San Francisco/Los Angeles Daily Journal September 26, 1996 by Vito C. Peraino
It's New Year's Eve 1999. In Times Square, all eyes turn to the lighted ball that descends to a deafening crescendo of cheers. As the ball reaches the base, a new millennium begins and life as we know it ceases: Computers in securities firms, insurance companies, banks, universities, airlines, hotels, credit card companies, subways, government and every corner of business around the world grind to a halt, foiled by a simple but devastating programming error.
This is hardly science fiction, it is known as the year-2000 problem. The U.S. computer industry has awakened to an insidious technical problem that infects much of the commercial software in use around the world with this simple discovery, one of the largest waves of litigation seen in years may not be far behind.
Computers have traditionally been programmed to use a two-digit field to represent the year. For example, the number 68 represents the year 1968. But computer programmers were so busy attempting to save space in their programs that they failed to plan for how the computer would handle the year 2000. A computer reads the year 2000 as 00.
This simple problem will wreak havoc. For example, a computer would calculate my age by subtracting the year of my birth (56) from the present year (96) to arrive at my age (40). In the year 2000, a computer win use the same formula and subtract the year of my birth (56) from its representation of 2000 (00) and I will be 56 years old.
Life insurers may not be able to calculate benefits, banks may not be able to calculate interest, retirement plans may not be able to calculate retirement dates, payroll systems may miscalculate paychecks and the problem goes on. In short, any company that used its computers to make a date-sensitive calculation that is, virtually every business institution in the United States will be in jeopardy if this problem is not corrected.
The Gartner Group, a computer industry consultant, estimates that the total worldwide cost of solving the problem would be between $300 billion and $600 billion. Some in the industry have begun to reprogram millions of lines of computer code. Chubb and Sons Inc. reports that it has allocated 10 full-time programmers to the task of repairing its system at a cost of tens of millions of dollars. San Antonio-based USAA Group has between 40 and 50 programmers as well as outside vendors addressing the problem on a full-time basis. Costs to the insurance industry alone are estimated at $50 to $75 million. "Business Insurance" at 248 (May 20, 1996).
It appears, however, that most companies are ignoring the problem. Industry surveys reveal that only 36 percent of companies that recognize that they have a year-2000 problem are currently undertaking a plan to fix it. The Computer Business Review reports that only 50 percent of companies will be ready for the millennium change and 10 percent of US. businesses will go bust because of it. "Computer Business Review" at 36 (March 1, 1996). The American Banker reports that "many bank executives are having a hard time taking the A2000 crisis seriously." Matt Barthel, 'The American Banker," at 16 (March 7,1996).
Unlike many problems this one will not go away. In April, Kevin Schick, Research Director of the Gartner Group, testified before Congress: "The Year 2000 date change is the first time in the history of the information technology industry that an issue must be addressed by all organizations, and organizations must address that issue within a specific time horizon." He estimated that by the year 2000, 90 percent of all applications will fail or create errors if not corrected.
The bottom line is that failing to address the problem will result in liability and threaten the foundation of many businesses. There are many aspects to the year-2000 problem that counsel and clients need to assess immediately:
Companies must be made aware that failure to address the year-2000 issue will result in liability for many industries. Those industries that provide finance related services C such as banking, accountancy, insurance, securities and real estate C are particularly vulnerable. Should the companies awake on New Year's Day 2000 unable to service their client base, potential liabilities loom large. Class-action suits, breach-of-contract actions, mass business tort exposures and consumer-fraud actions will be filed against companies that have not addressed their problems.
Imagine a class of all bank depositors who are unable to withdraw funds, obtain correct interest payments or clear checks. Imagine an insurance company unable to track or process claims. Imagine a securities firm that cannot clear trades, and imagine an accounting firm unable [to] certify financial statements. The issues are real and they win develop into lawsuits if action is not taken now.
The problem may be larger for publicly traded companies. To the extent that these entities are aware of a year-2000 problem, which tends to be more expensive for larger companies, counsel need to consider whether such expenditures constitute a material fact that must be disclosed. Where costs range in the $20 to $50 million range, it is likely that many companies will be facing material expenditures.
Likewise, failure of management to address the issue and to adopt a year-2000 plan may open the door to securities actions. The Internet is fined with frustrated information-systems personnel who are complaining loudly that management refuses to acknowledge their pleas to address the problem. If this is true, management should be aware that it is facing more than the cost of hiring a few more programmers.
In addition to auditing existing systems, companies need to assure that current vendors are providing year-2000 compliant software and hardware. Contracts need to be evaluated through out the company to assure that companies are receiving warranties that the products they purchase are year-2000 compliant.
Lest anyone think that this problem is limited to large mainframe applications, that is not the case. Personal computers also are vulnerable to this problem. Companies that purchase significant numbers of PCs need to assure that the computer's internal clock will roll over properly on Jan. 1, 2000. Leaving aside the potential liabilities of the manufacturers of the world's 60 million personal computers, companies need to assure that each PC user has hardware that is tested and will work. Pro-active lawyering through careful contract review will help avoid some of these problems.
It will be critical to assess whether the company has a right to recover against third parties for failure to provide year-2000 compliant products or services. Counsel should undertake an internal audit to determine whether causes of action exist, mindful that statutes of limitation may be running. Analysis should include, at a minimum, actions for negligence, product liability, breach of contract, breach of express warranty, breach of implied warrant, negligent misrepresentation and fraud.
Special attention must be given to statute of limitations issues, especially where legacy systems are involved. While at first it may seem that statutes might bar actions, there will be circumstances where causes of action have not accrued. State law varies radically on this issue. States may have special rules relating to latent defects, fraud and professional negligence. Some states hold that in certain circumstances causes of action do not accrue until damage is suffered.
Warranty disclaimers will also be rigorously tested once the wave of year-2000 ligation hits. While hardware and software providers have paid millions to their outside counsel to draft warranty disclaimers, few have been tested in court. Keep in mind that warranty disclaimers are disfavored in the law and will be strictly construed against the company that drafted the disclaimer. Furthermore, the conduct of the parties during the course of their relationship may undercut the effect of what seems on its face to be a solid warranty disclaimer.
Special attention should also be given to so-called programming houses that may s have provided an entire suite of services to a company. Services typically have been provided pursuant to a specially drafted contract. Companies often undertake ongoing service obligations that should include year 2000 upgrades.
Even if a company is smart enough to have addressed its internal problems, ensures that its computer vendors are providing year-2000 compliant hardware and software, promptly reports material facts it and is pursuing vendors that have caused economic damages, the work may not be done. A rigorous assessment of third parties that provide services to a company must be undertaken to assure that someone else's year-2000 problem will not affect operations.
Companies must assure that their vendors will not suffer year-2000 failure. Consideration should be given to financial institutions, accountants, payroll vendors, shippers of goods, benefits providers and insurers as a minimal listing of companies that need to be put on notice that they will be expected to provide services in the millennium.
Hancock Rothert & Bunshoft has formed a Year 2000 Team to assist companies with related legal problems. If you would like more information on Hancock's Year 2000 Team, or on the firm in general, please contact: Vito C. Peraino on Tel: 213-623-7777 or E-mail: Click Contact Link or visit the Hancock Rothert & Bunshoft website at Click Contact Link
Visit the Year 2000 website at Click Contact Link
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
It's New Year's Eve 1999. In Times Square, all eyes turn to the lighted ball that descends to a deafening crescendo of cheers. As the ball reaches the base, a new millennium begins and life as we know it ceases: Computers in securities firms, insurance companies, banks, universities, airlines, hotels, credit card companies, subways, government and every corner of business around the world grind to a halt, foiled by a simple but devastating programming error.
This is hardly science fiction, it is known as the year-2000 problem. The U.S. computer industry has awakened to an insidious technical problem that infects much of the commercial software in use around the world with this simple discovery, one of the largest waves of litigation seen in years may not be far behind.
Computers have traditionally been programmed to use a two-digit field to represent the year. For example, the number 68 represents the year 1968. But computer programmers were so busy attempting to save space in their programs that they failed to plan for how the computer would handle the year 2000. A computer reads the year 2000 as 00.
This simple problem will wreak havoc. For example, a computer would calculate my age by subtracting the year of my birth (56) from the present year (96) to arrive at my age (40). In the year 2000, a computer win use the same formula and subtract the year of my birth (56) from its representation of 2000 (00) and I will be 56 years old.
Life insurers may not be able to calculate benefits, banks may not be able to calculate interest, retirement plans may not be able to calculate retirement dates, payroll systems may miscalculate paychecks and the problem goes on. In short, any company that used its computers to make a date-sensitive calculation that is, virtually every business institution in the United States will be in jeopardy if this problem is not corrected.
The Gartner Group, a computer industry consultant, estimates that the total worldwide cost of solving the problem would be between $300 billion and $600 billion. Some in the industry have begun to reprogram millions of lines of computer code. Chubb and Sons Inc. reports that it has allocated 10 full-time programmers to the task of repairing its system at a cost of tens of millions of dollars. San Antonio-based USAA Group has between 40 and 50 programmers as well as outside vendors addressing the problem on a full-time basis. Costs to the insurance industry alone are estimated at $50 to $75 million. "Business Insurance" at 248 (May 20, 1996).
It appears, however, that most companies are ignoring the problem. Industry surveys reveal that only 36 percent of companies that recognize that they have a year-2000 problem are currently undertaking a plan to fix it. The Computer Business Review reports that only 50 percent of companies will be ready for the millennium change and 10 percent of US. businesses will go bust because of it. "Computer Business Review" at 36 (March 1, 1996). The American Banker reports that "many bank executives are having a hard time taking the A2000 crisis seriously." Matt Barthel, 'The American Banker," at 16 (March 7,1996).
Unlike many problems this one will not go away. In April, Kevin Schick, Research Director of the Gartner Group, testified before Congress: "The Year 2000 date change is the first time in the history of the information technology industry that an issue must be addressed by all organizations, and organizations must address that issue within a specific time horizon." He estimated that by the year 2000, 90 percent of all applications will fail or create errors if not corrected.
The bottom line is that failing to address the problem will result in liability and threaten the foundation of many businesses. There are many aspects to the year-2000 problem that counsel and clients need to assess immediately:
Companies must be made aware that failure to address the year-2000 issue will result in liability for many industries. Those industries that provide finance related services C such as banking, accountancy, insurance, securities and real estate C are particularly vulnerable. Should the companies awake on New Year's Day 2000 unable to service their client base, potential liabilities loom large. Class-action suits, breach-of-contract actions, mass business tort exposures and consumer-fraud actions will be filed against companies that have not addressed their problems.
Imagine a class of all bank depositors who are unable to withdraw funds, obtain correct interest payments or clear checks. Imagine an insurance company unable to track or process claims. Imagine a securities firm that cannot clear trades, and imagine an accounting firm unable [to] certify financial statements. The issues are real and they win develop into lawsuits if action is not taken now.
The problem may be larger for publicly traded companies. To the extent that these entities are aware of a year-2000 problem, which tends to be more expensive for larger companies, counsel need to consider whether such expenditures constitute a material fact that must be disclosed. Where costs range in the $20 to $50 million range, it is likely that many companies will be facing material expenditures.
Likewise, failure of management to address the issue and to adopt a year-2000 plan may open the door to securities actions. The Internet is fined with frustrated information-systems personnel who are complaining loudly that management refuses to acknowledge their pleas to address the problem. If this is true, management should be aware that it is facing more than the cost of hiring a few more programmers.
In addition to auditing existing systems, companies need to assure that current vendors are providing year-2000 compliant software and hardware. Contracts need to be evaluated through out the company to assure that companies are receiving warranties that the products they purchase are year-2000 compliant.
Lest anyone think that this problem is limited to large mainframe applications, that is not the case. Personal computers also are vulnerable to this problem. Companies that purchase significant numbers of PCs need to assure that the computer's internal clock will roll over properly on Jan. 1, 2000. Leaving aside the potential liabilities of the manufacturers of the world's 60 million personal computers, companies need to assure that each PC user has hardware that is tested and will work. Pro-active lawyering through careful contract review will help avoid some of these problems.
It will be critical to assess whether the company has a right to recover against third parties for failure to provide year-2000 compliant products or services. Counsel should undertake an internal audit to determine whether causes of action exist, mindful that statutes of limitation may be running. Analysis should include, at a minimum, actions for negligence, product liability, breach of contract, breach of express warranty, breach of implied warrant, negligent misrepresentation and fraud.
Special attention must be given to statute of limitations issues, especially where legacy systems are involved. While at first it may seem that statutes might bar actions, there will be circumstances where causes of action have not accrued. State law varies radically on this issue. States may have special rules relating to latent defects, fraud and professional negligence. Some states hold that in certain circumstances causes of action do not accrue until damage is suffered.
Warranty disclaimers will also be rigorously tested once the wave of year-2000 ligation hits. While hardware and software providers have paid millions to their outside counsel to draft warranty disclaimers, few have been tested in court. Keep in mind that warranty disclaimers are disfavored in the law and will be strictly construed against the company that drafted the disclaimer. Furthermore, the conduct of the parties during the course of their relationship may undercut the effect of what seems on its face to be a solid warranty disclaimer.
Special attention should also be given to so-called programming houses that may s have provided an entire suite of services to a company. Services typically have been provided pursuant to a specially drafted contract. Companies often undertake ongoing service obligations that should include year 2000 upgrades.
Even if a company is smart enough to have addressed its internal problems, ensures that its computer vendors are providing year-2000 compliant hardware and software, promptly reports material facts it and is pursuing vendors that have caused economic damages, the work may not be done. A rigorous assessment of third parties that provide services to a company must be undertaken to assure that someone else's year-2000 problem will not affect operations.
Companies must assure that their vendors will not suffer year-2000 failure. Consideration should be given to financial institutions, accountants, payroll vendors, shippers of goods, benefits providers and insurers as a minimal listing of companies that need to be put on notice that they will be expected to provide services in the millennium.
Hancock Rothert & Bunshoft has formed a Year 2000 Team to assist companies with related legal problems. If you would like more information on Hancock's Year 2000 Team, or on the firm in general, please contact: Vito C. Peraino on Tel: 213-623-7777 or E-mail: Click Contact Link or visit the Hancock Rothert & Bunshoft website at Click Contact Link
Visit the Year 2000 website at Click Contact Link
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
