This issue inaugurates the Millennium Bug Liability Newsletter. This newsletter will bring you the latest information on the Year 2000 problem from the legal perspective. It will report developments in the Year 2000 field to practioners and non-practioners alike. It will also provide up to date analysis and reporting on topics of interest to lawyers and those with an interest in the law. You can keep track of this edition and future editions at the Hancock Rothert & Bunshoft LLP web page, found at Click Contact Link
Hancock Rothert & Bunshoft LLP believes that the Year 2000 problem will result in one of the biggest litigation problems in history. In testimony before the Subcommittee on Technology and the Subcommittee on Government Management, Information and Technology of the United States House of Representatives, Vito Peraino, the chair of the HRB Year 2000 Working Group testified:
"The Year 2000 problem is a litigation catastrophe waiting to happen. Equally important, it is a catastrophe to which most companies and most lawyers are completely blind. If the litigation hits, it will hit like a fireball - fast and pervasive."
This newsletter hopes to help get the word out to practitioners and companies that immediate action is needed to avoid potential Year 2000 legal liabilities. Likewise, companies facing large Year 2000 costs not only risk being sued but also are likely to bring suit to recoup their outlays. No matter what side of the Year 2000 problem you may be on, the legal considerations are vital. We hope this newsletter will help you get prepared.
What is the Year 2000 Problem and Why Should Your Company Care?
Pick up any Year 2000 briefing and you will quickly learn that the Year 2000 problem has many faces. It is a funding problem; it is a human resources problem; it is a business systems problem; it is an information resources problem; and it is a management problem. One aspect of the problem, however, has not received full consideration. Perhaps most fundamentally, the Year 2000 problem is a legal problem.
The Problem
In a nutshell, the Year 2000 problem derives from the fact that much computer software is not equipped to properly recognize the year change from 1999 to 2000. Much software has been designed to utilize only two digits to represent a year. So, the year 1996 is represented by the digits "96". A computer assumes that the first two digits are "19". In the Year 2000, the computer will read the two last digits of the year, "00", and will continue to assume that the first two digits of the year are "19" - incorrectly interpreting the year 2000 as the year 1900. This simple problem will cost U.S. businesses hundreds of billions of dollars to correct.
The date miscalculation corrupts many date sensitive calculations that a company's computers generate. Interest calculations, inventory controls, lease obligations, amortization schedules, billing and collection information and a host of other information will be affected by this problem.
At its most fundamental level, the Year 2000 problem threatens the integrity of financial information produced by an organization's computer systems. This corruption of financial data could potentially undermine an organization's credit rating, its ability to obtain an audited financial statement, its ability to report financial information, its ability to trade on regulated exchanges, its ability to maintain systems that support the organization's cash flow and its ability to service customers. In short, the Year 2000 problem presents a legal mine field that needs to be negotiated with the utmost care.
The Legal Audit
Faced with a Year 2000 problem, companies need to implement a legal strategy to avoid potential liabilities. A legal audit designed to assess potential liabilities and avoid them as well as to explore avenues of cost recoupment should form the first step of a Year 2000 legal strategy.
The first challenge faced by publicly traded companies will be the decision of whether or not to disclose their Year 2000 problem publicly as a "material fact." While materiality will vary from company to company, the cost of the Year 2000 problem for most mid-sized companies will be an undertaking in the tens of millions of dollars. For larger companies, many have spent well into the hundreds of millions of dollars. Aside from financial impact, a fact may need to be disclosed depending on the anticipated impact on company operations. Given the pervasive nature of this computer error, assessing company impact may present a sensitive analysis.
Certain to follow the internal assessment will be the interaction with company auditors. For example, Ernst & Young's British arm has announced that it will qualify the accounts of British companies which have not put in place adequate plans to address their Year 2000 problem. American auditors will not be far behind.
Avoiding securities class actions is only the beginning of the audit function. Recoupment of the substantial costs associated with the Year 2000 problem also is essential. A complete review of all vendor, software, hardware and outsourcing contracts is a place to begin the Year 2000 inquiry. Inasmuch as statutes of limitation may be running, it is imperative that an immediate assessment of rights be undertaken to secure legal rights that may exist. The modest undertaking of a legal audit will allow the company to develop a unified approach to third parties to assure that negotiations or other dispute resolution procedures are consistently analyzed.
Finally, companies need to recognize that even if they are diligent in correcting their own Year 2000 problem, they are not immune from potential liabilities. Third party service providers to the company also must be compliant in order to assure that the company can continue to meet its financial and contractual obligations on January 1, 2000. For example, if a companies' payroll vendor is not compliant and can't issue checks in the New Year, liabilities will certainly follow. A comprehensive strategy to assess exposures relating to third party vendor compliance is a necessary component to a legal audit.
Conclusion
This short summary of Year 2000 legal problems cannot begin to analyze the myriad of legal problems posed by the Year 2000. Prudent management will undertake the necessary steps to involve its legal advisors to manage this risk and to protect the company's assets and positions. In short, it is imperative that companies act now to secure their viability on January 1, 2000.
SEC Disclosure Guidance
The SEC has finally spoken to provide some guidance to publicly traded companies regarding their Year 2000 disclosures. The following extract from the Current Issues and Rulemaking Projects (May 12, 1997) can be found at http://www.sec.gov/rules/othern/cfcr0597.txt.
"Virtually all companies and organizations are devoting resources to evaluating the extent of their 'Year 2000 problem.' This critical data management problem may have substantial financial consequences for companies throughout the world. Most computer systems in use today were designed and developed over many years without regard to the impact of the upcoming century change. Because computer memory was so expensive on early mainframes, many programs used only two digits for the year in the date field. As a result, many computer applications could fail completely or create erroneous results by the year 2000 unless corrective measures are taken.
"Questions have been asked about the nature of disclosure that should be made by public companies regarding the Year 2000 problem. Companies may be undertaking major research and development projects in order to address this problem. To the extent the problem is not successfully addressed, material adverse consequences could follow, depending on the extent of the problem and the nature of the industry and the computer software. Companies should review on an ongoing basis the need for disclosures concerning projected expenditures and uncertainties associated with Year 2000 consequences, particularly in connection with their forthcoming reports or registration statements to be filed with the Commission.
"Consideration should be given to whether either the costs of addressing the problem or the consequences of incomplete or untimely resolution of the problem represent a known material event or uncertainty that would affect future financial results, or cause reported financial information not to be necessarily indicative of future operating results or future financial condition. As such, appropriate disclosure should be made in "Management's Discussion and Analysis of Financial Condition and Results of Operations" (Item 303 of Regulation S-K and S-B) in the company's reports on Form 10-K and 10-Q.
"Companies also should consider other disclosure requirements, such as 'Description of Business' (Item 303 of Regulation S-K and S-B) and rules requiring disclosure of any additional material information, beyond information specifically required to be disclosed, that is necessary to make the required statements not misleading (Securities Act Rule 408 and Exchange Act Rule 12b-20)."
Noteworthy in the statement, is the SEC's observation that consideration must be given to disclosure if "incomplete or untimely resolution of the problem represent(s) a known material event or uncertainty that would affect future financial results . . ." This "crystal ball" analysis may require companies to undertake a worse-case scenario analysis of their Year 2000 efforts. The statement presumes that companies are undertaking an analysis of the problem, considering costs and considering effects on ongoing operations. All publicly traded companies should be aware of this long awaited SEC guidance.
Year 2000 June Highlights
Morella Concerned About Litigation.
Representative Constance Morella (R. Md.) continues to sound the alarm on Year 2000 issues. The June 11, 1997 Cybertimes, (www.nytimes.com/library/cyber/ week/millennium.html) reports that Morella advocates Congressional action "to avert an impending computer catastrophe". Morella reports that she has been asked to set a legal limit on industry liability due to Year 2000 failures. Morella did not indicate whether she would endorse such a proposal. Cybertimes quotes Morella as saying "Since there looms the potential for great legal liability, many in industry have refused to acknowledge they are even aware of the problem for fear that it could ultimately leave them vulnerable to negligence and warranty suits."
London Securities Firms Face Sanction.
The Sunday Times reported on June 8 that the Securities and Futures Authority, the regulatory body for Britain's securities firms, is threatening to discipline, fine and potentially to expel members who are not prepared for the Year 2000 problem. The Times reports that "lawyers are preparing for a spate of litigation about the Millennium, with actions against suppliers, insurers and directors."
Monetary Authority of Singapore Sounds Litigation Alarm.
The Singapore Straits Times reported on May 21 that the Monetary Authority of Singapore has warned its banks and financial institutions that failure to address the Year 2000 problem may "potentially result in legal suits against them for failure to exercise due diligence in the fulfillment of their fiduciary duties." The SST quotes the MAS as calling the Year 2000 problem "one of the most serious technical and operations issue confronting business today." The Singapore Press Times reported on May 12 that a survey conducted by IDC revealed that 40 per cent of Singapore companies surveyed stated that they have not begun to address the Year 2000 problem.
New Jersey Eyes Y2K Litigation.
The New Jersey Lawyer reported on May 19 that New Jersey lawyers are eyeing Year 2000 litigation. One attorney, the former chairman of the ABA Section on Science and Technology, speculates that warranty case law in New Jersey may support a theory of recovery against a company whose software failed due to a Year 2000 glitch. The New Jersey Lawyer quotes him as saying "it would be a very interesting argument." NJL reports that, in the New Jersey Senate, one senator has asked why the state is spending money to fix something that resulted from a programmer's lack of foresight.
IRS Falling Farther Behind.
The March 17 edition of Accounting Today reported that Arthur Gross, Associate Commissioner for Modernization, testified to the IRS Restructuring Commission that the $45 million appropriated by Congress this year and the $84 million requested by the Clinton Administration will not be enough to solve the agency's Year 2000 problem. AT reports that Gross estimated that the IRS project would take 1,700 work years by IRS software engineers.
Ready for the Year 2000.
According to the article "Staring down the deadline" in the June 2, 1997 issue of Computerworld, Delta Health Systems in Altoona, Pennsylvania is ready for the year 2000 just 18 months after launching a software project to address the Y2K computer problem. According to the article, Delta has reviewed and recoded all 5,900 computers. The project was completed by a team of six people.
Business Credit.
In the June 3, 1997 Boston Herald article "Banks prepare for the Year 2000 problem", it is evident that borrowing money for your company may be harder than it was 6 months ago. According to the article, banks such as BankBoston Corp., are assessing whether potential corporate borrowers are prepared for the Year 2000 computer problem. In some situations BankBoston will send staff to the company seeking the loan in order to ensure that they are addressing the problem.
It's Always Funny Until...
Playing make believe can be great fun. Imagine that you are living in the year 2002. According to the June 9, 1997 Internet Week article "Back to the Future at Comdex" futuristic predictions were the game of the day at a panel discussion at Spring Comdex. The year 2000 problem received much attention. In one scenario the Time Square ball went up instead of down. In another situation an elevator went to the lowest level while waiting for instructions.
Professional Notes
Speaking Engagements
Vito C. Peraino is scheduled to speak at the following speaking engagements:
July 24, 1997 San Diego Chapter of RIMS July 25, 1997 Orange County Contingency Planners August 18, 1997 Institute of International Auditors August 26-27, 1997 DCI Conference in AnaheimDevin F. O'Brien is scheduled to speak at the DCI Conference in Orlando on September 23-25, 1997.
Publications
Vito C. Peraino was featured in an article entitled "Beat the Clock'" which was published in the June 1997 issue of the ABA Journal.
Other Year 2000 Conferences
DCI's Issues and Answers Conference & Expo
September 23-25, 1997 Orlando December 9-11, 1997 Chicago Register on the internet at: www.dciexpo.com/2000AD The Year 2000 Problem - When the Clock Turns, Be Ready July 17-18, 1997 Chicago-Holiday Inn O'Hare 800-465-4329 July 20-21, 1997 Houston - Red Lion Hotel 800-733-5466 August 7-8, 1997 Las Vegas - Alexis Park Resort 800-453-8000 August 10-11, 1997 Seattle - Red Lion Sea Tac 800-547-8010 Sponsored by: National League of Cities. For Additional Information Call: (202)626-3188 Performing A System Review of the Year 2000 Date Problem September -9, 1997 Atlanta September 22-23, 1997 New York Sponsored by: Audit Serve, Inc. For Additional Information: Mitchell Levine at www.auditserve.com or call (203)972-3567 4th International Conference and Expo on Year 2000 Computing November 6-7, 1997 New York- Park Central Hotel Sponsored by: AITP SIG Mainframe. For Additional Information Call: Bill Brand (212) 734-4412 The Year 2000 Information Network June 30, 1997 July 30, 1997 August 27, 1997 September 30, 1997 October 29, 1997 Location: All conferences are in Toronto at the Howard Johnson. Register on the Internet at www.y2klinks.com/y2kjob.htm
Hancock Rothert & Bunshoft has formed a Year 2000 Team to assist companies with related legal problems. If you would like more information on Hancock's Year 2000 Team, or on the firm in general, please contact: Vito C. Peraino on Tel: 213-623-7777 or E-mail: Click Contact Link or visit the Hancock Rothert & Bunshoft website at Click Contact Link
Visit the Year 2000 website at Click Contact Link
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.