Countdown to Year 2000: Let's Join Hands, Not Point Fingers

It’s interesting to look at the Y2K litigation bills as they wind their way through the House (H.R. 775) and through the Senate (SB 96, chief-author Sen. John McCain, R-Ariz.). While a compromise bill gets fleshed out from these two, President Clinton has let congressional leaders know his position.

The bills attempt to change 200 years of evolved law in one swift blow. The bills’ authors believe that the U.S. technology industry should be excused for the Y2K fault – or at least heavily protected.

The new bills propose to:

• Impose 30- to 60-day waiting periods before lawsuits can be filed.

• Cap most punitive damages at $250,000.

• Restrict class action lawsuits by requiring them to be filed in federal rather than state courts, a move that effectively limits lawyers’ ability to file broad customer-based claims.

• Use proportionate liability clauses that limit Y2K defendants to the percentage of material damage they caused if there are other defendants.

While these bills may appear fair, the details favor vendors, integrators, consultants and outsourcers, many of which have been lazy, under-motivated and have taken laissez-faire attitudes – at the expense of their customers and clients.

The President, however, supports meaningful legislation that: provides incentives to make systems Y2K-compliant before a problem occurs; encourages resolution of Y2K problems without resort to litigation; and discourages frivolous litigation, while still ensuring the courts remain open for legitimate claims.

While the Clinton Administration supports legislation that includes the elements described below, it has expressed grave misgivings about the bills currently being considered by Congress. The President’s senior advisors recommend that the President veto legislation that is inconsistent with the following principles, summarized from Administration letters to congressional leaders:

Pre-litigation Procedures. The Clinton Administration supports mechanisms that encourage parties to settle their disputes without litigation. Specifically, the Administration supports requiring plaintiffs to notify defendants of their intention to file suit, requiring defendants to respond with the action they plan to take to cure the defect, and encouraging parties to use other resolution mechanisms.

Pleading Requirements. In order to screen out frivolous claims and ensure that claims allege material defects, the Administration supports asking plaintiffs in Y2K actions to plead with particularity the facts concerning the materiality of the defect and the ensuing damages. This is information that is in the province of plaintiffs and, thus, the requirement is not unduly burdensome.

Class Actions – Material Defect Requirement. Class actions are a critical avenue of relief for consumers and small businesses that frequently cannot afford to file their own lawsuits. We would support limiting permissible class actions only to claims in which the plaintiffs’ damage is "material."

Duty to Mitigate Damages. In an effort to encourage everyone to take steps to avoid Y2K failures, the Administration would support excluding from recoverable damages any amount that the plaintiff reasonably should have avoided in light of information that was provided to the plaintiff by the defendant.

Contract Interpretation. Parties should have the benefit of the bargain that they made. The Administration supports making contract terms enforceable, and common law defenses available, consistent with applicable law, so that state legislatures or courts do not shift liability rules in anticipation of, or in response to, Y2K failures.

Joint and Several. This liability holds that each responsible defendant is liable for the entire amount of a judgment, but, generally, can seek contribution from others for their share of damages. This rule can impose disproportionate responsibility on those with "deep pockets," if those primarily responsible cannot be located or are "judgment proof."

The Administration supports rewarding those who have taken specific appropriate steps to prevent or minimize harm to the plaintiff from Y2K failures, by limiting their responsibility for paying the entire amount of the judgment. A broader rule that limits damages to the defendant’s proportionate liability regardless of their remediation efforts could undercut current incentives to prevent or minimize harm from Y2K failures.

Economic Loss. Many states have legal rules limiting the recovery of "economic loss" damages in certain tort lawsuits. These rules are designed to bar parties to contracts by avoiding contract limitations on liability by suing in tort. Congress supports statutory recognition of this rule as a way to limit frivolous Y2K claims, provided that the rule is limited so that it would not prevent recovery in cases of fraud.

About the Author: Warren S. Reid is the President of WSR Consulting Group, LLC, in Encino, Calif. He can be reached by fax at (818) 986-7955, via e-mail at wsreid@wsrcg.com or through his Web site at www.wsrcg.com.