Clark, Eugene; Cho, George; Hoyle, Arthur --- "Y2K Litigation: More Bugs Hitting the Same Legal Fan" [1999] JlLawInfoSci 12; (1999) 10(2) Journal of Law, Information and Science 246

	Home \| Databases \| WorldLII \| Search \| Feedback Journal of Law, Information and Science

• Outlines the nature of the Y2K problem and of the risks associated with it;

• Provides a brief discussion of the types of legal issues to which Y2K has given rise and the principles which are relevant to those issues;

• Examines the cases which had been filed in the US by the end of 1999 to give readers a feel for the types of issues to which Y2K could yet give rise in Australia;

• Provides a number of resources in print and electronic form which may be useful to those seeking more information about the legal issues inherent in the Y2K bug.

The bulk of the paper deals with the types of legal issues to which Y2K has given rise and concludes that apart from the ‘Good Samaritan’ legislation, the bug does not raise any new legal issues. Principles of contract and tort law plus statutory regimes such as the Trade Practices Act, the Fair Trading Acts and the Corporations Law provide remedies to address the substantive issues involved.

1. Introduction

It outlines the nature of the Y2K problem and provides a number of examples of the risks associated with the Y2K; it provides a brief discussion of the relevant legal principles, derived from reported decisions and from legislation relevant to the Y2K problem; it examines the Y2K cases filed by the end of 1999 in order to give readers a 'feel' for the types of issues and contexts which may yet arise in Australia; it provides a number of useful resources in print and electronic form which will be useful to those seeking more information about the legal issues inherent in the Y2K bug.

The thesis of this paper is that, with the exception of the 'Good Samaritan' legislation, the Y2K issue does not raise new legal issues, even though the extent of the problem may yet give rise to some litigation. Principles of contract and tort law, together with flexible statutory regimes such as the Trade Practices Act and Fair Trading Acts provide reliable remedies to redress the substantive issues raised. The greater availability of class actions procedures and an active ACCC will also play their part in helping Australia to combat any losses incurred as the result of Y2K date recognition defects. The paper was delivered to the NSW Judiciary Conference in September 1999 as an assessment of the potential of Y2K to cause widespread litigation, and if so what legal issues and concepts would be likely to become involved, and ought to be read in that light. It is submitted that the analysis of the legal issues has application to future problems of this type, and should be considered with that view in mind.

With the passing of the critical dates of 1^st January and 29^th February 2000 without any of the forecast mayhem, it is reasonable to consider that the threat of widespread litigation has receded, with only actions alleging misleading and deceptive conduct on behalf of the remediators being prominent. Public and expert opinion appears to be somewhat divided on the success or otherwise of the Y2K cleanup, with those who saw it as a major threat hailing the success of the unprecedented global cleanup effort, and many of those who had to pay for it crying foul. That is not to say that there were no Y2K problems on either date, but the fact that they were not widespread or damaging has tended to diminish their importance in the public eye. There is some evidence that Y2K type errors have occurred but have not been categorised as such as a defence mechanism against legal action. For example on 12 March 2000 a man in New England in the USA is reported to have renewed his registration at the Motor Vehicle authority, and found that he had been assessed $300,000 in late charges and penalties as the computer believed he was 100 years late. The interesting part of the article was the last line, which said that the state's motor vehicle department reported that "this was not a Y2K problem".^[2]

It remains a fact however that the Y2K phenomenon serves as a reminder of the vulnerability of businesses in the digital age to a technology which is changing so rapidly that traditional methods of legal risk management developed over the past hundred years are clearly no longer sufficient to provide the certainty they require to plan and develop. It also serves as a case study of the ability of a legal system which was effectively built up prior to the electronic age to deal with unprecedented (but nevertheless foreseeable) legal problems faced by society at the start of the 21^st Century.

2. Y2K Bug

The Basics

Size of the problem

Worldwide, the estimated cost of Y2K rectification is believed to have been in excess of $US300 billion and possibly reaching $US600 billion. Pricewaterhouse Coopers (PwC) estimates the total cost of Australian Y2K remediation to be approximately $A10 billion. In addition, there is anecdotal and survey evidence that many companies did not have the problem fixed by the year 2000. In the PwC survey of 1100 companies, while 76 per cent of the respondents intended to put in place a contingency plan only 30 per cent had done so by December 1998. The survey also found that 77 per cent of the respondents would fail to meet their December 1998 Y2K work-in-progress deadline.^[3]

In the US, notwithstanding all the press coverage given to Y2K issues, evidence available suggests that many industries were unprepared. The Electronic Commerce and Law Report points to the Gartner Group study released on October 7, 1998 which predicted widespread Y2K failures.^[4] This included 66 per cent of companies in industries such as health care and food processing 50 per cent of companies in global trading partnerships, 33 per cent of companies in the medical equipment, publishing, consulting, biotechnology, retail, television, software, aerospace and heavy equipment industries and 15 per cent of companies in the pharmaceutical industry.

In Australia, a recent study of 6,500 businesses of all sizes by the ABS found that nearly a fourth of all small businesses had yet to make any preparation in relation to Y2K problems.^[5] The summary table gives some results from that survey.

Economic Sector	% planning Y2K work
Agriculture	43
Transport and storage	48
Accommodation, cafes, restaurants	50
Construction	50
Retail trade	51
Cultural and recreational services	54
Personal and other services	59
Education	60
Communication services	62
Manufacturing	62
Property and business services	63
Health ad community services	70
Mining	72
Financial and insurance	73
Wholesale trade	75
Utilities	86

Size of Business Enterprise	Active Year 2000 Program per cent
Micro (< 5 employees)	40
Medium (5 - 199 employees)	80
Large (> 199 employees)	98

The medium to large database systems industries assessed as being vulnerable to the Y2K problem include:

It is of interest to note the perception of the Y2K problem among IT managers. In a survey of IT managers in the US in 1997 nearly a quarter of those surveyed thought that the Y2K problem was insignificant to less than average. About two-fifths thought the Y2K to be a very significant problem (Pusey 1997).

There was a preview of the Y2K bug in New Zealand. In 1992 an automatic teller machine (ATM) program for a bank in New Zealand experienced a year change problem. In that case, on January 1, 1992 all of the bank’s ATM machines erased the magnetic strip on customers' cards and rejected all further transactions. The error in the program was traced and remedial action taken before it affected the rest of the world.^[6] It can hardly be comforting to the inhabitants of New Zealand that they will be living in the first industrialised country to experience the first day of the new century, and will therefore be the first to experience any Y2K problems. Australia by default will at least have some two hours of early warning given the time difference. This may be sufficient to pull identified failed systems off-line before the Y2K bug can cause real and lasting damage.

It is important to remember that computers are literal machines entirely dependent on the code supplied to them. The type of computer programs which are likely to fall victim to Y2K problems may be described as being 'functionally rich applications which perform the tasks once done by people, or tasks too complicated for humans or requiring execution speeds beyond human capability. In short, the programs, applications and utilities upon which 20^th century commerce – and modern life as we know it – depends'.^[7]

3. Contract and Tort

In a consumer context, it is most likely that the Trade Practices Act, especially s52, will come into play. In other cases, principles of contract and tort law will be the major determinants of liability in relation to Y2K problems and the resultant damages.

A. Contract Law

Most Y2K problems in computer software will involve general issues of contract and tort liability. Because there is no standard form of contract used in the software industry, it is beyond the scope of this article exhaustively to analyse all the possible contract claims which might be involved in different Y2K contexts. The major legal issue, however, will be most likely to concern warranties, express or implied, which might have been made in relation to Y2K issues.

Express Warranties

In some cases there may be warranties made in relation to the software, including claims that it is Y2K compliant. Warranties may be either expressed or implied. An express warranty is a statement presented as fact, a product description or a promise made concerning the software product. If these representations form part of the "basis of the bargain" between the parties to the contract, then they will be treated as an express warranty that the product will perform as represented.

In order to determine the scope of the warranties which accompany a software transaction, a court will need to examine all transaction documents, product manuals and sales and marketing materials which may have accompanied the sale of the software. In this event, transaction language which states that, "This product will take you into the next century and beyond," may very well be treated as an express warranty that the product at issue is Y2K compliant.

Whether or not these types of representations are considered to be part of a contract between the vendor and the ultimate software user depends on the terms of the contract between the parties. An effective disclaimer can usually be devised which will make clear that such statements are not assurances regarding the quality of the product and are not part of the sales contract. In the instance of a “shrink wrap” license (that is one in which the consumer is deemed to have accepted the terms attached to the licence through the fact of opening the wrapping – whether it be actual plastic or notional), it is unlikely that a disclaimer as to these types of warranties would be effective. The courts seem to be electing to prevent vendors from "giving with one hand and taking away with the other", often on the grounds of inequality of bargaining power between the parties. However, in commercial business versus business contexts, where the contract consists of a sales document or licence which was negotiated and executed by the parties as equal bargaining partners, courts are much more likely to allow disclaimers of warranties to stand.

Implied Warranties

As explained in the following section, if the software transaction is governed by legislation such as the Sale of Goods Act or the Trade Practices Act, implied warranties may be deemed to exist, and in cases involving consumers these may be mandated by statute. These warranties include the warranty of merchantability and the warranty of fitness for a particular purpose. These warranties are not triggered by representations on the part of the software vendor but arise through the operation of law. The warranty of merchantability provides that in every sale of goods there is a promise that the goods are suited for the ordinary purposes for which they would be used. With respect to software, that is, if a certain type could be expected to have a post-January 2000 life span or would be used to calculate dates beyond the Year 2000 in ordinary circumstances, failure to provide a Y2K-compliant product would constitute a breach of that warranty. As this requires an objective analysis of liability, an investigation must be made to determine the ordinary expectations of a user of this type of software prior to determining whether a breach has actually occurred.

The implied warranty of fitness for a particular purpose arises when the vendor has or is deemed to have knowledge that the purchaser is buying the product in order to fulfil a particular need, and that the purchaser is relying on the superior skill or knowledge of the vendor to procure the appropriate product. This warranty is especially significant in instances in which the vendor is also serving as a software developer or as a consultant to the purchaser of the software. In the situation where a customer approaches a software developer requesting a particular type of system which would need to operate beyond January 2000, failure of that developer to cause the system to be Y2K compliant would constitute a breach of this warranty.

Both of these implied warranties may be disclaimed in a contract for the sale of the software if such disclaimer is not prescribed by legislation such as the TPA. Otherwise, the disclaimer will be considered to be ineffective and liability can arise for breach.

Vendors' Limitation of Potential Liability

As discussed above, vendors can limit their potential contractual liability by disclaiming warranties where this is permitted by law. Express representations outside the contract can be limited by including appropriate integration and merger clauses. These clauses must state clearly the terms of the contract control and that representations not contained in the contract are to be inoperative. However, such clauses do not bar tort claims such as fraud on public policy grounds, nor would they be effective in most circumstances against a claim of misleading and deceptive conduct in breach of the Fair Trading Act or Trade Practices Act (see discussion below).

Quantum of Damages

Perhaps the most challenging issue will not be the question of liability, but the determination of damages. A large firm may have thousands of computers, hundreds of software applications and numerous embedded systems. Some of this technology will be data sensitive and some will not. Some of the software “bugs” will become evident on 1^st January 2000, but many errors will not be evident until later. Most of the errors are likely to cause only a small inconvenience, but some could cause failures in critical business and even national infrastructures. Thus, there will be both direct and indirect damage. Direct damage is that caused by system failures and incorrect processing. Indirect damage is however harder to quantify and includes, for example, problems caused to trading partners, customers, and others in a relationship with the damaged organisation. Other damages will include the spin-off impacts: eg, duplicating records in paper, extra costs of people on call, extra communications to assure customers and so on. These types of issues will give rise to some very tricky law and policy questions in relation to the measure of damages and who should be responsible for them.

Liquidated damages

Provision for liquidated damages can be included in all contracts, provided that the estimate of damages stated in the contract constitutes a reasonable estimate of damage incurred due to breach of contract. Recovery can also be limited through contract provisions to the repair or replacement of the software, in this case the upgrade or modification of the current software version to a Y2000 compliant version. As long as these types of provisions are negotiated between the parties and are made explicit in the contract, courts are likely to let them stand.

B. Tort Liability

Possible tort claims which might arise in a software transaction concerning a non-Y2K compliant software product include: fraud and misrepresentation, negligent misrepresentation, negligent design, and strict liability.

Fraud

Fraud and misrepresentation are often connected to a claim for breach of express warranty. A claim for fraud and misrepresentation requires the purchaser to prove that the software vendor had an intent to deceive and that the customer detrimentally relied on the deceptive representation. This type of claim is very difficult to prove, and is frequently precluded by a claim for breach of contract under express warranty if an intent to deceive cannot be shown. Additionally, as discussed above, a properly drafted contract disclaimer can greatly limit potential liability stemming from express representations.

Negligent Design and Strict Liability

These two theories arise under a products liability theory of recovery and are discussed below. However, in the instance where non-Y2K compliance leads to the personal injury of an individual, design flaws inherent in the product could give rise to a viable claim for negligent design or strict liability under product liability legislation found in Part VA of the Trade Practices Act. The potential exposure for such claims in the event of an avionics software program or a medical equipment software program could conceivably be astronomical if Y2K compliance is not immediately reviewed and remediation undertaken as required.

Negligence

Probably the most contentious issues associated with these theories rest with the issue of just how wide is that duty of care, as well as that of what standard of care is to be applied. Each of these is problematic in its own right in so far as attempting to limit the number of potential litigants who may seek redress as well as the particular facts of each case.

In a Y2K context therefore, the supplier of equipment can be held to a standard reasonably expected by all in that industry. The equipment supplied would be put to reasonable use rather than extraordinary use. Given the history of the problem and the world-wide publicity given to it in both the specialist and popular press, any problem caused by the millennium date change can reasonably be deemed both as being in fact a 'problem', and a foreseeable one at that. However, whether compensation is available under the rules of negligence is an issue that can be expected to long exercise legal scholars and the courts. This issue is perhaps one which need not be canvassed here, ironically because under the rules of negligence the loss or damage must either have been sustained or deemed to have incurred (and this has been the decision in a number of cases brought to court in the USA).

To prove negligence it is also necessary to show that the negligent person's conduct is the real and proximate cause of the injury suffered. Unpredictable circumstances or the intervening act of a third party including those of the 'victim’s' own doing may be sufficient to hold that the cause was not proximate enough to lay all the blame on the 'negligent' person. Contributory negligence may serve to mitigate the degree of blame on the negligent person to enable a court to apportion blame in proportion of their respective culpability. In a Y2K context, perhaps the issue is one where the problem is so well-known that a court might take notice of it. If this line of thought is accepted then it may be argued that one should have strategically planned to eliminate the possible damage before the event taking place. Alternatively, it may be argued that this is an issue where the principle of res ipsa loquitur [the thing speaks for itself] should apply and where the blame is placed on the supplier of the equipment because it would not work after the year 2000.^[8]

Appropriate disclaimers have usually been inserted to avert most product liability claims in hardware and/or software and systems operations. The suppliers however have to ensure that the equipment supplied was 'fit for purpose' and of 'merchantable' quality. Explanations and warnings supplied with the equipment and software may help avoid liability for personal injury and wrongful death. Such disclaimers should be distinguished from those that seek to contract away exposure to any liability.

Some Possible Defendants

Apart from the software vendors of non-Y2K compliant systems, the other major players who may owe a duty of care and may have breached that duty could include the following:

• Directors and Officers of corporations either for failing to address the Y2K problem or for failing to disclose the financial impact of compliance.

• Software acquisition consultants. (However, one needs to question whether Y2K functionality was ever discussed at the Request for Proposals (RFP) phase or even during the contracting process).

• Vendors of computer systems and other software which are Y2K compliant but which fail to meet customer expectations. These litigants may come to the fore after the initial rush of year 2000 legal actions.

The resolution of many of these problems will depend on a clear definition of what one means by a Y2K-compliant system. In a given case, this in turn will depend on a precise technical understanding of the particular needs of each customer. The challenge then is to tie down a legal definition of the term and the meaning of Y2K-compliant' and if this proves impractical to avoid its use totally in all legal documentation.

Negligence and Self-Help

The obligation to take care and to assume legal responsibilities above suggests also the need to examine the context from the point of view of the one who has suffered loss. There is a responsibility to take reasonable precautions in caring for and helping one's self. The law has recognised three such defences. These include the voluntary assumption of risk, the theory of comparative or contributory negligence and mitigating loss. Thus, where a person entrusts repairs of a delicate instrument to a non-expert there is a voluntary assumption of risk. The damage suffered may not only have been caused by the negligence of the accused person but also by the intervening negligence and voluntary assumption of risks taken by the owner of the instrument.

Similarly, the theory of comparative or contributory negligence holds that there is a defence in which a court may apportion the damage suffered between the parties.^[9] This apportionment may depend on the comparative degrees of contribution to which particular negligence resulted in the victim's loss. In such a defence, the claim is purely in ascertaining the role of the victim's own contribution to the loss. There is no implication of any duty or standard of care owing by the defendant.

In all instances after a victim has suffered an injury or loss, the victim has a positive duty to minimise its impact in whatever way this is described or characterised. In the processing of data, for instance, where a loss of useful processing has occurred, and this is traceable to particular faulty hardware or software, there is a duty to mitigate loss by using alternative equipment if such equipment is reasonably available. The victim here can add the cost of doing so to the claim of damages, plus the actual loss itself. In the assessment of loss where no mitigation of loss was undertaken, the negligent defendant could argue that the victim could have minimised the loss and thereby can only claim damages for a lesser amount. However, it should be noted that this line of argument has been viewed circumspectly by the courts.

4. Sale of Goods Legislation

Depending upon the context, the appropriate Sale of Goods legislation may be relevant. Whether the contract is for the sale of 'goods', whether it is a 'consumer contract' and issues about the applicability of warranties will be important. Legislation such as the Contracts Review Act may also come into play.

5. Trade Practices Act 1974 (Cth)

Holding pride of place and with broad language to cover a wide range of factual contexts is Section 52 of this important consumer protection legislation. This section of the TPA will be a steady sword which the plaintiff will use in Y2K matters for pre-contractual dealings, to counter exclusion clauses and to handle post contractual conduct. Moreover, the flexible remedies which it contains will give Courts the scope they require to address Y2K contexts.

Together with section 53, the unconscionability provisions of Part IVA, section 51, the provisions in relation to services and the implied warranty/condition provisions in consumer contracts can also be expected to play an important role in many cases.

Case Examples

1. Any industry where government and business are spending billions of dollars can be expected to attract its share of frauds. An example is to be found in Australia where Millennium Diagnostics, markets franchises for Y2K remediation. In this case, the ACCC obtained an injunction against the company to stop them from making claims that earnings of franchisees could expect to reach a particular level and from the unauthorised use of the Government's Year 2000 Industry Program Logo. Millennium Diagnostics and Millennium Solutions had placed ads in the Sydney Morning Herald offering Y2K remediation distributorships for $10,000 plus stock for $13,000 claiming that annual earnings of $600,000 were possible. Also, contrary to their advertised claims, the distributors would require more than a basic computer knowledge.

2. PC Resq distributed a Y2K product which when installed overrides the clock of desktop Personal Computers. Their advertisement correctly claimed that the product overrides the non-compliant real time clock of desktop computers. In its advertising literature however, it claimed that its package would make desktop computer hardware compliant at the highest Y2K level and that this was necessary for computers running mission-critical applications. The ACCC claimed that PC Resq breached the Trade Practices Act (TPA) by, among other things, implying that consumers needed to fix the real time clock on their desktop computers in order for them to work properly from 1 January 2000. PC Resq received a letter from the ACCC threatening Federal Court action unless they signed a statement retracting their claims. On legal advice they signed the letter and the ACCC issued a press release on its web site headlined' "PC Resq to Offer Refunds to Consumers Misled on Y2K Compliance." The negative publicity all but destroyed the reputation of the business.

3. A harbinger of things to come is found in the in the US where Andersen Consulting undertook a Y2K remediation for the J Baker chain of clothing department stores. Andersen was sued and settled out of court. Thereafter it refused do any further Y2K remediation work claiming that the legal risks were too high. Clients wanted guarantees and the state-of-the-art could not match those expectations.

4. Other tricksters in the US are reported to have called consumers claiming to be representatives of the bank and requesting account details so that they can be placed into a Y2k safe account.

6. Product Liability Law

Federal product liability legislation came into effect in 1992. The product liability provisions which are found in Part VA of the TPA enable compensation of a person who has been hurt or who suffers losses due to a defective product by establishing a compensation-based, as opposed to a fault-based, system of product liability.

Under Part VA of the TPA, the Australian Competition and Consumer Commission (ACCC) is empowered to bring a class action on behalf of identified consumers who have suffered loss under s75AQ of the TPA. Thus, small firms suffering, or likely to suffer from a lack of Y2K compliance in widely used software may bring a class action against software suppliers. Such an action is along the lines of the US class actions in the Medical Manager case.^[10] The prevalence of Y2K class actions in the USA is indicated in the chart below. An added benefit is that there will be no financial risk or exposure to potential plaintiffs, provided they can persuade the ACCC to bring the action.

Who is Liable?

The basic policy underlying a compensation-based scheme is that product liability legislation should encourage manufacturers and suppliers of goods to produce safer products. This could be construed to cover losses related to Y2K faults. Manufacturers and suppliers may be in the best position to assess the risk of whether goods will cause loss. The law also provides a mechanism for cost spreading and loss distribution among manufacturers, suppliers of goods and consumers.

Any person suffering loss or damage as a result of using a defective product, has a right to compensation upon proof of (a) the existence of loss or damage; (b) that the loss or damage was caused by the defects in the goods; and (c) that the goods were manufactured for trade and commerce. In contrast, under the law of negligence, there is no need to prove the additional elements, that the goods were unsafe or defective.

Types of Loss and Damage Covered

Compensation under Part VA of the TPA covers economic and non-economic loss arising from personal injury, disease or death and which results from the loss of or damage to property in which the plaintiff had a proprietary or possessory interest. There is no limitation on the amount of compensation recoverable, and there is no need to establish that the third party is contractually linked to the sale of the faulty software. A third party, such as a bystander, injured by the defective product is also entitled to recover. However, where the third party is in a commercial relationship, such as a company director or business partner, they will not be entitled to sue under the act (s75AE). Where the product results in death, the legislation also preserves state laws which permit certain dependents of the deceased to claim specified classes of damages through the administrator or executor of the estate (s75AD(f) and s75AH).

Required Notice before Action / Defences

To promote settlement and discourage false claims, plaintiffs must, before commencing proceedings seeking compensation, serve a verified notice setting out the allegations forming the claim. In addition, the legislation allows for a number of defences:

1. Acceptance of the risk It is a defence if the plaintiff knew of the nature of the goods before the loss or damage occurred, on the grounds that this would have enabled a reasonable person to assess the risk that the goods would act in the manner that caused damage. An untested extension to this argument is that the risk of Y2K failures is so 'notorious’ within the business community that a buyer would knowingly take a risk of not ensuring that the product was Y2K compliant.

2. Developmental risks It is also a defence if at the time the goods were initially retailed, the defect could not reasonably have been discovered using any scientific or other techniques and that the manufacturer could not have known in any other way that the goods were defective. This may be a poor defence in the case of Y2K problems because these deficiencies can easily be tested for and remediated at the time of manufacture (such as by the simple expedient of advancing the system clock to a suspect date).

3. Mandatory standards It may also be a defence when it can be shown that the goods performed as they did only because they complied with a mandatory standard which the law requires of such goods. However, such a defence is unavailable in Australia.

4. Reductions from compensation A major premise underlying the TPA is that manufacturers and suppliers should only be liable for loss or damage actually caused by their defective products. Accordingly, the legislation allows the court to deduct from the total amount of the loss:

• the act of some other person, who is not involved in manufacture or supply of the goods; or

Part VA of the TPA cannot be excluded or modified by contract, and any term of a contract which attempts to exclude Part VA is void under s75AP. Thus, under the TPA any Y2K exclusion clauses in computer contracts will render such a contract void.

Contribution and Indemnity

To avoid the problem of having to locate and then undertake legal action against a number of parties, product liability legislation provides for the nomination of the person, usually the manufacturer, who is in the best position to know how the goods will perform (if the goods are imported, the importer is deemed to be liable). If the manufacturer cannot be identified, then the supplier is held to be liable if the supplier does not identify the manufacturer after being requested to do so within a reasonable time. Rights against the retailer are reserved if the only remedy sought by the plaintiff is either for a refund, repair or replacement of the goods. Finally, consistent with the principle that those responsible should pay, a person who is sued may recover indemnity or contribution from others if their conduct caused or contributed to the defective product.

Other Product Liability Issues

Presently several class actions are before the courts in the USA, and typical of these is the suite of actions against the manufacturers of the computer software package Quicken.

Case Example:

This is a leading class action case. Five litigants claimed that the on-line banking features of certain versions of Quicken were not Y2K compliant. Issokson claimed that the on-line banking functions of Quicken would not operate after December 31, 1999, and that as such, all users were entitled to damages. In an important precedent for Y2K litigation, HERLIHY J ruled that, because no form of damage from Intuit's software products had yet been experienced, and as there was no proof offered to the court that any such damage would take place before Intuit had the opportunity to provide a remedy to any user of its software, that the complaint be dismissed.

In the case pending of Atlaz International Ltd v Software Business Technologies Inc. and SBT Accounting Systems Inc.a New York company instituted a class action against a developer of accounting software, alleging breach of warranty and related claims and asserting that the software is unable to recognise and handle dates starting in the Y2K.^[12] The plaintiff is suing on behalf of users of the software, and estimates that $50 million in fees are involved. The plaintiff claims that other vendors are providing Y2K fixes for software free of charge but that the defendant is charging substantial fees to upgrade its software to a Y2K compliant version. According to the plaintiffs, the defendant's software packages contained an express written warranty which states that:

In the instant case, the plaintiffs allege, among other things, that the software does not operate in substantial conformity with these written specifications and have claimed a breach of warranty.

Knowledge of the Y2K problem and implications

An important issue for those claiming to have been ignorant of the problem is that of when they ought to have become aware of the Y2K problem. This has implications for establishing the existence of a duty of care discussed under negligence above. Although generally not recognised as a serious threat prior to 1995, there were articles in computer literature describing the problem as early as 1987,^[13] and in the USA at least there may be precedent for failure to act on knowledge within an industry as amounting to knowledge in terms of negligence.

In Faegenburg v Intuit Inc. the plaintiff alleged that the computer industry was aware of the problem since the early 1970s and that computer software manufacturers knew about the Y2K problem for over 20 years and did nothing because of the additional costs involved.^[14]

This case reinforces an important new issue in the notion that knowledge of a potentially damaging flaw and the liability which may be attached to it may be imputed. Judicial backing may be found in an earlier decision dealing with computer-related repetitive strain injury (RSI) in the workplace. In Peerless v Synchronics, in the Second Circuit, WEINSTEIN J ruled that the evidence could reflect the computer industry's 'collective' state of mind in 1991. Tellingly His Honour held that a manufacturer's ignorance of the industry's state of mind 'may be taken as an indication of negligence.' Although this lead has yet to be adopted directly in Y2K litigation, the court in Faegenburg v Intuit Inc has been invited to do so.^[15]

Courtney v Medical Manager Corp^[16]

This case involved a doctor taking action on behalf of all other doctors in a similar situation against Medical Manager Corporation, the maker of 'The Medical Manager.' Dr Courtney complained that he purchased this bookkeeping software only a year before the newer version was offered as Y2K compliant. Apparently, the previous version was not.^[17]

The action is based statutory breach including the New Jersey Unfair Trade Practices Act, breach of implied warranty of merchantability and fitness for a particular purpose, as well as estoppel.

Retrospective Application

There have also been cases where plaintiffs have begun to test the extent to which the courts will extend liability retrospectively.

The Right to No-cost Y2K Rectification

In Womens Institute For Fertility Endocrinology And Menopause and Pediatric Associates of the Main Line Ltd v Medical Manager Corp. a case has been brought against Medical Manager for its failure to provide a free upgrade of its software.^[18] This action is much broader than Courtney v Medical Manager Corp. discussed above as the defendants in this action include resellers of the Medical Manager software, as well as a company known as Boston Computer Systems which, it is claimed, promised to provide free upgrades of software as necessary. The complaint has cited breach of implied warranty, negligence and negligent misrepresentation and fraud and deceit as its grounds.

Case Example:

In this case an appellant sought declaratory relief that respondent's conduct did not constitute negligence, misrepresentation, breach of contract, breach of the covenant of good faith and fair dealing or unfair trade practices. On August 31, 1998, the New York Times reported that a large apparel retailer, J Baker Inc., has demanded that its consultant, Andersen Consulting, reimburse it for its nearly ten year old computer system because it may not be Y2K compliant. In response, Andersen Consulting filed an action in Massachusetts on August 28, 1998, seeking a declaration that Andersen met all of its contractual obligations when it installed the merchandising system for Baker. Following mediation, J Baker announced that they had re-evaluated their claims and the suit was dropped without either party being required to make any payment to the other.

Dennis College, M.D., P.A. v Medical Manager Corp is another case on essentially the same grounds.^[20]

In summary, the lessons gleaned from the various cases that have made it to court thus far include:

• the possibility of bringing or joining a class action against a manufacturer of hardware and/or supplier of software that may not be Y2K compliant;

• the need to establish when knowledge of the Y2K problem became known in a particular industry. Here it is not the knowledge per se which is determinative but rather the positive acts or omissions (failure to act) after having known of the problem that is crucial;

• the remediation of defects to avoid the founding of liability for equipment and software that are not Y2K compliant and whether or not the suppliers or vendors are responsible for such costs;

• testing the extent to which courts are willing to extend liability retrospectively; and,

• the right to no-cost Y2K remediation work especially in so far as it concerns software products.

7. Fair Trading Legislation

The Commonwealth can only act within powers allocated to it under the Australian Constitution. However, since the early 1990s this limitation on the power of the Commonwealth government has become less significant in the field of consumer protection (which is not mentioned in the Constitution), as all Australian States and Territories have now adopted Fair Trading legislation (FTA) which mirror most of the provisions of the consumer protection safeguards found in Part V of the Trade Practices Act 1974 (Cth). Unfortunately, there is not always uniformity between the fair trading acts of various States and Territories. Unlike the TPA, the Fair Trading Act 1992 (Cth) (FTA) is unconstrained by the limitations of legislative power. Under the TPA the Commonwealth section is directed primarily at the conduct of corporations. The FTA, on the other hand covers conduct by persons, whether incorporated or not.

8. Occupational, Health and Safety Law

Although a full discussion of general occupational health and safety legislation issues is beyond the scope of this paper, another important area of relevance to Y2K issues concerns the duty of employers to provide a safe work place. Although at common law, employers have a duty to ensure that they use reasonable care in providing a safe workplace, the workplace safety has in recent times been regulated by legislation. All Australian States and Territories have laws which mandate occupational health and safety standards in the workplace. In some cases, the laws are general in scope and relate to the broad duty of employers to provide workplaces which are physically safe (for example, Occupational Health and Safety Act 1983 (NSW)). The Occupational Health and Safety legislation in each jurisdiction has as its main objective, the securing of health, safety and welfare of persons at work by the promotion of work environments which are adapted to the physiological and psychological needs of employees. Breach of the obligations under the act can result in criminal liability of the employer in addition to civil liability on the grounds, for example, of negligence.

Among the duties imposed by occupational, health and safety legislation are a duty to: provide or maintain plant and systems of work that are safe and without risks to health, make arrangement for the safe handling, storage or transport of plant and dangerous substances, provide information, instruction, and supervision required to maintain a safe work environment, ensure employees are not exposed to risks to their health while at work, and so on. The legislation also requires employers with 20 or more employees to establish an occupational health and safety committee to review measures to ensure workplace health and safety, to investigate any matter regarded as a risk to health and safety, to resolve matters or request an inspector to investigate. There are also ‘whistleblowing’ provisions which make it an offence for an employer to punish, dismiss or injure an employee because they make a complaint in relation to a health and safety matter or exercise any of their functions as a committee member.

Industry Specific Legislation In other cases occupational health and safety legislation is industry specific, for example, in relation to conditions in coal mines (Miners Inspection Act 1901 (NSW); Coal Mines Regulation Act 1982 (NSW)) or factories (Factories, Shops or Industries Act 1962 (NSW)) or in respect to dangerous goods (Dangerous Goods Act 1975 (NSW).

The failure of an employer or government agency to take appropriate action to prevent a foreseeable failure of plant or equipment, for example, may result in civil and criminal liability. Environmental systems may also contain computer chips which may not be Y2K compliant thus giving rise to breaches of Occupational Health and Safety and Environmental laws in addition to exposing the employer to civil liability.

9. Corporations Law

The law governing the duties of directors and officers of companies is a basic area of the Corporations Act 1989 (Cth).^[21] Directors have a fiduciary duty to the company in which they serve. Although the exact nature of this duty is far from precise because of its subjective nature, it is required that they operate in good faith and with fair dealing. In a Y2K context, this requires that directors and officers of a company act in a way which maximises the return to it from sales of its product, while at the same time minimising its exposure to liability from known and preventable Y2K faults, even extending to those which they ought to have suspected but did not. This duty to act bona fide or in good faith is an essential ingredient of the fiduciary relationship, and is construed strictly by the courts, so that:

External Investigation

The Australian Securities Commission (ASC) has a general discretion to undertake an investigation where it 'has reason to suspect that there may have been committed' a contravention of various laws.^[23]

Before it can exercise its investigative and information gathering powers under s13(1) the ASC must satisfy various elements including a 'reason to suspect' an offence, that 'may have been committed' and that the offence related to one of the laws specified in that section. This suspicion must be 'more than idle wondering ... a positive feeling of actual apprehension or mistrust amounting to a slight opinion, but without sufficient evidence'.^[24]

It follows therefore that in the event of a Y2K failure, an ASC investigation is an option, not only for those who have suffered as the result of reckless indifference of the directors of a corporation, but also for those shareholders and creditors who may have suffered tangibly from breaches of the duties of good faith and fair dealing. It may be available to those persons as a kind of ‘no-cost’ class action where the ASC foots the legal costs, and has the significant resources and coercive powers of the Commonwealth behind it.

Shareholder Actions

The fiduciary duty conferred on company directors by section 181 of the Corporations Act requires directors to act in good faith and to exercise their discretion bona fide 'in the interests of the shareholders as a whole, rather than arbitrarily or capriciously'.^[25] It follows that a failure to deal adequately with the Y2K problem may leave them open to an action under s232(2) by aggrieved shareholders, or even in some circumstances by company creditors.^[26] The standard expected of Directors was set down in Daniels v AWA (1995) 16 ACSR 607 where the majority of the High Court of Australia drew a distinction between care and skill, applying the objective test to the application of the duty of care, and a subjective one to level of skill required. This has meant that, in Australia at least, it may be possible for shareholders to bring an action against Directors who fail to act on the disastrous potential of the Y2K problem.

Under the Corporate Law Economic Reform Program (CLERP), s236 creates a statutory derivative action allowing shareholders (or even individual Directors) to bring an action on behalf of the company when it is unable or unwilling to bring an action itself. Directors need to be aware that this cause of action is now available in Y2K cases.

Other Causes of Action Against Directors

In addition to general legal requirements for persons in fiduciary positions to exercise a reasonable care in their dealings on behalf of the corporation, Section 180(1) of the Corporations Act requires Directors (as officers of the corporation) to 'exercise the degree of care and diligence that a reasonable person in a like position in the company would exercise in the corporation’s circumstances'. The objective nature of this test means that it applies a rather lower threshold than would be the case if it were applied subjectively (where the circumstances surrounding the particular alleged failure to take appropriate action are examined).

The Potential Effect of the Y2K Problem on Mergers and Acquisitions

By its very nature the potential for Y2K failures will remain hidden within a corporation’s operations unless efforts are made to uncover them. Although it is widely recognised that failure to take steps to identify and rectify a corporation’s Y2K problems has the potential to reduce the value of the corporation not only in terms of the value of its shares , but also through a reduction in its value due to debilitating damages award or settlements. The effects of this problem on mergers and acquisitions have not been widely recognised, although US and Australian regulatory authorities have taken steps to mandate the filing of details of remediation efforts for stock market participants. A reduction in merger and acquisition activity due to the Y2K problem has been forecast by Electronic Data Services (EDS) Diversified Financial Services, at least in the USA, in two ways:^[27]

Y2K Disclosures and sale of shares

In one of the first Y2K cases of its kind, Rhodes v. Omega Research, Inc^[28] was a shareholder class action against Omega and its securities underwriters due to their alleged failure to disclose in the company's initial public offering prospectus, among other things, that some of Omega's software products were Y2K noncompliant. On March 1, 1999, the Florida court dismissed the Y2K non compliance fraud claim with prejudice under the "bespeaks caution" defence, because the prospectus included risk factors regarding "defects in current or future products". The Court permitted the plaintiffs to amend the complaint regarding alleged overstatements of Omega's sales, and undisclosed non-Y2K technical glitches and bugs.

The implications of these issues on the continuing move towards consolidation of parts of the Australian corporate sector, and in particular the financial services sector, however, remains to be seen.

10. Intellectual Property Law

The success or failure of much of the litigation seeking to impose liability for Y2K rectification or for resultant damages can be expected to focus in some cases on the ownership of the faulty systems. This in turn will depend on who the law of property deems to have ownership or possessory rights over those systems.

Licenced Software Problems

Many companies have identified Year 2000 problems in their own systems and have taken steps to resolve them. These systems use and may even combine licensed and internally developed software. Software may be licensed from several vendors. The technical Y2K solutions must be implemented system-wide.

Companies may use internal or external resources to remedy Y2K problems. First, third-party licensors may undertake solutions to Y2K problems, either at the company's request or through actual or threatened legal action. Second, companies may use their own employees to fix Y2K problems for internally developed or licensed software. Finally, companies may hire outside specialists. The last two scenarios raise copyright issues that companies should address.

Infringement Claims By Licensors Copyright issues may arise when businesses have used their employees or outside vendors to modify licensed software components. Much of the software in company systems is licensed from third parties who own the software copyright and merely licence its use. The agreement may or may not address the licensee company's right to modify the software. If the agreement does not grant the licensee the right to modify, and the licensee nevertheless does so, the licensor may claim that the licensee has infringed the licensor's exclusive right to create derivative works, even where to do so actually reduces the owner’s potential Y2K liability. A derivative work is broadly defined by statute to include editorial revisions, annotations, elaborations, or other modifications which, as a whole, represent an original work of authorship.

Software licensees should anticipate copyright infringement claims by licensors and should take steps to address them. First, licensees who expect to modify licensed software should review existing licence and maintenance agreements. If the agreements do not permit licensee modifications or are silent on this issue, the licensee may seek the licensor's permission to modify the software. Licensees who do not have the licensor's permission to modify should assess the available defences to a copyright infringement claim by the licensor A very strong argument can be made that modifications relating to the Y2K problem are "an essential step" in using the program. This is especially true if the program becomes inoperative after December 31, 1999. However, further modification, which is not related to or necessary for the continued operation of the computer software, is not likely to be authorised under this statute and would be considered to be the creation of an unauthorised derivative work. Other possible arguments a software owner might make to defend a claim of copyright infringement on the basis of modifications to ensure Y2K compliance include both fair use and a "private use" defence. The Copyright Act provides that "fair use" can be made of copyrighted works. This means that an individual can engage in acts which are infringing under the statute, but that such acts are excused because of the circumstances of use.

Copyright Ownership

Companies who hire Y2K remediation companies to correct problems in company-developed software should address ownership of the copyright for the modified software. Under the "work made for hire" doctrine, the copyright in works prepared by company employees within the scope of their employment is typically owned by the employer. On the other hand, the copyright in works created by independent contractors is presumed to be held by the contractor. Companies who already own the copyright to internally developed software should ensure that they own the copyright to any modifications made by Year 2000 "fix-it" companies.

In part as a response to the threat posed by Y2K, but also in order to give domestic effect to key portions of the World Intellectual Property Organisation Copyright Treaty of 1996 as incorporated into the US Digital Millennium Copyright Act enacted in that country on 28 October 1998, and to remove the perceived impediment represented by restrictive Australian copyright legislation in the area, the Government announced further and far reaching amendments on 24 February 1999. Amongst these were changes intended to enable the decompilation or “reverse engineering” of computer programs where necessary for the development of interoperable products where copyright owners unreasonably refuse, or are unable to provide the necessary information to allow self help remediation.

Trade Secrets

The potential loss of trade secrets may be a major problem when outside consultants are used to remediate Y2K problems. Under the common law, once information is disclosed, one cannot claim that it remains a trade secret, and in this lies a significant potential problem for those seeking to engage outside contractors to remediate Y2K problems. In order to maintain trade secret status, laws generally require that one takes reasonable steps to maintain secrecy by preventing unauthorised access. It is therefore conceivable that by giving Y2K remediation contractors access without first obtaining appropriate enforceable guarantees against disclosure, one’s firm could waive its rights under trade secrets law. If one wishes to assert ownership of trade secrets, but at the same time engage outside experts to remediate a Y2K problem, then prudence would dictate that all necessary precautions are taken to safeguard those secrets through appropriate legally binding contractual provisions, together with whatever physical constraints one can devise

Trans-Border Issues

Jurisdictional limitations and complexities abound in the field of copyright given the borderless nature of the computer 'world’ and this could have important implications in terms of Y2K related litigation. For example, when a work is copyright in one country but accessed from another through the territory of a third, the potential exists for a three-way litigation. Trans-border litigation has the effect of encouraging multi-jurisdictional forum shopping and for litigants to take action in the forum offering the optimal solution.

11. Insurance Law

This is an important area in Y2K related computer problems. It could be said that insurance for specific Y2K indemnity falls into two categories.^[29]

1. Before coverage will be granted an underwriting assessment at the expense of the prospective insured firm is undertaken. This level or type of insurance policy is more suited to large firms which are already undergoing substantial remediation and/or have a comprehensive compliance plan.

2. That which provides a relatively low ratio of coverage value to premium costs with some right of return of the premiums. This is the type of insurance which may be appropriate for smaller firms, those for which the probability and dollar value of damages as the result of unforeseen Y2K problems are entirely unknown. Such insurance cover, if available, can be expected to be extremely expensive.

The premiums charged by insurance companies can be expected to be inversely proportional to the amount expended by firms in internal compliance and remediation.^[30]

Policyholders already may have insurance coverage for the cost of eliminating the Y2K bug and for Y2K loss or liability under a host of different insurance policies, such as the following:

• business-interruption insurance (especially business-interruption policies written on an 'all risk' basis);

While seemingly reassuring, buying insurance policies as outlined above has proven not be all that simple. The Association of Insurance and Risk Managers, a London-based group representing commercial policyholders, concluded that many all-risk insurance policies cover property and business-interruption losses from Y2K claims. Many US insurance companies have been reported to be renewing such policies with a 'computer problem’ exclusion clause added on a 'take it or leave it' basis.^[31]

The issue of 'take it or leave it' Y2K insurance policy exclusions in fact became an important issue in the US, where standard policy exclusions were approved for use in 47 States. Only Maine, Massachusetts and Missouri failed to approve such policies and nine States have restrictions on how insurance companies may use them.^[32]

Although E&O liability insurance policies may protect directors and officers from Y2K claims alleging failure to remedy the company's computer operations in time or to properly disclose the magnitude of the company's Y2K problem, such E&O liability insurance policies are written differently. E&O liability may cover computer professionals for claims that they were negligent in developing computer systems that advertently or otherwise included the millennium bug or in changing computer systems to make them Y2K compliant.

It may however, be possible to transfer liability for both remediation costs and damages, with companies facing the costs to prevent Y2K failures seeking to sue the computer consultants and software and hardware manufacturers. Generally accepted accounting principles (GAAP) and other accounting standards in the USA, UK and Australia, and securities and banking laws and regulations in those jurisdictions may require disclosure of potential Y2K losses and corrective costs. These disclosure requirements may expose officers and directors of companies and financial institutions to statutory and common law causes of actions for liability.

In the USA the Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITP) issued a ruling on July 18, 1996 that prohibited all US companies from capitalising costs associated with the Y2K software changes. Y2K costs may be capitalised if old software is being replaced with new applications which give the organisation added value (Pusey 1997; Jinnett, 1996).^[33] In Australia, the adoption of accrual accounting by many large firms and corporations suggests that all capitalisation costs may be written off during the year of acquisition and expenditure. The Australian Taxation Office (ATO) permits depreciation on capital goods according to an agreed rate and scale of depreciation.

An important issue which managed somehow to escape the calculations of even prudent company managers and senior staff is the fact that that even if a business solves its own Y2K related problems, other companies with whom they deal and/or exchange data may not have solved theirs. This may make it impossible for the companies to transact business with some or all of its suppliers, landlords, banks, joint venturers, retail distributors, or other entities. Thus, companies that have been successful in eradicating their own millennium bugs (typically large organisations), may be unable to conduct business when they have to deal with non-Y2K compliant (and typically smaller) third parties.^[34]

Australia

In Australia, it is claimed that there has been an 'inconsistent approach [which] has Australian Insurance agencies in a state of flux as they evaluate the consequences of providing cover in what is considered a unique circumstance'.^[35] One company, CIC Insurance is reported as saying that its customers 'generally want direct losses excluded and indirect losses covered', with the rationale being that direct losses (including microprocessor failure) being foreseeable and therefore to be catered for by the insured.^[36] This position has been supported by the Insurance Council of Australia which maintains that the Y2K problem is a foreseeable event, and therefore must be addressed by the insured party itself. This position is reinforced by CIC's liability or professional indemnity insurance policies which cover injuries and personal property and contains an exclusion for Y2K related losses.^[37] The Insurance Council of Australia leaves it up to individual insurance companies to decide the extent of Y2K liability insurance they wish to underwrite.

Policyholder Actions To Preserve Coverage

It may be that the most cost-effective option is for policyholders to consider filing claims under their existing liability policies for potential Y2K liability. Depending upon the specific policy, a policyholder may give notice of a 'circumstance' that may result in a future claim. The notice should provide dates, transactions, and other details regarding the potential claim. Policyholders should carefully consider whether to give this notice at all.^[38] Such circumstances include

1. that they should consider the response of the insurance company which may raise the policyholder's insurance premium or even possibly refuse to renew coverage upon expiration of the current insurance policy; and,

2. that they should also consider the consequences of not disclosing to the insurance company their potential Y2K liability at this time.

If the policyholder fails to discuss the scope of their potential Y2K exposure on an insurance application, the insurance company may deny coverage on the grounds that the policyholder misrepresented or failed to disclose material information at the time of purchase. Alternatively, the insurance company may be unwilling to underwrite any such Y2K related policy.

12. Legislative Developments in Australia and Overseas during 1999

The emergence of an interdependent world economy meant that the Y2K problem is a global phenomenon, and Australia had to take note of international developments and legislation. Below is a brief summary of the extent to which nations enacted specific Y2K laws.

Australia

With the exception of Good Samaritan legislation (discussed below) and the loosening of the Copyright restriction on reverse engineering (discussed above) there was no attempt by any Australian government to enact Y2K specific legislation. Consequently all parties are forced to rely on existing common law and equitable remedies, the Corporations Law, Sale of Goods and Trade Practices legislation to enforce rectification or to seek compensation for losses incurred.

The Year 2000 Information Disclosure Act 1999 commenced operation on 27 Feb 1999. The Act sought to encourage the voluntary disclosure and exchange of information about Y2K computer problems and correction efforts. This is done by protecting the maker of a ‘Y2K disclosure statement’ from liability for the making and content of that statement, but only in certain circumstances. The statement can be an original or republished statement. It will be protected if:

• it states that it is a Year 2000 disclosure statement for purposes of the Act;

• it consists of the republication, re-transmission, reproduction, recital or reading aloud of the whole of an original year 2000 disclosure statement;

Protection is afforded for things arising out of or incidental to the making of the statement, and provides that a protected statement is inadmissible against a person in proceedings to which they are a party.

• with the sole or dominant purpose of inducing consumers generally to acquire goods or services, in an action to which the consumer is a party relating to those goods or services acquired by the consumer;

• with the sole or dominant purpose of inducing a particular consumer to acquire goods/services in an action to which that consumer is a party relating to those goods or services acquired by the consumer;

• if made to another person in connection with the making of a contract where the other person is a party in an action relating to that contract; or is made as required by law or under a contract.

Even if a statement is protected in some proceedings, it will not be protected in other proceedings which are:

• regulatory or enforcement proceedings under the CW, State or Territory law; or

The Act does not have retrospective application - it only applies to statements made on or after 27 February 1999:

• It will not be allowed to change contractual obligations unless the parties agree it should.

Note that it will not cover statements which are other than Year 2000 processing and will not cover a republished statement which does not include all of the original. A person will not be covered if the statement does not contain all of the mandatory content.

• Directors and officers and others need to be extremely careful in making such statements;

• They should be sure that the statement focuses on the process and plans related to Y2K;

• They should be cautious in relation to claims about the result or predictions; and

• They should make sure the statement is made on reasonable grounds and that statements are updated regularly.

Although a number of experts claim the legislation is fatally flawed, this has to date not been tested. In effect, the legislation means that companies could with impunity put unreliable Y2K statements into the public arena, thus passing on the risk of harm on to consumers. This is because a consumer who previously could rely on such Y2K disclosures as a basis for liability (for example, under the misleading and deceptive conduct provisions of the TPA) would no longer be able to do so.

USA: Special Y2K Laws

The situation in the United States is somewhat different, with significant pro-active effort being made at both state and federal level to provide legislative remedies and protection for all concerned. Given the world-wide nature of the expected effects of the Y2K problem and the borderless nature of cyberspace it is instructive to look at some of these pioneering efforts.

At its most basic level and in an effort to promote the sharing of important remediation information, legislation also known as the 'Good Samaritan' Bill was passed by the US Congress in 1998. The Senate Judiciary Committee and the Senate Special Committee on the Y2K Technology Problem has worked to protect companies from legal liability for disclosing Y2K information that turns out to be inaccurate, provided disclosure is made within a 45 day 'window of opportunity'.^[39]

The US Year 2000 Information and Readiness Disclosure Act 1998 (US) was intended to encourage business-to-business exchange of information on compliance, tools and solutions and provides limited liability and evidentiary protection for those statements and disclosures. Similar but (in some cases, significantly) more restrictive legislation is being introduced at a state level.

There are however difficulties in the interpretation of the US `Good Samaritan Act’. For example, s4(b) sets out the requirements for holding a maker of a 'Y2K statement' liable for a false, inaccurate or misleading statement. Section 4(b)(1) provides that the claimant must show by clear and convincing evidence that 'the Y2K statement was material.' It is not clear whether ‘materiality’ as used in this clause is based on materiality to the maker or to the claimant.

Swafford (1998) has argued that if materiality is defined separately from any transaction for example, in the context of a 'public service' message regarding remediation or testing advice, then the 'safe harbour' provided by the legislation would actually be creating an entirely new duty and cause of action.^[40]

He observes that under the present US common law and legislation no person has a general duty to assist anyone else in becoming Y2K compliant. Further, in both the USA and Australia, there is no common law liability for fraud or negligent misrepresentation in the absence of the familiar elements of reasonable reliance and an intent on the part of the speaker to induce reliance.^[41]

During late 1999, President Clinton signed into law a bill that curtails the legal costs and monetary damages computer software and other high tech companies may face if consumers' computers malfunction because of the Y2K problem. Among other provisions, the law requires a 90 day cooling off period before consumer can file lawsuits. That is aimed to give software companies time to fix any failure which could occur if computers read the year 2000 as 1900. The law also puts restrictions on the ability of a consumer to sue manufacturers on product liability grounds. There is also a cap on punitive damages for small businesses with fewer than 50 workers. Also, when the case involves $10 million or more in claims and more than 100 claimants it must be heard in the Federal Court. The legislation also makes it clear that parties will only be liable for their share of the blame in apportioning any damages. Importantly, the judge can order 'bad actors' to pay triple damages if they didn't try to redress Y2K problems despite knowing about them, or those who lied to consumers about the problem. In the case of multiple defendants, computer companies who are solvent could be ordered to pay twice their share if the other party is insolvent.

Other measures taken by the US authorities include interpretative guidance from agencies. In this regard the SEC has been exemplary by its 'Frequently Asked Questions' guidance, and other publications.^[42] Also important is the testing being conducted by government agencies. An example is the testing by the Federal Reserve System in the US of its 3,000 plus depository institutions and their systems.^[43] Finally, many jurisdictions in individual States have passed legislation which gives public entities immunity from suits alleging Y2K harms.^[44]

Similarly, legislation is being proposed which would limit the number of Y2K class action suits^[45] brought as a result of systems failures on a widespread scale and impacting a large number of people.^[46] Even in the US, however, it has been argued that governments are not doing enough as suggested by a US House of Representatives Government Reform and Oversight Committee report released on October 8, 1998.^[47] The Report expressed deep concern that 'approximately one-third of all Federal mission critical systems will not be compliant by March 1999. The Committee made the following recommendations:

13. Conclusion

With the benefit of hindsight observers of the Y2K phenomenon can view the relative peace with which the new millennium dawned as evidence that the whole issue was a ‘beat-up’. That there were significant and worrying failures has been overlooked in the general relief that few if any lives were lost. Nevertheless, it is submitted that this paper remains relevant as an attempt to charter the legal landscape in relation to possible claims arising out of the Y2K Bug. It concluded that the Y2K problem raises few new legal issues. Somewhat presciently, it predicted that within Australia itself, the impact of the Y2K problem was likely to be relatively minimal. To the extent that a likely increase in Y2K litigation was foreseen, the bulk of it is expected to be aimed at those who thought they had fixed the problem but nonetheless suffered a failure with consequential loss. In such cases, plaintiffs are likely to make extensive use of s52 of the Trade Practices Act, notwithstanding the attempts of technicians to protect themselves by exclusion clauses. Other actions will be directed to small business which has lagged behind the larger corporations which have generally been pro-active in taking early and effective action against the Y2K problem. The banking sector especially took precautions by putting on extra staff at all hours leading up to 2000.

On a public level, the ACCC has shown that it will be aggressive in pursuing those who make exaggerated claims or engage in misleading and deceptive conduct in relation to Y2K issues, and there are signs that this is already occurring in the USA with actions commenced by large corporations seeking proportionally large damages for allegedly unnecessary remediation work.

The relevant US Cases which were brought before midnight on 31 December 1999 are as follows:

• Against Gravity Apparel, Inc. v. Quarterdeck Corp., (N.Y. Sup. Ct. New York County, filed July 30, 1998)

This is a class action on behalf of thousands of licensees for the cost of upgrading software allegedly due to defendant’s non - compliant telecommunications software, Procomm Plus version 4.0. Defendant made a compliant upgrade available, but for an additional fee of $30. Plaintiffs allege that the system will not be able to correctly exchange files and usenet messages on the Internet after 1999.

All of Plaintiff's claims for breach of express warranty, violation of the Magnuson-Moss Warranty Act and deceptive acts were dismissed on April 5, 1999, due to the terms of a 90-day warranty.

• American Alliance Insurance Co. v. Sunbeam Corp., No. 98 CIV 4703 (S.D.N.Y., filed Jul. 2, 1998)

This is a declaratory action brought by an insurer against a policyholder for an order denying D&O coverage. American Alliance had offered D&O coverage to Sunbeam in 1998, but the policy was conditioned upon American's receipt, review and acceptance of certain information from Sunbeam prior to binding. Among the information that Sunbeam allegedly failed to adequately provide was a letter indicating that the company was or would be Y2K compliant before May of 1999. Sunbeams's motion to transfer to the S.D. Fl. was denied on January 28, 1999, and the decision is available at 1999 WL 38183.

• American Guarantee and Liability Insurance Co. v. Xerox, No. 603169/99 (Sup. Ct. New York County, N.Y., filed July 1, 1999)

American Guarantee filed an insurance coverage declaratory judgment action against Xerox, a policyholder, seeking a determination that Xerox's $183 million in Y2K remediation costs are not covered by Xerox's first-party property policy. Xerox made a claim under its policy's "sue and labor" clause on March 19, 1999.

American Guarantee asserts no coverage due to late notice, because the policy contains a 60-day notice provision, but Xerox's SEC filings indicate that its remediation efforts began as early as 1993, and that most work had been completed by the end of 1998. American Guarantee seeks declarations that remediation costs are non-fortuitous, ordinary business expenses, and are not covered by the policy's provisions regarding coverage, perils, time element, property excluded, expediting expense, machinery conditions, cooperation of the insured, sue and labor, and Electronic Date Recognition. American Guarantee also seeks declarations that Xerox has failed to provide "full particulars", a completed proof of loss form within a 60-day statutory deadline, and other information about remediation costs.

On July 2, 1999, Xerox sued American Guarantee for coverage in Connecticut state court in Stamford.

• Andersen Consulting v. J. Baker, Inc., No. 98-01597 (Mass. Super. Ct. Norfolk County, filed August 27, 1998)

Andersen sued its former client for a declaratory judgment in order to establish that Andersen fulfilled the terms of its agreement when it installed a computer system in the late 1980s that was Y2K noncompliant. A contingent-fee plaintiff’s firm had sent a pre-litigation notice to Andersen on J. Baker’s behalf, triggering Andersen’s preemptive filing. Both parties withdrew their claims on December 21, 1998, after non-binding mediation. J. Baker "re-evaluated its claims and is now satisfied that Andersen Consulting had met all of its contractual obligations...."

• ASE, Ltd. v. INCO Alloys International, Inc. (Ct. Comm. Pleas Allegheny County (PA), filed July 29, 1998)

ASE filed this action for breach of contract and injunctive relief against INCO under a 1995 software consulting contract. INCO had stopped paying fees to ASE under the contract, and INCO demanded reimbursement of $3.9 million in Year 2000 remediation costs that it paid to a third party, because INCO contended that ASE was responsible for Year 2000 compliance under the 1995 contract. ASE filed this action as a result. The parties arbitrated the matter, and the arbitrator ruled on November 17, 1998, that ASE owed no duty of Year 2000 compliance to INCO.

• Atlaz Int'l, Ltd. v. Software Business Technologies, Inc., No. 172539 (Super. Ct. Marin County, Cal., filed Dec. 2, 1997)

This is a class action brought by the owners of software that is not year 2000 compliant after the vendor refused to upgrade the software for free. The case was settled on October 14, 1998. SBT will offer a free "Century Date Kit" to owners of Pro Series 3.0i and Vision Point 8.0 software, which will enable users to make their software compliant. Owners of earlier versions will receive discounts on upgrades. SBT agreed not to oppose attorneys' fees and costs of up to $565,000.

• Beatie, King & Abate v. Lucent Technologies, Inc., and AT&T Corp., No. 600192/99 (Sup. Ct. New York County, N.Y., filed Jan. 13, 1999)

This is a class action against Lucent and its predecessor AT&T over the sale of 59 various telecommunications products. Causes of action include claims of unfair trade practices, and breach of express and implied warranties. On February 14, 1999, the defendants filed a motion to dismiss.

• Cameron v. Symantec Corp., No. 772482 (Cal. Super. Ct. Santa Clara County, filed Mar. 4, 1998)

This is a class action on behalf of thousands of licensees for the return of their license fees and for unspecified damages resulting from the non-compliance of defendant’s Norton Anti-Virus software versions prior to 4.0. Defendant made a Y2K-compliant upgrade available, but for an additional fee of $50 per package.

• Capellan v. Symantec Corp., No. CV772147 (Cal. Super. Ct. Santa Clara County, filed Feb. 19, 1998)

This is a class action on behalf of thousands of licensees for the return of their license fees and for unspecified damages resulting from the non-compliance of defendant’s Norton Anti-Virus software versions prior to 4.0. The defendant made a Y2K-compliant upgrade available, but for an additional fee of $50 per package.

• Carder Buick-Olds Co. Inc. v. Reynolds & Reynolds, Inc., No. 98-3338 (C.P. Montgomery County, Ohio, filed Sept. 9, 1998)

This is a class action in which defendant's automobile dealership management and accounting system, which is used by a large number of dealerships across the country, is allegedly noncompliant. The defendant allegedly informed dealers that the software contained a Y2K defect in October of 1997. The defendant further allegedly stated that it would not remedy the defect, but that it would terminate existing service and maintenance contracts on December 31, 1998. The plaintiffs were also told that they could replace the software with the new compliant "ERA" system for an additional fee, but that defendant is providing free compliant upgrades to current users of defendant's "ERA" system.

• Chilelli v. Intuit, Inc., No. 402582/98 (N. Y. Sup. Ct. Nassau County, filed May 13, 1998)

This is a class action on behalf of thousands of licensees for the return of their license fees and for unspecified damages resulting from the non-compliance of defendant’s Quicken software versions prior to 98. The defendant made a compliant upgrade available, but for an additional fee of approximately $35 per package. Intuit has stated that it will provide a free remediation patch for noncompliant versions 5 and 6 prior to 2000. The case was dismissed on December 1, 1998, as there had been no demonstrated harm suffered.

• Cincinnati Ins. Co. v. Source Data Systems, No. C98-144MJM (N.D. Iowa, filed Dec. 1, 1998)

As a result of the Pineville v. Keane case (listed below), one of the defendant's insurers brought the first Y2K insurance declaratory judgment action seeking a declaration that it has no duty to defend, nor duty to indemnify its insured. It is apparent that the insurer has been defending the case, because it has included a prayer for reimbursement of costs already incurred.

• Cobb & Shealy, P.A. v. Equitrac Corp., No. CV98-809H ( Cir. Ct. Houston County, Ala., filed Nov. 13, 1998)

Equitrac makes copier and telephone billing systems. The company sent out notices to its clients that:

3. clients must each pay $2,000 for the upgrade, despite the fact that many clients are already paying monthly maintenance fees "to keep the Equipment and Software in, or restore the Equipment and Software to good working order."

Unfortunately, many of Equitrac's customers are attorneys. Equitrac reportedly has not republished its earlier statements under the auspices of the new Y2K IRDA. The plaintiff's claims are for declaratory judgment, injunctive relief, restitution, and breach of contract."

• Colbourn v. Intuit, Inc., No. 405095 (Cal. Super. Ct. San Mateo County, filed June 4, 1998)

This is a class action on behalf of thousands of licensees for the return of their license fees and for unspecified damages resulting from the noncompliance of defendant’s Quicken software versions prior to 98. The defendant made a compliant upgrade available, but for an additional fee of approximately $35 per package. Intuit has stated that it will provide a free remediation patch for noncompliant versions 5 and 6 prior to 2000. The Colbourn, Issokson and Rubin class actions against Intuit were all consolidated, and they were twice dismissed due to a lack of harm. The complaint was amended a third time, to which Intuit filed a demurrer on July 12, 1999

• College v. Medical Manager Corp., No. 986401-J (Fla. Cir. Ct. Hillsborough County, filed August 25, 1998)

This is a class action for the failure by the defendant to provide a free compliant upgrade of its medical office management software. On December 17, 1998, all of the Medical Manager class actions were settled, except for Highland (N.D. Ill.) and MVA (D. Mass.). Licensees of noncompliant versions going back to version 7 will receive a free, newly created version 8.12, which is compliant. Licensees who upgraded to version 9, which is also compliant, may choose to receive a free software module or share in the $1.455 million settlement pool, approximately half of which will be used to pay the fees of the nine law firms representing the various classes.

• Colletti v. Medical Manager Corp., No. 988198-J (Fla. Cir. Ct. Hillsborough County, filed November 11, 1998)

• Community Health Association v. Lucent Technologies, Inc., No. 99-C-948 (Cir. Ct. Kanawha County, W. Va., filed Apr. 29, 1999)

This is a class action against Lucent and AT&T over the sale of a variety of Y2K noncompliant telecommunications products. Causes of action include unfair trade practices, product defect, and breaches of the implied warranties of merchantability and fitness for a particular purpose, contract and express warranty. The plaintiffs seek compensatory and statutory damages, disgorgement, an order requiring defendants to provide free upgrades, interest, costs, expenses and attorneys' fees.

• Courtney v. Medical Manager Corp., No. ATL-L-2031-98 (Super. Ct. Atlantic County, N.J., filed July 27, 1998), removed (D.N.J. July 15, 1998) (settled Dec. 16, 1998)

• DBN, Inc. v. Sage Software, Inc., No. 799983 (Cal. Super. Ct. Orange County, filed Sept. 25, 1998)

This is a putative class action involving allegedly noncompliant "M*A*S 90" accounting software, which was advertised to "handle the needs of your business through the 90's and beyond". The user manual also allegedly falsely indicated that the system was capable of handling four-digit year fields. Compliant software is allegedly available from the defendant, but for an upgrade fee of $7,000. Causes of action include fraudulent business practices and breach of express warranty. Plaintiff seeks compensatory and statutory damages, disgorgement of ill-gotten gains, attorneys' fees and experts' fees. Ironically, the name of the defendant until late 1997 was "State Of The Art, Inc.", when its name was changed to Sage.

• Elbert v. Packard Bell NEC, Inc., No. BC212012 (Cal. Super. Ct. Los Angeles County, filed June 15, 1999)

This is a class action against Packard Bell NEC (PB NEC) due to the alleged Y2K noncompliance of PB NEC's Versa 2000 laptop computer BIOS, ROM and motherboard. Although the computer can maintain a post-1999 date, the current date must be re-entered each time the computer is turned on. The limited warranty had allegedly not yet expired at the time the lawsuit was filed, but the company allegedly stated that the problem was not a defect and not covered by the warranty; rather, the computer "was not designed to function in 2000". The company also allegedly "had been aware of the potential for this problem for a number of years".

Causes of action include violation of the federal Magnuson-Moss Consumer Warranty Act, breach of contract, fraud, violation of California's Song-Beverly Consumer Warranty Act, violation of California's Consumer Legal Remedies Act and unfair business practices. The plaintiff seeks compensatory and punitive damages, civil penalties, disgorgement, attorneys' fees and costs. The plaintiff also seeks an injunction against PB NEC's refusal to honour the warranty, and a declaratory judgment that PB NEC must remediate the noncompliant laptops.

• Faegenburg v. Intuit, Inc., No. 98602587 (N. Y. Sup. Ct. New York County, filed May 26, 1998)

This is a class action on behalf of thousands of licensees for the return of their license fees and for unspecified damages resulting from the non-compliance of defendant’s Quicken software versions prior to 98. The defendant made a compliant upgrade available, but for an additional fee of approximately $35 per package. Intuit has stated that it will provide a free remediation patch for non-compliant versions 5 and 6 prior to 2000. The case was dismissed on December 1, 1998, due to a lack of identified harm.

• Garrison and Sumrall v. Active Voice Corp., No. CV-99-587 (Cir. Ct. Montgomery County, Ala., filed Feb. 17, 1999).

This is a class action that alleges that the defendants' voice mail system products released prior to Repartee Version 7.44 are non-compliant, and that plaintiffs will be forced to pay upgrade fees for compliant systems ranging from $4,000 to $6,000. The complaint alleges breach of warranty, and seeks restitution and declaratory and injunctive relief forcing defendants to remediate their products for free.

• Glusker v. Medical Manager Corp., No. CV775812 (Cal. Super. Ct. Santa Clara County, filed Aug. 5, 1998)

This is a class action for the failure by the defendant to provide a free compliant upgrade of its medical office management software. On December 17, 1998, all of the Medical Manager class actions were settled, except for Highland (N.D. Ill.) and MVA (D. Mass.). Licensees of non-compliant versions going back to version 7 will receive a free, newly created version 8.12, which is compliant. Licensees who upgraded to version 9, which is also compliant, may choose to receive a free software module or share in the $1.455 million settlement pool, approximately half of which will be used to pay the fees of the nine law firms representing the various classes.

• GTE Corp. v. Allendale Mutual Insurance Co., et al., No. 99-2877 (D.N.J., filed June 18, 1999)

This is a declaratory judgment action brought by GTE against five of its insurers in order to recover $400 million of Y2K remediation costs under the "sue and labor" clauses of GTE's property and excess property policies that were in effect during 1996 to 2000. All of the policies allegedly expressly cover computer data and software. The causes of action include breach of contract and bad faith, and GTE seeks a declaratory judgment that the insurers are obligated to indemnify and reimburse GTE for its past and future Y2K remediation costs. GTE also seeks damages, attorneys' fees, costs and interest.

• Hannah Films, Inc. v. Micron Electronics, Inc., No. CV98-05692 (Idaho Dist. Ct., filed Oct. 26, 1998)

Hannah Films filed a class action in Idaho State court against Micron Electronics due to the noncompliance of certain CPUs. Micron offered a compliant upgrade, but for a fee of $79 for each machine. The complaint includes claims for fraud, violation of the Magnuson-Moss Consumer Product Warranty Act and violation of the Idaho Consumer Protection Act.

• Highland Park Medical Associates, S.C. v. Medical Manger Corporation, No. 98C7022 (N.D. Ill., filed Nov. 3, 1998)

This is a class action against Medical Manager Corp. on behalf of some 110,000 physicians due to the failure by the defendant to provide a free compliant upgrade of its medical office management software. On December 17, 1998, all of the Medical Manager class actions were settled, except for the Highland (N.D. Ill.) and MVA (D. Mass.) cases.

• H. Levenbaum Insurance Agency, Inc. v. Active Voice Corp., No. 98-3864H (Mass. Super. Ct. Suffolk County, filed July 28, 1998)

This is a class action on behalf of more than 500 businesses that licensed defendant’s allegedly noncompliant telephone voice activation system, and which will cost $1,000 to $5,000 per user to upgrade to the compliant version. The complaint does not allege actual damages.

• Issokson v. Intuit, Inc., No. CV773646 (Cal. Super. Ct. Santa Clara County, filed Apr. 29, 1998)

This was the first of all of the class actions filed against Intuit, putatively filed on behalf of thousands of licensees for the return of their license fees and for unspecified damages resulting from the non-compliance of defendant’s Quicken software versions prior to 98. Defendant made a compliant upgrade available, but for an additional fee of approximately $35 per package. Intuit stated that it will provide a free remediation patch for noncompliant versions 5 and 6 prior to 2000.

The Colbourn, Issokson and Rubin class actions against Intuit were all consolidated, and they were twice dismissed due to a lack of harm. See the first dismissal. The complaint was amended a third time, to which Intuit filed a demurrer on July 12, 1999.

On July 20, 1999, Intuit announced that it will make free Y2K compliant patches available for Quicken.

• Johnson v. Circuit City, No. C99-00054 (Super. Ct. Contra Costa County, Cal., filed January 14, 1999)

This is a class action on behalf of customers of major retailers of personal computer-related products. The complaint alleges deceptive sales practices and the sale of unnecessary Y2K upgrades, and seeks to cause the retailers to:

3. put Y2K compliance information in their marketing materials; 4) offer 50 percent discounts on fixes; and 5) pay Johnson's attorneys' fees.

The named defendants are Circuit City, Fry's Electronics, The Good Guys, CompUSA, Office Depot, Staples and OfficeMax.

Circuit City, Office Max and Fry's Electronics have sought to join IBM, Microsoft and other computer companies as necessary parties. Discovery is proceeding, while court-ordered mediation is in the works. Office Depot has settled by agreeing to post Y2K warning signs

• Kaczmarek v. Microsoft Corp., No. 98C 7921 (N.D. Ill., filed Dec. 10, 1998)

This is a class action on behalf of licensees of FoxPro and Visual FoxPro for compensatory, incidental, consequential and punitive damages due to Microsoft's breach of express and implied warranties due to the alleged Y2K non-compliance of those systems. The complaint also seeks a free remediation patch.

The court dismissed the case with prejudice, because the FoxPro system is indeed capable of handling four-digit year fields by simple programming, even though the default mode is a two-digit year field.

• Miller v. State of Alabama, No. CV-99-197 (Cir. Ct. Montgomery County, Ala., filed Jan. 14, 1999)

This is a class action that alleges that the State of Alabama and several of its administrative agencies have failed to deliver essential services -- such as child support payments and food stamps -- and have repeatedly lost personal information necessary for the continued receipt of benefits, due to the Y2K problem and other problems with their computers that cause the computers to frequently crash. The suit seeks to cause the state to appropriate sufficient funding to remediate all of its noncompliant systems.

• Milton Bradley Corp. v. GARPAC Corp., No. 996000463 (Sup. Ct. New York County, N.Y, filed Jan. 28, 1999)

This is a class action that alleges that in 1993 Milton Bradley ("MBC") licensed software designed for use in the garment industry. The license agreement calls for a term of 50 years, which had been extended from an original duration of 25 years. GARPAC advised MBC that the software is not Y2K compliant and may provide erroneous information when calculating dates beyond the year 2000. The cost of the license agreement is in the range of $80,000.

• Mineral Area Osteopathic Hospital, Inc. v. Keane, Inc., No. C-99-50 (N. D. Iowa, filed Mar. 31, 1999)

This is a purported class action on behalf of 200 hospitals, involving the same noncompliant $300,000 patient management software package at issue in the Pineville v. Keane case. Keane stated that MEDNET would be "sunsetted", and that a compliant system would be made available for an additional fee of $500,000 per hospital. The causes of action include breach of warranty, breach of contract, and breach of the implied covenant of good faith and fair dealing, and the plaintiffs seek damages, attorneys' fees, costs, expenses, and injunctive and declaratory relief.

• Modern Drummer v. Lucent Technologies (Super. Ct. Middlesex County, N.J., filed January 29, 1999)

This is a class action against Lucent and its predecessor AT&T over the sale of 59 various telecommunications products. Causes of action include claims of consumer fraud and breach of express and implied warranties.

• Morris v. Infosoft, Inc., No. CV 99-019-M (Cir. Ct. Choctaw County, Alabama)

This is a class action involving SoftDent Practice Management System, a dental office management software program, which is allegedly noncompliant, seeking damages and a declaratory judgment that the defendant has a duty to keep the equipment and software in good working order by updating it.

• MVA Center for Rehabilitation v. Medical Manager Corp., No. 98-30217-MAP (D. Mass., filed Nov. 2, 1998)

• Paragon Networks International v. Macola, Inc., No. 98CV0119 (Ohio Ct. Common Pleas Marion County, filed April 1, 1998), dism., (Dec. 16, 1998)

This is a class action on behalf of 16,000 licensees for the return of their license fees and for unspecified damages resulting from the noncompliance of defendant’s Progression Series accounting software versions prior to "6.2000". The defendant made a compliant upgrade available, but for an additional fee of approximately $5,000 per installation. The case was dismissed on December 16, 1998, because the court held that Macola had fulfilled all of its contractual and legal obligations to its end users.

• Paywrite Systems, Inc. v. Peachtree Software, Inc., Automatic Data Processing, Inc., The Sage Group, PLC, New England Business Services, Inc., Meca Software, LLC, and Great American Software, Inc., No. 99-350-CIV-J-20B (M.D. Fla, filed Apr. 16, 1999)

This is a putative class action involving noncompliant small business accounting software called "One-Write Plus", which was marketed by all of the defendants. One-Write Plus was advertised to be "well adapted to novice users ... whose knowledge of ... computers is not extensive." The developer notified licensees that versions prior to DOS 4.6 will not operate for fiscal years 1999 and beyond, that licensees may suffer a loss of data, and that a compliant upgrade is available, but for an additional fee of $80.

Causes of action include violation of the Magnuson-Moss Consumer Product Warranty Act, breach of the implied warranties of merchantability and fitness for a particular purpose, breach of express warranty, unfair trade practices and fraud. Plaintiff seeks compensatory damages, attorneys' fees, costs and interest. Plaintiff also seeks an injunction to stop the defendants from continuing to charge for the compliant update, and to force defendants to advertise the product's noncompliance and to recall all noncompliant copies.

• Peerless Wall and Window Coverings, Inc., v. Synchronics, Inc., No. 98-1084 (W.D. Pa., filed June 24, 1998)

This is a class action on behalf of thousands of licensees for the cost of upgrading software and hardware allegedly due to defendant’s accounting software’s noncompliance. The defendant made a compliant upgrade available, but for an additional fee. The plaintiffs allege that the system will not accept credit cards with expiration dates after 1999. It is not specifically alleged, however, that any plaintiff has suffered actual harm.

• Pineville Community Hospital Assoc. v. Keane, Inc.No. 98-CI-00302 (Cir. Ct. Bell County, Ky., filed July 22, 1998), removed (D.Ky. Aug. 1998)

Pineville involves noncompliant hospital software called MEDNET. Keane demanded a fee for a Y2K compliant upgrade, despite its predecessor’s alleged promise that the system would be made compliant. Replacement costs are alleged to be in the range of $750,000 to $1.25 million. The case gave rise to the first Y2K insurance declaratory judgment action, Cincinnati Insurance v. SDS, in which Keane's insurer sought to deny coverage for Pineville's claim.

• Produce Palace Int’l v. Tec-America Corp., No. 97-3330-CK (Mich. Cir. Ct. Macomb County, filed June 12, 1997) (settled Sept. 9, 1998)

This was the first Y2K case filed. It is not a class action, and it does allege actual harm. A single plaintiff sued as a result of defendant’s noncompliant point-of-sale system, which crashed whenever credit cards that contained expiration dates on or after January 1, 2000, were processed. Customers’ purchases could not be processed, and the plaintiff was literally left "holding the bag". The case was settled on September 9, 1998, for $260,000, due primarily to mediation.

• Pushmataha Plantation v. Nova Corp., No. CV-99-32 (Cir. Ct. Choctaw County, Ala., filed Mar. 4, 1999)

This is a class action that alleges that members of the class, who purchased credit card processing equipment from defendants, were each unilaterally assessed charges of $80.00 by defendants for Y2K remediation work. The complaint alleges breach of contract, unjust enrichment and the imposition of a penalty, and seeks reimbursement.

• Qual-Craft Industries Inc. v. RealWorld Corp., No. 98-01186 (Super. Ct. Norfolk County, Mass., filed June 26, 1998) (settled Jan. 4, 1999)

This is class action case in which the plaintiff alleges that the defendant's accounting and business software should be upgraded for free, instead of for a fee of between $3000 and $5000 to eliminate Y2K problems. Plaintiff claims that it purchased version 6.6 of the defendant's software in April 1995, and that the software will not recognise dates beyond 1999. The case was settled on January 4, 1999, in exchange for RealWorld's provision of Y2K compliant free modules and discounts to the 275,000 licensees of versions 6.0 to 7.2 of the Classic Accounting Software. The upgrade enables users to be fully Y2K compliant. Further, registered owners of the software will be eligible for free software subscription services. Customers who already purchased a Year 2000 compliant version prior to the class-action suit will have the ability to receive a fifty (50%) percent discount off of the list price of all of RealWorld's Windows-compatible software modules.

• Rockland Pulmonary and Medical Associates v. Medical Manager Corp., No. 5228/98 (N.Y. Sup. Ct. Rockland County, filed Aug. 7, 1998), removed , No. 98 CIV 6190 (S.D.N.Y. Sept. 2, 1998)

• Rubin v. Intuit, Inc., No. CV774287 (Cal. Super. Ct. Santa Clara County, filed May 27, 1998)

On July 20, 1999, Intuit announced that it will make free Y2K compliant patches available for Quicken.

• SPC, Inc. v. NeuralTech, Inc., No. 8:98CV521 (D. Neb., filed Oct. 23, 1998) (settled Nov. 4, 1998)

SPC is a subsidiary of a bank, which was ordered by the Federal Financial Institutions Examination Council to assess its Y2K compliance. SPC alleges that it discovered that NeuralTech’s CADRE Merchant credit card processing system version 3.X will fail to process post-1999 dates on 6/30/99. SPC also alleges that it has had problems with other modules of the CADRE system since its installation in May of 1997. SPC initially agreed to pay $1.5 million for the system, but has admittedly withheld some portion of that fee. NeuralTech allegedly stated that a compliant upgrade is available -- version 4.0 --, but NeuralTech has allegedly recommended to its clients that they pay an additional $300,000 for the timely and accurate conversion of legacy systems. SPC alleges breach of contract, and seeks damages and an injunction for specific performance. The case was settled on November 4, 1998, for undisclosed terms.

• Stein v. Intuit, Inc., No. 98603134 (N. Y. Sup. Ct. New York County, filed June 25, 1998)

This is a class action on behalf of thousands of licensees for the return of their license fees and for unspecified damages resulting from the noncompliance of defendant’s Quicken software versions prior to 98. The defendant made a compliant upgrade available, but for an additional fee of approximately $35 per package. Intuit has stated that it will provide a free remediation patch for noncompliant versions 5 and 6 prior to 2000. The case was dismissed on December 1, 1998, due to a lack of harm. See the decision.

On July 20, 1999, Intuit announced that it will make free Y2K compliant patches available for Quicken. The patch will remediate, among other things, the online banking feature.

• Sunquest Information Systems, Inc. v. Dean Witter Reynolds, Inc. and The Compucare Company, No. Civ.A. 98-188J (W.D. Pa., filed July 30, 1998)

Sunquest purchased all of the stock in Compucare's subsidiary, Antrim Corporation, for $5million. Part of the transaction involved the transfer to Sunquest of Antrim's medical laboratory information management software. Sunquest alleged in its complaint, among other things, that the software suffered from a number of defects, including Y2K noncompliance, and that intensive, specialised remediation would be required for each of Antrim's clients. Dean Witter acted as Compucare's investment banker. In its complaint, Sunquest alleged breach of contract, breach of express and implied warranties, fraud, negligent misrepresentation, and securities fraud under federal and state laws, and Sunquest sought damages in excess of $75,000, indemnity under the sale agreement, and rescission.

The defendants' motion to dismiss was granted in part on March 24, 1999. The decision is available here and at 1999 WL 167091. The Court held that Sunquest may pursue claims against Compucare and Dean Witter for indemnity, breach of contract and breach of express warranty, and that it may amend its securities claims against Dean Witter, but not against Compucare. The Court also held that Sunquest's allegations do not give rise to claims for breach of implied warranty, negligence or fraudulent misrepresentation.

• Vernis & Bowling of Miami v. Nortel Networks, Inc., No. 99-10186 (Cir. Ct. Miami-Dade County, Fla., filed Apr. 26, 1999)

This is a purported class action resulting from the sale of allegedly Y2K non-compliant telecommunications products. Defendants have made compliant products available, but allegedly for additional costs and service fees in the range of $1,000 per customer. Causes of action include unfair trade practices, breach of the implied warranties of merchantability and fitness for a particular purpose, breach of express warranty, negligence and fraud. Plaintiffs seek compensatory damages, costs, expenses, interest, attorneys' fees, an order requiring defendants to provide free upgrades, and damages for lost business and profits during the time Y2K compliance upgrades will be made.

• Women’s Institute for Fertility, Endocrinology and Menopause v. Medical Manager Corp., No. 000419 (Pa. Ct. Comm. Pleas Philadelphia County, filed August 4, 1998)

• Yu v. Int'l Business Machines Corp. and Medic Computer Systems, No. 98-8241 (N.D. Ill.,filed Dec. 22, 1998), dism. (Feb. 23, 1999), refiled, No. 99CH02873 (Ill. Cir., Cook Co.,Chanc. Div., Feb. 24, 1999), dismissed (May 28, 1999)

This is a class action arising out of allegedly noncompliant IBM RISC 6000 hardware, the IBM AIX operating system 4.1, MEDIC applications software version 7.0, and accompanying professional services necessary to support the hardware and software. The lawsuit was brought on behalf of all persons and entities who purchased the defendants’ noncompliant systems, as well as a subclass of those persons who purchased IBM AIX operating system 4.3, which is compliant. The software allegedly costs approximately $20,000 each, and is used by over 60,000 physicians in over 11,000 medical offices to monitor and schedule patients’ treatment, and to track patient tests and results. The plaintiff was advised two years after it purchased its system that it would need to pay an additional $2,410 for the compliant version.

On February 23, 1999, the judge dismissed the complaint, because the allegations supporting diversity jurisdiction were insufficient; the amount in controversy had not been satisfied. After a complaint was filed in Illinois state court on February 24, 1999, the case was dismissed with prejudice on May 28, 1999.

• Zee's Home Decorating Centers, Inc. v. DacEasy Inc., No. DV 98-06073-B (Dist. Ct. Dallas County, Texas, filed Aug. 5, 1998)

This is a class action alleging that version 7.0 and earlier versions of defendant's accounting software are noncompliant, and that defendant should provide a free upgrade or a patch for existing software. The plaintiff claims that defendant is not providing free compliant upgrades, but is relying on customers to purchase newer versions of the software, despite the defendant's representations in its user's manual that the software will be able to handle years represented by four digits.

References

Australian National Audit Office (ANAO) 1998 Getting Over the Line. Selected Commonwealth Bodies Management of the Year 2000 Problem, Canberra: AGPS.

Anderson, S 1996 'Directors at risk from policy flaws', The Australian Financial Review, July 30, 1996, p. 2.

Asher, A 1997 'Carrot and stick--recognising compliance', ACCC Journal No 9, June, p. 2.

Bennett, A 1996 'Expensing computer change to 4-digit years in 2000 is appropriate, practitioner says', BNA Management Briefing, July 23, 1996.

Burkholder, S 1996 'Switching computers to 4-digit years in 2000 to be an expense, not capitalized', Taxation, Budget and Accounting (BNA), July 19, 1996, no. B9 at G-3.

Clout, J 1998 'Y2K dangers are still being ignored', Australian Financial Review, December 15, 1998, p. 39.

Cohen, F 1994 A Short Course on Computer Viruses (2nd ed.), New York: Wiley Professional Computing, p. 2.

De Jaeger, P 1998 Chilling litigation – building bug-free software is virtually impossible, but where is the line between reality and being responsible for your product? Behind the News, CMP Media October 12, 1998, Issue 704.

Dee, B 1997 'Characterising conduct as 'behavioural' or 'procedural': a new paradigm', ACCC Journal, No 12, December, p. 20-23.

Eisenstein, L & Button, KK 1998 'Year 2000 contingency planning: A legal perspective' Electronic Commerce & Law Report, Vol. 3 No. 39, October 14, 1998, pp. 1216-18.

First B-D enforcement cases brought over failure to report on Y2K readiness, Electronic Commerce & Law Report, Vol.3, No.41 October 28, 1998 p.1251.

Head, R 1998 'Insurers Weigh Y2K Risk' in The Australian, August 25, 1998, p.54.

Hughes, G 1986 'Computer contracts - the maze of implied terms', The Australian Accountant, Vol. 56, No. 5, (June), 64.

Hugo, I 1998 Managing Y2K: A Code of Practice for Small and Medium Enterprises, Standards Australia.

James, D 1997 'The benefits you perceive come from the knowledge you receive', Business Review Weekly, May 5, p. 74.

Krieger, M 1996 'Drafting tip: the threat of 2000 calender clause protection', Cyberspace Lawyer, v. 1 (2) (May), 1996.

Litigation concerns: A big priority, Electronic Commerce & Law Report, Vol.3, No.41 October 28, 1998 p.1252.

Macleary, J 1998 ‘Millennium bug bill reaches $10b’, The Australian, December 2, pg. 25.

Meyer, JA 1998 'Y2K changes climate for mergers, acquisitions', Electronic Commerce & Law Report Vol.3, No.41 October 28, 1998, p.1253.

Omnibus spending bill includes $3.4 billion in emergency funds for Y2K computer glitch, Electronic Commerce & Law Report, Vol. 3, No.41 October 28, 1998 p.1252.

Raysman, R & Brown, P 1998 ‘Preparing for a Y2K compliance audit’, The New York Law Journal, January 13, pp. 35-39.

Reid WS & Brower S 1996-97 'Beyond awareness: ten management and ten legal pitfalls regarding the Year 2000 computer problem that you may not have considered yet', URL http://www.year2000.com/archive/beyond.html.

Sharpe, B 1997 'Legal due diligence system ineffective', Australian Company Secretary (August) p. 287

Taylor, M 1998 ‘No assurances from audit office’ The Canberra Times December 21, p.3.

Tomasic, R, Jackson J & Woellner, RH 1996 Corporations Law: Principles, Policy and Process, Sydney: Butterworths

Tomasic, R & Bottomley, S 1995 Corporations Law in Australia, Sydney: The Federation Press.

Y2K glitch poses opportunity for financial institutions to gain competitive advantage, Electronic Commerce & Law Report, Vol. 3, No. 41, October 28, 1998, p. 1253.

A survey conducted by the Gartner Group and reported in 'Mediating Year 2000 (Y2K) Disputes’ URL

Thomas Workman JIT and the Y2K Shutdown PLI Year 2000 Law List <PLI-Y2K http://www.pli.edu

An Annotated List of Useful Printed Resources

Printed Resources

Davis, AE & Spencer, RH 1998 The Year 2000 Problem and the Legal Profession: Managing the Risks, American Bar Association, ISBN 1570736324, 56 pages.

Gutman, HA 1998 The Year 2000 Legal Handbook, Year Two Thousand Books, ISBN: 1892190028, 400 pages. Gutman developed one of the first Websites on Y2k issues. Though US in its focus, it is a very useful resource.

Scott, MD & Reid, WS 1998 Year 2000 Computer Crisis. Law, Business, Technology, New York: Glasser Legalworks. ISBN: 1888075821, 756 pages. This is a comprehensive US book covering the legal, technical and commercial issues relevant to the Y2K problem. It also contains a large number of checklists, sample contingency plans, evaluation forms and other practical information.

Williams, RD & Smyth, BT 1998 Law of the Year 2000 Problem: Strategies, Claims and Defenses, ISBN: 0735503001.

^[1] Eugene Clark is Pro Vice-Chancellor and Professor of Law, University of Canberra Law School, George Cho is Assoc Professor of Geographic Systems and the Law and Arthur Hoyle is Lecturer in Law. Clark, Cho and Hoyle are co-authors of Y2K: Avoiding the Legal Byte, Sydney, Prospect Publishing, 1999. Research assistance has been provided by Kerrin Stewart.

^[3] Macleary, J 1998 ‘Millennium bug bill reaches $10b’, The Australian, December 2, p. 25.

^[4] The Electronic Commerce & Law Report, Vol. 3, No. 39, October 14, 1998, p. 1211.

^[5] Clout, J 1998 'Y2K dangers are still being ignored', Australian Financial Review, December 15, 1998, p. 39.

^[7] De Jaeger, P (1998) Chilling litigation – building bug-free software is virtually impossible, but where is the line between reality and being responsible for your product? Behind the News, CMP Media October 12, 1998, Issue 704.

^[8] The maxim applies whenever it is so improbable that damage would have happened without the negligence of the defendant and that a reasonable jury could find without further evidence that it was so caused. See Scott v London and St. Katherine's Docks Co [1865] EngR 220; (1865) 3 H & C 596.

^[10] Courtney v Medical Manager Corporation Filed June 10, 1998, Removed to District Court of New Jersey, July 15, 1998, No. 98 cv03347.

^[11] Superior Court of California, Santa Clara County No.: CV773646 Filed April 29, 1998.

^[12] Case No. 172539 (California Superior Court, Marin County, complaint filed December 2, 1997).

^[13] Computer processing of dates outside the 20^th Century Datapro Research Corporation, April 1987, cited in Mitchell L Lathrop 'Its only a question of Zeros and Ones: The year 2000 problem' Luce, Forward, Hamilton & Scripps LLP March 1998, p.27.

^[14] Supreme Court of New York, New York County No.: 98602587 Filed: May 26, 1998.

^[16] Filed: June 10, 1998 Removed to District Court of New Jersey: July 15, 1998 No.: 98cv03347.

Journal of Law, Information and Science

Clark, Eugene; Cho, George; Hoyle, Arthur --- "Y2K Litigation: More Bugs Hitting the Same Legal Fan" [1999] JlLawInfoSci 12; (1999) 10(2) Journal of Law, Information and Science 246

Y2K Litigation: More Bugs Hitting the Same Legal Fan

Outline

Abstract

1. Introduction

2. Y2K Bug

The Basics

Size of the problem

3. Contract and Tort

A. Contract Law

Express Warranties

Implied Warranties

Vendors' Limitation of Potential Liability

Quantum of Damages

Liquidated damages

B. Tort Liability

Fraud

Negligent Design and Strict Liability

Negligence

Some Possible Defendants

Negligence and Self-Help

4. Sale of Goods Legislation

5. Trade Practices Act 1974 (Cth)

Case Examples

6. Product Liability Law

Who is Liable?

Types of Loss and Damage Covered

Required Notice before Action / Defences

Contribution and Indemnity

Other Product Liability Issues

Case Example:

Knowledge of the Y2K problem and implications

Courtney v Medical Manager Corp[16]

Retrospective Application

The Right to No-cost Y2K Rectification

Case Example:

7. Fair Trading Legislation

8. Occupational, Health and Safety Law

9. Corporations Law

External Investigation

Shareholder Actions

Other Causes of Action Against Directors

The Potential Effect of the Y2K Problem on Mergers and Acquisitions

Y2K Disclosures and sale of shares

10. Intellectual Property Law

Licenced Software Problems

Copyright Ownership

Trade Secrets

Trans-Border Issues

11. Insurance Law

Australia

Policyholder Actions To Preserve Coverage

12. Legislative Developments in Australia and Overseas during 1999

Australia

USA: Special Y2K Laws

13. Conclusion

References

An Annotated List of Useful Printed Resources

Printed Resources

Courtney v Medical Manager Corp^[16]