respect to Y2K, as I see it. It comes into play when you have fraud

involved, primarily, is what I see here.

And the situation that you are talking about, Senator, in the example you gave, Senator Bennett, about the person who does everything he should do, but he is held liable anyway for punitive damages—that doesn’t occur. You are not held liable for somebody

else’s grossly negligent conduct. That is an independent standard,

and joint and several liability doesn’t apply to the egregious conduct. That has to be an independent finding.

Senator may I address one issue that we were talking about with

respect to the Produce Palace of Mr. Yarsike, how this bill may affect——

Senator EDWARDS. I actually intended to ask you about that, so,

yes, please.

Mr. NATIONS. OK, all right, how this bill may affect Mr. Yarsike

and Produce Palace. It is the several liability portion, the proportional liability portion of the bill that may very well affect a small

business such as Mr. Yarsike and Produce Palace. It occurs in this

fashion. Joint and several liability——

Senator EDWARDS. Can I interrupt you, Mr. Nations?

Mr. NATIONS. Surely.

Senator EDWARDS. You are discussing the fact that the bill, Senator Hatch’s bill, provides for proportionate liability and eliminates
what has traditionally been the law in this country of joint and

several liability, and in some ways, at least from my perspective,

puts the burden on the innocent party instead of putting the burden on the parties who are responsible for what happened.

Mr. NATIONS. Absolutely. It will put the loss on a lot of American

small businesses. As Senator Bennett has pointed out, this is a

worldwide situation. A lot of the manufacturers of products that

will cause the Y2K problem ultimately are foreign vendors. And

under several liability, the people who will be liable, the downstream defendants in joint and several liability—the sellers, the

distributors, and so forth—will not be liable because they will come

in and say, well, I wasn’t aware of this; I didn’t know that it wasn’t

Y2K-complaint. They are off the hook.

And where do you go? You have to go back, and in this case if

the product that failed in his case had been manufactured in

Japan, for example, and sold FOB Yokohama, he would be left

without a remedy because everybody in the downstream would

have—they would be immunized by this bill and he would be left

to go back against a corporation in Yokohama, where he has no jurisdiction to get them in the United States. So, that is how Senator

Hatch’s bill could apply to prevent recovery by Mr. Yarsike.

Senator EDWARDS. Before we leave—and I am running short on

time—tell me just a few, briefly, if you can, constructive ideas that

I saw in your testimony about how to address some of these problems.

Mr. NATIONS. Well, the idea I had with respect to how to accomplish remediation and repair, Senator, is if we could create a Federal repository for Y2K remediation solutions. The problem is, as

you point out in your report, that there are 500 languages and 36

million different programs. A lot of companies are working on the

same language and the same program in different parts of the

country, and if you could create a repository that would cause them

to place with the Federal Government their solution to that language and that program—now, in order to do that, you are going

to have to give them an incentive. So I think the incentive would

be a tax incentive, if you give them a tax break for placing their

solution into a repository. Maybe the tax break could be based

upon the number of times it is used by other companies. But that

is a thought with respect to how to accomplish that.

The second thing is that the Internal Revenue Code has as Rule

482, Section 482, which I think has—I am sure it is well-meaning,

but as applied to Y2K it is pretty treacherous. Section 482 says

that if a company has multiple divisions—this would be a big corporation—has multiple divisions around the country, if they have

a division in Chicago that finds a Y2K solution and they send that

out to their division of their same big company in California and

their division in Florida and it costs them $1 million to create, that

is a taxable event. It is a $1 million taxable event to the California

division of the same company. So 482 should be suspended, I suggest, with respect to Y2K.

The other suspension, I think, that would help in remediation

and repair would be if you suspend the antitrust laws in a vertical

industry; for example, Ma Bell and the Baby Bells. They are working on exactly the same problem. They need the same solutions,
but it would be a violation of the antitrust laws as they exist now

to have them share information. So if you suspend the antitrust

laws in that vertical industry so that they could put their information into a Federal repository, their solutions into a Federal repository, because they are clearly working on the same problems, same

solutions.

Those are some of the thoughts. Just a couple of other things, if

I may, and that is——

Chairman BENNETT. We are running short on time. We have two

more panels we would like to hear from.

Mr. NATIONS. OK, thank you, sir. The rest of them were in my

remarks.

Senator EDWARDS. Thank you, Mr. Nations.

[The prepared statement of Mr. Nations can be found in the appendix.]

Chairman BENNETT. I would like to go on. This is an interesting

panel and we could have a very stimulating time, but we do have

two more panels to hear from. I would comment, Mr. Nations, that

the sharing of information was why we passed the law last time,

and it has not worked to nearly the degree that we had hoped. We

created a Good Samaritan situation where one organization could

share its fixes with another without fear of lawsuits.

As we try to find out why it has not produced the sharing of information that we had hoped it would produce, we are told in many

instances the legal departments of the companies involved are saying, well, the law to the contrary notwithstanding, it hasn’t been

tested and we don’t want you to tell anybody what your fixes are

just in case when the law is tested we might be liable.

So, unfortunately, there has not been the kind of sharing that

you are talking about. The idea of setting up a Federal repository

as something of a cut-out for that sharing might be something to

look at it. I think it is an interesting idea. But we went through

this discussion. We passed the legislation in the last Congress, hoping for good results, and the results have been less than we had

hoped for.

I could go on, as I say, but I will observe my own admonition to

the other members of the committee. Thank you all very much. We

will have written questions, I am sure, for all of you as this thing

goes forward. Thank you for your testimony. We will now go to the

next panel.

Mr. Sessions, we are delighted to have you here. This is the

courts panel. You are a board member of FedNet, Incorporated, and

we will look forward to your testimony.

[The questions and responses can be found in the appendix.]

STATEMENT OF HON. WILLIAM STEELE SESSIONS, BOARD

MEMBER, FedNET, INC.

Mr. SESSIONS. Good morning, Mr. Chairman, Senator Dodd. I see

Senator Edwards has left. He probably picked a good time——

Vice Chairman DODD. He is coming back.

Chairman BENNETT. He will be back.

Mr. SESSIONS. I am very pleased to be here. When I saw how I

was designated, it reminded me that I am, of course, no longer a

judge. I was privileged to serve as a United States district judge
for almost 13 years, including 7 of those as chief judge. But I don’t

claim to have the expertise that might come from the Administrative Office of the United States Courts or the Judicial Conference

of the United States or the Chief Justice himself.

What did occur to me this morning while we were sitting here

listening was your need to recognize that assuming all of the

things which you have heard this morning happen, as President

Truman was want to say repeatedly, the buck stops here. All the

efforts that we make along this line, all the time that is spent, all

the contemplated legislation is going to still end up in the courts.

And the courts, both State and Federal, are going to need to cope

with it.

We can talk about the possibility of $1 trillion being involved either in damages or legal fees or attorneys fees. We can talk about

all the problems that will come as a result of the Y2K circumstance, and the bulk of them will wind up in the courts. I find

that when Senator Hatch talks about the provisions of S. 461,

there are two areas that are particularly interesting.

No. 1 is the 90-day cooling-off period, which is 90 days which can

be very well used. The other, of course, is an adjunct to that; that

is, the alternative dispute resolution capability, ADR. So it occurs

to me that any legislation that comes out that encourages ADR in

the Federal area is extremely important.

We have heard learned counsel talk about those kinds of litigation which may be involved, and it reminds me of the multiple

choice question answers—A, B, C, D and E; E being ‘‘all of the

above.’’ I think you can take almost any one of those areas and presume, that from the constitutionality of a statute on down the line,

there is the strong potential for ending up in the courts. It can end

up as a constitutional question. It can end up as a pure challenge

to the legislation itself. It can be carrying out the legislation, but

it calls for a court that must receive it and handle it.

Most of our State courts across the country have full benches.

Governors normally, very promptly appoint replacements, or there

are judicial elections that are held very promptly to fill vacancies

and fill those benches. That is both trial and appellate, and, of

course, the supreme courts of the various states.

The point is that State courts will have a full team on the field.

It is extremely important that the Senate concentrate on making

sure that the period of time we have now, between now and the

time the bell curve hits the top in 2001 or maybe 2003, be used

to make certain that Federal courts will have the ability to deal

with the litigation. If we use that time to be sure that we have a

full team on the field—that is, to have as many vacancies as exist

filled so that we are ready. There has been discussion about the

use of senior judges. Senior judges are like I in that respect; they

are white haired. They have been on that bench many years. They

know all the ins and outs of both civil and criminal litigation. They

are, of course, entitled not to take a full caseload, but most of them

are well challenged with substantial case loads. The point is that

senior judges can help you considerably in handlling the load, but

there is no substitute for active judges who are actually there and

ready to handle the case loads.
I want to speak for a moment about ADR, and then I will be willing to answer any questions that I can which you have. My written

testimony is brief, it is succinct, and it is to the point. ADR, it

seems to me, offers a particularly strong opportunity to deal with

Y2K litigation. There are a number of organizations nationwide,

that are involved in alternative dispute resolution.

The proposed legislation contemplates pre-litigation mediation;

that is, before the filing of the law suits, in order to have an opportunity to go into ADR, particularly into mediation. These ADR procedures will allow the parties to be directly involved in solving

their own problem; to arrive at a solution that they may not necessarily be happy with, but with which they will be satisfied. The

90-day period that is contemplated for normal remediation—that is,

normal mediation or the beginnings of arbitration—can also be

helpful because it can immediately shift that burden from both

State and Federal courts. So I think that is very important to think

about ADR and to consider it’s viability.

You must take a look at burdonsome statutes that are now on

the books which have, in fact, had the affect of federalizing crime,

in many respects. The experience that we have had with the statutes may show you that some of those statutes ought not be Federal laws; that they no longer appropriate as Federal laws, but

rather should be handled by the States, which have the bulk of the

prosecutive capabilities and the bulk of the judicial capabilities

that are needed to deal with crime. This action of repealing those

law would considerably lighten to load of Federal courts.

Finally, I would say this. You should look at the major city

courts, both State and Federal. They will be the most likely places

where the unique burdens of the legislation will fall; that is, those

suits that are challenging either the constitutionality or other parts

of the statutes themselves. Those are difficult and lengthy cases requiring considerable judge power. It needs to be clear that the

courts are handling their business, and handling it well.

Major city courts are going to have a dual problem. They are

probably going to have a rash of the contract-type cases that Mr.

Nations referred to and they are also going to have the very difficult, long-term litigation that is not going to go away. You need

to have a full bench to meet this challenge. You should make every

effort to be sure that you can do that.

The Senate is, singularly, in a responsible position. There are no

judges placed on the bench without the Senate’s approval of those

judges. So I would urge that you will serve the Nation well if you

deal with the Y2K problem by making certain that the third

branch has sufficient judges was able to do the job with which it

is charged under the Constitution. This is critical and your obligation is clear unceasing.

I thank you for the opportunity to appear here this morning. My

written testimony, I hope will be helpful. I hope that it is brief

enough and that the appendices will be helpful to you.

Senator Edwards, you were gone the moment I came up. I thank

you for allowing me to be here and to have an opportunity to respond to the panel’s questions.

Thank you, sir.
Chairman BENNETT. Thank you very much. Just because you are

no longer a Federal judge presumably doesn’t mean that your

memory is gone and you don’t have an understanding of——

Mr. SESSIONS. There is a little bit of intrusion of Alzheimer’s, but

I am doing fairly well.

Chairman BENNETT. No, no, no.

Vice Chairman DODD. Senior moments, we call them.

Chairman BENNETT. Senior moments.

Mr. SESSIONS. Senior moments, absolutely. Well, I have got both,

Senator.

Chairman BENNETT. OK. You were here during the previous discussion. Your comment about the bell curve stretching out into

2003, 2004, maybe even beyond, I think is accurate because the

bell curve that I described is based on the number of failures that

will occur as a result of Y2K. And the lawsuits, of course, will outlive the failures by a very long period of time.

Mr. SESSIONS. They tend to have a life of their own, yes, they do.

Chairman BENNETT. They will have a life of their own, and I am

interested to have you say there will be lawsuits other than the

massive contract disputes that Mr. Nations spoke about.

Mr. SESSIONS. I believe that is correct, Senator.

Chairman BENNETT. That could tie up the courts, and that is, of

course, one of the concerns we have. This is unusual, if not unique,

because it will be one—I was about to say one event, but that is

not true. There will be hundreds of thousands, if not millions, of

events, but they will be focused around a single date and a single

phenomenon tied to that date. I say date; I should say dates.

You may not have followed this, but we are worried about April

9th because it is the 99th day of the 99th year and that could trigger failures in some software programs. We are worried about September 9th because it is 9/9 of 1999, and that could trigger some

software problems. We are worried about, of course, the change

from 1999 to 2000. We are worried about February 29, 2000, because the algorithm that is used to compute dates, for some reason

that I won’t bother to explain, does not recognize the leap year in

2000. The algorithm misses leap years every 400 years, and 2000

happens to be the one.

Mr. SESSIONS. Of course.

Chairman BENNETT. Of course. And so these series of failures

will produce the bell-shaped curve that I talked about, and it will

peak probably not in January of 2000, but will peak several months

thereafter and then begin to taper off through 2000, as I say, and

be with us through 2001.

The lawsuits will, as you indicate, then move out into 2002, 2003,

2004, and so on, and the burden on the courts will occur in that

period. And anything we can do to filter out the frivolous ones,

while protecting the legitimate ones like Mr. Yarsike’s, is what we

are after here.

Mr. SESSIONS. Well, access to the courts is always a great issue,

Mr. Chairman. Access to the courts is very important, and the

Speedy Trial Act of 1974 nearly killed the civil dockets in many

courts, particularly in metropolitan areas. There were lawyers all

over the country whose limited access to the Federal civil docket
made it necessary for them to file suits in the State courts in order

to have the cases heard in a timely manner.

That ought not happen, particularly with major, complex, or

multi-district, multi-State litigation. Litigation must have access to

have courts that can handle it. Therefore, we must make sure we

have a full Federal judicial team to handle whatever comes.

Chairman BENNETT. Now, I would like your comment on an issue

Senator Hatch raised—we could have gotten into it with the attorney panel, but again we were spending too much time on it as it

was—about the fact that States are passing laws exempting themselves. Right and left, as States look at the Y2K problem, they are

passing legislation. I wanted to get into this, didn’t have time to

get into this with Mr. Spencer, who said we can go along just fine.

The State laws as they are currently structured go back hundreds

of years and they will be just fine. The State laws are not as currently structured; they are being amended, changed, repealed all

over the place all the time.

Do you have a view of the impact of that that you could share

with us?

Mr. SESSIONS. There was comment made that law firms are preparing for litigation. These include major law firms that recognize

that these serious questions are probably going to flow directly into

the State courts, but may well end up, one way or the other, in the

Federal system.

And those are major litigations, whether they are State or Federal. They eat up an inordinate amount of time and they are not

easily subject to mediation or even arbitration because you are deciding on the viability, the constitutionality, the appropriateness of

law. I think that it is going to be a major concern. It is going to

be on the back of the courts, and the courts must be prepared to

handle it.

Fortunately, the Congress of the United States has taken steps

with the Federal systems since the early 1990’s that would allow

mediation to be recognized as an appropriate aid to the courts. I

think there are many former Federal judges who will be called

upon by the courts to deal with litigation either as special masters

or with alternative dispute resolution, particularly court-annexed

arbitration. The former judges have a blend of the expertise and

knowledge of the laws that will help them deal with the fact issues.

It is going to be interesting.

Chairman BENNETT. It is going to be—yes, the Chinese curse,

may you live in interesting times.

Mr. SESSIONS. Well, I think judges live for that. They are ready

to handle it. That is what they are on the bench for, and so we are

blessed in that regard.

Chairman BENNETT. My time has expired.

Senator Edwards.

Senator EDWARDS. Thank you. Good morning, Judge Sessions.

How are you?

Mr. SESSIONS. I am fine, thank you. Nice to be here.

Senator EDWARDS. I was particularly taken by your comments

about the effects of the—was it the 1974 Act on speedy trial?
Mr. SESSIONS. The Speedy Trial Act of 1974 gave judges 90 days

with which to begin the trials or have them dismissed if there were

not motions pending.

Senator EDWARDS. I happened to be a law clerk in the Federal

court system shortly after that.

Mr. SESSIONS. Were you in North Carolina?

Senator EDWARDS. I was in North Carolina. We didn’t do anything but try criminal cases.

Mr. SESSIONS. That is right, and there are many courts that

today still have that burden. The Western of Texas from which I

come is one of them; the Southern of Texas; and Miami. These

courts that are along the country’s borders tend to have that kind

of tremendous problem.

Senator EDWARDS. And I am also interested in—even with these

various proposals about litigation, I am interested in asking you

about two areas. One is filling these judicial vacancies. We have

two now in my circuit, the Fourth Circuit, United States Court of

Appeals for the Fourth Circuit. And I also have some district court

vacancies that have not been filled, and have not been filled for a

number of years. This is not something that has been present for

60 days or 90 days; this has been several years.

I gather from what you are saying that regardless of how we legislate or don’t legislate about liability matters in this area of Y2K

that you do believe Y2K is going to create an additional burden on

the Federal court system, and therefore it is critically important

that we move with dispatch as judiciously as we can to fill those

vacancies.

Mr. SESSIONS. It is something that you can do in the natural

order of things without any legislation. I recognize that those are

political matters and they are very important. I recognize that, for

instance, in the Fourth Circuit there are some judges on that circuit who say we do not need additional people. That may be so, but

wherever the litigation hits, the one thing the U.S. Senate can do

is to help prepare the team to deal with the Y2K problem, however

voluminous it is.

The predictions are sufficiently solid enough to know that the

case volume will be one that would fall in the category of, quote,

‘‘major impact,’’ end of quote. We need to be able to deal with it.

The judiciary is going to have the problem. The Chief Justice is absolutely correct, and I think those people who speak for the filling

of those vacancies, such as the American Bar Association and other

State organizations, as well, are very sound. The impact on the

Federal judiciary can be lessened by having a full team.

Senator EDWARDS. And would you agree that a fair assessment

of the need to fill any vacancy, any Federal judicial vacancy in this

country today—part of the calculus should be taking into account

the potential impact of Y2K litigation?

Mr. SESSIONS. I think it has to be. If you ignore it, whatever the

weight, you run the risk of not having taken your own medicine;

that is, having said Y2K is a tremendous potential problem, as best

we can weigh it is going to be a significant problem, and therefore

we should have done what we did not do. And then it is a little

bit too late. It takes time to get that done, and I recognize that.
But I think the Senate carries out admirably its responsibility,

but it does need to give the attention to that particular part of it

to be sure that it doesn’t fail, to give the country what it must have

to deal with the problem that may develop.

Senator EDWARDS. And in terms of filling those vacancies, what

I hear you saying is it is important that we start focusing on that

process now.

Mr. SESSIONS. You can count me as being right there, yes, sir.

Senator EDWARDS. OK, good. I agree with you. The second thing

I wanted to ask you about was when you talk about alternative dispute resolution, particularly in the context of Y2K litigation, are

you talking about mandatory or voluntary?

Mr. SESSIONS. You know, I could talk about them both. Every

once in a while, in a mediation, I will have some candid person either representing his business or himself individually who will say,

you know, judge, you talk about my being here in good faith but

I am not here in good faith, A judge ordered me to be here. And

I always try to deal with that anger at being required to do something that the party believes to be nonsensical. I try to make him

or his company understand that they have an opportunity in mediation, where they themselves can control the outcome and settle

the litigation. They are the ones who can finally agree that although they are not happy, they are satisfied with what has been

arrived at. It is ‘‘doable,’’ not what they want, but what they will

agree to. And it is very important in mediation to arrive at that

point.

Here, you heard the grocer talk about what he had to do to get

into the settlement posture. It is quite possible now that with the

cadres of mediators that we have, particularly those who are prepared to deal with heavy litigation, we can actually do pre-litigation mediations, or very close to it because they are in the 90-day

period that Senate 461 contemplates.

And so if you move to ADR, whether it is court-annexed, whether

it is binding or not binding you have an opoportunity to dispose of

the litigation and relieve the pressure on the courts.

Senator EDWARDS. Well, I will just speak from my own personal

experience, having been in literally hundreds of mediations, nonbinding mediations. They have the potential to be extraordinarily

effective, particularly if you have got talented, experienced mediators conducting them.

Mr. SESSIONS. I have been in States, Senator, where there is no

mediation process, where I have been like Daniel Boone, cutting

through the forest. But I have found that the minute those people

understand that they have control of the litigation and it is the last

time they are probably going to have control of the litigation, they

really get serious and then it becomes a good-faith effort. Anger

goes and arriving at a solution becomes the focus of their thinking.

How can we get rid of this? How can we save the dollars that are

involved? How can we save the anguish? How can we save the time

that is going to be spent by our businessmen and businesswomen

involved in this bottle when we ought to be working on our business. It is that simple.

Senator EDWARDS. Thank you, judge.

Mr. SESSIONS. Thank you, sir.
Chairman BENNETT. Thank you very much. We appreciate you

being here. Again, I am sorry that the time constraints don’t allow

us to spend more time with you because you have much to contribute. But we will go over your written statement very carefully, and

appreciate the thoughtfulness that went into preparing it.

Mr. SESSIONS. Mr. Chairman, any time, any circumstance, under

any way that you want to do it, I will be available to your committee to either answer questions in writing or otherwise, or to come

back and be with you. I appreciate having the opportunity to

speak. Thank you, sir.

Chairman BENNETT. Thank you very much.

[The prepared statement of Mr. Sessions can be found in the appendix.]

Chairman BENNETT. We go now to our final panel, the industry

panel. We have Dr. William Frederick Lewis, who is President and

CEO of Prospect Technologies. We have John McGuckin, Jr., Executive Vice President and General Counsel of Union Bank of California, and George Scalise, who is President of the Semiconductor Industry Association. Gentlemen, we thank you for your patience in

what I know has been a long morning.

Dr. Lewis, we will start with you.

STATEMENT OF WILLIAM FREDERICK LEWIS, PRESIDENT AND

CHIEF EXECUTIVE OFFICER, PROSPECT TECHNOLOGIES,

WASHINGTON, DC.

Mr. LEWIS. Thank you very much. Mr. Chairman and members

of the committee, I am Bill Lewis, President and Chief Executive

Officer of Prospect Technologies, a small business headquartered in

the District of Columbia. Our firm employs 23 individuals dedicated to providing information solutions to a number of Fortune

500 companies and U.S. Government agencies both here in the

United States and internationally. Our business includes computer

hardware manufacturing, computer software, and consultative

services. I also come before you today as a member of the U.S.

Chamber of Commerce Small Business Council.

As we quickly approach the millennium, the greatest issues we

face as an ongoing concern is the year 2000 computer problem.

Technology represents one of America’s greatest accomplishments,

as one of our most challenging issues as we approach the new millennium. On one hand, technology has helped American business

to become more efficient and more able to compete with our foreign

counterparts. On the other hand, as we have become so reliant on

technology, we have become more vulnerable to the problems of

that technology. To our clients and me, the benefits far outweigh

the problems, and we should continue to explore new opportunities

for improving products and services and competing more effectively

around the world.

I raise the issue of risk and reward as it relates to technology

because each day, as a business that provides both hardware and

software solutions to our customers, Prospect Technologies must

continually ensure that our products and services work to enhance

business operations and not complicate or interfere with normal operations.
I come to you today concerned about the Y2K litigation as potentially both a defendant and as a plaintiff. From my perspective, my

clients rely on me to certify that the hardware and software that

we manufacture and sell to them will be Y2K-compliant. Because

we are using the latest technology from corporations like Intel, Advanced Micro Dynamics [AMD], Microsoft, and others, we have

been ensured that their operating chips and software are, in fact,

Y2K-compliant, and we are confident that all the components are

in compliance.

I am not necessarily concerned about the computers leaving our

manufacturing site, but rather what happens once they are shipped

to a client. Once the basic computer is shipped, clients will load

their own applications software and other operating software to

run such programs like scheduling and payroll. If these application

programs are not Y2K-compliant, most likely as a manufacturer of

the computer I am the person they are going to call first.

In all of my business dealings since founding our company, we

have always approached such technical malfunctions with the attitude that as a businessman and as a businesswoman, come let us

reason together to find a solution, instead of pointing fingers or

looking for the blame. To put it another way, let’s fix the problem

and not litigate the problem.

We have taken this approach, quite frankly, because we have to.

Unlike a Fortune 500 company, I do not have a dedicated legal

team, nor do I have millions of dollars in reserves for such issues.

Instead, I focus on what I do best, and that is to provide leadingedge technology solutions for companies wishing to be more efficient and productive in business matters. I must say that with very

few exceptions, my customers respect our approach to handling

complications.

As I mentioned earlier, I could potentially become a plaintiff in

the Y2K-related problems. Obviously, as a manufacturer of computers, I must rely on my suppliers to provide the necessary parts according to our contractual obligations. In the case of manufacturing

computers, there might very well arise a situation in which a supplier’s manufacturing system shuts down or is delayed, and therefore I do not receive the parts I need to meet my contractual obligations. My first approach with the supplier would be to try and work

out the problem, but if that should fail and I accrue damages as

a result of lost revenue, I would expect to have the appropriate

compensation for actual damages.

I founded my business on the notion of the American dream.

When I started my business, I knew nothing would come easy, but

rather I would have to work for every penny I earned. I would take

risks and hopefully be rewarded, but there were no guarantees.

Never once during my business planning process did I say to anybody, well, I will work hard, I will work smart, but if it all fails,

I will get rich by suing someone for something they did wrong.

That is not the spirit of the American business person, but rather

that of a person who is looking to make a quick buck.

I have special obligations to the men and women that work for

Prospect Technologies, in that we are their livelihood. The income

they make for their services provides their family and their community with means to function. To that end, I take every precaution to ensure that the Y2K bug does not adversely affect their

livelihood.

I would like to take a moment to commend the work of you, Mr.

Chairman, Mr. Vice Chairman, and the leadership you and other

members of the Special Committee on the Year 2000 Computer

Problem have provided on this critical issue. In addition, I would

like to commend the leadership of Senators Hatch and Feinstein,

and Senator McCain, and their proposed Y2K legislation in the

Senate, and Representatives Davis, Dreier, Cox, Moran, Cramer

and Dooley for their work on H.R. 775, the Year 2000 Readiness

and Responsibility Act, in the House of Representatives.

As a small business owner who could potentially be both a plaintiff and defendant in the Y2K litigation, I fully support their approach to dealing with this complicated issue. Their legislation will

help to encourage businesses to fix the problem and not litigate the

problem. I am particularly interested in three aspects of the bill.

Because I expect my customers to approach technology glitches

with the same reason that I do, I should give my suppliers the

same courtesy. To that end, I agree with the provision to provide

a 30-day notice to a potential defendant and allow them 60 days

to fix the problem. I suspect that in many cases it will not take 60

days. However, this is a reasonable timeframe to ensure compliance. This provision is very much in sync with our company’s philosophy of saying may we come together and find a reasonable solution to fixing this problem.

I firmly believe the provisions of the legislation and the 90-day

cooling-off period will help alleviate the vast majority of the problems associated with Y2K. I say this because many business owners will appreciate the fact that once a problem is identified, they

will have a specific timeframe in which the issue will have to be

resolved.

Similarly, the caps on punitive damages will discourage frivolous

lawsuits filed by those seeking to get rich by someone else’s misfortune. And alternate dispute resolution, ADR, will help alleviate the

time and money needed to prepare as either a defendant or as a

plaintiff in legal proceedings.

Chairman BENNETT. Could you wrap up? Your time is gone. I am

sorry to interrupt you.

Mr. LEWIS. Let me come to the end by saying the problem associated with Y2K—the least of my concerns is that we can fix the

problem. My greatest fear has been having to use my limited resources to defend ourselves or file a lawsuit instead of investing the

funds and knowledge of my firm to create new technology and new

jobs in our area of expertise. I have no legal team. If I would go

to court, I as CEO and my Chief Technology Officer and my other

senior management would become involved with that suit. This

would cause us to be in court fighting, and that takes time away

from the things I do best.

So, finally, again, Mr. Chairman, Mr. Vice Chairman, members

of the committee, I would like to thank you on behalf of the employees and customers of Prospect Technologies, and appreciate you

having me here today. Thank you very much.

Chairman BENNETT. Thank you very much.
[The prepared statement of Mr. Lewis can be found in the appendix.]

Chairman BENNETT. Mr. McGuckin.

STATEMENT OF JOHN H. McGUCKIN, JR., EXECUTIVE VICE

PRESIDENT AND GENERAL COUNSEL, UNION BANK OF CALIFORNIA, SAN FRANCISCO, CALIFORNIA, ON BEHALF OF THE

AMERICAN BANKERS ASSOCIATION

Mr. MCGUCKIN. Good morning, Mr. Chairman. I am John

McGuckin, the Executive Vice President and General Counsel of

Union Bank of California, a national bank headquartered in San

Francisco. Today, I am testifying on behalf of the American Bankers Association.

I want to leave you with three important points about the American banking industry and the year 2000. First, America’s banks

are taking Y2K very seriously. Since 1995, the banking industry

has devoted millions of employee hours and billions of dollars to

addressing Y2K. We recognized early on that Y2K is much more

than a systems problem. Y2K reaches into every part of the bank.

Every product and service is affected. Every employee and every

customer must be knowledgeable about the Y2K issue.

We also recognized early on that Y2K is not just an internal operations issue. A bank is dependent upon its vendors, service providers, data partners, and customers both here and abroad. America’s banks have addressed all these areas in preparing for Y2K.

The argument that liability legislation will somehow undermine

the incentive American companies have to deal with the Y2K problem simply does not hold true for banks. Banks across America are

fixing Y2K problems for one simple business reason. We want to

survive and compete in the next millennium. If we don’t address

the century change competently, America’s banks and businesses,

large and small, will lose customers and revenues. We do not need

the threat of litigation as a motivating factor. Our customers motivate us. Litigation is only a distraction from fixing Y2K problems

at hand.

My second point is that the American banking industry will be

prepared for the century change. We know we will be prepared because of the extensive planning and testing we have done and are

doing to our own systems. Many banks are testing systems now by

turning forward the computer clock to January 1, 2000, and running test programs to verify remediation.

Our internal and external auditors have vigilantly overseen our

progress and reported that progress to our senior management and

directors. Meanwhile, our regulators have conducted detailed and

repeated onsite examinations of our Y2K programs. The financial

regulators have worked in close partnership with banks across the

country to assess each bank’s response to the Y2K problem and to

ensure that we are on track to a timely completion. To put it another way, the money of the American people will be safe in America’s banks. To quote the chairwoman of the FDIC, money is safe

in an FDIC-insured account, no ifs, ands or buts.

My third message is that the banking industry, along with the

rest of the American business community, urges Congress to address broader Y2K liability issues this year. Last year’s legislation
was helpful in promoting an environment of open disclosure and

discussion of Y2K-related information. But now we must address

the potential tidal wave of litigation which could engulf the American judicial system, the American economy, and American businesses large and small after the century change.

You may be asking yourself if the banking industry has spent so

much money and time on Y2K and if our regulators think that we

will be ready, why are the banks concerned about litigation?

First, we believe that it is sound policy to remediate, not litigate.

Even after the century change, most companies, including banks,

will work to fix any Y2K problems which occur rather than litigate

them with our customers and our vendors. This is why we urge a

no-surprises, pre-litigation opportunity to remediate before lawsuits

are filed. This is also why alternate dispute resolution should have

a place in any proposed legislation.

Second, we believe that the vast sums in litigation costs estimated to arise from Y2K disruptions, both real and imagined,

would be much better spent invested in our economy at the start

of the new century. Litigation, especially class action litigation,

with the potential of unfettered damages, is easy to begin but very

costly to resolve.

Because banks have millions of customers and are financial

intermediaries in millions of transactions everyday, we are especially vulnerable to deep-pocket litigation. If Congress agrees that

we have made reasonable efforts to address this once-in-a-millennium problem, you should consider appropriate legislation which

recognizes rather than punishes our diligence.

In conclusion, Mr. Chairman, we feel confident that the American banking system will be safe during the century change. The

American banking industry has made an unprecedented investment to prepare for this unique event in history. But, nonetheless,

we urge Congress to take action to prevent the derailing of this

massive Y2K remediation effort both before and after the century

change into a litigation morass of unprecedented scope and cost to

all of us.

Thank you for the opportunity to address the committee. I am

happy to respond to questions later.

Chairman BENNETT. Thank you, sir. We appreciate it.

[The prepared statement of Mr. McGuckin can be found in the

appendix.]

Chairman BENNETT. Mr. Scalise.

STATEMENT OF GEORGE SCALISE, PRESIDENT, SEMICONDUCTOR INDUSTRY ASSOCIATION, SAN JOSE, CALIFORNIA

Mr. SCALISE. Thank you, Mr. Chairman. My name is George

Scalise, President of the Semiconductor Industry Association, and

I appreciate the opportunity to be here today.

Let me spend a minute to tell you about the semiconductor industry, and in particular the U.S.-based portion of that. This is a

$125 billion-a-year industry. The U.S.-based companies have the

leading position in that, with about a 54-percent market share. The

industry grows at about 17 percent, compounded, and has done

that for the last 40 years. We expect it to continue. But perhaps

most important, it reduces its prices to its customers about 30 percent every year, and that has gone on from the very earliest days.

So there is increased value and lower cost, with more functionality,

with higher quality each and every year.

We pay our employees roughly twice what the average is for industry in this country. The Commerce Department states that we

are the leading contributor to value-added of the entire manufacturing sector in this country which, as you know, is the definition

for creating wealth. And perhaps, again, one of the more important

parts of what we have to do is we spend about a third of our sales

dollar on the combination of research and development and new

plant and equipment each and every year. So it is a very capitaland a very R&D-intensive industry.

Now, the benefit that flows from this is that the end customer

gets great value. If you look at the desktop computer and go back

just 2 years, the average price for that was about $1,900. And if

you look at the same machine today, with greater functionality,

higher speeds, and so on, it is about $1,200. That delta of $700 in

cost to the consumer is largely the benefit of lower cost of the semiconductors. Roughly 85 percent of that cost reduction is as a result

of semiconductor pricing. So $600 of the $700 is the benefit that

comes from our products.

Now, let me get into the Y2K issue and why this is all important.

We talk about pervasiveness. Today, the industry provides about

10 million transistors every man, woman and child on this Earth.

By the year 2008——

Chairman BENNETT. Ten million?

Mr. SCALISE. Ten million.

Chairman BENNETT. For every——

Mr. SCALISE. Here in the U.S., it is about 50 million. In the lessdeveloped countries, it is down in the area of less than 3 million,

obviously. By the year 2008, we will be producing 1 billion transistors for every man, woman and child on Earth. So you can see the

definition of pervasiveness here.

What has happened is, as a consequence, there is a real misunderstanding of what the semiconductor does, and therefore there

is a misperception of what its role is in this whole year 2000 issue.

So what I would like to try and do in just a few minutes here is

clarify what the misperception is and provide the reality that we

need to focus on as we deal with the issue.

But let me emphasize that our focus is truly remediation, not litigation. That is what we want to do, and I think that is what Dr.

Lewis was talking about. We do not want to limit the legal actions

involving personal injury. We think that that should take a course

that it has in the past. We are focusing on ensuring that the legal

system isn’t going to be exploited to extract settlements from those

who have been responsible in dealing with this whole Y2K issue.

Electronic products are a collection of chips and other components, along with software. And blended together, they end up with

a system that in the final analysis is what is going to deal with

and cause or avoid the whole Y2K issue. The chip is not the determining factor. A small percentage of chips can be programmed so

that they deal with the date issue, but most chips do not. I mean,

the vast majority of these millions and millions of transistors we

produce have nothing to do with the date code issue.
In general, the chip makers do not design the software and put

it into these chips. That is largely what the end producer of the

equipment does, and in many instances that is where their added

value comes in. So, in effect, if you looked at the chip makers, they

would be more like the ones who make the books, and those who

use the chips and program them and end up with the end equipment are the ones who put the words on the pages. And I think

that is one way of describing how we can differentiate ourselves.

Another term that comes up is ‘‘embedded systems,’’ and there is

nothing very unique about an embedded system except it is a subset of the overall system and it is embedded somewhere in the architecture. But, again, it has all of the same attributes, and the

software that is going to drive that system and cause it to do what

needs to be done is largely going to be supplied by the producer of

that end equipment. So what we are trying to do is work with both

our suppliers and our customers to make certain that we are remediating any issues that are out there today. Anything we can do to

help out, that is what we are doing.

So I hope this gives you at least a reasonable idea of what the

embedded system is, the chip is and what it is not, and therefore

where the distinction lies. So, ultimately, the manufacturer of the

end product is the one that is going to have to be the one to come

forward and help resolve whatever issues happen to emerge here.

So we believe it is essential that this issue be approached in such

a way that it is not subject to frivolous lawsuits. We aren’t asking

for dispensation for anyone who hasn’t acted in good faith. We

don’t want that. We want to make certain that those who have

acted in good faith should not be punished, though.

So we do support the aim of the two bills by Senators Hatch and

Feinstein, along with the one from Senator McCain. And certainly,

from what we heard from Senator Dodd here this morning, it

sounds like he is much on the same track. What we would like to

see is have this legislation passed so we can continue to spend our

resources on this productive R&D that provides the consumer more

value for less cost, and more functionality, and let the benefits flow

to the consumers here in the U.S. and around the world and avoid

the litigation that could be caused by this issue.

Thank you.

[The prepared statement of Mr. Scalise can be found in the appendix.]

Chairman BENNETT. Thank you very much. Let me comment on

your general testimony. One of the things we have learned in this

committee and in the work Senator Dodd and I did on the Banking

Committee before this committee was formed—one of the happy

things we have learned—is that the embedded chip problem is not

as pervasive as we thought it was.

When we first got into this, I was told that the embedded chip

failure rate would be somewhere between 2 and 3 percent, and a

failure rate of 2 and 3 percent of embedded chips would be catastrophic. And now we are being told on the basis of new research

that the embedded chip failure rate will be .01 percent or something of that kind.

Do you have a number? Can you confirm for me?
Mr. SCALISE. No, we don’t have a number, but it is a very, very

small percent, because again you have to think in terms of what

is the industry composed of and there aren’t that many of the chips

that deal with that function, a very, very small percentage.

Chairman BENNETT. Let’s go to these cooling-off periods and the

30-day remediation period, and so on. Dr. Lewis, you talked about

that. One of the things we are learning on this committee is that

the failure—these are all guesses; I have to underscore that—the

failure period will be for most of the failures 3 days or less.

Dr. Lewis, do you have any comment on that? You have probably

looked at the data.

Mr. LEWIS. The answer is that you would begin to see problems

immediately when a computer has its date indicating that it is indeed in the year 2000. And, in fact, it is possible for you, Mr. Senator, to re-set your computer today and advance your date and

cause your computer to think you are in the year 2000. So the general answer to your question is right around the year 2000, most

computers will begin to experience this problem. And something

unusual may go wrong.

Chairman BENNETT. But presumably it could be fixed in a 3-day

period?

Mr. LEWIS. No, that is not necessarily true. As I mentioned before, it, the problem, could be in the applications software that the

customer has loaded. It could be on a number of things, and it

would take a period for my engineers to go in and talk with the

customers, discuss it with them, assess what is going on. It is our

experience that much older software is more prone to the problem

than the newer software, for innumerable reasons I could get into.

So the answer to some of these questions would be a migration

path from an older piece of software to a newer piece of software

might be a solution for many of these Y2K problems for an individual customer.

Chairman BENNETT. What I am driving at is that if the projections being made by the consultants that we have had before the

committee are correct, the bulk of the problems in the United

States—I don’t want to get into the problem of overseas—the bulk

of the problems in the United States could be resolved in a relatively short period of time and that the 30-day period or 90-day

period in the legislation would be sufficient to get the problem

solved.

Mr. LEWIS. Senator, I now understand your question a little better. We may argue about a day or two here or there, but clearly

within a reasonably short period of time, there would be some kind

of an amicable solution arrived at between the supplier and the

customer at that point.

Chairman BENNETT. So the provisions for that in the legislation

you think are sound policy?

Mr. LEWIS. Absolutely. We strongly support that cooling-off period. Let us come in and fix the problem, and it would take the period of time that is already mentioned in the bill.

Chairman BENNETT. Now, Mr. McGuckin, your comment about

you being driven by your customers, not by lawsuits, reminds me

of a phrase from my younger days. I was working for a company

and they said we have a very unique incentive program here, and
that is if you do your job, you get to keep it. And I think that is

basically the attitude of most business, that if they do their job,

they get to keep their customers, they get to keep their market

share, and that is indeed the driving force.

Now, our examination on this committee corroborates what you

have said about the banking industry, and the banking industry as

a whole is perhaps the best prepared or among the best prepared

of the industries dealing with this. You have spent an enormous

amount of money. Citicorp, for example, originally said when I got

into this they were going to spend $500 million fixing the problem.

And then by the time this committee was formed, we were told it

was going to be $650 million. Now, I understand it is getting close

to $800 million, and probably by the time the thing finally works

its way through the bell-shaped curve, it could conceivably top $1

billion in this one corporation alone.

Some other large corporations are talking about numbers in that

area, and you are obviously getting a return on that investment in

the form of getting the problem under control and getting remediation. Nonetheless, you will have problems. Do you have any kind

of a study in the ABA or anecdotal information that you could

share with the committee with respect to where you expect the

problems to arise that might fall into either the 30-day or 90-day

period where you would have to deal—or are you confident enough

that there won’t be any?

Mr. MCGUCKIN. I am certainly not confident that there won’t be

any, Senator. I think that this is a totally unpredictable situation.

The banking industry for quite some time has dealt especially with

our consumer customers within that window period. If you look at

your banking statement, you will see on it an 800 number that you

can call if the information is incorrect. And we expect that many

of our consumers, when they review their banking statements after

the year 2000, will do just that, and so we are geared up and we

are used to that.

I think that the issue that is unknown to us is as the ripples of

Y2K begin to run through our customer base, we don’t know how

it is going to affect a small company that we lend to. We don’t

know how it is going to affect a large company for which we do the

payroll or the employee benefit recordkeeping, or for which we invest the funds in the 401(k) plan. Those issues are not going to be

spotted on January 3. Consumer issues I think probably will be.

But as we go out through the year and we receive data from a

company for their payroll or their 401(k) plan, which affects hundreds of customers and consumers and employees, we have to make

sure that that data goes through our system clean and it doesn’t

infect our system again. In each of those cases, I think if we find

a glitch, if we find a problem, we are going to go immediately back

to the company and hope that we can work with the company within the cure period to correct problems. It is in our incentive to do

that because we want to keep that customer. You are absolutely

right.

Chairman BENNETT. One final question and then I will go to Senator Edwards. When we first started looking at this—oh, it has

been 2 years ago now that Senator Dodd and I got into it on the

Banking Committee—we were told there wasn’t a single ATM machine anywhere in the country that was Y2K-compliant. You have

been working for 2 years now. Can you give us a number or a percentage for ATM’s, because that is the first place where you will

get panic if people feel they can’t get their money out of the bank?

I am trying to tell people don’t draw out large sums of money

with respect to Y2K. Now, am I right in saying that or am I going

to be embarrassed as people can’t get their money? Can you give

us some kind of a figure on ATM remediation and where it is nationwide?

Mr. MCGUCKIN. Well, we will try not to embarrass you, Senator.

That is one of our major jobs. Unfortunately, I will have to get back

to you on the number. What I can tell you is that the banks

throughout the country and the ATM systems are systematically

checking each one of those ATM’s. And we anticipate that by well

in advance of the year 2000, the ATM system will be Y2K-OK. And

whether you will see that on your ATM or you will get it from your

bank, we anticipate that the ATM’s will be OK.

The issue—and this is one of the ripple effects that I know the

committee has already taken a look at—is getting enough cash to

those ATM’s to be ready for what we anticipate will be larger than

normal withdrawals. Many consumers are used to on the third day

of a 3-day weekend going to their ATM and finding that it is out

of money. That is something that we all deal with, and you just go

to another ATM.

On this weekend, a major part of our contingency planning

throughout the entire banking industry is how do we get the cash

which the Fed has already thought about and has already put in

place—how do we get that to that ATM so that when you walk up

to it anytime during that weekend, there is cash available? That,

I think, is the more significant planning and contingency issue before the banking industry than whether or not the ATM’s will recognize your card when you put it in. We feel confident it will, Senator.

Chairman BENNETT. OK.

Mr. LEWIS. Senator, if I may support my colleague, Mr.

McGuckin, I can speak of Europe, since we are in the process of

opening a European office. Currently, three French banks have

people whose sole job is to go to ATM machines in France and try

putting in a card which has the year 2000 on it. The failure rate

to obtain cash is anywhere from 40 to 60 percent right now. We

clearly know the rest of the world is very far behind us.

Chairman BENNETT. Yes.

Chairman BENNETT. Senator Edwards.

Senator EDWARDS. Thank you, Senator Bennett.

Mr. McGuckin, let me ask you just a couple of questions and

start by commending you. It does appear to me from everything I

have read in trying to catch up with the work that—and I have got

a long way to go to catch up with the work that Senators Dodd and

Bennett have done on this committee for a couple of years now—

that the banking industry has worked extraordinarily hard to avoid

the upcoming problems.

You may be interested in knowing that when Chairman Greenspan testified before the Banking Committee, I asked him the question, if you were an elderly couple with your money in the bank—
I don’t know if you were present for that—at the end of 1999, what

would you advise them to do? And his advice was to leave the

money in the bank, and I think that is in large part due to the

work that you all have done.

I do want to ask a couple of questions. First, Dr. Lewis, if I can

start with you, when did you first become aware of Y2K problems?

Mr. LEWIS. The Y2K problem has been around since days of early

cobol programmers. At that time we were trying very hard way

back when, about 30 years ago, to save space. It was a common

technique where storage space was much more valuable or much

more expensive, so when we programmed it was common to leave

off as many what we thought to be a few insignificant bits of data

as possible. So it would go back to when I first started programming when I was a teenager.

Senator EDWARDS. And that would have been roughly when?

Mr. LEWIS. We are talking about the early 1960’s.

Senator EDWARDS. Do you know—and I am not asking about you

specifically; I am asking about what you know about. We have

heard some stories this morning and I have read about some other

stories. Are you aware of any situations where manufacturers or

vendors, at least from your perspective, have tried to profiteer from

Y2K problems, Y2K problems of their own making or that they

have some responsibility for?

Mr. LEWIS. I can certainly tell you as a representative from the

technology community that I know a lot of people are desperately

trying to fix their systems to become Y2K compliant. I cannot tell

you from personal experience, Senator, of a firm that is trying to

do something with their software that would cause damage or

harm to other people in the Y2K area.

Senator EDWARDS. Mr. Scalise—am I pronouncing that right?

Mr. SCALISE. Yes.

Senator EDWARDS. Let me ask you the same question I just

asked Dr. Lewis.

Mr. SCALISE. No, I don’t know of any instance where that is the

case. In fact, in the semiconductor industry, I guess we can pride

ourselves on the fact that we not only compete vigorously, but we

also finds ways to collaborate in the appropriate manner. And in

this instance, through Sematech, we are assessing all of the equipment that comes into the industry on a coordinated basis to make

certain that it is going to be complaint, so that there is a coordinated effort to make certain this doesn’t happen. So we are looking

at it upstream and downstream in that regard, and hopefully

avoiding and remediating wherever necessary.

Senator EDWARDS. Senator Bennett asked about the cooling-off

period, 30, 90 days. Ninety days is what is in Senator Hatch’s bill.

Let me just tell you candidly what my concern is about that and,

Dr. Lewis, get you to respond to this, if you would.

I am concerned about the small business who—you know, they

are told there are going to be 90 days. Their computer system has

shut down. They can’t make payroll. Their cash registers don’t

work. A lot of the small businesses that I have known and represented over the years couldn’t survive 30, 60, 90 days of essentially being out of business. If you were to put yourself in their

shoes—I am asking you to trade hats here for a minute, but if you
were to put yourself in their shoes, can you see why they might

have concerns about such a period, 30 or 90 days?

Mr. LEWIS. But remember, Senator, if you will, I am a small

business, too. I have 23 employees. In fact, in part of my testimony

I spoke about what would happen to my firm in the case of the

Y2K when I was not able to get parts and able to understand that

I would not be able to fulfill my——

Senator EDWARDS. So you don’t have to work hard to put yourself

in that position.

Mr. LEWIS. Oh, absolutely not! And that is why I come back to

that phrase, quoting the Bible, of saying come let us reason together. If the problem will be exacerbated due to older pieces of

software or things that are not more recently constructed, taking

into account that, oh, by the way, 1900 now when we program

means the year 2000 and not 1900, then there are many remedies.

For instance, there are wonderful packages out there, modern

packages, that do payroll. There are wonderful, modern packages

out there that do manufacturing.

Senator EDWARDS. But, Dr. Lewis, who is going to pay for that?

Mr. LEWIS. I can say that giving us the time when two businessmen can work together on something, that is an additional opportunity for businessman to businessman, business woman to business woman, we can all work together to come out with some kind

of a solution. There may exist packages that we might be able to

give that could have a thousandsfold times the benefit of the original piece of software. I don’t have an answer for you, Senator, right

now.

Senator EDWARDS. You understand why I would be concerned

about that?

Mr. LEWIS. Absolutely, but that is why I am saying during a cooling-off period where we can come up with an amicable solution on

both parts, that will allow that—we can do that with either ADR

or just this cooling-off period we have been speaking about—that

will allow for good American business to take over and not immediately jumping the gun to say we have a lawsuit. Let me tell you

the problem that would happen if I were sued.

My company would probably shut down. As CEO, I would be involved. My chief technologist would be involved. I would no longer

be able to function in my leadership role. My customers would not

be serviced. My employees would not be paid. I would be in a difficult period of time.

Senator EDWARDS. As the result of a lawsuit?

Mr. LEWIS. Absolutely, because I would have to be involved. In

this case, remember, if one of my computers was involved with

this, again as a small business, I would directly have to be involved. I do not maintain a legal staff. I do not have millions of dollars of reserve. So I personally would have to be involved in this

lawsuit against my firm.

Senator EDWARDS. I guess what my concern about the 90-day

cooling-off period—and I see my time is up, so I will make this

brief. My concern about the 90-day cooling-off period is I think it

could also be described as a 90-day small business shutdown period, I mean, unless something is worked out. And I hear what you

are saying.
Mr. LEWIS. Yes.

Senator EDWARDS. I mean, basically, your response is good people of goodwill who work together in a normal business context can

come together, absent a lawsuit, and work these things out. I hear

you. I mean, I am not misunderstanding your testimony. But my

concern is that 30-or 90-day period also has the potential—I mean,

sometimes things don’t get worked out, and it also has the potential of putting small business out of business, including a small

business like yourself. And I have a real concern about that.

Mr. LEWIS. Senator Edwards, I understand your concerns, but if

I may just make two points to that——

Senator EDWARDS. I will ask Senator Bennett. My time is up.

Chairman BENNETT. Go ahead.

Mr. LEWIS. If I can respond, Senator Bennett, I want to quote

something that you said. It is in very much in my best interest to

keep my customer satisfied because he or she is also my source of

revenue. So I will be, during that period of time, going to work very

hard to rectify that situation and not put them out of business.

Secondly, if I were involved in a lawsuit, I physically and my

other people that should be fixing this problem could not be out

there with our unfortunate customers. We would be in court.

Senator EDWARDS. Thank you, Dr. Lewis. Thank you all very

much for being here.

Chairman BENNETT. We can do another round if you have additional questions.

Senator EDWARDS. I actually, Senator, only had one other—I had

read a comment that I would like to get the response from the

three witnesses, and that would be all I would care to ask about.

Chairman BENNETT. Well, let me make a comment first. I have

been where Dr. Lewis is talking about. I have been at the head of

a very small business that had a lawsuit that we felt was inappropriate, and some of our shareholders said let’s fight it on a matter

of principle. And I said you fight this on a matter of principle and

you are out of business. You settle.

Our legal bills were running $25,000 a month, at a time when

$25,000 a month would put us out of business. And I settled for

$2,500 a month, and people were grumbling, yes, but you are giving in and they are wrong and the principle—you have got to make

the point. And I said, I am sorry, I don’t want to make the point,

I want to survive. And the worst thing that can happen to a small

business that is struggling to survive is to get hit with a lawsuit

because the time and the attention, the focus of the management

team is all destroyed as far as building the business is concerned.

So I know exactly what you are saying and where you are on that,

and that is the kind of concern that I have here.

Now, let me make another comment. Any small businessman

who gets caught—now, this is not a legal issue; again, I am speaking from a business perspective—any small businessman who gets

caught unaware by a Y2K problem is himself guilty of some kind

of negligence. That is what we are holding these hearings for. That

is why Tony Blair in the British Isles has billboards with his signature on it saying this is the No. 1 issue facing the survival of the

United Kingdom. I am not exaggerating very much. I don’t have

the exact words, but they are pretty close to that.
A small businessman who does not take the time to pick up the

phone and call Dr. Lewis and say is my software going to be all

right, can I get a Y2K response from you, is a small businessman

who is being negligent in terms of his own shareholders. When people ask me what should I do with respect to Y2K, I always say to

them take charge of your own Y2K problem. Call your bank and

make sure your bank is going to be Y2K-compliant. Call your software supplier and ask the question. Don’t sit around and wait for

the failure and then say, oh, gee, I can sue somebody.

I gave this speech in a small, rural Utah town and people asked

me what should we do, and I said, you know, take charge, call everybody. Among other things, I said call the mayor and make sure

the water purification system in the town is going to work, because

most water purification plants are run by computers.

At the end of the speech, a fellow came up and introduced himself, shook my hand, and he said, I am mayor. He said you have

just triggered a whole bunch of phone calls that I am going to get.

I said, Mr. Mayor, is your water purification system going to work?

And he said I don’t have the slightest idea; it never occurred to me

to ask that question before.

As I say, that is why we are holding these hearings. I would hope

that every businessman and woman, regardless of size, gets on the

phone and starts this process that you are talking about, Dr.

Lewis, far in advance of the year 2000, gets in touch with the software supplier. If you have got Windows 95, get a hold of the web

site of Microsoft and get the fix because Windows 95 is not Y2Kcompliant. There is a free fix that can be downloaded, but you have

to go get it.

And I don’t want people to say, well, because I didn’t go get it

and Microsoft didn’t contact me and I had a failure on my Windows

95, now I am going to sue, and jam up the courts. Or more importantly somebody saying I am going to file a class action lawsuit on

behalf of every Windows 95 user. It is irresponsible if you are using

Windows 95 and you are not checking to make sure that the applications you use are, in fact, compliant. You have an obligation to

your employees and your shareholders to do that yourself.

I will get off my soapbox, Senator. Go ahead.

Senator EDWARDS. Actually, Senator Bennett, a lot of what you

say I agree with. I think that I, speaking for myself, believe strongly in personal accountability and responsibility. And I think you

are right. I think that all these businesses have a responsibility to

take the action they can to ameliorate whatever damage may be

done. I think a lot of what you say makes just good old common

sense.

But I will have to tell you I put it in the context of a legal system

that—and I understand your perspective and I respect it very

much, and I have defended people in your position and I have seen

the anguish that you describe. But on the whole, I have watched

a legal system over 20 years that works for the most part and protects the rights of people whose rights need to be protected.

I guess my hope and wish in this process is that we be thoughtful and balanced in our approach to it. And it is certainly what I

intend to do, and I know from having listened to you and your comments that you intend to do that. Again, I thank these witnesses,

who I think also have the same attitude.

Chairman BENNETT. Thank you all. We appreciate your coming.

We appreciate your patience with some long-winded Senators. That

is part of the occupational hazard.

The committee is adjourned.

[Whereupon, at 12:23 p.m., the committee was adjourned.]

A P P E N D I X

ALPHABETICAL LISTING AND MATERIAL SUBMITTED

PREPARED STATEMENT OF CHAIRMAN ROBERT F. BENNETT

Today marks the 11th hearing of the Special Committee on the Year 2000 Tech- nology Problem. We are pleased to have Senator Hatch with us today. It would appear that Senator Hatch and I have switched places. Just over a week ago I was

testifying on Y2K liability legislation at the Senate Judiciary Committee, which

Senator Hatch chairs, and today, I am welcoming him to the Y2K Committee’s hearing on the same subject. For obvious reasons, both the Y2K Committee and the Judiciary Committee have an interest and expertise in the arena of Y2K liability. Such has been the case with

every sector we have investigated, because Y2K affects directly or indirectly all organizations, be they government agencies or private businesses. It is a pervasive

problem. Every committee within the Senate has oversight of an area that in one

way or another will be effected by Y2K. We in the Senate Special Committee on the

Year 2000 Technology Problem are encouraged when other committees such as the

Senate Judiciary Committee, recognize the potential impact of Y2K and take steps

to address it. Senator Hatch has certainly done that in his committee and we applaud his efforts.

While we are here to discuss many of the issues that were raised in that earlier

Judiciary Committee hearing, our hearing is taking a broad approach to the subject.

We want to examine the specific liability bills circulating in the Senate, but we also

wish to address other subjects, such as the potential for court overload, and the effects that Y2K litigation may have on the operation of businesses either faced with

lawsuits or forced to seek legal recourse through the court system. In a related matter, businesses that are sued will often turn to their insurance companies to collect

on their policies. The GAO has ongoing work in this area for the Committee, and

will issue its findings in the near future. However, GAO recently told us that insurance regulators are lagging behind in their efforts to increase awareness and provide guidance for Y2K, and to conduct examinations to assess and verify Y2K readiness. In addition, the industry isn’t planning to validate Y2K readiness through

broadscale testing. We’re concerned that Y2K failures in the insurance industry

might, among other things, adversely affect businesses that are trying to collect on

their insurance policies in the aftermath of litigation. GAO has provided its preliminary findings in a statement for the record for today’s hearing.

There have been some alarming projections concerning the total cost of Y2K-related litigation. I think the figures $500 billion to $1 trillion speak for themselves.

That is more money than most people care to conceptualize. Let me help you with

that—if your business lost $1 million every single day since the year 740 BC, that

would equal roughly $1 trillion in total losses. That amount of money is staggering

to imagine. It’s over 14% of our nation’s total GDP. We have been referred to as

a litigious people, but how could such an insurmountable cost be possible? I want

to paint the most accurate picture of the situation that I can. However, the very

size of the problem makes it difficult, and almost surreal, to grasp.

According to the February 16, 1999 Congressional Research Service Report for

Congress on legal issues surrounding the Y2K computer problem, the following are

potential defendants in Y2K liability suits.

Hardware and software vendors, consultants, and service providers;

Corporate boards of directors and top management;

Software licensees;

Product manufacturers;

Landlords of ‘‘smart’’ or secured buildings;

Banks, securities firms, and other financial entities;
and Insurers

You have undoubtedly noted that the list is not short. The defendants will not be the only individuals adversely affected by litigation. All parties involved in a suit

sacrifice time and resources. Furthermore, the time, effort, and resources in terms

of personnel and money, that is allocated towards litigation by corporations, firms

and other organizations, versus the greater priority—Y2K remediation—equates to

time, effort and resources not invested in the research and development of viable

solutions to this problem. Anything we do, we must do quickly and we must ensure

fairness. Senator Hatch, you and Senator Feinstein, as well as Senator McCain have

already worked closely on this problem and I feel that we are getting close to finding

a solution.

Fear of litigation catalyzed our efforts to pass the ‘‘Year 2000 Information and Readiness Disclosure Act,’’ which promotes the free disclosure and exchange of information related to Year 2000 readiness. It does work to provide some liability protection for the release of certain information. Today we will investigate the prospect

of a more aggressive, yet narrowly tailored bill which would act to neither reward

nor encourage irresponsible behavior relative to Y2K problems. I’ve said before that

the best deterrent to trial lawyers running amuck with Y2K is remediation. If the

problem is fixed, there should be no cause for visiting our courts. Ultimately, this

is the best answer to the question, ‘‘how do we keep the flood gates closed to the

impending wave of litigation?’’ At the same time, we must consider in the presentation of any bill, that providing a safe-haven for businesses that work to mitigate

their Y2K exposure, should not at the same time protect those who would choose

to ignore the threat of Y2K-related system failures. In that regard, our mission is

two-fold: first, to preserve the right of the government to bring action against those

who failed to disclose their Y2K status while allowing consumers and business associates to seek fair retribution for damages; and second, to extend protection to companies and others who have strived to do all they can to navigate the obstacles of

Y2K in such a way that it would be obvious to any reasonably thinking person that

they fulfilled their duty.

PREPARED STATEMENT OF VICE CHAIRMAN CHRISTOPHER J. DODD

Thank you Mr. Chairman. Your leadership throughout the last eleven months is

greatly appreciated. Yours has been the loudest voice of warning about a variety of

Y2K issues, and I’m sure the American people are truly grateful. We welcome all

in attendance today, and thank the witnesses for their participation and for the effort they have made in taking time out of their busy schedules to be here. We especially thank Senator Hatch for taking time from his day to join us.

Today we are examining the potential effect that the Y2K problem may have on

litigation. I believe that our ultimate goal should be to encourage Y2K compliance.

Our legal system is already burdened by a tremendous number of cases. the burgeoning caseload in federal courts is well-known, and the problem in the state

courts is just as bad. In 1997, there was one case filed in the state courts for every

three people living in the United States. A potential escalation in Y2K litigation

could further impede the efficiency of our court system, and cost taxpayers billions

in inflated costs for products and services, as well as insurance premiums, as companies shift the cost burden to consumers.

In the same spirit that we passed ‘‘The Year 2000 Information and Readiness Disclosure Act,’’ which acts to encourage a steady flow of information regarding Y2Kreadiness, we should proceed into a discussion of Y2K litigation reform. ‘‘The Year

2000 Information and Readiness Disclosure Act’’ brought about a bipartisan compromise that satisfied industry concerns. It was crafted with a single purpose in

mind, and I hope that we would take this same approach in developing Y2K litigation reform.

I agree with Senator Bennett that even with this legislation, fears of Y2K litigation weigh heavily on the minds of business owners. Yet, we hear rumors, almost

on a daily basis, of business enterprises which are doing relatively little in the way

of remediation. Even with ‘‘The Year 2000 Information and Readiness Disclosure

Act,’’ corporate attorneys may still be counseling their clients to be wary of full-disclosure. But, the Act has worked to encourage many companies to begin thinking

in terms of Y2K remediation. Further reform should shine a stronger light on those

who choose to do nothing.

After examining the various Y2K litigation bills, I am very concerned that they

may go beyond what is needed to address the very valid concerns of a Y2K litigation

explosion. As some of you may know, in 1995 I joined with Senator Domenici to author Securities Litigation Reform Legislation. This was a limited, carefully crafted
remedy to correct specific known abuse. I have frequently stated that any Y2K litigation should be similarly designed and should avoid overreaching its intended purpose. Many interest groups will therefore have to curb their political appetites. I

strongly believe that we must leave broad tort reform for another day. I don’t want

to make the perfect the enemy of the good. If we seek through this legislation to

achieve broad tort reform, we run the risk that we will not have meaningful Y2K

liability protection.

Therefore, I intend to introduce a bill that is narrow in scope and does not overreach. The goal of this bill will be do discourage frivolous suits and therefore guard

against the potential flood of Y2K litigation. I intend for this bill to provide for the

following:

• An opportunity for defendants to cure—I endorse a 90-day period, where

litigation would be stayed giving a defendant an opportunity to correct and therefore, hopefully mitigate Y2K-related damages.

• Voluntary Alternative Dispute Resolution (ADR)—I strongly believe that

alternative dispute resolution, commonly termed ADR, is a very effective tool in

avoiding the time consuming and expensive proposition of litigation for both plaintiff

and defendant. Certainly ADR could be an extremely useful tool in resolving the

complex and disparate legal claims that may arise from Y2K-related failures.

• Specificity in pleadings—Embedded within the requirement for a specificity

in pleadings is the proposition that Y2K suits should definitively outline the causes

of action which form the underlying claim for damages. By requiring plaintiffs to

detail the elements of their claim, courts can more accurately judge, and if necessary, dismiss frivolous or legally unsupportable suits.

• Requirements of minimal injury in class action suits—During securities

litigation reform we worked to eliminate ‘‘strike’’ suits and other attorney-generated

class actions. Similarly I am concerned that we potentially face an onslaught of suspect Y2K class action suits. By requiring any alleged defect to be material we help

ensure that superficial or frivolous Y2K class action suits do not occur.

• Contract Preservation—In civil action involving contracts it is the terms of

those very contracts that should be strictly construed. It is important, however, to

evaluate whether this might eliminate state law causes of action based on implied

warranty.

• Reasonable Efforts Defense—In a claim for money damages, except in contract, a defendant should be entitled to enter into evidence that it took measures

that were reasonable under the circumstances to prevent the Y2K failure from occurring or from causing the damages upon which the claim is based.

• Negligence—In an overall discussion of negligence claims and in our desire

to limit frivolous law suits, it is appropriate that we review the standards of proof

and determine whether those standards need to be raised.

• Duty to Mitigate—In the complex and unknown world of potential Y2K failures, it is important that prospective plaintiffs make all reasonable efforts to avoid

damages in circumstances where information was readily available. And yet, we

must not bar the plaintiff from their fundamental legal rights.

I hope that a bill based on these principles will meet our objectives without overstepping the bounds of our intentions. I welcome the perspective and insight that

each of our witnesses bring to us today.

Thank you Mr. Chairman.

PREPARED STATEMENT OF SENATOR ORRIN G. HATCH

Chairman Bennett and Senator Dodd, let me express my gratitude for your decision to invite me to testify before the Y2K Special Committee on the problems posed

by Y2K-related litigation. Both of you recognize how important Y2K remediation is

to consumers, business, and the economy. This problem is of particular interest in

my state of Utah which has quickly become one of the nation’s leading high tech

states.

Building on the bipartisan efforts in the Judiciary Committee last year in passing

the Y2K disclosure law, our Committee has been studying the litigation problem in

the hopes that we can pass a bill that can avoid a potential catastrophic logjam of

Y2K-related cases. Working together, Sen. Dianne Feinstein and I have produced

a bill—S. 461, ‘‘The year 2000 Fairness and Responsibility Act’’—that encourages

Y2K problem-solving, rather than encouraging a rush to the courthouse. It is not

our goal to prevent any and all Y2K litigation. It is to simply make Y2K problemsolving a more attractive alternative to litigation. This benefits consumers, businesses, and the economy.
The main problem that confronts us as legislators and policy makers in Washington is one of uniquely national scope. More specifically, what we face is the threat

that an avalanche of Y2K-related lawsuits will be simultaneously filed on or about

January 3, 2000 and that this unprecedented wave of litigation will overwhelm the

computer industry’s ability to correct the problem. Make no mistake about it, this

super-litigation threat is real, and if it substantially interferes with the computer

industry’s ongoing Y2K repair efforts, the consequences for America could be disastrous.

Most computer users were not looking into the future while, those who did, assumed that existing computer programs would be entirely replaced, not continuously

modified, as actually happened. What this demonstrates is that the two-digit date

was the industry standard for years and reflected sound business judgment. The

two-digit date was not even considered a problem until we got to within a decade

of the end of the century.

As the Legal Times recently pointed out, ‘‘the conventional wisdom [in the computer business was] that most in the industry did not become fully aware of the

Y2K problem until 1995 or late.’’ The Legal Times cited a LEXIS search for year

2000 articles in Computerworld magazine that turned up only four pieces written

between 1982 and 1994 but 786 pieces between 1995 and January 1999. Contrary

to what the programmers of the 1950s assumed, their programs were not replaced;

rather, new programmers built upon the old routines, tweaking and changing them

but leaving the original two-digit date functions intact.

As the experts have told us, the logic bomb inherent in a computer interpreting

the year ‘‘00’’ is a programming environment where the first two digits are assumed

to be ‘‘19’’ will cause two kinds of problems. Many computers will either produce

erroneous calculations—what is known as a soft crash—or to shut down completely—what is known as a hard crash.

What does all this mean for litigation? As the British magazine The Economist

so aptly remarked, ‘‘many lawyers have already spotted that they may lunch off the

millennium bug for the rest of their days.’’ Others have described this impending

wave of litigation as a feeding frenzy. Some lawyers themselves see in Y2K the next

great opportunity for class action litigation after asbestos, tobacco, and breast implants. There is no doubt that the issue of who should pay for all the damage that

Y2K is likely to create will ultimately have to be sorted out, often in court.

But we face the more immediate problem of frivolous litigation that seeks recovery even where there is little or no actual harm done. In that regard, I am aware

of at least 20 Y2K-related class actions that are currently pending in courts across

the country, with the threat of hundreds more to come.

It is precisely these types of Y2K-related lawsuits that pose the greatest danger

to industry’s efforts to fix the problem. All of us are aware that the computer industry is feverishly working to correct—or remediate, in industry language—Y2K so as

to minimize any disruptions that occur early next year.

What we also know is that every dollar that industry has to spend to defend

against especially frivolous lawsuits is a dollar that will not get spent on fixing the

problem and delivering solutions to technology consumers. Also, how industry

spends its precious time and money between now and the end of the year—either

litigating or mitigating—will largely determine how severe Y2K-related damage, disruption, and hardship will be.

To better understand the potential financial magnitude of the Y2K litigation problem, we should consider the estimate of Capers Jones, Chairman of Software Productivity Research, a provider of software measurement, assessment and estimation

products and services. Mr. Jones suggests that ‘‘for every dollar not spent on repairing the Year 2000 problem, the anticipated costs of litigation and potential damages

will probably amount to in excess of ten dollars.’’ The Gartner Group estimates that

worldwide remediation costs will range between $300 billion to $600 billion. Assuming Mr. Jones is only partially accurate in his prediction—the litigation costs to society will prove staggering. Even if we accept The Giga Information Group’s more conservative estimate that litigation will cost just two dollars to three dollars for every

dollar spent fixing Y2K problems, overall litigation costs may total $1 trillion.

Even then, according to Y2K legal expert Jeff Jinnett, ‘‘this cost would greatly exceed the combined estimated legal costs associated with Superfund environmental

litigation . . . U.S. tort litigation . . . and asbestos litigation.’’ Perhaps the best

illustration of the sheer dimension of the litigation monster that Y2K may create

is Mr. Jinnett’s suggestion that a $1 trillion estimate for Y2K-related litigation costs

‘‘would exceed even the estimated total annual direct and indirect costs of all civil

litigation in the United States,’’ which he says is $300 billion per year.
These figures should give all of us pause. At this level of cost, Y2K-related litiga- tion may well overwhelm the capacity of the already crowded court system to deal

with it.

Looking at a rash of lawsuits, we must ask ourselves, what kind of signals are we sending to computer companies currently engaged in or contemplating massive

Y2K remediation? What I fear industry will conclude is that remediation is a losing

proposition and that doing nothing is no worse an option for them than correcting

the problem. This is exactly the wrong message we want to be sending to the computer industry at this critical time. I believe Congress should give companies an incentive to fix Y2K problems right away, knowing that if they don’t make a good-faith effort to do so, they will shortly

face costly litigation. The natural economic incentive of industry is to satisfy their

customers and, thus, prosper in the competitive environment of the free market.

This act as a strong motivation for industry to fix a Y2K problem before any dispute

becomes a legal one. This will be true, however, only as long as businesses are given

an opportunity to do so and are not forced, at the outset, to divert precious resources

from the urgent tasks of the repair shop to the often unnecessary distractions of the

court room. A business and legal environment which encourages problem-solving

while preserving the eventual opportunity to litigate may best insure that consumers and other innocent users of Y2K defective products are protected.

There are now at least 117 bills pending in state legislatures. Each bill has differ- ing theories of recovery, limitations on liability, and changes in judicial procedures,

such as class actions. This creates a whole slew of new problems. They include

forum shopping. States with greater pro-plaintiff laws will attract the bulk of lawsuits and class action lawsuits. A patchwork of statutory and case law will also result in uneven verdicts and a probable loss of industry productivity, as businesses

are forced to defend or settle ever-increasing onerous and frivolous lawsuits. Small

states most likely will set the liability standard for larger states. This tail waging

the dog scenario undoubtedly will distort our civil justice system. Some states are attempting to make it more difficult for plaintiffs to recover. Pro- posals exist to provide qualified immunity while others completely bars punitive

damages. These proposals go far beyond the approach taken in the Judiciary and

Commerce Committee’s bills of setting reasonable limits on punitive damages. Other

states may spur the growth of Y2K litigation by providing for recovery without any

showing of fault. A variety of different and sometimes conflicting liability and damage rules create tremendous uncertainty for consumers and businesses. If we want

to encourage responsible behavior and expeditious correction of a problem that is

no nationally pervasive, we should impose a reasonable, uniform Federal solution

that substantially restates tried and true principles of contract and tort law. If there

is an example for the need for national uniformity in rules, this is it. The most appropriate role we in Washington can play in this crisis is to craft and

pass legislation that both provides an incentive for industry to continue its remediation efforts and that preserves industry’s accountability for such real harm as it

is legally responsible for causing. This will involve a delicate balancing of two equally legitimate public interests: the individual interest in litigating meritorious Y2Krelated claims and society’s collective interest in remediating Y2K as quickly and

efficiently as possible. We need to provide an incentive for technology providers and

technology consumers to resolve their disputes out of court so that precious resources are not diverted from the repair shop to the court room.

And this is the need that our bill, S. 461, the Hatch-Feinstein ‘‘Year 2000 Fairness and Responsibility Act’’ meets. The bipartisan bill, among other things does the

following:

*Preserves The Right to Bring a Cause of Action;

*Requires a 90-Day ‘‘problem-solving’’ period which will spur technology providers

to spend resources in the repair room instead of diverting needed capital;

*Provides that the liability of a defendant would be limited to the percentage of

the company’s fault in causing the harm;

*Specifically encourages the parties to a dispute to request alternative dispute

resolution (ADR) during the 90-day problem-solving period; and

*Prevents Careless Y2K Class Action Lawsuits;

*Caps punitive Damages; and

*Insures that the Federal Courts will have jurisdiction over this national problem.

In conclusion, Y2K presents a special case. Because of the great dependence of

our economy, indeed of our whole society, on computerization, Y2K will impact almost every American in some way. But the problem and its associated harms will

occur only once, all at approximately the same time, and will affect virtually every

aspect of the economy, society, and government. What we must avoid is creating a

litigious environment so severe that the computer industry’s remediation efforts will
slacken and retreat at the very moment when users and consumers need them to

advance with all deliberate speed. Respectfully, I think our bill strikes the right balance. Still, I recognize that if we are to enact worthwhile Y2K problem-solving legislation this year, we must all work together—Democrats, Republicans, and the Administration—in a cooperative manner which produces a fair and narrowly tailored

bill. Recently, the Judiciary Committee initiated such an effort—to which both Senators Dodd and Bennett have sent representatives—and I postponed a mark-up of

the Hatch-Feinstein bill originally scheduled for today. All of this has been done in

the hope that we can produce a measure which has even broader political support,

can pass the Congress, and become law.

RESPONSES OF ORRIN G. HATCH TO QUESTIONS SUBMITTED BY

CHAIRMAN BENNETT

Question 1. Isn’t the figure you quoted of $1 trillion in worldwide litigation costs

exaggerated?

Answer. Let me stress that the $1 trillion figure represents a very rough estimate

by a group of respected consulting firms, trade associations, law firms, and businesses. In truth, however, while no one can predict with certainty exactly what the

total litigation cost will be, almost all the legitimate experts agree that Y2K-related

litigation will have a profound effect on the economy.

Pending legislation in nearly all 50 States will have a significant effect on the

Y2K litigation environment. Litigation in States that habitually award unrealistically high punitive damages will have two harmful side effects. First, in small

States that make it relatively easier to win punitive damage awards, insurance

rates in other States will likely increase as a result.

Second is the so-called ‘‘shadow effect’’ that large punitive damage awards in one

State will have on litigation in other States. As we recounted in detail in a recent

report by the RAND Corporation, the ‘‘shadow effect’’ induces companies to settle

even frivolous lawsuits because they fear excessive punitive damage awards. Although there is no way to document this statistically, plenty of anecdotal evidence

suggests that the ‘‘shadow effect’’ does indeed exist. This was one of the key points

the RAND report made. Reflecting on this, I think the RAND analysis will most certainly apply in the Y2K litigation arena. I also think we can reasonably predict

right now that those States that enact legislation imposing strict liability and a negligence per se standard on information technology companies—meaning that liability can be imposed without any showing of fault—are likely to attract the bulk of

Y2K claims, especially class actions. Not only would such State laws clog the courts,

they would create a distinct Y2K ‘‘shadow effect.’’

Question 2. How does S.461 ameliorate the problems you’ve just described?

Answer. There are two major ways in which our bill will help hold down the potentially exponential growth of Y2K-related litigation costs.

First, the bill provides a strong incentive for information technology companies to

fix their Y2K problems before litigation occurs. In this way, fewer of these firms’

precious resources will be drained from the repair shop to the court room. The bill

acts to encourage problem solving in several ways. Perhaps the most important way

it does this is through the mandatory 90-day cooling-off period that the bill imposes

on all would-be litigants of Y2K disputes and through the duty to mitigate that is

required of plaintiffs.

The bill also promotes problem solving by allowing defendants in contract suits

to offer evidence of reasonable efforts in avoiding a Y2K problem. This provision will

act as an incentive for potential defendant companies to continue or even increase

their remediation efforts because they will know they can offer this in evidence if

the dispute ever goes to court.

Similarly, the bill codifies the common-law defense against negligence claims—

which is almost universally accepted in every State—that the defendant acted reasonably in his efforts to prevent a Y2K problem or avoid its associated damages.

By preserving this defense to negligence claims, the bill will effectively pre-empt

State strict liability and negligence per se laws, which, as I said earlier, often drive

up damage awards. This provision will induce defendant companies to continue or

increase their remediation efforts because evidence of such efforts negates the element in a negligence claim that the defendant acted unreasonably or created an unreasonable risk of harm. In other words, States have always recognized that proof

that the defendant acted reasonably is a defense to negligence.

Let me also point out that if any potential defendant company refuses to communicate with the plaintiff during the waiting period or in any way acts in bad faith
or with a corrupt motive, the bill’s defenses are not available to them. It will then

be far more likely that they will be held liable, which is as it should be.

Question 3. Why does the bill preempt state law? Answer. In addition to providing a strong incentive for Y2K problem solving, the bill will also help to hold down litigation costs because it meets an urgent need for

uniform legal standards. First, the bill’s class action provisions allow a Federal court

to dismiss a class action in which the aggregate value of all claims does not exceed

$1 million, where the class numbers less than 100, where the primary defendants

are State officials or governments, where State law predominates, or where the primary defendants are not citizens from different States. These provisions will help

to reduce the widespread abuses of class actions in the mass tort context, where

plaintiffs’ attorneys, not the individual victims, get the lion’s share of the monetary

award.

Second, the bill imposes reasonable limits on punitive damages, thus greatly reducing the ‘‘shadow effect’’ I talked about earlier. Third, the bill’s state of mind provisions in the section governing tort claims serves to prevent States from enacting

strict liability and negligence per se statutes that often act as magnets for litigation.

In that regard, let me also mention that the clear-and-convincing evidence standard

will only apply to quasi-intentional torts such as constructive fraud. Ordinary negligence claims will be unaffected. For those special tort claims that do require proof

of some state of mind, I believe the clear-and-convincing evidence standard is fully

justified by the emergency situation Y2K has created.

Question 4. Doesn’t S.461 unnecessarily federalize State contract and tort law?

Answer. If there was ever a prime example of an emergency situation that requires a Federal solution and nationally uniform legal standards, Y2K is it. Not only

will Y2K substantially affect interstate commerce, which will allow Congress to exercise its commerce power, but the problem is genuinely and pervasively national

in scope. No technology failure in recent memory will have quite the magnitude on

the United States as a whole as the simultaneous disruption of many of its computer systems. The dependence of our economy, government, and society on computerization has had more far-reaching, national implications than almost any other

technology in our history, except perhaps electric power and the internal combustion

engine. As a result, Y2K will be a truly unique event. To respond to this event, Congress’ role should be to encourage industry to solve Y2K as expeditiously as possible

without the crippling distraction that hysteria-driven litigation will create.

Aside from the overwhelming need for a Federal solution, I must point out that

doesn’t create a newfangled Federal law of contracts or torts. Rather, the bill merely

preserves the traditional State common-law defense to negligence claims. Our intent

is to prevent States from disrupting the litigation environment and causing Y2K remediation to slacken by rushing to impose strict liability or negligence per se standards on the computer industry at this critical time. Since reasonableness is always

relevant to disprove the element in a negligence suit that the defendant breached

his duty to exercise ordinary care, S.461 merely creates a Federal standard out of

the negligence law that already prevails in all 50 States.

In addition, the bill’s contract provisions ensure that in the vast majority of cases,

the terms of any written agreement will govern the legal relationship between the

parties, unless the contract is found unconscionable as a matter of State law. In

doing this, the bill ensures that the parties to a contract are guaranteed to receive

the benefits and protections for which they bargained. And when such agreements

are silent on Y2K issues, our bill merely requires that the commercial law that was

in effect at the time the contract was formed and in the State where the contract

was formed will govern. The only change our bill makes is to allow defendants in

contract suits to offer evidence of reasonable efforts to prevent a Y2K problem or

avoid Y2K-related damages. Unlike the tort section, this provision is not a complete

defense to liability, it merely guarantees that the jury will be able to consider evidence of the defendant’s remediation efforts.

Finally, I want to emphasize that the bill’s mandatory 90-day cooling-off period

is substantially derived from the Uniform Commercial Code, versions of which govern the sale of goods in most States. Again, our bill doesn’t change State law so

much as it extends the UCC’s waiting-period concept to transactions involving both

goods and services.

PREPARED STATEMENT OF SENATOR JON KYL

Good morning, I would like to thank all our distinguished witnesses who have

taken the time to be here today. I especially would like to thank our distinguished

Chairman, Senator Bennett, for his outstanding leadership and for his efforts to inform the public on the year 2000 problem. This Committee’s hearings have helped

enforce the message of preparedness, rather than panic when it comes to addressing

the ‘‘Y2K.’’

The issue of liability is an important issue to me. Last Congress, I sponsored the

Year 2000 Information and Readiness Disclosure Act, which became law. That legislation encouraged companies to disclose and exchange information about computer

processing problems, solutions, test practices, and test results that have to do with

preparing for the year 2000. The goal of the bill was to encourage information sharing, which would in turn lead to remediation, which would in turn lead to greater

Y2K compliance.

However, many companies still fear liability and it is that fear of lawsuits that

is inhibiting them from getting done what is needed—which is remediation.

Like the Year 2000 Information and Readiness and Disclosure Act, it is my hope

that we can re-visit the issue of liability and create a solution that will ease fears

and which will result in remediation rather than litigation.

PREPARED STATEMENT OF DR. WILLIAM FREDERICK LEWIS

Mr. Chairman and members of the committee, I am Bill Lewis, President and

Chief Executive Officer of Prospect Technologies a small business headquartered in

the District of Columbia. Our firm employs 23 individuals dedicated to providing information solutions for corporations and government agencies both here in the

United States and internationally. Our business includes computer hardware manufacturing, computer software, and consultative solutions. I also come before you as

a member of the U.S. Chamber of Commerce’s Small Business Council.

Working with organizations like the United States Coast Guard, the Federal Maritime Commission, the Department of Defense, Princeton University, Enterprise

Rent-a-car, a McGraw Hill, we provide solutions that help to dramatically improve

business processes through the use of technology and the Internet.

As we quickly approach the new millenium, the greatest issue that we face as an

ongoing concern is the Year 2000 computer problem. I would like to take a moment

to commend the work that you Mr. Chairman, and Mr. Vice Chairman have done

thus far and the leadership you and the other members of the Special Committee

on the Year 2000 Computer Problem have provided on this critical issue.

Technology represents one of America’s greatest accomplishments as well as one

of our most challenging issues as we approach the new millenium. On the one hand,

technology has helped American business to become more efficient and more able

to compete with our foreign counterparts. On the other hand as we have become

so reliant on technology, we become more vulnerable to problems with that technology. To our clients and me, the benefits far outweigh problems and we should

continue to explore new opportunities for improving products and services and competing more efficiently around the world.

I raise the issue of risk and reward as it relates to technology, because each day

as a business that provides both hardware and software solutions to our customers,

Prospect Technologies must continually ensure that our products and services work

to enhance business operations and not complicate or interfere with normal operations. As a result, I am continually challenged as the President and Chief Executive Officer to check and double check that our products and services do not adversely effect one of our customers. I come to you today concerned about Y2K litigation as potentially both a defendant and as a plaintiff.

From my perspective, my clients rely on me to certify that the hardware and software that we manufacture and sell to them will not crash on January 1, 2000. As

a manufacture of computers, each component must be certified that it is capable of

knowing that ‘‘00’’ means Year 2000 and not the year 1900. Because we are using

the latest technology from corporations like Intel, Advanced Micro Devices (AMD)

Microsoft, and others, we have been assured that their operating chips are in fact

Y2K compliant and we are confident that all other components are in compliance.

I am not necessarily concerned about computers leaving our manufacturing site,

but rather, what happens once they are shipped to the client. Once the basic computer is shipped, clients will load their own application software and other operating

software to run such programs like scheduling, payroll, and manufacturing systems.

If those application programs are not Y2K compliant, most likely as the manufacturer of the computer I will be the first person they call to report a problem.

In all of my business dealings since founding our company, we have always approached any such technical malfunctions with the attitude that as businessmen

and businesswomen, come let us reason together to find the solution instead of
pointing fingers or looking for blame. Put another way, let’s fix the problem and not

litigate the problem. We have taken this approach because quite frankly, we have to. Unlike a Fortune 500 company, I do not have a dedicated legal team or millions of dollars in reserve

for such issues. Instead, I focus on doing what I do best and that is provide leading

edge technology solutions for companies wishing to have more efficient and productive business operations. I must say that with very few exceptions, my customers

respect our approach to handling complications. They recognize that if my staff and

I are in court defending our livelihood, it becomes almost impossible to provide the

solutions that are going to make their business better. As I mentioned earlier, I could potentially become a plaintiff in Y2K related prob- lems. Obviously as a manufacture of computers, I must rely on my suppliers to provide the necessary parts according to our contractual obligations. In the case of

manufacturing computers, there might very well arise a situation in which a suppliers’ manufacturing systems shuts down or is delayed and I therefore do not receive

the parts I need to meet my contractual agreement. My first approach with the supplier would be to try and work out the problem, but if that should fail, and I accrue

damages as a result of lost revenue, I would expect to have the appropriate compensation for actual damages. I do not however, expect to be compensated for punitive damages because quite frankly there are no such damages in this instance. I founded my business on the notion of the American Dream. When I started the business, I knew nothing would come easily, but rather, I would have to work for

every penny I earned. I would take risks and hopefully be rewarded, but there were

no guarantees. I understood this from the onset and I instill this attitude in every

one of our employees. Never once during my business plan did I say, ‘‘well I will

work hard and work smart, but if that fails, I will get rich by suing someone for

something they did wrong.’’ This is not the spirit of the American businessperson

but rather the person who is looking to make a quick buck! I have a special obligation to the men and women that work for Prospect Tech- nologies in that we are their livelihood. The income they make for their services provides their family and their community with the means to function. To that end I

am taking every precaution to ensure that the Y2K bug does not adversely effect

their livelihood.

I would also like to take a moment to commend not only the members of this com- mittee, but also Senator Hatch and Senator Feinstein, and Senator McCain for their

leadership on legislation that will help to encourage businesses to fix the problem

and not litigate the problem. I have had an opportunity to review the provisions of each of their perspective bills, and as a small business owner who could potentially be both a plaintiff and

a defendant in Y2K litigation, I fully support their approach to dealing with this

complicated issue. More specifically:

• The provisions dealing with the alternative dispute resolution will encourage

business owners to work together and find alternatives to litigation for solving the

problem at hand.

• Because I expect my customers to approach technology glitches with a sense

of reason, I should also give my suppliers the same courtesy. To that end, I agree

with the provision to provide a 30-day notice to a potential defendant and allow

them 60 days to fix the problem. I suspect that in many cases it will not take 60

days; however, this is a reasonable time-frame to ensure compliance. This provision

is very much in sync with our company’s philosophy of saying ‘‘may we come together and find reasonable solutions to fixing the problem.’’

I don’t think it would come as a surprise to anyone who has been in business,

but unfortunately sometimes, it is necessary to threaten legal action to get an issue

resolved. The problem with doing so requires me to prepare for such a suit and also

to hire a qualified attorney. After the initial steps are completed, often, the supplier

will realize that it is time to fix the issue and the case never goes to court but rather is solved in an amicable way. Unfortunately for me, I have already spent the

money on an attorney and more importantly it has used important time that could

have been spent with my customers or individuals creating technology to meet customer demand.

I firmly believe the provisions of this legislation and providing this 30 day notification period coupled with 60 days to fix the problem will help to alleviate the vast

majority of the problems associated with Y2K. I say this, because many business

owners will appreciate the fact that once a problem is identified, they will have a

specific timeframe in which the issue will have to be resolved.

• With regards to caps on punitive damages, I firmly believe that this legislation

will discourage frivolous lawsuits filed by those seeking to get rich from someone

else’s misfortune. Small business owners like me are working diligently to fix the
problem. If parties are able to reap huge punitive awards from this unfortunate situation it will truly represent a setback for many years to come in the small business

community. Small business owners like myself are fighting every day to ensure payrolls are met, bills are paid, and keeping an eye on our competitors. My typical day begins

at approximately 6:30 in the morning and ends sometime around 9:00 in the

evening. I typically put in another 20 hours on the weekend and it is not unusual

to work around the clock to beat a customer deadline. Put another way, working

90-100 hours per week and throwing in a couple of hours per night for sleep does

not provide a lot of time for other things.

If during the course of the year 2000 computer problem, I have to add hours and

days of time to become a plaintiff or defendant in Y2K legal proceedings, it will

most certainly cause my corporation, my employees, their families and their communities to suffer. Time spent in court will take precious time away from not only me,

but also from our Chief Technologist and our General Manager of Customer Support. This time spent in litigation is much better spent in the areas of fixing the

problem, innovation, and providing services to our clients that will ultimately provide further growth and jobs in the U.S. economy.

Of all the problems associated with the Y2K, the least of my concerns has been

whether we can fix the problem. My greatest fear has been having to use our limited resources to defend ourselves or file lawsuits instead of investing the funds and

knowledge to create new technology and new jobs in our area of expertise.

I encourage this committee, members of the U.S. Senate and U.S. House of Representatives to enact the Y2K legislation proposed by Senators Hatch and Feinstein,

or the legislation introduced by Senator McCain in the Senate and the Year 2000

Fairness and Responsibility Act in the U.S. House of Representatives. This legislation will help to not only protect small business owners like me from frivolous lawsuits, but it will also help to protect future innovation that will provide incredible

benefits for many years to come. Both consumers and business owners should have

the opportunity to seek damages caused by Y2K; however, this should not become

a one-time bonanza or payday for individuals looking to make an easy buck. I firmly

believe that Americans have the will and determination to come through this dangerous period in our history if we focus on working together to fix the Year 2000

computer problem and not work against one another to litigate the Year 2000 computer problem.

Again, Mr. Chairman, Mr. Vice-Chairman and the members of the committee, I

would like to on behalf of the employees and customers that I represent thank you

for having me here today and for your thoughtful leadership in dealing with this

issue.

RESPONSES OF DR. WILLIAM FREDERICK LEWIS TO QUESTIONS SUBMITTED BY

CHAIRMAN BENNETT

Question 1. Dr. Lewis, you testified that you agree with the legislative proposals

to provide a 30-day notice to a potential defendant and give them 60 days to solve

a Y2K-related problem. As a potential plaintiff, how do you think this requirement

would work if the problem you had was a mission-critical one, and your business

could not wait 90 days for the problem to be solved?

Answer. The 30/60-day notice provision in S. 96 and S. 461 would not adversely

affect a potential plaintiff who had a mission-critical failure due to a Y2K problem.

The notice/cure period only applies to cases seeking money damages. If the potential

plaintiff needed immediate relief (i.e., sooner than 30-90 days), the legislation explicitly reserves a plaintiff’s ability to sue for equitable relief such as for specific performance of a contract.

Question 2. It is possible that a number of your customers could suffer Y2K failures in the first week of the year 200. Whether or not these failures are traceable

to something your company did, several of these customers might threaten to take

you to court. How would these threats affect your firm’s ability to solve your customers’ problems? What would be most helpful in preventing these immediate

threats of lawsuits?

Answer. The Y2K problem is unique—Y2K failures and Y2K lawsuits will cluster

around a single date, January 1, 2000. If my customers threaten to sue me, as a

prudent businessperson, I would have to prepare to defend myself. Rather than

spending resources to help fix my customers’ problems, I would have to use those

resources to get ready for the lawsuits. The most helpful thing Congress can do to

help my company solve any problems my customers have because of Y2K is to establish a set of fair, fast and predictable ground rules that encourage remediation over
litigation and to encourage the quick and fair resolution of legitimate claims once

litigation occurs. It seems to me that Congress has a choice in this situation. It can

either do nothing and watch our economy be crippled by Y2K-related litigation, or

it can provide valuable leadership and proactively establish a system to resolve disputes efficiently so businesses can address our nation’s needs as it moves into the

21st century.

Question 3. You testified that most of your customers recognize that if your staff

and you are in the court because of a problem it is almost impossible for you to solve

that problem. Have you had any discussions with your customers on the possibility

of Y2K-related failures and how you might try to deal with them outside of the legal

process? For example, have your customers indicated that they would be willing to

engage in alternative dispute resolution?

Answer. My company has always approached technical problems such as Y2K

with the attitude that, as responsible businesspeople, we should reason together to

find the solution instead of pointing fingers or looking for blame. Put another way,

we want to fix the problem and not litigate it. We have taken this approach because

we have to. Unlike a Fortune 500 company, my company (and other small businesses like it) does not have a dedicated legal team or millions of dollars in reserve

for such issues. I must say that with very few exceptions, my customers respect our

approach to handling complications. They recognize that if my staff and I are in

court defending our livelihood, it becomes almost impossible to provide the solutions

that are going to make their businesses better. I believe that the provisions dealing

with alternative dispute resolution will encourage business owners to work together

and find alternatives to litigation for solving their Y2K problems and I think my

customers would agree with that. Most businesses do not want to be in court, they

simply want to have their problems taken care of so they can go back to doing business. Voluntary alternative dispute resolution mechanisms help accomplish that

goal.

Question 4. Dr. Lewis, I understand from your testimony that from your position

as a potential plaintiff, you wouldn’t expect to see a situation where punitive damages were warranted. If you did, however, would you still be in favor of the proposed

punitive damages cap?

Answer. The legislation would not prevent small businesses from recovering their

legitimate losses and damages. This legislation allows all plaintiffs to be fully compensated for their Y2K losses. The bill does not prevent a plaintiff from recovering

consequential damages or any other damages allowed by contract or law. As pointed

out by the question, the legislation does cap punitive damages, but does so at a reasonable level and does not entirely preclude a plaintiff from being able to recover

them. If there were a circumstance where I expected to see punitive damages, I

would still support the reasonable limits contained in this legislation.

Question 5. Dr. Lewis, there are some who believe that the threat of litigation is

what will make most companies fix Y2K problems for which they are responsible,

and that adding the 90-day cooling-off period removes that as an incentive. From

your perspective as a potential plaintiff, do you think the threat of immediate litigation serves that incentive purpose? From your perspective as a potential defendant,

would adding the 90-day cooling-off period make you think you could just put off

fixing the problems?

Answer. The need for this legislation is that the entire business community is concerned that Y2K has the strong potential to become a litigation bonanza for those

who engage in filing frivolous lawsuits. The sad fact of such a situation is that for

each frivolous lawsuit any company has to defend, valuable resources will have to

be shifted from efforts to correct Y2K problems or to otherwise engage in business

to defending against that suit. If that situation were allowed to occur, it would not

encourage the remediation of Y2K problems. The 30/60 notice and cure period will

not encourage potential defendants to wait to fix problems. It is still smart business

practice to do everything you can do to take care of your customers before problems

occur. The notice period would not change this principle of good business. As a potential plaintiff, I want to see any Y2K problems I experience be taken care of as

well as having my business relationships be preserved. Litigation does not always

meet those goals. The notice period gives potential plaintiffs, such as my company,

the ability to have their Y2K problems solved quickly rather than waiting for years

in court.

PREPARED STATEMENT OF JOHN H. MCGUCKIN, JR.

Mr. Chairman, I am John H. McGuckin, Jr., Executive Vice President and General Counsel of Union Bank of California, and am testifying on behalf of the American Bankers Association (ABA). The ABA brings together all categories of banking

institutions to best represent the interests of this rapidly changing industry. Its

membership—which includes community, regional and money center banks and

holding companies, as well as savings associations, trust companies and savings

banks—makes ABA the largest banking trade association in the country. I am pleased to be here today to discuss what the banking industry is doing to address the Year 2000 computer problem (Y2K). These hearings are very important

because information about the Y2K problem—and what the government and industry are doing to meet this challenge—is critical to maintaining confidence in our

economy. I would like to begin by thanking Senator Bennett and Senator Dodd, for your outstanding leadership on the Y2K issue. You have both done much over the past

two years to encourage a vigorous, constructive response to the Y2K challenge in

both the public and private sectors. On behalf of ABA, I would also like to thank

the Senators who have recognized the importance of addressing the threat of Y2K

litigation before it becomes a harsh reality. In particular, I would like to commend

the efforts of Senator John McCain, Senator Orrin Hatch, Senator Dianne Feinstein,

and other co-sponsors of Y2K legislation introduced in the Senate this year. The Y2K challenge essentially has two components. The first is technology—mak- ing sure that software and hardware systems will work on January 1, 2000 and beyond. The second is communication—making sure the public is knowledgeable about

the problem and what is being done to solve it. Even if the technical problems are

fully resolved, people need to know about it. If nothing is said, the information void

will surely be filled with misleading and provocative stories that will create undue

anxiety, and lead to bad decisions. The problems created by adverse public reaction

or panic could be far worse than the actual problem. The news media, government,

private industry, bankers, and all other stakeholders must join forces to stabilize

the public opinion, and manage expectations. The banking industry is working hard at solving both aspects of the Y2K problem. Since 1995, the banking industry has devoted millions of man-hours and billions of

dollars to addressing Y2K. The banking industry is well into the testing period for

all critical systems, working closely the Federal Reserve and other federal bank regulators. Our progress is right on track. The ABA and individual banks have also

done a tremendous amount of work to keep our customers informed about our

progress. We believe this communications effort is right on track, too. At Union Bank of California, Y2K has been identified as the single most critical project to be completed this year. Its criticality has been communicated through senior management, right down to every employee and business manager. Nothing at

our bank has higher priority or greater scrutiny than this important project. At Union Bank of California, we are preparing for the century change with a com- prehensive enterprise-wide Year 2000 Program. We have identified all of the major

systems and have sought external and internal resources to renovate and test the

systems. We are testing purchased software, internally developed systems and systems supported by external parties as part of the program. We are evaluating customers and vendors that have significant relationships with us to determine whether they are adequately prepared for year 2000. In addition, we are developing contingency plans to reduce the impact of some potential events that may occur.

Our Year 2000 Program is comprised of numerous individual projects that address

the following broad areas: data processing systems; telecommunications and data

networks; building facilities and security systems; vendor risk; customer risk; contingency planning; and communications. We have identified over 2000 individual

projects. The projects vary in size, importance and materiality from large undertakings, such as remediating complicated data systems, to smaller, but still important,

projects, such as installing compliant computer utility systems or assuring that

building equipment will perform properly. The program continues to evolve as we

identify new projects to keep up with the increased understanding of year 2000 implications and evolving external requirements. Virtually all of the projects currently

identified have begun, and approximately 2/3 have been completed.

At Union Bank of California, our Year 2000 Program Office reports on progress

monthly to our Executive Management Committee and quarterly to the Audit and

Examination Committee of our Board of Directors. Other committees of the Board

of Directors receive periodic reports on Y2K preparedness in their areas of oversight

responsibility. Our internal Audit Division, the National Bank Examiners from the

Comptroller of the Currency and examiners of the Federal Reserve Bank of San

Francisco regularly assess our year 2000 preparations and report to the Audit and

Examination Committee.

The banking industry is unique in that it has extensive levels of federal and state

regulation and examination. We have worked closely with bank regulators to address all aspects of the Y2K issue. The results of the Y2K compliance examinations

have been very positive. We believe it would be very helpful for the bank regulators

to comment publicly the industry’s readiness for Y2K, and remind the public of all

that is being accomplished. There are four key messages that I would like to leave with the Committee today:

• The banking industry is on track meeting critical deadlines; • Educating our customers and the public generally is vital; • The safest place for customers’ money is in the bank; and • Congress should enact legislation to encourage businesses to devote resources to remediation, not litigation. Before turning to these points, I want to take a moment to focus on why these

issues are so important to the banking industry. We take our role in the economy

and in each community we serve very seriously. Our business is built on the trust

established with our customers over many decades. Maintaining that trust is no

small matter to us. When customers put money in a bank, they need to feel that

their funds are secure, accessible when they need them, and financial transactions

will be completed as expected. It is, therefore, no surprise that we in the banking

industry understand that so much is at stake in addressing the Y2K problem.

On a larger scale, our national economy relies on a smoothly functioning payment

system. It’s something the general public takes for granted because our payment

system is so efficient, accurate and easy to use. Assuring this high level of performance requires the collective efforts of many participants: banks, thrifts, brokerage

firms, regional clearinghouses, and the Federal Reserve.

Careful planning, correcting and testing is crucial to minimize any disruptions

from the century date change. But we must be realistic: it is inevitable that some

glitches will occur. Contingency planning, therefore, must be and is an integral part

of the process. In the case of the banking industry, our contingency plans are examined by the bank regulators. We intend to be as prepared as possible for any eventuality.

Preparedness, however, goes well beyond the banking and financial sector. The

tightly woven fabric of our economy means that businesses, households and government must work together. Success depends upon the efforts of all sectors of the

economy, including energy, telecommunications, transportation, public utilities, retail services, etc. Bankers have reached out to other industries, as well as our customers, to ensure that we all come through this challenge intact.

I. Technology: The banking industry is on track meeting critical deadlines

Many banks began their Y2K risk assessment efforts as early as 1995. The cost

of assessing, correcting, testing and contingency planning will easily exceed $9 billion, in the banking industry alone. The goal of this massive commitment of effort

and resources is to provide a smooth transition of banking and financial services

into the 21st century with minimal disruptions.

The Y2K strategy involves awareness, assessment, renovation, validation and implementation. Key components of these broad strategic areas include the assessing

of business risks, conducting due diligence on service providers and software vendors, analyzing the impact on customers, and assuring customer awareness of

progress in addressing Y2K concerns.

At Union Bank of California, we plan to complete all projects currently identified

prior to the year 2000. The most important projects are the ‘‘mission critical’’ application systems upon which we rely for our principal business functions. We have

renovated and tested all these systems. However, outside services provide three of

them. Our outside service provider has renovated and tested each of these systems,

but we still need to validate them ourselves.

In addition to testing individual systems, we have begun integrated contingency

testing of our ‘‘mission critical’’ and many other systems in a separate computer environment where dates are set forward in order to identify and correct problems

that might not otherwise become evident until the end of the century.

While we do not significantly rely on ‘‘embedded technology’’, that is microprocessor-control devices as opposed to multi-purpose computers, in our critical processes, all building facilities are being evaluated, and we expect all systems using

embedded technology be confirmed as year 2000 ready by June, 1999.

We rely on vendors and customers, and we are addressing year 2000 issues with

both groups. We have identified over 300 vendors and have made inquiries about

their year 2000 readiness plans and status.

We also rely on our customers to make necessary preparations for the year 2000

so that their business operations will not be interrupted, thus threatening their ability to honor their financial commitments. We have identified over 2,500 borrowers,
1The Federal Reserve, the Office of the Comptroller of the Currency (which regulates national

banks), the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration work jointly on key regulatory and supervisory issues

through what is known as the Federal Financial Institutions Examination Council, or FFIEC.

Through this cooperative regulatory effort, the FFIEC has played an important role in promoting Y2K education and communication among bankers and service providers. For example, representatives of the banking industry trade groups meet on a quarterly basis in Washington with

staff members from the various Y2K teams of the FFIEC member agencies to discuss ongoing

efforts, upcoming programs and publications, and to exchange news on Y2K developments in

general. The banking agencies have also offered countless regional seminars on Y2K issues, as

provided for in the ‘‘Examination Parity and Year 2000 Readiness for Financial Institutions

Act.’’ We are extremely pleased at these joint efforts and the agencies should be commended

for their work in this area.

capital market counter parties, funding sources and large depositors that constitute

our customers having financial volumes sufficiently large to warrant our inquiry

and assessment of their year 2000 preparation. One of the greatest challenges to business managers is identifying and then ad- dressing the vast number of outside touch-points to a business unit. These include

vendors, suppliers, service providers, and a host of other businesses that touch us

from outside on a daily basis. Ongoing communication and monitoring of these partners is critical to the success of the Y2K effort.

Regulatory Oversight

The banking industry is unique in that it is a highly regulated industry at both the state and federal level. Since 1997, the banking industry has worked with the

regulators in assessing the extent of the Y2K problem and developing a three-phase

plan of attack.1 The public is not aware of the tremendous joint efforts be- tween the banking industry and government regulators to meet the Y2K

challenge. During phase one, completed June 30, 1998, federal bank supervisors conducted on-site examinations of every depository institution and rated them on their remediation plans and written testing strategies. Regulators also conducted

on-site examinations of firms providing data processing and system services. During phase two, supervisors are examining banks for how well the testing of critical systems is progressing and on contingency plan development. This is critical

as it measures the success of the remediation efforts. For banks with their own internal systems, testing was to be completed by the end of last year. By March 31,

1999, banks relying on outside service providers should have testing completed. All

institutions should also have initiated external testing with customers, other banks

and payment system providers. The results of on-site, phase one and phase two examinations show that the banking industry is right on track meeting its goals. As of December 31, 1998, 97 percent

of the industry held the highest rating and only 17 institutions—out of more than

10,000 banks and thrifts—received unsatisfactory ratings. These poorly rated institu- tions are being closely monitored by the regulatory agencies. Phase three includes final testing of internal and third-party systems and testing with the Federal Reserve and clearing systems participants. Phase three will run

from April 1 through December 31, 1999, with a critical deadline of June 30 for completion of testing validation and implementation of remediated systems. After June

30, institutions will continue to monitor and update contingency plans as may be

required by external developments, and monitor customer and counter-party risk.

Agency examiners will continue to check on bank testing implementation and contingency plans, and, where needed, with continued on-site reviews.

Testing with the Federal Reserve and clearing system participants is very important. Starting last summer, the Fed established dedicated times for banks to test

the operability of systems for Y2K compliance. Systems tested include Federal

Funds Transfer, Fed Automated Clearinghouse (ACH) transactions, check processing and other payment systems. The Fed reports that more than 6,000 banks have

already conducted tests of these systems. Additional testing by the banks will be

happening throughout the first half of 1999.

Credit and debit card systems have already been tested for Y2K compliance and

adjustments to software and hardware have been made. Many cards in use today

have expiration dates in the year 2000 or beyond. Systems needed to be ready to

recognize these cards as valid when they were issued last year. I am happy to report

that the transition was made so smoothly and with so few problems that the public

was largely unaware that any changes had been made.

Contingency Planning

While we believe our systems will be ready for the century date change, we nonetheless are actively developing Y2K contingency plans. One reason contingency

planning is so important is because banks rely on a whole host of outside service
providers, which are undertaking their own Y2K remediation over which we have

little control. For example, utility companies provide electricity for banking offices,

branches and ATM machines; telecommunications facilitates customer inquiries of

financial records and verifies transactions at ATM machines and at point-of-sale terminals (for credit cards and debit cards) in retail establishments. And banks rely

on armored cars to deliver cash to bank branches and ATMs, and other transportation services to deliver checks for clearing at large banks or through the Federal

Reserve. We are asking questions of these providers and testing compatibility of remediated systems.

At Union Bank of California, we are developing year 2000 remediation contingency plans and business resumption contingency plans specific to the year 2000.

Remediation contingency plans address the actions we would take if the current approach to remediating a system is falling behind schedule or otherwise appears in

jeopardy of failing to deliver a year 2000-ready system when needed. Business resumption contingency plans address the actions that we would take if critical business functions cannot be carried out in a normal matter upon entering the next century due to system or supplier failure.

We are developing plans for system-wide or regional failures and for individual

critical operating units when necessary. We expect to complete development of plans

for the operating units and their validation in June 1999. We expect to complete

development of plans to address system-wide and regional facilities and their validation in September 1999.

Having plans to deal with unexpected events is nothing new for the banking industry. Every bank has business recovery plans in the event of natural disasters

such as hurricanes, earthquakes, tornadoes, floods and fires. When those occasions

arise, the bank is typically the first business in the community to be back up and

running. Here are just a few examples of this:

• The two-dozen banks in the Grand Forks, North Dakota area got their banks

up and running in April 1997 within days of the worst flooding by the Red River

in this century. Banks reopened in trailers, truck stops and grocery stores to keep

the cash flowing.

• On the morning of December 8, 1998, construction equipment severed a cable

in suburban San Francisco, causing a massive regional power outage across Northern California. While the power company worked to repair the damage, Bay Area

banks, including Union Bank of California, continued to operate and provide customer services. In fact, some banks took advantage of the event as an opportunity

to implement portions of their Y2K contingency plan designed to deal with power

outages.

• In Des Moines in 1993, one bank avoided disruptions by moving most of its

750 employees to temporary offices after rising waters flooded out four of its mortgage operations’ downtown buildings. And as a levee threatened to burst down-river

in Kansas City, Missouri, one bank CEO rented a tractor trailer and with is 23 employees, trucked vital bank records and equipment to higher ground.

• After Hurricane Andrew roared through south Florida, bankers hauled in portable generators, transferred employees from other parts of the state and quickly

made available several billion dollars in storm-related emergency loans.

• Banks recovered quickly after the World Trade Center bombing in New York.

Several banks, including Union Bank of California’s New York subsidiary, continued

to process payments to corporations around the globe despite the disaster. Within

hours these banks shifted their processing to off-site disaster-recovery locations

where, over the weekend, employees worked around the clock to complete the processing.

• Most banks reopened within a day or two of the powerful 1994 Los Angeles/

Northridge earthquake, including our own branches at Union Bank of California.

One bank’s credit-card processing facility near the epicenter suffered structural

damage, so the bank moved to vacant offices downtown, leased buses to transport

some 520 employees to the new location and kept customer services flowing.

• When fire swept through the 62-story First Interstate headquarters building

in Los Angeles in 1988, key bank employees quickly implemented the bank’s new

$1.5 million disaster plan in an underground command center seven blocks away.

The CEO said later that the only customers affected by the huge fire were those

who banked in the headquarters’ first-floor branch.

• A detailed disaster plan made it possible for bank customers to continue to get

cash and make deposits after a Thanksgiving Day fire in 1982 caused $75 million

in damage, destroying the Minneapolis headquarters of Norwest Bank. Two days

later a Norwest ad read: ‘‘It takes more than a five-alarm fire to slow us down.’’
The ABA has published its own guidance for banks to follow as they proceed

through the contingency planning process, ABA Millennium Readiness Series, Year

2000 Contingency Planning Program Management.

II. Beyond Technology: Maintaining Consumer Confidence

The steps banks are taking now are intended to make sure our systems will work

when the calendar changes. Perhaps the bigger challenge is maintaining public confidence. We believe that Congress has a critical role to play, as do bankers, in keeping consumers informed about what is being done and what they can do to prepare

for the century date change. People want and need to know that their money will

be safe, their records secure and their banks open to serve them next January.

Consumer education is vital. Recent focus group research by ABA indicates that

consumers, while concerned about Y2K, are not overly alarmed by the prospect of

the calendar change. However, we know there will be tremendous speculation between now and January 1 about what will work and what will not work. Many consumers we met with did not know that the federal financial regulators are examining every bank multiple times to test compliance on the full range of systems, software, backup and other contingency plans. The fact that bank regulators are watching over banks’ Y2K efforts is good news to consumers. The fact that the Federal

Reserve is printing billions of extra dollars and is working to expedite cash delivery

to banks from the current three days to same-day delivery is also good news to consumers. And the fact that deposits are federally-insured up to $100,000 and backed

up by the full faith and credit of the federal government is good news as well. The

message is that the American banking industry will be ready.

One unique factor affecting the Y2K issue that is different than other historical

events, is the advent and widespread usage of the Internet as an information medium. News reported on the Internet surrounding the Y2K issue ranges from sensible advice and preparation, to absolute propaganda. One problem with the proliferation of the Internet is the inability of many consumers to separate fact from

fantasy. Many people have not realized that not everything printed on the Internet

is true. There is much irrational, irrelevant and misleading information being circulated regarding this issue. Therefore, there must be an equally aggressive effort

to dispense facts and dispel fiction.

This raises another critical point. Several well-intentioned organizations are advising consumers to withdraw extra cash ‘‘just to be on the safe side.’’ In fact, it

is anything but the safe side. People need to think twice about how much money

they want to be carrying around with them and keeping in their house. Personal

safety is each individual’s responsibility. Exploiting the year change will tempt

many people, from champagne vendors to petty thieves, who are well aware that

people will be withdrawing extra money. There has already been one publicized report of $20,000 withdrawn from a bank in preparation for Y2K, buried in the backyard—and stolen. The safe side? Not at all.

The message is simple: The safest place for customers’ money is in the

bank. The depositor does not have to worry about theft or loss, and deposits are

FDIC-insured. The consumers we spoke to in our focus groups were concerned about

the accuracy of their bank records and getting access to their cash. In terms of accuracy, customers get statements of their accounts monthly. Banks reconcile their

books daily and have extensive backup records to preserve the financial data. In addition, banks will be taking extra precautions with manual reports and backups

during the calendar change. At Union Bank of California, in addition to regular

monthly statements, our customers are able to obtain activity statements either

from the ATM or by requesting statements through telephone banking services, for

account reconciliation at any time should it be necessary.

How much cash will people need? Probably about as much as they would need

on any other holiday weekend. Personal checks are Y2K-compliant and will work

anywhere—in the bank and at a wide range of retailers and service providers, both

in- and out-of-state. If people are still concerned about their cash needs, they can

put a little extra money in their checking account—their FDIC-insured checking

account. Would you want to be carrying around a lot of extra cash? Would you

want your elderly relatives to be carrying around a lot of extra cash? I certainly

would not.

There are common sense steps consumers can take to prepare for the century data

change. Here are some of the prudent measures that banks around the country have

been advising their customers to take?

• Read the information their bank sends about Y2K. Please call the bank if they

have any questions at all. Trust, but verify, in other words.
• Hold onto bank statements, bank receipts, canceled checks and other financial

records, especially for the months leading up to January 2000.

• For customers that bank on-line, make sure home computers are Y2K-ready.

Check with computer and software manufacturers for details on how to do this. And

visit your bank’s website to learn more about its Y2K preparation.

• Copy important financial records kept on home computers to a back-up disk.

• Do not turn your money over to anyone who promises to hold it or ‘‘keep it

safe’’ through the data change.

• Withdraw only as much cash as would be needed for any other holiday weekend.

To maintain consumer confidence in the banking industry, ABA is communicating

with bankers, consumers and the media. We have produced three informational videos for banks to use with their customers—one designed for retail customers, a second for a bank’s tellers and other front-line personnel, and a third for small business customers. We send a monthly fax newsletter to banks, which contains updates, helpful tips and shares ideas that have worked for other banks. We have provided ads, a Y2K customer communications kit to help bankers reach out to their

customers, telephone seminars on a wide range of aspects of the Y2K challenge, a

Y2K Project Management Manual and a Y2K Contingency Plan Manual. The latest

piece in this continuing series is a Y2K Instruction Booklet containing tips to help

banks comply, communicate and cope. ABA’s web site—www.aba.com—provides

our members with other Y2K resources and information. Additionally, many banks

maintain websites to inform their customers of the progress being made by the

bank’s Y2K project team.

In December, ABA ran a full-page ad in USA Today and beamed a video news

release via satellite to more than 700 television stations around the country to reach

out directly to consumers. The news release included part of an interview with John

Koskinen, chairman of the President’s Council on Year 2000 Conversion, who has

aid the banking industry is ‘‘ahead of the curve’’ in Y2K preparedness.

ABA has also been holding media briefings jointly in Washington with the other

financial trade groups, and around the country in collaboration with the state bankers associations. We are also doing special media tours, making bankers available

to discuss Y2K issues on TV and radio.

Customer communication is a must for every bank in the country. After all, every

customer wants to know about their particular bank. No one knows how consumers

will behave leading up to January 1, and we will continue to conduct research to

track their behavior and their level of concern. One thing is sure: they need information, sound advice and reassurance—from their bank, the banking industry, the

federal banking regulators, and the U.S. Congress.

III. Why Y2K Legislation is Needed

Congress, government and regulators have a special role to play in disseminating

accurate information and creating an environment for open discussion. The bill enacted by Congress last year, the Year 2000 Information and Readiness Disclosure

Act (P.L. 105–271), was an important first step in this direction. It encouraged information sharing among parties who are actually working on Y2K problems, by providing legal protection for their disclosures of technical information. Further, it

helps to ensure that disclosure of Y2K-related technical information will not become

the subject of lawsuits.

Congress can make a difference this year as well. In particular, we urge Congress

to consider broader Y2K liability issues, such as disruption liability, punitive damages, class actions, and alternative dispute resolution. The cost of doing nothing

may be considerable. As noted above, the industry has already spent billions of dollars on Y2K remediation efforts. Industry consultants further project that $2 million

could be spent on litigation for every $1 million spent on system remediation.

Business survival depends on remediation. Banks and businesses have every incentive to fix the problem so that they can stay in business and continue to serve

their customers. Speaking for the banking industry, it is clear that Y2K readiness

is a competitive issue. Banks want to keep our customers and build our businesses,

and to do so we must be ready for Y2K. We do not need the threat of litigation as

a stick to make us remediate. In fact, the litigation threat is an impediment, a distraction from the tremendous task at hand. Congress should keep this in mind as

opponents of Y2K legislation allege that proposals to reduce the litigation threat will

somehow remove the incentives to achieve Y2K readiness. Nothing is further from

the truth.
2Since the summer of 1998, a multi-sector coalition of industry groups, known as the Year

2000 Industry Coalition, has worked on Y2K legislation, both disclosure issues and broader liability issues. Among the participants in the coalition besides ABA are: National Association of

Manufacturers, Edison Electric Institute, Information Technology Association of America, U.S.

Chamber of Commerce, National Federation of Independent Businesses, National retail Federation, American Insurance Association, Business Software Alliance, Securities Industry Association, and more than 60 other trade and industry groups representing all economic sectors.

Here is a sampling of Y2K remediation and litigation cost estimates, cited by Representative David T. Dreier during the recent introduction of his Y2K liability legislation, H.R. 775, the Year 2000 Readiness and Responsibility Act:

‘‘What we do know is that the Y2K event represents the largest computing

project that the information technology industry has faced in the 50-year history of its existence. It is estimated that the global cost for remedying the problem could be as high as $600 billion. Possible litigation after the event could

reach $1.4 trillion.’’

Mr. Joseph E. Connor, United Nations

Under-Secretary-General for Management, December 11, 1998.

‘‘Estimates of the worldwide cost to cure the problem could range from $600

billion to $1 trillion. Companies would normally devote these financial resources

to improving profits, developing new products, hiring or sweetening paychecks.’’

Knight Ridder Newspapers, December 1, 1998

‘‘The Gartner Group estimates that litigation costs over Y2K service and product failures, both real and imagined, could soar to $1 trillion or more.’’ TIME,

June 15, 1998

‘‘The final cost of the Millennium Challenge, however, may well exceed $1

trillion. The reason for this is that most estimates only incorporate the direct

cost of becoming ‘Year 2000 compliant.’ Little attention is paid to the costs associated with project management, delayed upgrades, diverted resources and potential litigation.’’

‘‘The Millennium Challenge,’’ a report published by the Merrill Lynch

Forum, July 1997

‘‘The amount of legal litigation associated with Year 2000 has been estimated

by Giga Information Group to be $2 to $3 for every dollar spent fixing the problems. With the estimated size of the market for Year 2000 ranging from $200

billion to $600 billion, the associated legal costs could easily near or exceed $1

trillion.’’

Ann K. Coffou, Managing Director, Giga Year 2000 Relevance Service, before the U.S. House Committee on Science, Subcommittee on

Technology March 20, 1997

The banking industry is in a unique position regarding potential Y2K-related litigation. Banks of all sizes serve as financial intermediaries in virtually every transaction in the economy, from retail transactions to trade finance, real estate conveyancing, business credit lines, investment advisory services, and securities trading

and settlement. If such transactions or services become disrupted in January 2000

for any reason, banks will become the immediate targets for litigation because of

their perceived ‘‘deep pocket’’ status, regardless of their role in any Y2K disruptions

underlying the claims.

As has been noted by the federal banking regulators, some federal consumer protection laws limit a financial institution’s civil liability to third parties (i.e., customers and other private litigants) for unintentional violations that result from

‘‘bona fide errors,’’ provided the institution establishes by a preponderance of the

evidence that it has maintained procedures reasonably adapted to avoid such errors.

However, these provisions have been rarely invoked and have been narrowly interpreted when analyzed by the courts.

Without clarification by Congress, however, it is doubtful whether the ‘‘bona fide

error’’ provisions would provide any protection for financial institutions against frivolous or abusive litigation. Absent such clarification, insured depositor institutions

could face a wave of speculative class action claims by professional litigators seeking

damages from alleged Y2K-related disruptions of consumer financial services.

IV. Guiding Principles for Y2K Legislation

Starting last year, the ABA has been working with our members and with a

multi-sector coalition of more than 60 industry groups 2 to formulate legislative proposals that would encourage Y2K problem solving, and discourage speculative litigation. ABA strongly urges Congress to consider the following principles in enacting
legislation that would create a rational framework for Y2K dispute resolution. Here

are a set of principles that we believe should guide Y2K legislation: • Contracts Prevail: Existing contracts should be the first point of reference to define the rights and obligations of parties to any Y2K dispute. • Cure Period: Potential defendants, such as product vendors or service providers, should have the opportunity to cure a Y2K problem before a lawsuit is filed.

Parties need to devote their finite resources to remediation, not litigation. • Mediate not Litigate: Parties should be encouraged to resolve disagreements through alternatives to litigation. Likewise, parties with legitimate claims must

have their rights protected, but abusive and frivolous claims should be discouraged. • Mitigation: Claimants should have a duty to mitigate damages they could reasonably have avoided. This is a longstanding principle of law that needs to be applied to Y2K claims.

• Specific Claims: In the course of pre-trial dispute resolution or filing a lawsuit, the plaintiff should be required to identify the material defect and state the

specific remedy sought, rather than submitting vague or broad claims which obscure

the chances of fixing the problem.

• Damage Limits: Limit Y2K contract litigation to actual direct damages, and

place limits on consequential or punitive damages, unless parties have agreed otherwise by written contract. This would not apply to personal injury or fraud claims.

• Evidence of Efforts: Provide for ‘‘reasonable efforts’’ evidence to be considered by the tryer of fact in resolving contract or tort claims. Such an evidentiary

framework allows parties to establish their good faith and due diligence in achieving

Y2K readiness.

• Proportionate Liability: Liability of a defendant should be based on their

proportionate fault in causing a Y2K disruption. Proportionate liability should be

applied in tort claims, rather than joint and several liability, which unfairly targets

‘‘deep pocket’’ defendants who may not be primarily responsible for the harm. A federal comparative negligence rule would allow courts to apportion liability among

multiple parties.

• Speculative Suits: Discourage speculative class action lawsuits through minimum claim requirements, notice procedures, and clarifying federal diversity jurisdiction.

• Sector-Neutral: Legislation should be sector-neutral, with no sector of the

economy or level of government obtaining special exemptions not available to other

entities.

• Protect Legitimate Claims: Creating a framework for rational resolution of

Y2K-related disputes is important to every sector of the economy. Otherwise, the judicial system is likely to become clogged with frivolous suits, thus delaying resolution of legitimate claims.

These are serious issues which demand a bipartisan response. Many of these principles have been incorporated into Y2K liability proposals which are now awaiting

action by Congress:

S. 96 The Y2K Act Co-sponsors include: Sen. John McCain (R-Ariz.), Sen. Spencer

Abraham (R-Mich.), Sen. Bill Frist (R-Tenn.), Sen. Slade Gorton (R-Wash.)

S. 461 The Year 2000 Fairness and Responsibility Act Co-sponsors include: Sen.

Orrin Hatch (R-Utah), Sen. Dianne Feinstein (D-Calif.) Sen. Mitch McConnell (RKy.)

H.R. 775 The Year 2000 Readiness and Responsibility Act Co-sponsors include:

Rep. David Dreier (R-Calif.), Rep. Tom Davis (R-Va.) Rep. Jim Moran (D-Va.), Rep.

Bud Cramer (D-Ala.), Rep. Chris Cox (R-Calif.)

Each of these proposals incorporates many of the provisions that ABA considers

to be vital for promoting Y2K problem-solving and claim resolution across economic

sectors. The ABA continues to work with the multi-sector coalition to secure passage

in Congress of a bill that reflects the principles outlined above, and encourages remediation over litigation to meet the Y2K challenge.

VI. Conclusion

Mr. Chairman, the banking industry is working diligently to meet the Y2K challenge, and is doing so with a wide ranging response that sets an example for other

industries to follow. Financial institutions across the U.S. are implementing Y2K

project plans that are vast in scope, complexity and scale. However, we do not need

the threat of litigation spurring us on. Banks and businesses already have the

greatest incentive to finish the job for Y2K readiness, and that incentive is the goal

of survival as a viable business. Banks are devoting tremendous resources to overcoming the challenges of Y2K. But entire segments of the economy and the judicial

system could be rocked by the ordeal of protracted Y2K litigation. We urge Congress
to take action to prevent the potential derailing of the massive Y2K remediation effort into a litigation tangle of unprecedented scope and cost.

Thank you very much for the opportunity to address this committee. I would be

glad to answer any questions.

RESPONSES OF JOHN H. MCGUCKIN, JR. TO QUESTIONS SUBMITTED BY

CHAIRMAN BENNETT

Question 1. By all accounts, the banking industry is ahead of many other sectors

in its Y2K compliance effort. It is also clear, however, that no industry will be immune from Y2K lawsuits. Given the relatively high level of preparedness in the sector, what types of lawsuits do you expect the financial services sector to be most

vulnerable to next year?

Answer. The banking industry is in a unique position regarding potential Y2Krelated litigation. Banks of all sizes serve as financial intermediaries in virtually

every transaction in the economy, from retail transactions to trade finance, real estate conveyancing, business credit lines, investment advisory services, and securities

trading and settlement. If such transactions or services become disrupted in January 2000 for any reason, banks will become the immediate targets for litigation because of their perceived ‘‘deep pocket’’ status, regardless of their role in any Y2K

disruptions underlying the claims.

It is difficult to predict which area of financial services will generate the largest

volume of Y2K-related litigation. Similarly, no one could have predicted the Rodash

line of class actions against mortgage lenders that mushroomed in the early 1990s.

Those cases involved the treatment of fees under the Truth in Lending Act, and the

lawsuits spread rampantly until Congress stepped in to put an end to the litigation.

Banks are at greater risk in Y2K lawsuits stemming from transactions not covered by the federal consumer protection laws, since the ‘‘bona fide error’’ provisions

might not apply. Such transactions include cash management services for business

customers, investment advisory and fiduciary services, and other services outside

the traditional retail banking realm.

Question 2. You testified that the ‘‘bona fide error’’ provisions in certain federal

consumer protection laws would not provide any protection against frivolous or abusive lawsuits unless there is clarification by Congress. What type of clarification is

necessary?

Answer. The ‘‘bona fide error’’ provisions were designed to limit a financial institution’s civil liability to third parties (i.e., customers and other private litigants) for

unintentional violations that result from ‘‘bona fide errors,’’ provided the institution

establishes that it has maintained procedures reasonably adapted to avoid such errors. To date, the provisions have been rarely invoked and have been narrowly interpreted when analyzed by the courts.

Typically when errors or problems occur and a consumer contacts his or her financial institution, the bank routinely researches the problem and, if the bank is at

fault, offers to remedy the situation. In many instances, the bank offers to fix the

problem even if the error originated with a third party. This could be the case, for

example, with direct deposit payments or automated loan payments that somehow

go astray. Banks generally follow this practice because they value the ongoing relationship with their customers.

However, one concern is that errors or problems occurring on or after the century

date change could become grounds for lawsuits, as plaintiffs’ attorneys seek to exploit any disruptions and turn them into Y2K claims. If this were to occur, consumers might be advised by attorneys to turn down offers by their financial institution

to resolve disputes, and instead be encouraged to pursue potentially larger settlements by alleging ‘‘Y2K failures’’ either individually or through class action lawsuits. In such cases, banks would seek to rely on the ‘‘bona fide error’’ defense to

limit their liability.

Accordingly, ABA urges Congress to clarify that ‘‘bona fide error’’ or ‘‘inadvertent

error’’ provisions do in fact apply to Y2K disruptions. This could be done with a

technical amendment, noting that Y2K disruptions are one type of ‘‘computer malfunction and programming errors’’ contemplated in the statutes. Once again, the

maintenance of reasonable procedures by a financial institution to prevent such errors would be a precondition for seeking such protection. This clarification would be

helpful in discouraging speculative Y2K lawsuits against banks that have offered to

resolve Y2K disruptions affecting consumer financial services.

Question 3. Of the three Y2K liability proposals before Congress, which one best

addresses the concerns of the banking industry?
Answer. In ABA’s testimony, we outlined several principles that we believe should

be part of any Y2K liability legislation enacted by Congress. Among the most important of those principles are the following: 1) a pre-trial cure-period to give parties

a chance to fix Y2K problems before filing lawsuits; 2) alternative dispute resolution

to encourage parties to mediate, not litigate; 3) proportionate liability of responsible

parties to avoid unjustly punishing ‘‘deep pocket’’ defendants; 4) mitigation of damages by plaintiffs to prevent excessive consequential damages claims; 5) limits on

punitive damages to deter speculative Y2K litigation; and 6) specific pleading requirements so that broad, vague claims are not filed.

The current version of S. 96, The Y2K Act, contains many of these elements, and

is supported by the ABA as a rational Y2K dispute resolution framework for promoting remediation rather than litigation. On the House side, ABA views H.R. 775,

the Year 2000 Readiness and Responsibility Act, which has at least 81 bipartisan

co-sponsors, as the best approach to resolving these issues.
PREPARED STATEMENT OF HOWARD L. NATIONS

Distinguished Senators, thank you for the opportunity to address your committee

on this very important issue. The inquiry which we are asked to address is how the

potential of liability will affect an entity’s ability to timely repair and remediate its

year 2000 problems.

Examination of the rules of business law, by which the conduct of business entities is measured, reveals that the law, as it exists in all fifty states, encourages

business leaders to immediately address their Y2K problems. Business leaders are

held to a standard to take honest, informed, good faith efforts to seek immediate

Y2K solutions in order to avoid causing damage, both to their own company and

to those with whom they do business. Through avoiding the causation of Y2K damage, entities can avoid liability. It seems reasonable to assume that the desire to

avoid causing damage and the fear of liability arising from such damage should provide sufficient motivation to reasonable business leaders to immediately address

Y2K solutions.

America’s time honored common law principles and the statutory laws of all fifty

states have been promulgated by the best legal minds of the past two centuries,

carefully honed in court on a case by case basis, applied in jury trials with sworn

testimony and rules of evidence, fine tuned by trial judges and honed into strong

legal principles by the appellate courts of this land. The resulting business principles which have emerged from the cauldron of American justice are time tested

and tempered and should be applied to resolve the business problems arising out

of Y2K just as they have been applied to business problems in America since its

inception.

There is no need for federal legislation regarding Y2K liability because the common law principles, state statutes and the Uniform Commercial Code, which has

been passed by the legislatures of all fifty states, provide all of the business rules

and guidelines needed to measure the conduct of business entities, provide motivation for immediate remedial action, and provide remedies for wrongdoing. The business law in question provides both rules and remedies. Responsible business leaders

and consumers who have followed these business rules in matters relating to Y2K

are now entitled to rely upon the remedies which business law provides in order

to recover from those who ignore the rules and cause damage. It is inherently unfair

to change the Y2K rules with two minutes left in the fourth quarter in order to alter

the outcome to the detriment of those who have acted responsibly, and followed the

rules but will be damaged because of the failure of others to act reasonably. To focus on the issue of how liability will affect an entity’s ability to fix its Y2K problems, we need only understand the function of the business judgment rule, the

duty of due care, the Uniform Commercial Code, and the concept of joint and several

liability which have controlled business transactions of this type for several decades. The directors of a corporation owe a fiduciary duty of care to the corporation and its shareholders in carrying out their managerial roles. That is, they must exercise

the same degree of care and prudence that ordinary persons in a like position under

the same or similar circumstances would use.

The business judgment rule requires that business persons take informed, honest, good faith actions in the best interest of the company which they presume to lead.

Corporate directors who investigate, evaluate, deliberate and document as required

by the business judgment rule and the duty of due care will be immunized in their

efforts to remediate their Y2K problems. Absent an abuse of discretion, the judgment of directors in making a business decision will be respected by the courts.

Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). This does not seem to be an unduly harsh burden to place upon corporate directors. These rules certainly should motivate officers and directors to act promptly and reasonably to remedy Y2K problems. Federal legislation in this area of business law is unnecessary because the Uni- form Commercial Code has been adopted by the legislatures of all fifty states, thus

providing uniformity to Y2K business law. Under the terms of the Uniform Commercial Code the manufacturers of the defective systems and devices which are at

the base of the Y2K problem are subject to liability for breach of implied warranty

of fitness for a particular purpose, implied warranty of merchantability, express

warranties, and breach of contract. The Uniform Commercial Code was originally

formulated through the joint efforts of the best business law minds in the country.

The UCC has been effective enough to gain the confidence of fifty state legislatures

and the rules, once adopted, have been finely honed by appellate courts over the

past three decades. The rules of the UCC have also been taught in business schools

and used in business practice over the past three decades. Y2K presents precisely

the type of legal disputes which the UCC was designed to resolve. Most of the Y2K

business litigation will hinge on breaches of implied warranties or written contracts.

The UCC implied warranties rules should provide a great impetus to business leaders to make every effort to become Y2K compliant before damage occurs. Additionally, a party who reasonably fears that the other party will not be able

to perform is given protection by the U.C.C. in that the party may demand assurances that performance will be forthcoming at the proper time. If these assurances

are not received within a reasonable time, the party seeking assurances can treat

the contract as repudiated and suspend its performance. Thus, the U.C.C. clearly

provides adequate remedies for buyers and sellers of all goods, including any good

covered by proposed Y2K legislation. To remove the provisions of the UCC from the

law controlling Y2K can only serve to remove motivation for timely compliance of

those who have already procrastinated in addressing Y2K solutions.

In light of such protections which currently exist in the laws of all fifty states,

liability will attach only to those corporate officers and directors who fail or refuse

to act with due care and do not follow the business judgment rule. Hence it is incredibly disingenuous for a business leader to claim the inability to repair Y2K

problems because such repair may, in some mysterious way, predicate liability. It

is respectfully submitted that these business leaders should be concentrating on limiting the damage which they are about to cause instead of seeking limitations on

the damages which they fear they will have to pay. The best way to avoid paying

damages is not to cause damage. This can be accomplished by focusing, in the limited time remaining, on the remediation process, which they should have undertaken years ago.

Currently, the law in most states provides for joint and several liability of parties

in the chain of distribution of a defective product, with the accompanying right of

indemnification of downstream defendants by upstream parties until the costs of the

damage is ultimately placed on the original tortfeasor. There are sound business

and legal principles which predicated the development of this rule and its acceptance by the courts. There has seldom been a greater need in American jurisprudence for maintaining the rules of joint and several liability than in the Y2K litigation field. The reason is that many of the defective products and business systems
in America are manufactured by foreign vendors. As reported in this Committee’s

Report, there is grave concern about the level of Y2K remediation outside of the

United States and among many of our most frequent trading partners: The Committee is greatly concerned about the international Y2K picture . . . Several U.S. trading partners are severely behind in their Y2K remediation efforts. S. Rpt. No. 105–106–10 at 6 (1999).

The biggest Y2K impact may occur internationally. While the U.S. should have started its Y2K preparations earlier, worldwide preparations generally lag even further behind. S. Rpt. No. 105–106–10 at 1 (1999).

If small business and consumers are left with only several liability against foreign vendors, there will be no remedy and the loss will be absorbed completely by the

American consumers and businesses. Many of the products which are marketed in

the United States are sold f.o.b. at the dock in the shipping country, e.g., f.o.b. Yokohama. Joint and several liability permits recovery by the end user from the seller

in the United States and a cause of action by the seller against the foreign manufacturer. The U.S. distributor will be contracting directly with the foreign vendor and

will generally contract for venue in American courts to resolve disputes, with local

state law applying to the dispute. Contracts should also contain provisions for submission to the U.S. courts by the foreign vendors for dispute resolution. End users

have no such contracts and the abolition of joint and several liability will leave

many American consumers and businesses without a remedy for Y2K damage done

to them by foreign vendors. The Y2K problem confronting responsible business leaders in America who have followed the U.C.C. and sound business rules is that they are now facing losses generated by non-compliant vendors, many of whom are foreign. Possibly, examination of the application of existing law to real life Y2K situations will serve to illustrate how effectively current law functions in the Y2K world and

why there is no need to reject the U.C.C. and change the law. As of March 11, 1999, there have been fifty-six law suits related to Y2K filed in the United States. Many of those cases have been consolidated into class actions so

that the total number of actual lawsuits is closer to thirty. Most of the lawsuits are

class actions by small businessmen or consumers against vendors who are seeking

excessive prices for Y2K upgrades on products which should have been Y2K compliant at the time they were sold. For example, Dr. Robert Courtney is an OB/GYN

solo-practitioner in New Jersey. In 1987, Dr. Courtney purchased a computer medical system from Medical Manager, Inc. for tracking surgery, scheduling due dates

and billing. In 1996, the computer crashed from lack of sufficient memory. At that

time, Dr. Courtney replaced his old system with a new state of the art Pentium system from Medical Manager for $13,000, a sizable investment for a small town solopractitioner. The salesman assured Dr. Courtney that the new computer system

would last at least ten years. One year later, Dr. Courtney received a letter from

Medical Manager telling him that the system which he had purchased was not Y2K

compliant and it would not be useful to him as of January 1, 1999. In order to solve

the Y2K problem which Medical Manager had built into their 1996 model system,

Dr. Courtney would have to pay an additional $25,000 for an upgrade.

After the company ignored Dr. Courtney’s request for a free upgrade of his 1996

system, he retained an attorney and sued Medical Manager seeking to have them

either repair or replace his computer system at their cost. Dr. Courtney was designated as a class representative and it developed that Medical Manager had 17,000

other small businessmen-medical practitioners from whom they were demanding

$25,000 for Y2K upgrades. Not surprisingly, within two months after filing the class

action Medical Manager offered to settle by providing all 17,000 customers who

bought a non-Y2K-compliant system after 1990 with a free ‘‘patch’’ that would make

their old systems Y2K compliant. The sudden appearance of the software ‘‘patch’’

rendered it unnecessary for 17,000 doctors to buy a new upgraded system at the

cost of $25,000 each. Application of current law not only saved $425,000,000 in unnecessary costs to small businesses but also avoided $425,000,000 in profiteering by

Medical Manager through the sale of unnecessary Y2K upgrade systems when a

software patch was obviously always available.

This is typical of the type of profiteering which currently confronts small businesses, even prior to January 1, 2000. Small businesses will be a large segment of

the plaintiffs in Y2K litigation. For many small businesses, an outlay of $25,000 or

a delay of ninety days during which they are out of business as a result of a nonY2K compliant product will be fatal to the business and lead to bankruptcy. This

will be particularly true if the damages which they can recover from the provider

of the non-Y2K compliant device or product are limited. Courtney is an excellent example of how well the current civil justice system works. Within sixty days of filing
the lawsuit, the profiteering by the defendant ceased, the demand for $25,000 from

17,000 small businessmen was withdrawn and shortly thereafter, a free patch was

distributed to 17,000 doctors which magically made their old systems Y2K compliant.

Another type of damage which will arise out of Y2K will be the result of negligence by the creators of the system software or programmers of the embedded

chips. It is possible that we have seen a preview of coming attractions in New Zealand. At 12:01 a.m. on February 29, 1996, in the largest industrial plant in New

Zealand, all of the steel manufacturing machinery which was controlled by computers ceased to operate. The problem was that the computer system manufacturer had

failed to program 1996 as a leap year. As a result of this negligence, millions of dollars in machinery was ruined and the plant was out of business until new machinery could be obtained. This may be typical of the type of failures which we will see

after January 1, 2000 across America. Serious consideration should be given to

where the financial losses arising out of such negligence should be placed, on the

negligent system software provider or on the business which purchased the software

in the good-faith belief that it would function properly. If a situation such as the

New Zealand steel mill occurs in the United States and currently pending federal

legislation is past, a limitation of damages in the amount of $250,000 would pay

only a fraction of the cost of the losses of the steel mill. These damages limitations

would result in millions of dollars in losses to the innocent party. A ninety day notice period would add insult to injury. These changes in the law would be particularly devastating since the insurance industry has indicated that they will deny coverage across the board on Y2K related losses.

Over centuries of well-reasoned law, it has been determined that losses of this

type are better placed on the tortfeasor whose negligence caused the damage than

on the party which suffers the loss. This is the current law in America which would

control Y2K situations such as this one and it is respectfully submitted that such

law should not be changed in order to protect the wrongdoer at the expense of the

innocent business victim. Retention of this law should provide motivation to business leaders to seek immediate Y2K repairs.

Thus, it is respectfully submitted that the law as it currently exists is far better

suited to the resolution of Y2K claims than a complete overhaul of these time-honored principles, created without adequate time for reflection, amid a morass of misinformation and under the pressure of special interest groups who seek to protect

themselves from the consequences of their own actions.

This Committee has acknowledged the level of misinformation as follows:

The Committee has found that the most frustrating aspect of addressing the Year 2000 (Y2K) problem is sorting fact from fiction . . . The

internet surges with rumors of massive Y2K failures that turn out to be

gross misstatements, while image sensitive corporations downplay real

Y2K problems. S. Prt. No. 105–106–10 at 1 (1999).

One of the myths surrounding the Y2K litigation is the often cited Lloyds of London estimate of one-trillion-dollars in litigation costs. The one-trillion-dollar figure

emanated from the testimony of Ann Coffou, Managing Director of Giga Information

Group before the U.S. House of Representatives Science Committee on March 20,

1997, during which Ms. Coffou estimated that the Year 2000 litigation costs could

perhaps top one-trillion-dollars. Ms. Coffou’s estimate was later cited at a Year 2000

conference hosted by Lloyds of London and immediately became attributable to the

Lloyds organization rather than the Giga Group. Obviously, those who want to use

the trillion-dollar estimate for their own legislative purposes prefer to cite Lloyds

of London rather than the Giga Group as the source of this estimate. There has

been no scientific study and there is no basis other than guesswork as to the cost

of litigation. The trillion-dollar ‘‘estimate’’ by the Giga Group is totally unfounded

but once it achieved the attribution to Lloyds of London, the figure became gospel

and is now quoted in the media and legislative hearings as if this unscientific guess

by this small Y2K group should be afforded the dignity of scientific data. This is

just another of the many myths that surround Y2K and certainly should not be

given any credibility for changing 200 years of common law, and setting aside the

U.C.C., the business judgment rule, the duty of due care and joint and several liability.

Thus, in this atmosphere of misinformation, a short time-line and the pressures

of special interest groups, it seems appropriate to inquire as to whether this is the

proper time, place and forum in which to change 200 years of well-established common law and override the Uniform Commercial Code.

A further inquiry worthy of examination before changing the well-established

rules by which business is conducted in America is what is the nature of the ‘‘crisis’’
with which we are dealing, what is the cause of the ‘‘crisis,’’ and does it warrant

the pre-emption of state laws and the Uniform Commercial Code.

Y2K is a computer problem which has been known to exist for decades. The business community has had decades of notice and an equal amount of time to address

the solution to Y2K.

The Y2K crisis is not a computer crisis but rather a crisis of corporate leadership

which irresponsible business leaders seek to compound with a crisis of corporate accountability. We are in this situation because business leaders have made the conscious decision to ignore the Y2K problem and to procrastinate in implementing solutions until what began as a business problem has now become a business crisis.

Consider the findings of this Committee regarding procrastination: Leadership at the highest levels is lacking. A misconception pervades corporate boardrooms that Y2K is strictly a technical problem that

does not warrant executive attention. . . . S. Prt. No. 105–106–10 at 3

(1999).

Many organizations critical to Americans’ safety and well-being are still not fully engaged in finding a solution. . . . Id at 1.

Most affected industries and organizations started Y2K remediation too late. . . . Id at 2.

In discussing why many business leaders have been reluctant to ‘‘champion dif- ficult and complex issues’’ this Committee found that:

Y2K competes poorly against issues such as . . . market share and

product development. It lacks familiarity, and in a results-driven economy, Y2K remediation costs are difficult to justify to . . . shareholders. Additionally, few wished to be associated with the potential repercussions of a failed Y2K remediation attempt. Id at 7.

Thus, irresponsible business leaders have chosen to concentrate on market share

and profits while ignoring the necessity of addressing Y2K remediation. Their procrastination in seeking Y2K solutions will now damage those with whom they do

business. These are the leaders who are now seeking Congressional endorsement of

their procrastination in the form of legislation which will absolve them of responsibility for the losses and damages which they are about to cause. This is particularly damaging to their consumers and business affiliates since the insurance industry has indicated the intention to deny Y2K coverage across the board. Therefore,

Congressional absolution to the procrastinators, tortfeasors and wrongdoers will

simply shift the damage to their customers and victims. It is respectfully submitted

that the U.C.C., the law in fifty states, should not be rejected in favor of a federal

Procrastinators Protection Act.

There is no acceptable excuse for businesses not being Y2K compliant other than their own procrastination in addressing the problem. A brief examination of the Y2K

time-line indicates that the Y2K problem has been well known and steadily approaching for decades. In the late 1950’s when magnetic tape format allowed greater

memory capacity and less concern with space problems, programmers who were

aware of the distant Y2K problem assumed that technical advances would eliminate

the problem prior to 1/1/2000.

In 1960 Robert Bemer, a pioneering computer scientist, advocated use of the fourdigit rather than the two-digit date format which is the basis of the Y2K problem.

He was joined by forty-seven other industry specialists in an effort to devise computer programming standards that would use a four-digit rather than a two-digit

date field. In 1964, IBM had the opportunity to correct the problem when the revolutionary system/360 mainframe came on line and set standards for mainframes for

years to come. However, IBM chose to maintain the two-digit date field.

In 1970, Robert Bemer and eighty-six technical societies urged the Bureau of

Standards to adopt the four-digit rather than the two-digit date field in order to

avoid Y2K problems. The Bureau of Standards, at the urging of the same entities

who now face the Y2K problem, adopted the two-digit standard.

In 1979, Robert Bemer, writing in Interface Age, again reminded the computer

world that the inevitable Y2K problems would occur on 1/1/2000 unless the defect

was remedied. Mr. Bemer’s warnings were again ignored.

Notice again went out to the industry in 1984 when Jerome and Marilyn Murray

published Computers in Crisis: How to Avoid the Coming Worldwide Computer Collapse. The Murrays recognized the problem when they attempted to calculate annuities beyond the year 2000 and were unable to do so because of the Y2K date field

problem. This notice by the Murrays put the entire manufacturing and computer industry on notice that this was a problem which needed to be addressed and timely

remediated.

In 1986 a South African programmer, Chris Anderson, placed a magazine ad decrying ‘‘the time bomb in your IBM mainframe system’’ in reference to the two-digit
date field. This occurred thirteen years ago at a time when responsible business

leaders should have been seriously considering the remediation of impending Y2K

problems. Instead, IBM responded to the magazine ad in 1986 by stating, ‘‘IBM and

other vendors have known about this for many years. This problem is fully understood by IBM’s software developers, who anticipate no difficulty in programming

around it.’’

In 1989, the Social Security Administration computer experts found that overpay- ment recoupment systems did not work for dates after 2000 and realized that thirtyfive million lines of code had to be reviewed. In 1994, the Social Security Administration timely began a three-year review of their software and today the Social Security Administration is the leader among government agencies in software remediation, having timely undertaken the management of the problem. In doing so, they

set the standard of responsible conduct against which to measure those confronted

with Y2K remediation problems.

In 1993, two events occurred which placed both the federal government and the business world on notice that the Y2K problem needed to be addressed immediately.

The first event was the testing by engineers at North American Aerospace Defense

Command of the NORAD Early Warning System. As the engineers set computer

clocks forward to simulate 12:01 a.m. on 1/1/2000, every NORAD Early Warning

computer screen froze. Additionally, in 1993, Peter De Jager wrote ‘‘Doomsday

2000,’’ which was published in Computerworld concerning the Y2K defect. In this article, Mr. De Jager stated, ‘‘We and our computer were supposed to make life easier. This was our promise. What we have delivered is a catastrophe.’’

Responsible business leaders followed the lead of the Social Security Administra- tion and heeded the warnings of Robert Bemer, the technical scientific community,

and authors such as the Murrays and Peter De Jager. They timely undertook remediation of their Y2K problems in the early 1990’s when there was sufficient time

and talent available to solve the problems. Unfortunately, a large contingent of corporate leaders procrastinated, and failed and refused to follow the business judgment rule and to act with due care for the best interests of their corporation and

are now to be found in the halls of Congress lobbying for Congressional forgiveness

for the breach of contracts and the consequences of the negligent manner in which

they have approached the Y2K problem. Such Congressional seal of approval on procrastination and corporate irresponsibility would send the wrong message to the voters, the wrong message to the public, and the wrong message to those who will soon

be victimized by such corporate irresponsibility. It is respectfully submitted that rather pre-empting the law of the fifty states con- trolling business activities, this Honorable Senate may effectively help businesses

who are actively seeking remediation and who have already undergone the cost of

remediation and repair by considering the following types of legislation: 1. Legislation to aid in remediation and repair.

a. Create a federal repository for Y2K remediation solutions which could be

traded across industries. There are more than five hundred programming languages and thirty-six million programs to be remediated. Offer a tax benefit to

a company which achieves a remediation solution and places the solution in a

repository for use by others with similar problems. The tax credit may be based

upon the number of users who are aided by the remediation solution.

b. Suspend application of §482 of the Internal Revenue Code which requires

that Y2K repairs by one division of a company be treated as a taxable asset

if used by other divisions of the same company. This would promote the use of

repair tools or software packages between divisions without such transfer between divisions being a taxable event;

c. Suspend the enforcement of the portion of the antitrust laws which would

prevent the sharing of Year 2000 repairs and technologies within vertical industries because of the impact on competition. Currently, the impact on competition

which may result from sharing Y2K technologies and repairs may constitute a

technical violation of the anti-trust laws. Any action which promotes the more

expeditious repair of Y2K problems without adverse impact on other companies,

should be encouraged without regard to the impact on competition.

2. Tax Relief.

a. Allow the option to amortize the cost of Y2K repairs over several years or

be treated as expenses in the year incurred;

b. Issue a directive to the Internal Revenue Service that they are to minimize

the risk to taxpayers from punitive IRS actions in the event that their withholding information or interest information is incorrectly recorded due to the Year

2000 errors;

c. Provide additional corporate tax relief for businesses to compensate, to

some extent, for the cost of the Y2K repairs;
3. Relief for Governmental Agencies There is a basis for concern about the impact of Y2K on governmental bodies ranging from small cities to larger cities and states. Governments at every level

are confronted with a double impact on solvency. First, each government has

to budget its own costs for remediation of governmental Y2K problems. Secondly, the financial impact on taxpaying citizens and businesses will adversely

affect the bottom line of taxes collected by governmental bodies. Thus, each governmental body will be confronted with more bills to pay and less tax revenue

with which to pay them. In order to avoid interruption of vital infrastructure

services to our citizens, it is respectfully suggested that an emergency financial

relief system be established for aiding governments which find themselves unable to deliver vital services as a result of this double financial impact.

4. Y2K Compliance

It is respectfully suggested that a considerable amount of confusion and possibly even litigation may be avoided in the future by the adoption of a standard

definition for ‘‘Y2K Complaint.’’ At the present time the term is used very loosely without precise definition and businesses who are seeking to ascertain

whether their vendors or those with whom they do business are ‘‘Y2K Complaint’’ should be cautious to ascertain that they and their vendors are defining

the term in the same manner. It is respectfully suggested that the best definition for the term ‘‘Y2K Complaint’’ is found in the Federal Acquisition Regulation (FAR), part 39.002, published in Federal Acquisition Circular (FAC) 90–45:

‘‘Year 2000 compliant means information technology that accurately

processes date/time data (including, but not limited to, calculating,

comparing, and sequencing) from, into, and between the twentieth and

twenty-first centuries, and the years 1999 and 2000 and leap year calculations. Furthermore, Year 2000-compliant information technology,

when used in combination with other information technology, shall accurately process date/time data if the other information technology

properly exchanges date/time date with it.’’

To return to the original inquiry, it seems obvious that in the time remaining before the inevitable arrival of 12:01 a.m. on January 1, 2000, business entities which

have procrastinated for several years in addressing Y2K remediation could best

spend their time in long overdue efforts at Y2K solutions rather than pursuing a

Congressional Seal of Approval on procrastination.

The law of all fifty states, the Uniform Commercial Code, the business judgment

rule, the duty of due care and the concept of joint and several liability have been

finely honed for decades to handle precisely the type of litigation which will be the

hallmark of year 2000 lawsuits, business versus business. To set aside decades of

law in order to protect those who brought about this crisis of corporate leadership

would be unfair to the responsible business entities which are entitled to rely on

the remedies which those well-established business rules provide. There is no need

for federal legislation regarding Y2K liability.

Thank you for the opportunity to be heard on this important issue.

PREPARED STATEMENT OF CHARLES ROTHFELD

Mr. Chairman, I appreciate the opportunity to testify today about the litigation

consequences of the year 2000 computer issue. My law firm, Mayer, Brown & Platt,

is one of the many in the United States that has created a practice group devoted

to taking on Year 2000 legal issues. My firm also represents the Semiconductor Industry Association and the accounting profession in connection with legislative efforts currently underway in Congress to address the Y2K issue. Both the SIA and

the accounting profession participate in the Year 2000 Coalition, a broad group of

large and small businesses that supports Federal legislation to encourage remediation and discourage insubstantial or avoidable litigation.

The technical aspects and likely business consequences of the Y2K issue are, by

now, generally familiar. It seems safe to say that, even if the United States avoids

catastrophic computer and systems failures, the Y2K bug will cause glitches, inconveniences, and sporadic or temporary business shutdowns that will be felt throughout the economy.

We are here today, however, to talk about a secondary effect of the Y2K phenomenon that ultimately may have more destructive, expensive, and long-lasting consequences for the Nation than the millennial computer failures themselves: there is

a substantial danger that Y2K glitches may generate an unparalleled wave of litigation. Certainly, that is the general expectation of lawyers who defend business

cases. And knowledgeable plaintiffs’ lawyers appear to agree; attorneys at Milberg,
1Spencer & Graziano, Year 2000 Computer Litigation. 2The material in this section of my testimony rests substantially on work done by Andrew Morris of Mayer, Brown & Platt. See Morris, An Overview of Year 2000 Litigation Risks Con- fronting Financial Institutions, in Y2K Adviser (Mar. 1998) (‘‘Overview’’); Morris, The Year 2000

Problem: A Primer on Legal Risks, J. Internet. L. (Oct. 1998) (‘‘Primer’’). 3 An attorney at Milberg Weiss has identified six stages of Y2K litigation, including ‘‘Defective Software Litigation,’’ Defective Hardware Litigation,’’ ‘‘Who is Responsible Litigation,’’ ‘‘Disaster

Litigation,’’ ‘‘Breach of Duty of Disclosure Litigation,’’ and ‘‘Insurance Litigation.’’ Kathrein, Year

2000 Litigation—The Perspective of Plaintiffs’ Counsel. 4See, e.g., Paragon Network v. Macola Inc., Ohio Ct. Common Pls., Marion City, No. 98-CV–

0119; Capellan v. Symantec, Calif. Super. Ct., Santa Clara Cty., No. 772147; Issokson v. Intuit,

Inc., Calif. Super. Ct., Santa Clara Cty., No. CV 773646. 5J. Baker v. Andersen Consulting, No. 98–01597 (Mass. Super. Ct., Norfolk Cty.) 6Morris, Overview, at 4. 7The law is unsettled on whether the Uniform Commercial Code—or analogous principles— applies to software licenses. See Architectronics Inc. v. Hunkar Laboratories Inc., 935 F. Supp. 425, 432 (S.D.N.Y. 1996).

Weiss, Bershad, Hynes & Lerach, for example, one of the nation’s leading plaintiffs’

firms, have written that ‘‘[a]mong lawyers in the United States, it is widely anticipated that there will be numerous system failures, leading to damages suffered by

enterprises, and a concomitant effort to allocate liability—many a litigator’s dream

scenario.’’1

Against this background, I’d like to touch on three points in my testimony today.

First, I’ll review the sorts of Y2K lawsuits that we can expect. Second, I’ll look at

the volume of litigation that is likely. And third, I’ll briefly consider the steps that Congress could take to ameliorate the most serious problems created by excessive

Y2K litigation. A. Likely Types of Y2K Litigation

The ubiquity of computers and the potentially pervasive nature of Y2K problems throughout the business world means that the sorts of lawsuits that might arise out

of the year 2000 problem are virtually limitless. After all, there are any number of

relationships that might be affected by the Y2K glitch. Most obvious is the connection between an information technology (‘‘IT’’) provider and its customers. But computer-related business interruptions also could affect dealings between any business

and its suppliers or customers, causing domino effects up and down the distribution

chain. In addition, companies may be affected by errors on the part of entities with

whom they exchange electronic data. And Y2K failures may drive down company

values, which inevitably will lead to second-guessing about the performance of corporate officers or directors.

Litigation is possible—indeed, it is likely—at every stage of this process.2 While

the variety of possible claims makes it impossible to offer a comprehensive compendium of Y2K suits, for present purposes it may be useful to break prospective litigation into four categories: claims designed to recover remediation costs; claims based

on a failure to deliver goods or services, or on other types of business interruptions;

claims against fiduciaries and actions that assert securities fraud; and insurance

claims.3

1. Claims for remediation costs. The first and perhaps most obvious category of suits involves claims seeking remediation costs that are brought by technology

users against entities that assertedly are responsible for the defects in non-compliant products. To date, most potential disputes between IT vendors and customers

have been resolved amicably, with the bulk of vendors providing technical assistance, free upgrades or patches, and support in the testing process. But several

dozen cases have been filed against IT vendors,4 and at least one suit has been

brought against a consulting firm that assisted the plaintiff in the selection of computer systems.5 There is some reason to expect that the pace of this litigation will pick up in the future as larger companies turn their attention from carrying out remediation to recovering remediation costs, and as smaller companies that have been

behind the Y2K curve begin to recognize that they have significant problems. In

fact, some users who have spent large sums on remediation may conclude that they

must sue vendors or consultants simply to fulfill fiduciary duties to shareholders.6

The legal theories in these sorts of cases would include the following:

Contract and warranty claims. Claims of this sort typically will allege breach of contract or warranty. Because express Y2K warranties are rare, especially in

sales of technology products that took place prior to the last year or so, these suits

are likely to assert implied warranties of merchantability and of fitness for a particular purpose such as those recognized by the Uniform Commercial Code.7

It should be noted that this sort of litigation often will involve difficult and com- plex issues that will increase the length and expense of the suits. One source of dispute will concern the enforceability of warranty disclaimers and damages limita8See, e.g., UCC § 2–725; 735 ILCS 5/13–206. 9Morris, Overview, at 5. 10 Id. at 5 n.9. 11 Id. at 7.

tions. Another will involve the characterization of the contract. For example, contracts for the sale of goods generally are governed by a 4-year statute of limitations;

other types of contracts often are controlled by limitations periods of 6 years or

more.8 Plaintiffs therefore will attempt to claim that their contracts involve the sale

of services, an assertion that will raise difficult issues when software is sold together with consulting or maintenance services. As one knowledgeable commentator

has noted, ‘‘[t]his is likely to lead to a raft of litigation over whether the goods or

services aspect of a contract predominates.’’9

Tort and related claims. Plaintiffs also may assert tort claims based on neg- ligence, product defect, fraud (including allegations of misrepresentations about the

capacity of the IT product) and the like. Plaintiffs could make similar claims under

state deceptive trade practices and consumer protection statutes. These theories are

discussed in greater detail below.

2. Business interruption and related claims. A second—and potentially far broader—category of suits involves attempts to recover losses caused (directly or indirectly) by a Y2K failure. As might be imagined, cases in this category could involve an enormously broad range of possible parties and factual situations. Any

company that makes use of IT products (which is virtually every business of any

size in the United States), or whose suppliers or customers make use of IT products,

could suffer an injury that is traceable to a Y2K failure. These suits are likely to

advance contract, tort, and statutory claims of various sorts. Contract claims. Virtually all business-to-business relationships, and many busi- ness-to-consumer relationships, are governed by contract. As a consequence, essentially any Y2K problem that causes a company to fail in its business obligations

could lead to a contract action. Examples would be suits by purchasers against IT

vendors for damages caused by a Y2K failure (as distinct from suits seeking remediation expenses); actions by customers against suppliers that fail to deliver promised

goods or services; claims by suppliers against customers that cannot accept delivery;

and suits by companies against anyone whose nonperformance (or inadequate performance) made it more difficult (or impossible) for the company to operate. On the

consumer side, customers could bring suit against financial institutions or securities

firms whose operations were interrupted, or against IT vendors whose products

were defective, or against other providers of goods and services who failed to perform as promised.

The financial stakes in these cases could be enormous. Business plaintiffs alleging breach of contract would in most cases seek consequential damages, which could include lost profits and damages for business interruption.10 And consumers (whether

individuals or businesses) often would be able to participate in class actions because

the purchasers would have signed similar form contracts. Even if each class member

suffered only minimal damages, the amount at issue in such class suits would be

very large. Tort claims. Failures that cause an interruption of or interference with business

also could lead to tort claims. Plaintiffs in such suits could include persons who

have had contractual or other direct dealings with one another; plaintiffs also could

include third parties who never did business with the defendant but who suffered

an injury that somehow was traceable to the defendant’s failure. In such third-party

cases, plaintiffs seeking defendants with deep pockets could bring negligence suits

against parties whose actions indirectly caused damage, arguing that the injury was

a foreseeable consequence of the defendant’s failure to achieve Y2K compliance.

The likeliest tort cause of action would be one alleging negligence. Such a claim

typically would assert failure to adhere to a reasonable standard of care, or would

allege the existence of a duty to exercise care, breach of that duty, and resulting

harm to the plaintiff. Plaintiffs could allege negligence in a wide variety of settings:

against a consultant or professional who assertedly failed to exercise due care in the

provision of services; against an IT provider who is alleged to have failed adequately

to test its products; against any business that harmed another because it was insufficiently attentive to Y2K issues.

Plaintiffs also are likely to assert fraud claims, arguing that the defendant intentionally made false statements of fact. Such claims are possible whenever the defendant’s statements about the Y2K status of its products, or about its own readiness, prove not to be true.11 Indeed, one commentator who practices in the field has

noted that many of the inquiries that companies are now sending to other entities

with whom they deal are transmitted ‘‘precisely so that they can use them later as
12Morris, Primer, at 10. 13See cases collected at Products Liability: Manufacturer’s Postsale Obligation to Modify, Repair or Recall Product, 47 A.L.R. 5th § 2a (1997); Products Liability: Liability of a Manufacturer

or Seller as Affected by Failure of Subsequent Party in Distribution Chain to Remedy or Warn

Against Defect of Which He Knew, 45 A.L.R. 4th 777 (1993). 14See, e.g., Beshara v. Southern National Bank, 928 P.2d 280 (Ok. 1996) (banks owe elevated

duty to customers). 15See, e.g., East River Steamship Corp. v. Transamerica Delavel Inc., 746 U.S. 858, 874–876

(1986); Danforth v. Acorn Structures, Inc., 608 A.2d 1194, 1195–1200 (Del. 1992); Restatement

(Third) of Torts: Products Liability, § 1 (com. d), § 21. 16Morris, Overview, at 4. See Cunningham, Orphans of the Economic Loss Doctrine: Tort Liability of Information Providers and Preclusion of Comparative Negligence, 8 DePaul Bus. L.J.

41 (1995); Nussbaum, The Economic Loss Rule and Intentional Torts: A Shield or a Sword, 8

St. Thomas L. Rev. 473 (1996). 17Morris, Overview, at 7. 18See, e.g., MGLA 93A, § 2(a) (‘‘unfair methods of competition and unfair or deceptive acts or

practices in the conduct of any trade are hereby declared unlawful’’). 19 Kahn v. Roberts, 1995 WL 745056 *4 (Del. Chan. 1995) (citation and internal quotation

marks omitted). 20 Id. at *3. See also Rabkin v. Philip A. Hunt Chemical Corp., 13 Del. J. Corp. L. 1210 (Del.

Ch. Dec. 17, 1987). 21Kathrein, supra, at 14.

the basis for litigation. They may try to characterize statements made in responses

as contract terms—and thus the basis of contract claims, or as representations—and

thus the basis of negligent misrepresentation or even fraud claims.’’12 Depending on

the circumstances, plaintiffs also might reach into a grab-bag of other tort claims,

such as violation of a post-sale duty to warn,13 or departure from specialized duties

that are said to govern particular relationships.14

It should be added that one complication in these suits will be the ‘‘economic loss

rule,’’ which bars the recovery of economic damages, such as lost profits, in many

tort cases.15 While this rule seemingly would preclude the award of damages in

many Y2K tort suits, the doctrine varies in its details from state to state, and the

exceptions to the doctrine ‘‘are evolving and ill-defined.’’16 These uncertainties, and

the likelihood that ‘‘[c]reative plaintiffs may try to circumvent [the rule] altogether,’’17 may make litigation about the applicability of the rule uncertain, protracted, and expensive.

Statutory claims. In addition, plaintiffs may base suits for business interruption

or product defect on various statutory causes of action. Claims may be based on

state unfair trade practices or consumer protection statutes, which often are

couched in vague and very broad terms.18 These statutes have been invoked in

many of the Y2K suits that already have been brought. Plaintiffs also might rely

upon the Federal Racketeering and Corrupt Organizations Act, arguing that the defendant committed mail or wire fraud by making false statements about the state

of its Y2K compliance through the mails or over the telephone. RICO suits, which

entitle the plaintiff to treble damages, provide ample opportunity for strike suits.

3. Claims against fiduciaries and securities suits. A different category of

suits involves fiduciary/derivative claims or securities actions that might be brought

by shareholders. First, in the event of Y2K failures that damage a corporation,

shareholders could bring actions on behalf of the corporation, asserting that directors breached duties of care or loyalty. Such suits could be triggered by failures that

damaged the company’s business operations and profitability, or that led to judgments against the company in Y2K litigation—and, in the event that the company

is not damaged by Y2K problems, could even be based on allegations that directors

wasted company assets by spending too much on remediation. Plaintiffs could recover the company’s lost profits, out-of-pocket expenses, or legal judgments paid by

the company.

In theory, defendants in such derivative suits are protected by the ‘‘business judgment’’ rule, which rests on ‘‘a presumption that in making a business decision the

directors of a corporation acted on an informed basis, in good faith and in the honest

belief that the action was taken in the best interests of the company.’’19 But this

presumption may be overcome by a showing of ‘‘gross negligence,’’20 a vague allegation that may be difficult for the defendant to rebut on a motion to dismiss. In the

words of one attorney who written in the field, to take advantage of the business

judgment rule ‘‘the officer or director must take action and make an informed, reasonable decision in good faith. If no action is taken, or there is the absence of a conscious and documented decision, there is no protection.’’21 The difficulty of determining whether that prerequisite is satisfied provides fertile ground for litigation.
22See www.sec.gov/rules/concept/33–7558>. 23See, e.g., Atkinson & Ward, Avoiding a Y2K Lawsuit Frenzy 3 (PPI Mar. 1999). 24 Carter, Lawyers Suit up for a Juicy Millennium Bug Feast, Austin American-Statesman A2

(Aug. 5, 1998). 25 Carter, supra, at A2. 26Presented by Law Journal Seminars (Apr. 12 & 13, 1999). 27Presented by Fulcrum Information Services (June and July 1998). 28Presented by Mealey’s (Oct. 8 &9 1998). 29Presented by the Institute for International Research (March 22 & 23, 1999). 30 E.g., R. Williams & B. Smyth, Law of the Year 2000 Problem: Strategies, Claims and Defenses (1999); Mealey’s Year 2000 Report. 31See, e.g., Morris, Overview.

Second, other types of fiduciary suits also are possible. Investment advisors, trust- ees, and many other entities may owe fiduciary duties to their customers and

clients. If customer funds are lost as a result of such an entity’s actions, plaintiffs may recover both the lost funds and consequential damages.

Third, a potentially broader category of actions involves securities fraud suits that

would be based on asserted misstatements about Y2K readiness, or about alleged failures to disclose material information bearing on Y2K issues. Public

companies are required to make extensive disclosures of information to the Securities and Exchange Commission. In particular, the SEC recently required

disclosures regarding Y2K readiness and preparations.22

Any misstatement (or omission) in these disclosures, or in other corporate commu- nications, could form the basis of a suit against the corporation or corporate officers—and possibly against third parties, such as auditors, who arguably were involved in the review or formulation of the statement. Indeed, any drop in share

prices following a Y2K failure could prompt a securities fraud suit based on the allegation that the defendant failed to disclose relevant information about the state of

Y2K compliance.

4. Insurance claims. A final category of suits—and, presumably, the last to be brought—will involve litigation regarding insurance coverage. Such litigation could

involve claims brought under various types of policies for damages caused by Y2K

failures, and also could involve claims that remediation costs are covered.

B. The Likely Volume of Y2K Litigation

While it thus is clear that a great many types of Y2K suits are possible under existing law, deciding how many actions actually will be brought necessarily involves a more speculative undertaking. But the signs and leading indicators point

strongly toward the conclusion that the volume of litigation will be substantial.

First, virtually every expert attempt to assess likely litigation costs indicates that

the expense of Y2K suits will be enormous. The most widely cited figure suggests that litigation costs could approach $1 trillion.23 Even if that figure proves inflated, there appears to be a consensus among the analysts that the number

of suits likely will be without parallel in recent experience. A panel at last summer’s convention of the American Bar Association, for example, predicted that

legal costs associated with the Y2K problem will exceed the combined litigation costs attributable to asbestos, breast implant, tobacco, and Superfund lawsuits.24 That amount exceeds the aggregate estimated annual cost of all civil litigation in the United States. Indeed, it is noteworthy that more than 50 lawsuits—only one of which alleges an actual Y2K failure—already have been initiated, more than 9 months before the arrival of the year 2000. And Y2K litigation is likely to be protracted and expensive because it presents legal issues in

a novel and very technical context.

Second, the legal profession is now engaging in frantic preparations for anticipated Y2K litigation. As of last August, some 500 law firms, including those on the plaintiffs and on the defense side, had established specialized year 2000 practice

groups,25 and that number is sure to have grown in the intervening months. Seminars, presentations, and panels on how to initiate and litigate Y2K cases,

with titles like ‘‘Litigation Strategy for Year 2000,’’26 ‘‘Year 2000 Computer Crisis: The Litigation Summit,’’27 ‘‘Year 2000: Exposures and Coverage,’’28 or ‘‘Year

2000 Legal Liability Forum’’29 are presented virtually every week. Specialized

Y2K publications and treatises are multiplying.30 Law firms across the country

are busily informing their clients how to best position themselves both to bring

and to defend against Y2K litigation.31

All of this activity in advance of the year 2000 is remarkable, and allows us to

draw conclusions with some confidence about what is likely to happen after the date

change. It is improbable that all of these sophisticated and intelligent attorneys are
completely off base in preparing for lawsuits; the objective marketplace is telling us

that a substantial wave of litigation is likely. And even if these lawyers are wrong

in some objective sense about whether there should be many suits, this enormous

investment of legal capital is acquiring a momentum that makes a wave of actions

inevitable. Plaintiffs’ lawyers are gearing up to sue, while defense lawyers have conditioned their clients to expect suits. The litigation itself is sure to follow.

Third, experience shows that societal problems that have economic consequences almost always are addressed through litigation. The history of asbestos is one obvious example. But the Y2K issue has unique features suggesting it will impel

a uniquely large volume of suits. The Y2K problem has consequences that are

pervasive, potentially affecting almost everyone in the United States. And the

problem has a lead time that (at least theoretically) allows potential defendants

to take corrective action—meaning that, if something goes wrong, it will be possible in almost every case to allege (rightly or wrongly) that someone is at fault.

In these circumstances, our legal culture inevitably will attempt to assign blame

in the only way it can: through the medium of litigation.

It should be added that the example of asbestos provides a frightening model of what could happen as a consequence of Y2K litigation. Pointing to the volume of

asbestos suits, the Report of the Judicial Conference Ad Hoc Committee on Asbestos

Litigation found that dockets in both Federal and state courts continue to grow; long delays are

routine; trials are too long; the same issues are litigated over and over; transaction costs exceed the victims’ recovery by nearly two to one; exhaustion of [the

defendants’] assets threatens and distorts the process; and future claimants

may lose altogether.

Report at 3. The Committee added that ‘‘[t]he transaction costs associated with

asbestos litigation are an unconscionable burden on the victims of asbestos disease,’’

citing a RAND Corporation finding that, ‘‘of each asbestos litigation dollar, 61 cents

is consumed in transaction costs * * * . Only 39 cents were paid to the asbestos

victims.’’ Id. at 13 (footnote omitted). These tremendous costs were found to diminish the funds available to compensate plaintiffs: ‘‘[u]nfairness results because of the

excessive transaction costs and the finite resources available to pay meritorious

claims.’’ Id. at 14. If translated to the Y2K setting, this would not be a happy state

of affairs for plaintiffs, and it surely is not an outcome that we should be anxious

to visit on the economy’s high technology sector.

C. Proposals for Reform

Against this background, it would make sense for Congress to take limited steps

to rationalize the inevitable Y2K litigation before it hits. Such legislation should be

constructed around several principles. Because fixing Y2K problems is the best way

to avoid litigation, legislation should encourage companies (and individuals) to take

all reasonable steps to correct defects in their systems before problems develop. Because litigation inevitably involves waste and high transaction costs, legislation

should give people an incentive to resolve their disputes quickly and informally in

the event that computers do fail. And legislation should temper the possibility of

a litigation crisis by screening out the most insubstantial lawsuits—the ones where

there has no been no real harm—while preserving the rights of people who have

suffered substantial injury.

In my view, the bills that have been introduced by Senators Hatch and Feinstein,

and by Senators McCain and Gorton, as well as the bipartisan Y2K bill that has

been introduced in the House, are faithful to those principles. Some of their notable

provisions are the following:

A Pre-Litigation Waiting Period. This provision doesn’t take substantial rights

away from anyone. Plaintiffs who seek injunctive relief are not affected at all. The

provision affects only people who are asking for money damages. Those plaintiffs

would not get a judgment from a court for many months or years anyway; they

won’t be hurt by a brief delay before bringing suit. But that delay will keep disputes

off the litigation track for a reasonable period so that the parties have a chance to

resolve issues between themselves, without getting the courts involved and running

up huge legal fees. By doing that, the provision focuses the parties on getting Y2K

problems fixed, which is in everyone’s interest. Plaintiffs who are not satisfied with

the result will be able to get into court, without having given up any of their rights.

Requirement of Pleading With Particularity. Plaintiffs know and can easily

explain what damages they have suffered. They can describe the ways in which a

product isn’t working. And it is unfair for a plaintiff to accuse a defendant of acting

with a bad state of mind unless the plaintiff is able to articulate some factual basis

for that allegation. This provision simply makes it easier to smoke out insubstantial

claims at an early point, before the defendant runs up substantial litigation costs.
Duty to Mitigate. This provision codifies a rule that is generally recognized under tort and contract law. It is sound policy to give everyone an incentive to take

reasonable steps to minimize a societal problem like the Y2K glitch. And it makes

no sense to reward people who refuse to take actions that they know could easily

and cheaply prevent Y2K failures. Because the provision makes use of a fact-specific

‘‘reasonableness’’ standard, unsophisticated consumers would not be expected to

take extraordinary steps to educate themselves about the Y2K problem; the provision should come into play only when ordinary people in the plaintiff’s position

should have been aware of information that would have let them prevent the injury.

The bottom line is that legislation should encourage remediation of Y2K defects, and

both potential defendants and potential plaintiffs should be obligated to participate

in that effort.

Contract Preservation. As a general matter, contractual provisions should be enforced—and judges should not be permitted to throw out pieces of a contract after

the fact on the basis of ambiguous and amorphous ‘‘public policy’’ considerations.

The parties to contracts have worked out their rights and obligations between themselves; if, for example, the contract contains a liability limitation, that typically

means that the party insisting on the limitation would not have entered into the

contractual relationship at all unless it believed that the limitation would be enforceable. It is patently unfair to deprive that party of the benefit of its bargain if

things later go wrong. This is a particular problem for people who might be hired

to remediate computer systems. Fear of potential liability is so great that these experts are now reluctant to take on such projects because they have no assurance

that even seemingly iron-clad contractual liability limitations will be enforced. Providing that assurance would be a great help in solving Y2K problems before they

develop.

Proportionate Liability. It is fundamentally unfair to make a defendant pay for something that is someone else’s fault and over which the defendant had no control—and it is particularly unfair when, as often will be true in Y2K cases, some

of the responsibility for the injury is borne by the plaintiff. Without proportionate

liability, plaintiffs’ lawyers always will name a deep pocketed defendant in their

suits so long as there is any chance that the people who really are responsible for

the injury are judgment-proof; the lawyers will know that the deep-pocket will have

to pay the entire judgment so long as a jury can be persuaded to find it even 1 percent responsible. That kind of scheme simply encourages frivolous litigation by giving lawyers the leverage to bring abusive suits that the defendant will have no

choice but to settle.

Exclusivity of Contract Remedies (the ‘‘Economic Loss Rule’’). This provision, which simply codifies the common law rule that prevails in many jurisdictions,

accomplishes three things. First, it brings valuable uniformity in a confusing area that is sure to be extensively litigated in the Y2K context.

Second, it prevents a plaintiff from attempting to get out of a deal that it made by contract. The courts generally have recognized that the rights of parties who

have entered into a contract should be governed by that contract, and not by

tort rules that are outside of the agreement. If the contract specifically precludes the award of economic losses, there is no reason that a party should be

allowed to evade the limit that it agreed to. And if the contract is silent on the

question of economic losses, the parties will expect their rights to be governed

by existing state contract law; if that law provides for economic losses (as it

typically does, so long as the damages were foreseeable), the plaintiff will be

made whole. Plaintiffs therefore will not be left without a remedy.

Third, where there is no contract between the parties, this provision establishes

that economic losses are available only when those losses grow out of personal

injury or injury to tangible property. Courts have recognized that the prospects

of economic losses in other circumstances are so remote and unforeseeable that

it would be unfair to make defendants liable for them. While such suits likely

will be rare, permitting them would allow for unanticipated and potentially limitless liability.

Class Action Minimum Injury Requirement. Without the limitations in this

provision, plaintiffs’ lawyers will be able to manufacture essentially fictitious classes

by finding trivial or theoretical defects in products and bringing strike suits to extort settlements. And by definition, this provision applies only when the defect is

not material as to most class members, meaning that the defect will not have any

significant effect on the operation of a product.

Class Actions: Federal Jurisdiction. There is a compelling Federal interest in

having the suits governed by this provision decided by Federal courts. These cases

will be national class actions involving citizens of many states—and Federal courts
have far more experience than do state courts in resolving such claims. Moreover,

because the Y2K problem raises issues of great importance to the national economy,

it is important that the issues in such cases get the sort of nationally uniform treatment that is possible only in Federal court. The interests of states are safeguarded

by the exception that allows suits to remain in state court when most plaintiffs and

defendants are citizens of that state. * * * *

If we are facing a tidal wave of Y2K litigation, these provisions certainly are not

a panacea: they make only modest and incremental changes. But they are likely to

place a renewed focus remediation, while providing mechanisms to weed out the

most insubstantial litigation. Legislation of that sort will both strengthen the economy and assist plaintiffs who have suffered real injury.

RESPONSES OF CHARLES ROTHFELD TO QUESTIONS SUBMITTED BY

CHAIRMAN BENNETT

Question 1. Mr. Rothfeld, you’ve obviously given a lot of thought to the kind of

lawsuits that might be filed as a result of Y2K failures. Do you have any prediction

as to the kinds of actions that might be most prevalent?

Answer. It is impossible to be confident about what sorts of Y2K suits are most

likely to arise. Because Y2K glitches may develop throughout the economy, and because computers and computer-generated data are ubiquitous, Y2K claims may be

brought by and against virtually every imaginable set of parties. Of course, we can

be sure that many suits will be brought against technology companies, seeking to

hold them liable on contract, tort, or various statutory theories for damage flowing

from Y2K failures. And the plaintiffs’ bar certainly will initiate many class actions

alleging software or hardware product defects. Having said that, however, I hesitate

to predict that any particular category of suit is likely to be most prevalent.

Question 2. You testified that proposed legislation should temper the possibility

of a litigation crisis by screening out the most insubstantial lawsuits—the ones

where there has been no real harm—while preserving the rights of people who have

suffered substantial injury. What evidence do you have that there will be so many

insubstantial lawsuits that legislation is required to screen them out?

Answer. We can point to evidence of at least three sorts that a large volume of

insubstantial litigation is almost inevitable.

First, that conclusion is supported by the expectations and preparations of the

legal profession. Many hundreds of law firms have created specialized Y2K practice

groups; publications and presentations to help lawyers prepare for Y2K litigation

have become common; and lawyers are counseling their clients on how to position

themselves to initiate Y2K suits. The investment of all of this legal capital encourages clients to sue, and places an irresistible pressure on lawyers to initiate lawsuits—whether or not they are justified. In this respect, the Y2K problem presents

opportunities to lawyers that are very similar to those offered by securities litigation

prior to enactment of the Private Securities Litigation Reform Act of 1995.

Second, we already have seen more than 50 Y2K suits initiated. Many of these

were insubstantial claims that were dismissed because the plaintiffs have not yet

suffered any injury. Of course, this is only the smallest tip of the iceberg; the numbers will increase exponentially after the year 2000 when actual computer glitches

materialize. That a large percentage of claims that already have been filed have

proved to be insubstantial, however, strongly suggests that this is an area that lawyers will milk for quick settlements. And when faced with large numbers of suits,

defendants will not be able to litigate the cases through to judgment; they will have

no choice but to settle.

Third, experts who have looked at the Y2K problem expect there to be an enormous volume of litigation. Even the most conservative estimates predict that litigation costs will be a multiple of the expenditures devoted to remediation, which suggests that litigation will consume an amount running at least into the hundreds of

billions of dollars. Of course, not all of this litigation will be frivolous. But if even

a modest percentage of it is, the volume of insubstantial suits will be tremendous.

Question 3. With respect to the 90-day waiting period, isn’t that too long a time

to wait for a fix if a small business suffers a critical failure?

Answer. The waiting period would not affect any substantial rights of small businesses. If a business wants to bring suit for injunctive relief—for example, to get

specific performance of a contractual right to repair of defective software—the 90-

day prelitigation period would not apply at all. On the other hand, if the business

is bringing suit for money damages, even without the 90-day period the plaintiff

surely will not complete the litigation and obtain compensation for many months or
years; if time is of the essence, under existing law the business never will get relief

until it is too late. Understood in that context, waiting an additional 30 (or 90) days

before bringing suit will not materially disadvantage the plaintiff. To the contrary,

the waiting period may help the plaintiff get quick relief by obligating the potential

defendant to focus within 30 days on what it can do for the potential plaintiff to

head off litigation. At the same time, if the small business engages in self-help during the pre-litigation period (for example, by hiring a third party to repair its system, or by purchasing an alternative system), the business can obtain complete relief from the defendant for any expenditures it has made.

Question 4. You testified that fear of potential liability is so great that computer

experts who remediate systems are now reluctant to take on such projects because

they have no assurance that iron-clad contractual liability limitations will be enforced. Can you explain why they have such concerns?

Answer. Expert remediators are concerned that judges might seize on vague common law doctrines to void limitations on liability or warranty disclaimers. Because

potential Y2K liabilities are so great, many experts are reluctant to have anything

to do with Y2K remediation projects because they fear that, if a glitch occurs, the

party whose system they contracted to remediate could attempt to hold the remediator liable for all damages. Of course, the experts would have contracts with the

businesses whose system they tried to remediate, and they could try to limit their

liability by contract with those businesses. But the concern is that, if Y2K problems

are widespread, judges who are sympathetic to the plaintiffs in such cases could

void the contractual liability limitations as unconscionable or contrary to public policy. The state-law rules governing those doctrines are vague, and without a clear

statement that such contractual provisions will not be voided, remediators will be

reluctant to take the chance that liability limitations will be held enforceable.

Question 5. You testified that without certain limitations, plaintiffs’ lawyers will

be able to manufacture essentially fictitious classes by finding trivial or theoretical

defects in products and bringing strike suits to extort settlements. How do you draw

a line between what anyone would agree was a material defect and what might be

a material defect to only some people?

Answer. The determination of materiality is a familiar one in the law and arises

in a wide range of settings. Whether a defect was a material one as to particular

users or for particular purposes would be a factual question that would turn on all

of the circumstances: the intended use of a product, the specifications of the product,

the nature and effect of the defect, and so on. Finders of fact should not have any

trouble making that determination.
PREPARED STATEMENT OF HON. WILLIAM STEELE SESSIONS


















































































RESPONSES OF HON. WILLIAM STEELE SESSIONS TO QUESTIONS SUBMITTED BY

CHAIRMAN BENNETT

Question 1. Judge Sessions, you testified that you believe most of the class action,

shareholder derivative, multi-district, intellectual property and other large complex

cases will find their way to federal court, as opposed to state courts. For the benefit

of the non-lawyers among us, why would that be the case?

Answer. My reasoning for predicting a higher volume of the above matters finding

their way into federal court is based upon the nature of the cases and the historical

filing track record of similar matters.

Traditionally, lawsuits arising under laws of the United States have included intellectual property matters, antitrust and trade regulation cases, civil rights cases,

and Securities Exchange Act of 1934 matters and the like. Coupled with appropriately large dollar amounts in controversy, diversity cases are federal court mainstays as well. In some cases exclusive/mandatory jurisdiction is a factor along with
ease of nationwide discovery, familiarity of both the bench and counsel with these

types of actions in the federal courts. The state courts would likely field the bulk of personal injury, professional liabil- ity, property damage and the standard tort litigation almost exclusively.

Question 2. You testified that the federal courts are already overloaded, and that a deluge of new Y2K-related matters likely will cause a judicial bottleneck that will

be unusually difficult to address. How would that bottleneck manifest itself in terms

of, for example, the time it takes to resolve not only the new Y2K cases but the

other cases that are normally filed in the federal courts? What impact would this

bottleneck have on the justice system overall? Answer. Assuming that the Y2K litigation deluge hits hard, and as one massive wave of filings, the bottleneck could be devastating. We must make certain predictions about the manner in which the filings will flow. If we assume that failures

occur on January 1, 200, that the failures are colorably imputed to the some loss

on that date or soon thereafter, and that filings related to those failures follow a

predictable date patterns, (within six months), then we can forecast a massive wave

of filings within six months of the date of failure. Once we assume a deluge of fillings, the ramifications are readily apparent. Due to the requirements of the Speedy Trial Act of 1974, federal courts will continue to

be required to place a preference on criminal cases and the civil case docket will

lag appreciably. As more civil matters are filed, the more the civil docket will lag.

At some point, parties will not be able to obtain meaningful justice due to the delay

in having their matters adjudicated. Memories will fade, witnesses will die or be

unfindable. Not only will the Y2K civil cases be ‘‘lost in the shuffle’’, but all other

civil cases as well.

Additionally, the learning curve for courts on the merits of the various cases and the insurance coverage problems will cause delay which is virtually unavoidable. Even a well-organized, well-maintained docket will creak under the pressure of a massive docket. Dispositive motions will be delayed, trial dates will be pushed

back and the problem at some point will begin to circle back on itself. That is, the

longer it take to properly allow litigation to process through the system, the longer

it will take. That may sound redundant but it is not.

Question 3. Based on what you know of the types of lawsuits that will probably be filed, would you anticipate the need for any special training of federal judges to

handle these cases?

Answer. I do not anticipate that the overwhelming majority of the cases will be computer technical at their core. In other words, a medical malpractice case, an accounting fraud case, a securities fraud case, and a patent infringement case or an

engineering product case all require very technical explanations for what went

wrong, but the legal process is routine. A judge must know how to manage the legal process well, but does not normally

need to have an expert knowledge about the subject matter of the various litigations. The judge does not have to be an expert in brain surgery, dismantling accounting systems, engineering an atom-splitting machine or analyze stock portfolios.

Similarly, the judges do not have to understand the various computer program languages in order to deal with Y2K disputes. But they must possess some knowledge

which relatively minimal training can give to them. A training film, produced by

the Federal Judicial Center or the Administrative Office of the United States Courts

could be very helpful. You might send United States Magistrate-Judges from each

of the ninety-four Districts to receive the necessary training. After ‘‘training the

trainer’’ that person can then return to their districts and seminars can be held for

the judges and magistrate-judges who will be working on the Y2K litigation.

Question 4. You testified that there is a shortage of federal judges to adjudicate

the cases that already exist in federal courts. About how many cases is the average

district court judge assigned per year? Can you elaborate on the type of work that

would be involved for a judge in some of the Y2K lawsuits?

Answer. When I left the bench in 1987, I believe that four hundred cases per

judge was the standard justification for authorizing a new judgeship. Judges in various districts carry between three hundred and eight hundred cases on their dockets. The number of cases filed is not always an accurate guide about the real load

carried by a judge but it is helpful in assessing the potential impact of a Y2K deluge. The nature of certain cases skews the number of hours spent per case. A six

months criminal trial could have a tremendous impact on a small docket. Judges

with those kinds of cases must necessarily have a smaller number of cases on their

dockets. Certain geographic locations have higher filing rates than other location.

The type of work involved in a Y2K deluge is likely to include the certification

of classes, Daubert reviews of expert qualifications, diversity of citizenship challenge

motions, jurisdictional and venue questions, conflict of laws issues, issues of first impression on novel theories of law, as well as the traditional handling of motions and

discovery along with trial duties.

Question 5. Judge Sessions, you testified that the Chief Judge of Cook County, Illinois had taken measures to reduce the caseload and delay in this court system,

and that the influx of Y2K litigation might undo that work. Could you elaborate on

the measures he has taken and explain whether or not those measures might be

effective in the Y2K context?

Answer. I am informed that Judge O’Connell has utilized a firm and reassuring hand to guide the administration of justice in Cook County. He has found efficiencies in tracking cases and held people accountable. Of course, as a general rule,

the federal courts are well run and the court administrators do a marvelous job. In Cook County, Judge O’Connell has tried to assure that the efficiencies already in place in the federal system were mirrored in the state court system. Both systems

will be impacted by a Y2K deluge. It is difficult to compare the state and federal

systems.

Question 6. You testified that legislation geared toward the swift and fair resolu- tion of cases through such vehicles as alternative dispute resolution, dual track systems, and similar programs might be the best solution to the Y2K problem. Can you

elaborate on what you mean by ‘‘dual track systems’’? How would alternative dispute resolution of Y2K lawsuits alleviate the pressure on the court system? Answer. The tracks of the ‘‘dual track systems’’ might best be described as the ‘‘traditional track’’ of litigation and a ‘‘fast track’’ of litigation. The parties are allowed to ‘‘opt in’’ or ‘‘opt out’’ of a fast track which might include early intervention

techniques, including early neutral evaluation, mediation, arbitration, (binding or

non-binding), summary jury trials, mini trials and the like. The fast track allows

for limited discovery, expert testimony through reports, condensed live testimony

and the parsing of ancillary issues. It allows the parties to get the main issues early

in the case, review each others positions and have an adjudication on the core

issues.

Such voluntary submission to a condensed, concentrated legal review should be given a faster track, so that the premium is on swift resolution, without sacrificing

sound judicial judgment. Those not choosing to avail themselves of the ‘‘fast track’’, will have the standard, traditional course of litigation. On either the fast track or the traditional track,

sound implementation of ADR will move cases without the cost, time and delays associated with a full trial. Anything that provides full, fair swift and sound justice,

such as ADR could, improves the ability of the courts to dispense meaningful justice

to the parties remaining.

PREPARED STATEMENT OF GEORGE SCALISE

THE Y2K CHALLENGE: A SEMICONDUCTOR INDUSTRY PERSPECTIVE

Mr. Chairman, members of the Committee, thank you for inviting me to be here today to testify about the Year 2000—an issue that I believe is the biggest challenge

facing the business community today. Before I begin, I would like to tell you a little bit about the Semiconductor Indus- try Association. The SIA represents over 90 percent of the U.S. semiconductor industry. Today, the U.S. chip industry holds the lead in world market share. According to Department of Commerce data, the chip industry contributes more to this

country’s GDP in terms of value added than any other manufacturing industry. The

industry is both capital intensive and R&D intensive: indeed, our members must

spend a third of their revenues on research and capital equipment, among the highest percentage of any industry in the world. These tremendous investments in R&D and capital equipment have yielded a di- rect benefit to consumers everywhere: the cost of our products continues to decline,

and the functionality continues to increase. The increase in computing power has

allowed the spread of PCs to homes, schools and small businesses, and it has enabled the explosion of the Internet and e-commerce. The Economic Report to the

President last year pointed out that without the faster-than-average recent rate of

decline in computer prices, overall inflation would have risen steadily since early

1994: instead, because of the fall in computer prices, inflation has actually decreased.

An Introduction to the Y2K Issue

Semiconductors have become a part of everyday life: they exist in everything from

coffee makers and alarm clocks to advanced computers and electronic equipment. In
part due to the pervasiveness of our products, there is a misperception being perpetuated that the Year 2000 issue is somehow a ‘‘chip problem.’’ I would like to address

and clarify this misperception. First, though, I would like to emphasize that the overarching goal of the SIA and its members is to focus energy and resources on remediation rather than litigation.

Our goal is not to offer protection to those in the business community who have

been slow to act on Y2K or to limit actions involving personal injury. We are focused

on insuring that the legal system is not exploited to extract settlements from responsible companies or to cause harm to the U.S. economy by diverting resources

from productive uses such as R&D.

As you know, the Y2K challenge stems from a decades-old practice of sorting and

processing dates in a two-digit format, a practice that emerged when conserving

computer memory was considered essential because of its high cost. What this

means from a practical viewpoint is that electronic products that process dates in

this way, which could include everything from computers to the family VCR, may

not know whether ‘‘00’’ means the year 1900 or the year 2000. Another date-related

issue that companies are confronting arises from the practice of some computer programmers who use ‘‘dummy dates’’ such as ‘‘99’’ or ‘‘00,’’ which can trigger system

shutdowns and other effects when dates that include those numbers are reached.

Because electronic products are highly integrated into today’s world, these problems

can have far-reaching effects.

Evaluating whether a product is Y2K ready is quite complicated. Many electronic

products are collections of semiconductors and other parts that operate and interact

according to instructions supplied by software. It is the interaction of all these hardware and software elements that determines whether a particular product is Y2K

ready. To complicate matters, many elements found in the same product may have

been made and/or programmed by different companies.

The Unique Challenges Facing the Semiconductor Industry

The semiconductor industry faces a considerable challenge in evaluating Y2K

readiness issues. There are thousands of different kinds of semiconductors. The vast

majority of semiconductors are incapable of generating, comparing or sorting date

information. These semiconductors are unaffected by the Y2K issue. A small percentage of semiconductors are capable of generating or processing date information

when software is added to the chip: the software is typically specified and owned

by the customer, not the chipmaker. An even smaller number of chips have circuitry

that is designed to generate or process dates, and even in this category the

chipmaker may be manufacturing to customer specifications.

In general, chipmakers do not design or develop the programming for their products: in fact, typically the programming is the proprietary material of the third

party that developed it, not the semiconductor manufacturer. Even when the

chipmaker has access to the programming—which is provided as a series of zeros

and ones—it typically is not permitted by confidentiality agreements to verify

through reverse-engineering that the product is Y2K ready. For similar reasons, if

a semiconductor manufacturer has been asked to manufacture to a design applied

by a customer, the chipmaker can’t determine whether the semiconductor is Y2K

ready.

Further complicating this issue is the fact that semiconductors are an integral

part of larger ‘‘embedded’’ systems that affect the operations of a myriad of electronic products. Embedded systems provide control functions in numerous products,

from the family VCR to microwave ovens to cars. Embedded systems have the ability to compute. Typically, these systems also contain instructions—usually in the

form of software—that determine how the end product operates and what it computes. Again, these instructions are usually not developed by the chipmaker, but

rather by the manufacturer of the end product.

Another critical issue is how the semiconductor device will work as part of an

electronic product, which may contain other parts that are not Y2K ready. For example, a typical electronic product such as the family computer contains a collection

of parts that work together. It is the interaction of all these elements that dictates

whether the product is Y2K ready. In the case of the computer, these parts include

the microprocessor, the BIOS (Basic Input Output System) that controls the interface between the operating system and the computer hardware and controls the system’s real-time clock, the operating system and the software applications. Because

the readiness is determined by the interaction of all its various components, the

manufacturer—or in some cases the distributor or owner—of the finished electronic

product is the only entity capable of testing and evaluating whether the product is

Y2K ready.
The Chip Industry’s Response

Semiconductor makers are conducting extensive research and evaluation pro- grams to resolve the Y2K issues within their control. As part of this comprehensive

effort, our companies are working cooperatively with suppliers and customers to

help resolve questions and concerns about the Y2K readiness of electronic products.

Because of the complexity of these issues, the semiconductor industry supported the

Year 2000 Information and Readiness Disclosure Act, signed into law by the President last October 19, which encourages companies to disclose vital information

about Y2K issues so that they can work together to solve common issues. I hope this statement helps explain the relationship of ‘‘embedded systems’’ and chips to the Y2K issue. As I have already noted, the ultimate solution to this question is beyond the control of the semiconductor supplier. Chipmakers can and will

continue to assist their customers by providing information. Ultimately, the manufacturer of the finished electronic product is the only one capable of determining

how the elements of the system function together as an integral unit and whether

the product is Y2K ready. And at the consumer level, individuals and businesses

must contact the manufacturers of electronic products to determine whether they

are Y2K ready. Today, I would ask your help to insure that chipmakers and any other businesses that have approached the Y2K issue in a responsible and forthright manner not be

subject to frivolous lawsuits. I am not asking for dispensation for any business or

individual that has not acted in good faith. I am suggesting that those who have

acted in good faith should not be punished. This is the aim of two bills—one introduced by Senator Hatch and Senator Feinstein, and a separate measure put forth

by Senator McCain—both of which we strongly support. As I mentioned at the beginning of my testimony, semiconductors contribute more to the U.S. economy than

any other manufacturing industry. Please help us insure that we can continue to

spend our resources on productive R&D and other investments, rather than on legal

fees. Companies need to be focusing their attention on remediation, not litigation.

PREPARED STATEMENT OF MICHAEL C. SPENCER

My name is Michael C. Spencer. I am a partner at Milberg Weiss Bershad Hynes & Lerach LLP in New York City. I have been asked to provide testimony to the Special Committee in light of my experience in prosecuting Y2K-related actions filed by

my firm, and to comment on the potential ‘‘litigation explosion’’ that assertedly may

arise from Y2K-related failures.

Overview

My perspective on the Year 2000 issues facing the Congress and our society at large exactly reflects the name given to this Special Committee: this is a ‘‘technology problem,’’ not a litigation problem. My central point is that the law does not need changing to respond to Y2K issues. Our existing substantive common law rules and

our existing court procedures can and will deal with these problems adequately.

These rules and procedures have been developed and tested over lengthy periods of

experience by litigants and jurists of all political persuasions. The value of this past

experience is highest when our system confronts issues like the prospect of Y2K

legal disputes. We should not contemplate jettisoning our time-tested rules and procedures just at the time when they are most needed. There really should be no ‘‘sides’’ in discussing Y2K legal issues. The potential claimants or plaintiffs in Y2K disputes may include all types of individuals and

firms; for example, large businesses, which typically are viewed as defendants in

most debates over litigation issues, are as likely to be plaintiffs as defendants in

these situations. Nevertheless, we are seeing a special-interest group—high-tech

product vendors whose products contain unresolved Y2K defects—seek wholesale revisions to substantive and procedural law simply to protect themselves from legal

exposure, at the expense of our established system for resolving these types of disputes. If enacted, these steps would undermine basic confidence in the ability of the

legal system to provide just solutions to these problems. So far, only a relatively small number of lawsuits have been filed arising from

Y2K problems (several dozen at most). The facts giving rise to many of the lawsuits

reflect a disturbing trend: the proclivity of some high-tech firms to dishonor their

legal responsibilities to stand behind the performance of their products (typically

software or firmware), and instead to use Y2K problems as an opportunity to extract

revenues and profits from their customers—who are forced to pay for Y2K fixes

when they should be receiving them for free. These cases are being adjudicated

based on adequate existing law, but have not yet progressed far enough to provide

clear answers to the questions of liability presented in them.
In general, because of the pervasive involvement of computer and chip technology

in most aspects of modern life, Y2K failures may lead to disputes covering the full

range of civil legal liabilities, involving (for example): claims in tort and in contract;

large and small claims; economic, property, and bodily injuries; mass consumer

claims or highly individualized claims; immediate and consequential damages; invocation of policies favoring compensation and deterrence. As requested by the Special

Committee, this statement also outlines existing legal mechanisms for handling

these issues.

Experience and Perspective from Which This Statement Is Derived

The law firm at which I work, Milberg Weiss, is probably the largest and bestknown firm specializing in handling litigation for plaintiffs with respect to largescale business and economic disputes, often on a contingency-fee basis and often

using class action procedures. Our cases often involve securities fraud, accounting

failures, abuses of consumer protection laws, environmental and health issues, and

antitrust violations. We also have an active pro bono practice, which ranges from

representing individual Social Security claimants to mass actions to recover assets

stolen in the Holocaust. We have offices in New York, California, and Florida.

I and others at Milberg Weiss first became involved in Y2K litigation a little over

a year ago, when a small business owner on Long Island came to us concerning an

accounting software package he had purchased in July 1995. He had recently been

informed by the software vendor that his version of the software was not ‘‘Y2K compliant’’ (i.e., it contained Y2K defects) and that it would fail to process entries and

transactions accurately as the millennium approached. Moreover, although the software had been sold with an express five-year warranty, the vendor had informed

owners of this version that the Y2K problem would not be fixed free charge; an upgrade would need to be purchased. Depending on the number of program ‘‘modules’’

being used, the fix would cost about $2500 for the average user, versus an original

acquisition cost of $5–10,000. This amounted to a substantial and unanticipated

cash outlay for small business users.

We were retained to bring a class action. The client’s company, on behalf of itself

and a proposed class of other owners of similar software, sued the software manufacturer for breach of warranty and related claims in state court in northern California, where the manufacturer was located. This was the first class action raising Y2K

issues in the country. The vendor’s immediate reaction to the lawsuit was to offer

a free fix—an immediate salutary result for all class members. If the company had

offered the free fix all along, which in our view was its obligation under its pre-existing warranties, no litigation would have been necessary. The laws and procedures

involved in the lawsuit were not specific to Y2K problems in any way: this was a

fairly straightforward warranty dispute, made novel only because it was the first

class action in the Y2K arena, and thus attracted lots of attention. The case was

settled on the practical ‘‘free fix’’ basis (although not until further legal disputes

were resolved after several months of effort), and the final court hearing on the fairness of the settlement is scheduled for March 10, 1999 (shortly after this writing).

Atlaz Int’l, Ltd. v. Software Business Technologies, Inc., No. 172539 (Marin Co.

Super. Ct., Calif., filed Dec. 3, 1997).

My firm has commenced several other Y2K class actions, in situations that are

broadly similar, in various courts around the country. Our clients in these cases include a computer store, a medical practice, individual consumers (one salesman, one

independent film distributor), a car dealer, a windowshade manufacturer, and a bottled water distributor. We have heard from scores of other software owners who are

similarly aggrieved, including large and small businesses, municipalities, and nonprofit organizations. These cases are well suited for class action treatment because

the defendants’ conduct alleged to be unlawful has similar or identical effects on all

claimants (owners of Y2K-defective software for which the manufacturer has a warranty or consumer-protection obligation to fix it free of charge, but refuses to do so).

As with any collection of litigated actions, these cases have had a variety of results:

some have settled, some are still in early stages of litigation, some have been

through court proceedings in which we have been required to amend our pleadings

to conform to the courts’ views of applicable law, and one has been dismissed and

is on appeal. In all of these cases, we have found very widespread support for our

claims among the members of the proposed classes, for the simple reason that people cannot understand why they should have to pay substantial sums to fix software

they bought only recently, with the reasonable expectation that it would function

properly at least for several years into the future.

Outline of Potential Y2K Lawsuits—Claims and Defenses

The Special Committee’s invitation for testimony requests an explanation of the

potential causes of action and types of lawsuits that might arise in the event of
Y2K-related failures. The following comments, in outline form, describe potential

claims and the types of issues that have arisen or may arise.

A. User vs. Vendor (Software, Embedded Chips)

1. Owners of Y2K-defective software or firmware (machines controlled by embedded chips) may sue for breach of warranty, fraud, breach of contract, or violation

of consumer protection and unfair business practice statutes.

2. In general, these cases divide into two groups: those brought by consumers or

with respect to consumer products, for which statutory consumer protections apply,

including provisions preserving implied warranty obligations even if contractually

disclaimed; and those bought by businesses or with respect to non-consumer products, which may be governed by UCC principles that often recognize warranty disclaimers. In either situation, claims may also arise for fraud (for example, if the

vendor has induced purchase by fraudulent statements) and/or for breach of contract

(for example, if maintenance contracts are terminated or deemed not to cover correction of Y2K defects).

3. Most of the litigations already commenced are in this category, because users

are damaged immediately when vendors refuse to provide free fixes required under

applicable principles, and users either purchase the fixes or abandon the software/

firmware.

4. The cases are often suitable for class action treatment because of the common

legal and factual issues involved. Consequential damages (i.e., economic damages

deriving from Y2K malfunctions, such as accounting errors or missed deliveries) are

typically excluded from the class actions because they may involve non-common

issues. See Microsoft Corp. v. Manning, 914 S.W.2d 602, 610–11 (Tex. App. 1995)

(class certification sustained for non-Y2K consumer software defect claims based on

‘‘mere purchase of a defective product’’; excluding consequential damages).

5. Defenses include lack of ripeness (vendors argue that owners may not sue unless and until the Y2K defect is ‘‘manifest’’ and produces a computer malfunction

or causes consequential damages—see Issokson v. Intuit, Inc., No. CV 773646, slip

op. (Santa Clara Co. Super. Ct., Cal., Aug. 27, 1998); lack of privity (in cases involving express warranty claims and disclaimers); and contract disclaimers and integration clauses purportedly limiting warranty and fraud claims—see Paragon Networks

Int’l v. Macola, Inc., No. 98–CV–0119, slip op. (Marion Co. Ct. of Common Pleas,

Ohio, Dec. 16, 1998).

B. Users vs. Consultant

1. The only reported Y2K case in this category so far is Young v. J. Baker, Inc.,

No. 98–01597 (Norfolk Co. Super. Ct., Mass., filed Aug. 17, 1998). The consultant

that advised on purchase and implementation of a client’s computer system sought

a declaratory judgment that it was not liable for negligence, malpractice, or breach

of contract arising from Y2K problems that subsequently arose. This case was sent

to mediation and reportedly was subsequently resolved without any decision on the

merits. Consultants’ defenses in these cases may include invocation of the economic

loss rule (which may in some cases limit tort-based recoveries when product failures

cause only economic harm) and other defenses mentioned above.

C. Securities Purchases vs. Company

1. Companies that have allegedly issued materially false reports about their Y2K

problem, and companies providing Y2K remediation services that issued materially

false statements about business prospects, have been the subject of a handful of securities fraud class actions. These cases do not appear to involve issues different

from any other securities fraud cases.

D. Shareholders vs. Corporate Directors/Officers

1. These ‘‘derivative’’ cases would typically allege that corporate directors and officers breached their duties of care to their companies by failing to fix Y2K problems,

causing injury to the company. These cases have not yet materialized. Defendants

would typically assert defenses such as the business judgment rule. The legal issues

again do not appear to be different from those in other derivative cases.

E. Victim of Y2K Failure vs. System Owner

1. The broadest category of potential claims involves victims of consequential

damages suing the manufacturers, owners, or users of computer systems whose failures caused the damages, and follow-on ‘‘chain reaction’’ claims designed to assign

legal responsibility to parties actually at fault.

2. These claims may involve both economic and bodily injury (the latter, for example, in cases of hospital equipment failure or transit system mishaps) and could include both tort- and contract-based causes of action. These cases again would raise

typical issues and defenses, ranging from statutes of limitation; reasonable conduct

in identifying and remedying Y2K defects; and allocation of responsibility in contracts among economically related parties.
3. Depending on a number of factors, including the types of injuries involved and

the relationship between injured parties and parties whose equipment suffered Y2K

failures, many of these cases may be appropriately brought as class actions. For example, a financial institution’s failure to process transactions due to Y2K defects in

its proprietary computer system, leading to customers’ defaults on financial obligations, would appear to be well-suited for class treatment. Courts have been more

reluctant to permit class treatment for claims involving non-economic bodily injuries

on the ground that diverse legal and factual issues may predominate over common

issues.

Note: The above outline of potential lawsuits in this area is necessarily simplified. The legal profession has held numerous conferences on Y2K-related litigation and remediation topics in the past 18 months to prepare for issues that may

arise. Course materials from these conferences provide more exhaustive information

about these matters. See, e.g., Course Materials: Crises at the Millennium, Computer

Law Association (Nov. 10–11, 1998, New York).

Perspective on the Challenges to Our Legal System Arising from Y2K Defects

The announced topic for the panel discussions at this hearing of the Special Committee is ‘‘Y2K in the Courts: Will We Be Capsized by a Wave of Litigation?’’ As

stated in my introduction, my principal observation is that the vast majority of our

society’s time and resources should be devoted to fixing the Y2K technology problem,

and not to litigation matters. For those interested in litigation, however, the Special

Committee’s focus on a possible ‘‘wave’’ of litigation at least identifies the issue,

which is whether unprecedented quantities of litigation will ensue. There is no need

to be especially concerned about the qualitative ability of our court system to handle

Y2K problems because our present substantive law and procedural rules are in fact

well-developed to deal fairly with Y2K issues. The types of Y2K cases that may be

litigated involve familiar fact patterns and legal principles that are present in thousands of commercial and consumer cases that the courts handle successfully every

week.

Our system of slowly developing common law principles, augmented in some respects by statutes incrementally enacted over time to deal with general problems

not sufficiently addressed by common law (such as consumer protection issues), is

widely recognized as the most efficient and efficacious method for achieving economic justice in the world. This system reflects accumulated wisdom of numerous

judges and litigants who have faced factually diverse problems sought to be resolved

fairly using claims and defenses developed and argued by lawyers for many decades.

In a truly conservative sense, the genius of this system should be honored and preserved.

The present legislative proposals in the Senate and the House are devoted almost

exclusively to restricting rights and remedies for Y2K problems, which would have

the ultimate result (if enacted) of forcing the ultimate victims of Y2K failures to

bear the economic costs of their injuries, and of immunizing those who should be

held responsible for addressing the problem in the first place. The attempt to reduce

or remove existing rights and remedies simply because the Y2K problem may be

widespread, and because many of those responsible for its appearance are in hightechnology industries, is simply unjust.

For example:

• A pre-complaint notification provision, promoted as implementing a superficially appealing ‘‘cooling-off’’ period, in fact would simply delay efforts to obtain redress from defendants that have committed Y2K wrongs. A required three-month

lag in filling claims would probably act to reduce likelihood of settlement by removing any legal pressure on a defendant to take the claim seriously. While such a

three-month lag might appear harmless to some observers, a small business owner

who is highly dependent on a computer system that needs an immediate Y2K fix

may not be able to wait that long for results. And it is notable, even remarkable,

that the effect of filing a lawsuit in many of the class actions already brought has

been to cause the defendant to offer an immediate free fix to members of the proposed class—a clear demonstration of the efficacy of prompt legal action in appropriate circumstances.

• The House legislation would enact a ‘‘reasonable efforts defense’’ to contract actions. Existing law for centuries has required contracting parties to perform their

contractual obligations as agreed upon (unless limited doctrines of impossibility or

unconscionability apply)—not merely to make ‘‘reasonable efforts’’ to perform. This

would amount to a wholesale pro-defendant rewriting of contract law.

• The proposed ‘‘codification of the economic loss rule’’ would apparently jettison

established complex principles for economic loss recovery in areas such as malpractice, where state and federal courts have carefully developed standards in response to specific factual situations over many years.

• Limitations on liability of directors and officers (to the greater of $100,000 or

their compensation over the past year) and ad hoc limitations on punitive damages

for truly egregious wrongdoing amount to makeshift restrictions on recovery that

bear no relationship to any compensation or deterrence objectives in the law.

• ‘‘Proportionate liability’’ for defendants in Y2K tort actions would abrogate traditional doctrines of joint and several liability for defendants who participate in joint

activity that causes injury, and shift the risk of a defendant’s insolvency from other

defendants that joined in the wrongdoing, to the victims who would now be disabled

from recovering complete damages.

• Implementation of a ‘‘knowledge or reckless disregard of a substantial risk’’

standard for a defendant’s liability where state of mind is an element of a cause

of action again disregards carefully developed judicial and legislative standards applicable to various claims involving state of mind or standards of care.

• Restrictions on class actions, through heightened notice requirements, a ‘‘minimum injury’’ requirement, and fee limitations lack any justification other than antipathy toward class actions and fear that this remedy may actually be effective in

ensuring that high-technology companies honor their tort, contract, and statutory

obligations to consumers and other potential class plaintiffs. There is no plausible

reason to impose ad hoc limitations on class actions for Y2K problems—in fact,

those who are truly concerned about an increased volume of litigation should be promoting class actions (in which many claims are aggregated), not impeding them.

• Heightened pleading requirements similarly would be contrary to established

procedural law in other similar cases and have no apparent justification other than

to protect potential defendants.

the assertion by some organizations favoring this proposed legislation that it

somehow would ‘‘protect consumers’’ is astounding, because the legislation’s only

practical result would be to protect businesses potentially responsible for injuries resulting from Y2K defects.

The responsible way to approach challenges to our court processes that might

arise if Y2K actions represent a significant increase in federal and state court caseloads is not to limit the ability of victims to recover—it is to prepare courts to deal

with possible increased filings. Ensuring the judgeship positions are filled and court

administration positions fully staffed is one obvious step. And as has always been

true when an area of law develops quickly, precedents will be established in early

cases that will guide later potential claimants and defendants in resolving subsequent disputes without resort to the courts, and assist courts in adjudicating later

cases that are litigated. That is the way our common law system typically functions,

and there is every good reason to preserve the strengths of that system in the face

of possible increases in case volume if widespread Y2K problems materialize.

A Final Note on the Equities in Y2K Disputes

Although the Y2K problems is commonly referred to as the ‘‘millennium bug,’’ that

term is a misnomer. A bug is an unanticipated problem. The Y2K problem has been

anticipated for several decades. The failure of the computer industry to remedy this

problem in their products, because of years of industry procrastination and denial,

is the only reason the problem is perceived as a crisis at this time. Economic responsibility for the problem should be borne by the persons or entities that failed to correct the problem despite many opportunities to do so. The present efforts to restrict

or eliminate those entities’ legal liabilities in this area represent special-interest opportunism at its worst.

RESPONSES OF MICHAEL C. SPENCER TO QUESTIONS SUBMITTED BY

CHAIRMAN BENNETT

Question 1. Mr. Spencer, you testified as to your belief that the 90-day coolingoff period would just delay efforts to obtain redress. Isn’t it possible that there are

many responsible businesses out there that wouldn’t see the 90-day cooling-off period as a chance to delay, but as a chance to avoid litigation by solving the problem

when it is brought to their attention?

Answer. In every situation of which I have been aware, potential claimants who

have suffered a Y2K problem and believe it is the responsibility of another entity

(typically, a software vendor) to fix the problem have contacted the vendor and

sought a solution long before any litigation was commenced. No one wants to start

litigation before less drastic alternatives are explored—it is too expensive, and is

usually employed only as a last resort.
On the other hand, there have been, and undoubtedly will continue to be, situations in which a potentially responsible vendor has already announced definitively

that (for example) it will not fix a Y2K defect in its software products for free, or

its maintenance contracts do not cover Y2K defects. In those situations, a 90-day

mandatory ‘‘cooling-off period’’ would serve only to delay any legal remedies that

software users might need immediately—particularly if those users are consumers

or small businesses that depend on the software, and a Y2K defect has made their

computer systems inoperative. Such a delay can work a real hardship on these

users, and might also exacerbate ‘‘ripple effect’’ problems suffered by others who

deal with businesses dependent on the defective software. Finally, our court system

is designed to provide reasonably prompt remedies; a 90-day required delay would

be contrary to that laudable goal.

Any and all responsible parties to a Y2K dispute can always agree to a coolingoff period before litigation is filed, and most do desist from immediate litigation, as

described above. But a mandatory delay period would hurt those who need immediate remedies (particularly, for example, small business owners who rely heavily

on the proper functioning of their systems and might suffer substantial financial difficulties if a free fix is not provided promptly), and not really help those who are

not suffering urgent problems and thus would be likely to seek non-litigation resolutions regardless of any mandatory delay period.

Question 2. You testified that Y2K failures may lead to disputes covering the full

range of civil legal liabilities. Based on your experience in bringing Y2K actions, do

you have any sense of what kind of lawsuits will be more common than others?

Answer. Because computers and embedded chips have become ubiquitous, lawsuits over Y2K defects in those products will likely arise in a wide variety of legal

contexts. Claims to obtain Y2K fixes or recover the costs of those fixes typically are

based on contract law principles (breach of warranty or breach of maintenance

agreements, often covered by the Uniform Commercial Code) and on consumer protection statutes. Claims seeking recovery of damages for the effects suffered as a

result of Y2K defects may be based on contract principles (the defects may cause

one party to breach its contractual obligations), tort laws (for example, product liability or negligence), or statutory violations (for example, system failures at financial institutions may cause a wide range of statutory banking, consumer protection,

or securities violations).

In general, the types of claims that may arise will probably be similar to the types

of claims already in the legal system. In cases of preexisting contracts, the parties

may already have bargained for particular allocations of responsibility for such

problems. In cases of tort and statutory violations, existing laws, as interpreted by

the courts over the years, should suffice to obtain just adjudications within reasonably predictable parameters. In fact, these are the types of cases that courts across

the country deal with successfully and efficiently every day.

Question 3. Of the companies and individuals that have come to you for advice

about Y2K problems they have had or anticipate having, can you give a sense of

how many had tried to have the problems solved without litigation? If so, what were

the difficulties they encountered?

Answer. They all tried to have the problems solved without litigation. Of those

who were seeking a Y2K fix (without regard to whether it would be available free

of charge under an applicable warranty) or a free Y2K fix (because the software was

under warranty but the manufacturer was not honoring it), some succeeded in persuading the manufacturers to provide the requested remedies, and lawsuits were

not filed. In some cases, the manufacturers initially resisted and lawsuits were filed,

but the manufacturers then offered Y2K fixes (or free fixes) immediately. In a few

cases, solutions were not offered by the manufacturers and litigation is ongoing. The

principal underlying difficulty in all of these circumstances is the manufacturers’

unwillingness to recognize that they are responsible for the Y2K problem in their

software, and in appropriate cases to acknowledge their warranty obligations to provide a free fix. Many manufacturers view Y2K problems as profit opportunities (i.e.,

to collect upgrade charges from . . . . . . . problems). This is highly regrettable—particularly because many other manufacturers are scrupulous about honoring their responsibilities to their customers.

In addition, potential claimants may face prospects or threats of retaliation if they

file and pursue claims in litigation—which can be very daunting for a software user

whose business is dependent on obtaining continued support services from the software company.

Question 4. Mr. Spencer, you testified that, in your view, the responsible way to

approach this issue is to prepare courts to deal with possible increased filings. What

do you think of proposals to encourage the use of alternative dispute resolution?
Answer. First, I think the single most important step that can be taken to prepare the court system is to fill all open judgeship and other court personnel positions.

We cannot expect the system to work if it is not fully staffed. In conjunction with

that step, we should ensure that class actions remain a viable method for handling

numerous claims involving common legal or factual questions, since proper utilization of this procedure can make courts more efficient and relieve court congestion. Alternative dispute resolution should certainly be encouraged for those disputants

willing to make use of that method. However, mandating ADR would be a cop-out:

the very purpose of our court system is to resolve disputes that cannot be handled

in less formal or adversarial ways. There is no reason to conclude that the courts

cannot handle Y2K claims that rise to this level of seriousness.

Question 5. Mr. Spencer, what is your opinion of whether there will be a major

increase in the number of lawsuits brought for Y2K-related reasons?

Answer. So far there have been very few lawsuits. My opinion as to whether there

will be a modest increase in number, or the ‘‘tidal wave’’ some members of this Committee have envisioned, is essentially highly speculative, as is everyone else’s. If

there are widespread system failures due to Y2K defects, then there may well be

more lawsuits. Again, if many of the lawsuits share common legal or factual questions, use of the class action device can reduce the burden on the courts by aggregating similar claims.

Question 6. Some comparisons have been made between class action asbestos complaints and possible class action Y2K complaints. Based on your knowledge, what

parallels exist between the two and what differences might there be, in terms of

costs, damages awarded, and the concentration of claims being made during a limited time period?

Answer. I see more differences than similarities between the two situations. Asbestos claims developed over a long period of time and generally involved bodily injury, where the principal litigation issues have concerned causation of disease—

which have in turn posed obvious obstacles for class action treatment. On the other

hand, most Y2K claims are likely to arise within a reasonably short period of time

(even if many harmful effects are experienced only gradually, as contaminated date

data is recalled or used). The principal litigation issue I see in connection with Y2K

defects concerns allocation of legal responsibility between software, hardware, and

chip manufacturers on the one hand, and users on the other hand—but that issue

will arise in a wide variety of contexts involving torts, contracts, and statutory provisions, as described above. Although superficially the asbestos and Y2K problems

might appear similar because each involves fairly widespread harms grouped under

a common name, in fact the a. . . . . . . problem are likely to be substantially different.

PREPARED STATEMENT OF MARK YARSIKE

Chairman Bennett, Co-Chairman Dodd, Senators, my name is Mark Yarsike, and

I am a small businessman from Warren, Michigan. It is an honor for me to appear

before you today, and I appreciate your allowing me to testify on the Y2K issue. I

am the first person in the world to ever file a Y2K suit. That case—filed in Macomb

County, Michigan—settled quickly and proves that the current system works exactly

as it should. I am here to implore you to leave the system as it is. I’ll take a jury

of my peers in Macomb County under the current standards, system, and laws any

day of the week. It’s what worked for me, and I hope you’ll let it work for the other

small businessmen like me. We’re counting on that.

I am grateful to you, Mr. Chairman, for wanting to hear from a real businessman

from outside Washington as to how the court system will handle the Y2K cases that

are sure to appear within the next several years. Unlike some others who speak on

this issue, I do not pretend to be able to see into the future and forecast what will

occur several years from now. I do, however, know what happened to me. I am a

perfect example of a simple truth: the current court system can not only handle Y2K

cases, but it does so quickly and with justice.

I hear many heads of organizations that profess to know what’s best for me. I

hear many representatives of big business telling their side of the story. I look at

who else is testifying and I see that I am the only person who represents what I

think makes America work—the mom and pop little store. The bottom line is this:

I, and every other small businessman that I have ever spoken to, believe in and

trust in the current court system. We know what to expect from our local courts.

We signed contracts knowing and relying upon state laws protecting us—the UCC,

state fraud statutes, and the like. We don’t want anything to pull away what is

often our only safety net—state laws which were carefully drafted by locally elected
representatives who know what it is like for a small business to operate in Warren,

Michigan, or Valley Cottage, New York, or Broken Bow, Oklahoma. I would like to briefly tell you my story, and explain how the court system worked for me. My story proves, I think, what most people instinctively know: the current

system, with its ability to offer a jury of our peers, is in the best interests of everyone. It vindicates the innocent, rights the wrongs committed by the guilty, and allows small businessmen like myself to know that if we sign a contract in Michigan

a Michigan jury will uphold that contract under Michigan law. Following in the steps of my parents, immigrants from Poland, I own a gourmet produce market in the Detroit suburbs. My parents worked 7 days a week and instilled in me the values of hard and honest work; I apply those values everyday.

I, along with my partner Sam Katz, himself a survivor of the Holocaust like my parents, have managed to build a successful business. We offer our customers unparalleled service, adjust quickly to changes in the market, and treat our employees like

family. All that was put in jeapordy by a profiteering company trying to take advantage of the Y2K problem. It is only the court system that saved me. My parents had a cheap $500 cash register in their store. It was basic, but it worked. When I opened my store, I decided to take advantage of the most current

technology. I spent almost $100,000 for a high-tech computer system. My computer

systems were the top of the line—or at least that is what I thought. The company

that I purchased them from spent hours extolling the virtues of the system—they

sent a salesman from Chicago, they sent me sales literature, they promised that the

system would last well into the 21st Century. I believed them. Opening day was the proudest day of my life. As we opened the doors to the store, we were thrilled to see lines of people streaming in. The store was sparkling, everything was ready. Or so we thought. As people began to choose their purchases, lines began to form. Suddenly, the computer systems crashed. We did not know why. It took over a year and over 200

service calls to realize it was credit cards with an expiration date of 2000 or later

that blew up my computer system—the one which I spent $100,000 on. The crash of the system was devastating. We had constant lines. People walked out in droves, day after day. People were waiting with full carts of groceries to pay

but couldn’t. We could not process a single credit card or take cash or checks. We

could not make one sale.

We did what anyone would do. We called TEC America, which had sold us the registers. We called them over 200 times. Every day there were problems, lost sales,

aggravation. We were struggling to keep afloat week-to-week, day to day. The company declared that it was doing its best to fix the problem, but refused to give us another system to use while they fixed these broken ones. Each time their

technician visited our shop, the company insisted that the problem was solved—only

to have the registers fail again hours later.

I lost thousands of dollars and hundreds of customers. I was on the brink of economic disaster. I could not focus on the day-to-day operations of my business. I was

consumed with making sure this computer system functioned daily. I finally had to

go out and buy a brand new system. I should have bought the $500 dollar registers

my parents used when they arrived from Poland—at least those worked.

The huge costs of purchasing the first system, and then replacing it, on top of the

lost sales and lost reputation caused daily havoc and stress on my partner and myself and all the employees—and I was getting absolutely no satisfaction from the

computer company which put me in this fix in the first place.

So I turned to the court system. I approached an attorney and we filed a case

in Macomb County, Michigan. The system worked for me. The companies who

caused all this grief finally settled with me soon after I filed suit and I was able

to recoup some of my losses. It was only the fear of facing a jury and explaining

their inexcusable behavior that forced the settlement.

I’m just a businessman. I am no legal expert on the various pieces of legislation

before the Senate. But I do know enough to know that adding more procedural hurdles for good-faith plaintiffs and allowing defendants to have a ‘‘good faith’’ defense

makes absolutely no sense: TEC would never have settled. If we were lucky, we

would still be in litigation. But more than likely, my store would be out of business.

I would not be a small businessman today—I would be a former small businessman. 120 people would be out of work, my landlord would have a ‘‘for lease’’ sign

on my store’s front window, and I would be looking for a job.

One thing I know now is that the so-called Y2K problem is not a Silicon Valley

problem. It’s a Warren, Michigan problem. And its not so much a ‘‘high tech’’ problem as it is a problem of getting companies to take responsibility for their products

and the need to repair or replace them. What we need are responsible businesses

to take care of the problem now—and not spend months and months of wasted time
trying to get Congress to protect them. What I don’t understand from my vantage

point in Warren, Michigan is why Congress is first turning to giving liability protection to companies rather than turning to ways to get companies to remediate the

problem now.

Since I had my problems, I have kept up with the cases being filed concerning

the Year 2000 issue in order to see how things developed after I filed my case. I’ve

seen exactly what I would expect—some meritorious cases like mine proceeding to

settlement, others proceeding to trial, and a few seemingly insufficient cases being

dismissed. The current system is working. The good cases are being handled

quickly; the wrong-doers are recognizing that they need to do what is right. People

are getting patches for their computers so that they can go back to what they do

best—sell stereos, deliver groceries, clean clothes.

Let’s actually do something that FIXES the problem. Many of these bills—with

all due respect—make the problem worse by discouraging these companies from fixing the products. I ended up having to replace my entire system. Give me tax credits

for those purchases. Help me get SBA loans. Those are the kinds of things that will

help. Knee-jerk efforts to revamp the entire system of justice that businessmen rely

upon is wrong.

Finally, if Congress is hell-bent on passing some kind of liability protection bill

for large software manufacturers, or a bill that will alter the current court system,

at least exclude from the legislation small businesses who may end up being plaintiffs because they suffer commercial loss from software defects. Let the big guys cope

with this new scheme if they want, but not us who have to make payrolls and who

need the protection of state laws and the current system.

Long ago, while sitting in their little grocery store in Detroit, my parents taught

me that sometimes people with the best of intentions can try to make a problem

better, but end up making it worse. I understand what they mean. I know that Congress is trying to help. But, before you act, I now hope you will consider what altering the court system will do to the small businessman. I know that is why you have

allowed me to share my story, and I am grateful you provided me the opportunity

to testify today. I will be happy to try and answer any questions you may have.
1FFIEC was established in 1979 as a formal interagency body empowered to prescribe uniform principals, standards, and report forms for the federal examination of financial institutions,

and to make recommendations to promote uniformity in the supervision of these institutions.

The Council’s membership is composed of the federal bank regulators—Federal Deposit Insurance Corporation, the Federal Reserve System, and the Comptroller of the Currency—plus the

regulators for credit unions and thrift institutions—the National Credit Union Administration

and the Office of Thrift Supervision, respectively.

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

PREPARED STATEMENT OF RICHARD J. HILLMAN

Mr. Chairman and Members of the Special Committee:

Financial institutions are regulated for a variety of reasons, including both safety

and soundness and customer protection. This regulation supplements market discipline, especially in cases where customers have difficulty evaluating a company’s

financial soundness. This is true for depository institutions, securities firms, and insurance companies. The Year 2000 computer problem is an issue that can affect the

ability of an institution to continue to provide services to its customers; that is, it

can affect both safety and soundness as well as customer protection. Therefore, it

is appropriate that financial regulators be actively involved in making sure that (1)

institutions know what is expected of them to become prepared and (2) customers

and others who depend on a continued stream of services can be confident about

the operational viability of their financial institutions.

At the request of this Committee and the Ranking Member of the House Committee on Commerce, we have reviewed the activities of bank and securities regulators

and have reported that, after a slow start, they have generally made real progress

in validating the preparedness of their regulated institutions. We have recently

taken a similar look at the insurance industry and its regulators and, unfortunately,

have found that their regulatory presence regarding the Year 2000 area is not as

strong as that exhibited by the banking and securities regulators. In this effort, we

visited and surveyed 17 state insurance departments. Those departments regulated

companies providing about 75 percent of insurance written in the nation. At a future time we will be happy to share with you the detailed results of that work. However, at your request, we would today like to present a few preliminary results comparing some of the Year 2000 regulatory actions, both in timeliness and scope, of

regulators in all three of the major financial industries—banking, securities, and insurance.

We wish to emphasize that we in no way intend to suggest that there are likely

to be major problems in any of the three sectors. Indeed, regulators, as well as other

available studies, suggest that the financial sector is doing reasonably well in its

preparation for 2000. However, there are significant differences in the extent of validation taking place in the banking and securities industries compared to the insurance industry.

Consequently, it is difficult to know how much confidence to place in reports

about the readiness of the insurance industry, where there is generally less validation. To illustrate differences among the regulators, we will briefly focus on two

broad areas of regulatory activity—guidance and verification.

Regulatory Approaches to Facilitate Financial Institutions’ Efforts to

Become Year 2000 Ready

Banking and securities regulators have supplied guidance and direction regarding

Year 2000 problems, while state insurance regulators we contacted have provided

little guidance to their regulated institutions. Within the banking industry, the Federal Financial Institutions Examination Council (FFIEC) 1, through its member

agencies, has taken actions to (1) raise banking industry awareness regarding the
2 NAIC is a membership organization of state insurance commissioners. One of the NAIC’s

goals is to promote uniformity of state regulation and legislation as it concerns the insurance

industry. 3 Year 2000 Computing Crisis: An Assessment Guide, GAO/AIMD–10–1–14, September 1997.

4 NAIC summarized the survey results in a report, Year 2000 Insurance Industry Awareness,

issued in December 1997. 5 Insurance Regulatory Statement Regarding Industry Year 2000 Compliance and Remediation, approved by NAIC’s Year 2000 Working Group on 9/8/98.

Year 2000 problem and (2) provide financial depository institutions with Year 2000

guidance, including expectations for when certain phases of conversion should be

completed. Within the securities industry, the Securities Exchange Commission

(SEC) has engaged in similar efforts to promote and encourage Year 2000 readiness,

primarily through the securities industry’s self-regulatory organizations (SROs).

But, for the most part, as discussed below, state insurance regulators we contacted

and the National Association of Insurance Commissioners (NAIC) 2 have not been

as proactive in this area.

RAISING INDUSTRY AWARENESS

In our assessment guide,3 we state that Year 2000 awareness efforts should be

completed during 1996. In June 1996, FFIEC began to raise industry awareness by

disseminating letters to the boards of directors and senior management of all federally supervised banking institutions on key topics associated with Year 2000 readiness. Also starting in June 1996, SEC sent letters to the industry trade associations

and subsequently to individual firms informing them of the threat posed by Year

2000 problems to their operations and urging them to address these problems as

one of their highest priorities. In contrast, individual state regulatory efforts to raise

insurers’ awareness generally did not begin until 1997 or, for a few of the states

we visited, until late 1998. These efforts typically took the form of questionnaires

to insurers inquiring about their state of preparedness. In addition, the NAIC coordinated a national survey of insurance companies in August 1997 to, among other

things, serve as an impetus for them to take appropriate action.4 Because of state

insurance regulators’ late start, less time is available to fully assess the Year 2000

preparedness of insurers and to provide assurances to the public that the insurance

industry will continue to operate into the new millennium.

PROVIDING GUIDANCE AND MILESTONES

FFIEC has issued interagency guidance to federally regulated depository institutions on Year 2000 topics such as testing, contingency planning, and business risk.

It has also established and formally communicated to the banking industry, specific

deadlines for when companies were expected to have completed certain phases of

Year 2000 conversion (e.g., remediation, testing of mission critical systems, and

third party testing.) Although SEC has issued limited guidance on Year 2000 problems, the Securities Industry Association and other SROs have issued guidance to

their members. In particular, the National Association of Securities Dealers issued

guidance on such topics as investor concerns and testing requirements, and it conducted workshops around the country to raise awareness and provide assistance regarding the Year 2000 problem. Moreover, similar to the banking regulators, the

SROs established milestone dates for their respective member organizations.

With a few exceptions, state insurance regulators we contacted have not provided

insurance companies with formal guidance or regulatory expectations regarding

Year 2000 readiness. Some state officials took the position that it was not their role

to be directive with companies regarding Year 2000 solutions, but rather to monitor

their progress. A few others noted that they did not have the expertise and/or resources to provide specific guidance on preparing for 2000. In September 1998,

NAIC issued a statement of insurance regulatory expectations regarding due diligence in preparing for 2000.5 This statement was intended to provide useful guidance to the industry as well as to state insurance regulators. However, dissemination was left to the initiative of the individual states, and it was not uniformly made

available to all insurers. A few states we visited as late as December 1998 were still

unaware that NAIC had completed action on the regulatory guidance.

Regulatory Verification of Financial Institutions’ Year 2000 Readiness

Financial regulators have two principal ways of verifying the Year 2000 readiness

of their regulated institutions. These are on-site examinations and broad scale testing. Examinations on Year 2000 issues focus primarily on the actions that institutions are taking to prepare for 2000, in other words, on the process up to and including a review of test results and contingency planning. In contrast, successful broad

scale tests demonstrate that, after all the preparations, each of the pieces work, individually and together. Broad scale testing is more meaningful in some industries

than in others. To be meaningful, such testing requires considerable interconnectedness among the participants. The structure of the securities industry and, to a lesser extent, of the banking industry leads itself to such testing. In cases where this

interconnectedness may be absent or limited, as in the insurance industry, examinations become the most effective means for regulators to verify the status of financial

institutions’ Year 2000 preparedness.

Banking regulators rely primarily on examinations targeted directly at issues related to Year 2000 problems to validate the progress and status of their regulated

institutions. The first round of such examinations began in May 1997. Regulators

are now nearing completion of the second round of targeted examinations. At its

conclusion, every institution will have been examined twice. This will provide regulators with not only a snapshot of institutions’ status now, but a perspective of their

progress over time. Furthermore, time will still be available for regulators to return

to institutions where questions remain. In addition to targeted examinations, at the

encouragement of the Federal Reserve System, depository institutions are expected

to participate in broad scale tests demonstrating their ability to successfully interface with the Federal Reserve’s wholesale payments system. Such tests provide further assurances of the readiness of the banking industry to meet Year 2000 challenges.

The interconnectedness of the securities industry leads itself to broad scale testing

to an even greater extent. With the approval of the SEC, over 400 institutions are

participating in ‘‘street-wide’’ testing. A preliminary test was successfully held in

June 1998 and another test is now ongoing. In addition, the SEC has conducted

some examinations of securities firms and SROs have conducted more extensive examinations, but the examination coverage has not been as extensive as in the banking industry. Street-wide testing is the principal Year 2000 validation vehicle in the

securities industry.

Validation by insurance regulators of the Year 2000 readiness of insurance companies began late and, in most states, lacks the vigor demonstrated by bank and

securities regulators. The NAIC added nine questions on Year 2000 preparations to

the Examiners Financial Handbook (used by all states) in late 1997. Most states we

contacted began coverage of their regulated companies during regularly scheduled

financial examinations beginning in early 1998. However, state insurance regulators

routinely examine their companies only once every 3 to 5 years. As a result, many

companies will not have had a regular financial examination between 1998 and

2000. Recognizing this, some state regulators have begun or are considering incorporating targeted Year 2000 examinations into their validation programs. One state

began conducting such examinations in mid-1998. Several more began targeted examinations late in 1998. Others have either begun or plan to begin targeted examinations during 1999. Four of the 17 state insurance departments we visited told us

that they did not plan to conduct targeted examinations. In those states now conducting targeted examinations, the stated goal, with a few exceptions, is to examine

only those companies thought to pose the greatest risk.

Conclusions

Compared to standards presented in our assessment guide and to other financial

regulators, state insurance regulators we contacted were late in raising industry

awareness of potential Year 2000 problems. They also provided little guidance to

regulated institutions and failed to convey clear regulatory expectations to companies about Year 2000 preparations and milestones. Nevertheless, we found that the

insurance industry is reported both by its regulators and by other outside observers

to be generally on track to being ready for 2000. However, most of these reports are

based on information that has been self-reported by the insurance companies. Relative to other financial regulators, insurance regulators’ efforts to validate this selfreported information began generally late and too limited.

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