Y2K lawsuits: First let's kill the computers

The end of the 20th century has seen a dramatic increase in the numbers of computers and the number of lawyers. Unfortunately, only the computers have become twice as fast and half as expensive.

In the context of Year 2000 issues, lawyers tend to be associated with the problem, not the solution. It has been suggested that the impact of Y2K related lawsuits will be more devastating than the consequences of the underlying technical defect. When lawyers venture onto the Y2K battlefield, it will not be to combat the bug, or to administer aid to the afflicted, but rather to dispatch the survivors. As a result of lawsuits, many of the suppliers that provide support and maintenance for public sector IT systems may be driven out of business.

Visualize a Y2K class-action lawsuit from the perspective of a software supplier. Imagine a team of lawyers lowering a piece of raw meat into a pool of piranhas. Now imagine that you are the meat. Examples of Y2K lawsuits that have already been filed against software and hardware suppliers in the U.S. provide a chilling glimpse of what suppliers can expect.

The initial assault comes from customers. This attack has three separate dimensions. First, it is alleged the supplier provided a defective product and then charged customers for a corrective upgrade to fix it. Claims are made on behalf of all customers demanding that the corrections should have been provided at no charge and that a reimbursement obligation and punitive damages should be imposed. This means a drastic reduction in the supplier's anticipated cash flow from upgrades. Secondly, many customers have incurred large expenditures on Y2K remediation projects as a precautionary measure. It doesn't matter whether or not the customer actually experiences problems after Jan. 1, 2000. Claims will be made on behalf of these customers to recover all or part of their remediation expenses on the basis that the costs were incurred because the supplier refused to confirm that their product was free from defects or alternatively, provided a product with latent defects and failed to correct those defects in a timely manner. Finally, customers that actually suffer damages as a consequence of defective software will be claiming compensation for their losses. Tort law claims based on negligence may avoid the usual contract limitations on recovering indirect, incidental, and consequential damages

The second wave of the attack comes from shareholders. When customers launch a class-action lawsuit against a publicly traded software company, the impact on its stock price can be swift and negative. Investors who suffer a decline in the value of their shares often react with additional lawsuits seeking compensation from the company and its directors and officers for failing to adequately disclose, in public securities filings, the risk of exposure to claims based on Y2K deficiencies.

The final blow is delivered by insurers. Insurance policies include an obligation to defend claims made against the insured for risks covered by the policy as well as an obligation to pay, or reimburse the insured, for claims that are required to be paid. This means the insurer pays the cost of engaging lawyers to defend lawsuits against the insured. However, for Y2K-related claims, insurers have gone to great lengths to exclude or deny coverage. Accordingly, insurers are not obliged to hire lawyers to defend a supplier against a Y2K claim. As a result, suppliers face significant legal costs to defend a claim and have no protection against a successful claim.

David M. Robinson, lLB, is executive direc tor ol The Tech Knowledgey Group, advisors on negotiating and documenting complex IT transactions. Tel: (800)973-3833; email: info@tkygroup.com.

Copyright Plesman Publications Ltd. Jul 1999
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