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106th Congress Report
1st Session SENATE 106-10
_______________________________________________________________________
YEAR 2000 (Y2K) ACT
__________
R E P O R T
OF THE
COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
on
S. 96
together with
MINORITY VIEWS
March 10, 1999.--Ordered to be printed
--------
U.S. GOVERNMENT PRINTING OFFICE
69-010 WASHINGTON : 1999
SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington JOHN D. ROCKEFELLER IV, West
TRENT LOTT, Mississippi Virginia
KAY BAILEY HUTCHISON, Texas JOHN F. KERRY, Massachusetts
OLYMPIA SNOWE, Maine JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan RON WYDEN, Oregon
SAM BROWNBACK, Kansas MAX CLELAND, Georgia
Mark Buse, Staff Director
Martha P. Allbright, General Counsel
Ivan A. Schlager, Democratic Chief Counsel and Staff Director
Kevin Kayes, Democratic General Counsel
(ii)
106th Congress Report
1st Session SENATE 106-10
_______________________________________________________________________
YEAR 2000 (Y2K) ACT
_______
March 10, 1999.--Ordered to be printed
_______
Mr. McCain, from the Committee on Commerce, Science, and
Transportation, submitted the following
R E P O R T
together with
MINORITY VIEWS
[To accompany S. 96]
The Committee on Commerce, Science, and Transportation, to
which was referred the bill (S. 96) ``A Bill to regulate
commerce between and among the several States by providing for
the orderly resolution of disputes arising out of computer-
based problems related to processing data that includes a 2-
digit expression of the year's date'', having considered the
same, reports favorably thereon with an amendment (in the
nature of a substitute) and recommends that the bill (as
amended) do pass.
Purpose of the Bill
To regulate interstate commerce by making provisions for
dealing with losses arising from Year 2000 Problem-related
failures that may disrupt communications, intermodal
transportation, and other matters affecting interstate
commerce.
Background and Needs
The purpose of S.96 is to provide incentives for solving
technical issues related to Y2K problems before failures occur,
encourage efficient resolution of Y2K problems when they do
occur, and to impose reasonable limits on liability. The
potential Y2K failures result from the use of a two-digit code
for defining the year in computer programs, software, chips and
systems. Lawsuits have already been filed either based upon
failures or anticipated failures. The potential for litigation
to overwhelm the nation's judicial system, and to cause severe
damage to the nation's economy require incentives for proactive
solution of the problems before they occur, and prompt
resolution of those failures which do occur.
The ``Y2K'' problem arises from the manner in which dates are
coded and computed in computerized information systems.
Computer systems have historically been programmed using two
digits to represent the year, for example ``98'' instead of
1998, in order to minimize data storage requirements,
especially in earlier computers, and reduce operating costs.
Using a two-digit format, however, makes 2000 indistinguishable
from 1900, or 2001 from 1901. In addition, 2000 is a leap year,
raising additional date coding concerns. When a computer is
unable to recognize or compute the 00 date code used in 2000,
it may fail to operate, process or transmit the data, or may
fail altogether. Because of the widespread use of computers in
our society, the problem extends from the desktop PC to bank
systems to national power grids. An example of a Y2K failure
occurred last year when credit card machines used by some
retailers were unable to process sales for credit cards
expiring in 2000. The problem is international in scope, posing
concerns for the entire global economy.
The massiveness of the problem, and the corrections required
to prevent or remedy the potential computer, have resulted in
concern as to whether our society will be faced with a crisis
situation on January 1, 2000. The cost of fixing the problem in
all affected systems, both public and private, is astronomical.
Chase Manhattan Bank was quoted as spending $250 million to fix
the problem within its 2000 million lines of computer code. The
estimated overall cost of fixing the problem in the United
States ranges from $200 billion to $1 trillion. Lloyd's of
London has estimated the cost of litigation which will be
generated in the United States alone at over $1 trillion.
The actual impact of the problem remains unclear. Some
technical analysts predict that widespread failures in systems
across the country, including power outages, stalled assembly
lines, and halted international transactions could result in a
major nationwide, or even worldwide, recession. Others contend
that the efforts already underway or completed will ensure a
nearly disruption-free transition into 2000.
A number of Y2K lawsuits have already been filed. The threat
of litigation has resulted in a climate of fear and reluctance
by many companies to acknowledge the potential problems which
may be caused by their products. This atmosphere is
counterproductive to the cooperative efforts necessary to
ensure a seamless transition from 1999 to 2000, and is
disruptive to the stability of the nation's interstate
commerce.
Summary of Major Provisions
This bill was introduced January 19, 1998. The sponsors are
Senators McCain, Gorton, Abraham, Frist, and Burns.
The goal of the bill is to encourage companies to prevent Y2K
failures, to remedy problems quickly if they occur, and to
impose reasonable limits on liablity. The bill also encourages
resolution of disputes arising from Y2K failures through
alternative dispute resolution rather than through expensive
and time consuming litigation.
The bill provides incentives for companies to be proactive in
preventing Y2K failures through, e.g., a ``good faith'' defense
to non-contract claim damages is provided which requires a
showing that the company has used reasonable efforts to detect
and correct a Y2K problem. The bill also states that plaintiffs
have a duty to mitigate potential damages.
The bill also requires a prospective plaintiff to notify a
company it intends to sue and provide the company an
opportunity to correct the problem and offer remedies to
resolve the dispute.
The bill preserves contractual rights and obligations of
parties. Where the parties have already contracted for remedies
and resolution of Y2K problems, the contract will control.
Estimated Costs
In the opinion of the Committee, it is necessary under
paragraph 11(a)(3) of Rule XXVI of the Standing Rules of the
Senate to dispense with the requirements of paragraphs 11(a)(1)
and 11(a)(2) of the Rule and section 403 of the Congressional
Budget Act of 1974 in order to expedite the business of the
Senate.
Regulatory Impact Statement
In accordance with paragraph 11(b) of rule XXVI of the
Standing Rules of the Senate, the Committee provides the
following evaluation of the regulatory impact of the
legislation, as reported:
Because S. 96 does not create any new programs, the
legislation will have no additional regulatory impact, and will
result in no additional reporting requirements. The legislation
will have no further effect on the number or types of
individuals and businesses regulated, the economic impact of
such regulation, the personal privacy of affected individuals,
or the paperwork required from such individuals and businesses.
Section-by-Section Analysis
SECTION 1. SHORT TITLE; TABLE OF SECTIONS
Section 1 states the short title, the ``Y2K Act'', and
provides a table of contents for the bill.
SECTION 2. FINDINGS AND PURPOSES
Section 2 provides findings and purposes of Congress in
enacting the bill. The primary purposes of the bill are to
ensure that the problems associated with the two-digit date
code used in computer programming which impedes recognition of
the year 2000 and related date codes associated with the change
in millennium, including leap year on February 29, 2000, do not
result in undue strain on the national economy or the nation's
judicial system. The bill encourages all companies to prevent
Y2K failures where possible, to remediate them quickly and
without litigation, and to engage in alternate dispute
resolution opportunities. The purpose of the bill is also to
limit liability for persons acting in good faith and making
reasonable efforts to prevent Y2K failures, and to provide a
reasonable opportunity to correct Y2K failures upon their
occurrence prior to the commencement of legal action.
SECTION 3. DEFINITIONS
Section 3 sets forth definitions of certain terms used in the
bill. These include the term ``Y2K action'', the definition of
which prescribes the scope of the bill. The definition of
``person'' specifically includes Federal, State, and local
government entities.
SECTION 4. APPLICATION OF ACT
Section 4 contains general provisions governing the
application of the bill. It applies to any Y2K action brought
in a Federal or State court after February 2, 1999. The bill
creates no new causes of action. The bill does not cover claims
for personal injury or wrongful death. The bill does not
supersede a valid, enforceable written contract between a
plaintiff and defendant. The bill preempts State law to the
extent that it establishes a rule of law for Y2K actions that
is inconsistent with State law.
SECTION 5. PUNITIVE DAMAGES LIMITATIONS
Section 5 sets forth a punitive damage standard and
limitations. The bill does not establish a right to punitive
damages where none is provided in applicable State law. The
bill establishes a threshold for the award of punitive damages
in Y2K actions, ``conscious and flagrant disregard for the
rights and property of others.'' The bill prohibits punitive
damage awards against government entities. The bill caps
punitive damages at the greater of $250,000 or three times
actual damages for big businesses, or the lesser of these
figures for small businesses.
The Committee notes that the State of Alaska allows and
encourages the award of attorney fees to the prevailing party
in civil actions. One policy behind the State statute is to
prevent frivolous lawsuits. Under Alaska law, the award of
prevailing party attorney fees is not considered a punitive
measure and should not be included in the calculation of the
part of a plaintiff's recovery subject to punitive damage caps.
SECTION 101. PRE-FILING NOTICE
Section 101 requires plaintiffs to give 30 days notice to
defendants before commencing a Y2K action against defendants
(except when seeking only injunctive relief). If the defendants
don't respond to the notice within 30 days and describe what
action they will take, plaintiffs may commence suit, but if the
defendants respond favorably, 60 days are permitted to fix the
problem before the plaintiff may commence suit. If the
plaintiff files suit without giving notice, the defendant may
treat the filing as a notice and the court shall stay discovery
and all other proceedings for 90 days.
SECTION 102. PLEADING REQUIREMENTS
Section 102 requires a complaint in a Y2K action to specify
the nature and amount of damages and the factual basis for
calculation.
Materiality requirement: If the plaintiff
alleges that a product or service is defective, the
complaint must contain specific information about the
manifestations of the material defects and facts
supporting a conclusion that the defects are material.
Required state of mind: If a plaintiff is
required to prove the defendant's state of mind, the
complaint must state with particularity the facts
giving rise to a strong inference that the defendant
acted with the required state of mind.
SECTION 103. DUTY TO MITIGATE
Section 103 provides that damages in a Y2K action shall
exclude damages that the plaintiff could reasonably have
avoided in light of disclosures or other information that the
plaintiff was, or reasonably could have been aware of,
including defendants' reasonable efforts to advise purchasers
or users about ways to remedy or avoid the Y2K failure. While
the duty to mitigate is generally considered an obligation of a
plaintiff to determine and take measures to lessen the impact
and to limit the amount of damages resulting from defendants'
actions, the intent of this provision is also to highlight that
it is in the best interest of a defendant to make Y2K solutions
readily available so that potential plaintiffs can use them in
mitigation. A defendant that proactively provides solutions and
remediation in this manner will reduce its potential liability.
SECTION 104. PROPORTIONATE LIABILITY
Section 104 provides that liability in a Y2K action is
several and not joint, and defendants are liable only for their
share of responsibility as a percentage of the responsibility
of all persons (whether parties or not) at fault. This
provision prevents plaintiffs from selecting a defendant to pay
damages based upon ability to pay rather than responsibility
for the problem and harm.
SECTION 201. CONTRACTS ENFORCED
Section 201 provides that, in any Y2K action, any written
term or condition of a valid and enforceable contract between a
plaintiff and defendant, including limitations or exclusions of
liability and disclaimers of warranty, is fully enforceable.
Courts can determine that contract as a whole is unenforceable.
If the contract is silent on a matter, the interpretation of
the contract with respect to that matter shall be determined by
applicable law at the time the contract was executed.
SECTION 202. DEFENSES
Section 202 establishes a ``reasonable efforts'' defense. If
breach of contract is alleged, the party against whom the
breach is alleged can offer evidence that its efforts to
implement the contract were reasonable in light of the
circumstances for the purpose of limiting or eliminating the
defendant's liability.
It also provides that, if breach of contract is alleged, the
doctrines of impossibility and commercial impracticability in
force under applicable law on January 1, 1999, shall apply.
SECTION 203. DAMAGES LIMITATION
Section 203 provides that, in any Y2K action for breach or
repudiation of contract, no party may claim or be awarded
consequential or punitive damages unless those damages are
allowed (1) by the express terms of the contract; or (2) if the
contract is silent on such damages, by the operation of State
law at the time the contract was executed or by the operation
of Federal law.
SECTION 204. MIXED ACTIONS
Section 204 provides that, if a Y2K action includes claims
based both on contract and on tort and other non-contractual
premises, Title II applies to the contract claims and Title III
to the non-contract claims.
SECTION 301. DAMAGES IN TORT CLAIMS
Section 301 establishes a modified ``economic loss rule.''
Subject to applicable State and Federal law, a party making a
tort claim cannot recover economic loss damages, unless such
damages are provided for in a contract to which the party
making a claim is a party. Economic losses result directly from
a personal injury claim resulting from a Y2K failure or losses
result directly from damage to tangible property other than the
property that is the subject of the contract.
SECTION 302. CERTAIN DEFENSES
Section 302 provides for defenses based on good faith and
reasonable efforts. Section 302(a) provides that, in any Y2K
action except an action for breach or repudiation of contract,
the party against whom the claim is asserted can establish as a
complete defense to the claim that they acted in good faith and
took measures reasonable under the circumstances to prevent the
Y2K failure from occurring or causing the damage. While what
constitutes reasonable efforts and good faith will depend on
the facts and circumstances of each situation, generally it
will require affirmative actions which, when viewed
objectively, are calculated to prevent the Y2K failure or the
damage resulting from the Y2K failure.
With regard to the defendant's state of mind, section 302
provides that, in a claim for money damages in which the
plaintiff must prove the defendant's actual or constructive
knowledge of an actual or potential Y2K failure, the plaintiff
must prove by clear and convincing evidence that the defendant
knew or recklessly disregarded a known and substantial risk
that the failure would occur.
With regard to foreseeability, section 302 provides that, in
a Y2K action making a claim for money damages, the defendant is
not liable unless the plaintiff proves by clear and convincing
evidence that the defendant knew or should have known that the
defendant's action or failure to act would harm the plaintiff.
Section 302 also establishes as a rule that the fact that a
Y2K failure occurred in a facility, system, etc within a
person's control shall not be the sole basis for recovering
damages against that person.
SECTION 303. LIABILITY OF OFFICERS AND DIRECTORS
Section 303 provides that for officers, directors, trustees,
and employees in a Y2K action brought in a State where that
liability is not subject to lower monetary caps in State law,
charter, or bylaw authorized by State law, the liability of
directors, trustees, officers, or employees is capped at
$100,000 or pre-tax compensation in the year preceding the act
or omission. The caps do not apply if it is shown by clear and
convincing evidence that the person intentionally made
misleading statements about the Y2K problem or intentionally
withheld information she had a legal duty to disclose regarding
the businesses' Y2K problem that would likely result in an
actionable Y2K failure.
SECTION 401. MINIMUM INJURY REQUIREMENT
Section 401 provides that, in any Y2K action involving a
claim that a product or service is defective, the action can be
maintained as a class action as to that claim only if the court
finds that the alleged defect was material as to a majority of
the class members.
SECTION 402. NOTIFICATION
Section 402 provides that, in addition to any other notice
required by law, the court shall direct notice of a Y2K action
to each member of the class return receipt requested. If the
receipt is not verified, the person in excluded from the class
unless they notify the court in writing before trial or
settlement that they want to be in the class. The notice must
describe the nature of the action, the jurisdiction, and the
fee arrangement with counsel,
SECTION 403. FORUM FOR Y2K CLASS ACTIONS
Section 403 expands original jurisdiction of U.S. District
Courts for Y2K actions where there is minimal diversity, but
provides that district courts may abstain from hearing the case
if there is a predominant State interest (most members are from
same State as primary defendants and State law will apply) or
where the amount in controversy is minimal, the class is small,
or the primary defendants are States or other entities against
whom the district court may not order relief. In Y2K actions,
permits removal by any defendant or any plaintiff class member.
Rollcall Votes in Committee
In accordance with paragraph 7(c) of rule XXVI of the
Standing Rules of the Senate, the Committee provides the
following description of the record votes during its
consideration of S. 96:
The bill was ordered reported with an amendment in the nature
of a substitute by a rollcall vote of 11 yeas and 9 nays as
follows:
YEAS--11-- NAYS--9
Mr. McCain- Mr. Hollings
Mr. Stevens\1\- Mr. Inouye\1\
Mr. Burns-- Mr. Rockefeller
Mr. Gorton - Mr. Kerry\1\
Mr. Lott\1\-- Mr. Breaux\1\
Mrs. Hutchison\1\- Mr. Bryan\1\
Ms. Snowe-- Mr. Dorgan\1\
Mr. Ashcroft- Mr. Wyden\1\
Mr. Frist\1\- Mr. Cleland
Mr. Abraham--
Mr. Brownback- ---
\1\By proxy
Changes in Existing Law
In compliance with paragraph 12 of rule XXVI of the Standing
Rules of the Senate, the Committee states that the bill as
reported would make no change to existing law.
Minority Views of Senator Hollings
In offering the dissenting views to the reporting of this
bill, let me make it clear that I take the Y2K issue very
seriously. Because of the significance of this issue to the
entire country, Congress is certainly warranted in taking
action to prevent potential adverse consequences that may be
associated with it.
In pursuing this objective, however, Congress must make sure
that any action it takes is necessary, justified, and will
achieve the goals of encouraging readiness and preparedness on
behalf of public and private sector organizations. I have
objected to the bill reported by this Committee (S. 96) on the
grounds that it fails to meet these justifications.
The essence of this bill is to impose severe restrictions on
the ability of plaintiffs to recover damages in Y2K actions.
These restrictions include: (1) expansive pleading requirements
that parties would have to meet before even being afforded the
opportunity to a jury trial or judicial review; (2) elimination
of joint and several liability; (3) the granting of highly
favorable defenses to defendants to assist them in avoiding
liability and the payment of damages; and (4) exceptionally
stringent caps on punitive damages. These limitations will
apply to both commercial and tort related Y2K civil actions.
The bill's supporters claim these restrictions are needed to
prevent unnecessary and frivolous Y2K litigation. Yet, they
have provided no factual proof that there actually will be
unnecessary and frivolous claims. Additionally, because the
legislation applies to all cases regardless of the nature or
seriousness of the claims, it goes well beyond addressing the
issue of frivolous suits. For example, if a small business
owner experiences major losses due to a computer failure caused
by the use of defective software, would it be frivolous for
that business owner to sue the product seller to recover his or
her damages? What if there is evidence that the company
knowingly sold the product in a defective condition, and then
attempted to profit from the sale by offering to upgrade the
software at a cost higher than the original price? Would it be
illegitimate for the aggrieved party to reject such an offer
and pursue his or her right to recover damages in a court of
law? Moreover, would Congress be justified in passing
legislation that shields the seller of the product potentially
from any liability? Of course, the answers to these questions
are obvious; unfortunately, this would be the actual effect of
this legislation.
Proponents of the bill argue that the legislation will
benefit all parties involved in civil Y2K actions. However, the
way the bill is currently drafted, it will work to the
advantage of defendants only. It is obvious from the provisions
in the bill that the proponents intend to use the powers of the
federal government to reform state law in the broadest fashion
possible, so as to tailor the law in favor of defendants, and
more specifically entities that are likely to be responsible
for losses and injuries caused by potential Y2K disruptions. An
illustration of these intentions is a provision that would
allow a defendant to avoid paying damages in contract cases
based on evidence that the defendant made a reasonable effort
to comply. Generally under contract law, a party's subjective
intentions or conduct are immaterial. The only relevant issue
is whether the defendant party failed to meet the terms of the
contract, either by selling a defective product, or failing to
perform the required services. This legislation, however, would
allow defendants to use evidence relating to their conduct and
subjective intentions to avoid the payment of damages,
regardless of whether they breached the contract. This is one
example of how this legislation will drastically change civil
law.
Among the parties that will be affected adversely by the bill
are small businesses, and professional practitioners, such as
medical doctors. The Committee received testimony from
representatives of both groups. It is important to acknowledge
that they were not associated with any local trade association.
They testified in their capacity as independent proprietors.
They requested to appear to discuss their experiences with
litigation involving Y2K computer failures. In beseeching the
Committee not to pass this legislation, they made it clear that
if the provisions of the bill were the law at the time they
filed their claims, it is doubtful that they would have been
able to recover any sufficient amount damages, and most likely
would have been involved in protracted litigation.
Finally, proponents contend that the legislation is needed to
provide uniformity and clarity regarding possible Y2K claims.
This supposedly will help reduce the volume of litigation. If
this is the goal of the bill, however, it is not evident in the
legislation. For example, although uniformity is to be achieved
through the preemption of state law, the bill preempts state
law only to the extent that it benefits defendants. In
addition, the legislation, as drafted, will not provide clarity
to the law, nor is it likely to reduce litigation. In fact,
because the bill alters in part, but not in whole, complex tort
and commercial state law, the bill actually serves to create
more uncertainty about the law and liability, which is likely
to result in more, rather than less, litigation.
I also question why the majority members of this Committee
feel the need to act expeditiously on this legislation. A
number of studies have shown that large commercial entities in
general, and the computer industry specifically, have known
about the existence of the Y2K problem for more than 30 years,
as well as the availability, and likely feasibility, of
technology that could have corrected the problem.
Notwithstanding this reality, this Committee is intent on
providing these entities with broad legal protections.
Not only is the Committee's decision premature, however, it
contradicts the purported goal of the legislation, which is to
provide businesses with an incentive to become compliant. I am
baffled, however, as to how legislation that shields entities
from liability for not becoming compliant will, in turn,
inspire them to become compliant. The proponents' view is that
the legislation will create an opportunity for these entities
to direct resources into becoming compliant that they otherwise
would reserve for litigation. It appears to be a simple
proposition, however, that compliance and readiness in
themselves will eliminate concerns about liability and
litigation. This is, in fact, the essence of the liability and
civil justice systems. Additionally, I find it unacceptable
that Congress should pass laws to shield an entity either from
liability for wrongful acts it already has committed, or from
liability it might face for not doing what it is obligated to
do. At a minimum, this legislation will encourage organizations
to conduct a cost benefit analysis to determine whether it is
more economically feasible to resort to the legal protections
of the legislation, rather than expending the funds to become
compliant.
Both the Administration and the Senate have established
special committees to address the Y2K issue. Conducting the
review for the Administration is the ``President's Council on
Year 2000 Conversion.'' The group that has been working on
behalf of the Senate is the ``Special Committee on the Year
2000 Technology Problem.'' These committees have been in
existence for almost a year, and are considered the leaders and
experts on the Y2K issue. Their primary focus has been the
passage of measures to educate and provide incentives to public
and private sector organizations to actively address potential
Y2K problems. In keeping with this objective, they have
recommended passage of legislation, such as the Year 2000
Information Readiness and Disclosure Act [P.L. 105-271]. This
law encourages companies to share information about their Y2K
readiness by shielding them from liability solely on the basis
of such disclosures. They also recommended legislation recently
passed by the Senate that will ensure the availability of loans
to small business to aid them in becoming Y2K compliant. Both
of these measures were unanimously supported by the Senate.
Interestingly, neither the ``President's Council on Year
2000,'' nor the Senate's ``Special Committee on the Year 2000
Technology Problem,'' has endorsed the legislation reported by
the Committee. In fact, the ``President's Council on Year
2000,'' has expressed strong reservations about the need and
timing of the legislation. On March 1, 1999, John Koskinen, the
Chairman of the President's Council, released the following
statement regarding the legislation:
``The bills before the Judiciary and Commerce Committees
focus on liability litigation, which is not a Year 2000
readiness issue. In fact, I have serious doubts that these
bills will do anything to enhance readiness and increase the
number of systems able to effectively make the century
transition. In addition, we need to ensure that discussion
speculating about the possibility of voluminous litigation does
not inadvertently increase the possibility of unnecessary
overreaction by the public as a result of a misperception about
the magnitude of the number of systems that will fail.''.
In testimony before the Senate Judiciary Committee last week
on an almost identical bill, a representative of the Justice
Department advised against the passage of any bill that would
bar small businesses and consumers who have legitimate Y2K
claims from the courts. In the view of the Justice Department,
this legislation would represent ``by far the most sweeping
litigation reform measure ever enacted...'' At a minimum, the
Department believes Congress should conduct a careful and
thorough review of these measures.
In closing, I would like to reiterate my opposition to this
legislation. According to the Justice Department, this bill
goes well beyond restrictions contained in previous federal
litigation reform bills. The dangers of this bill are reflected
in the organizations that are opposed to its passage. Almost
every major consumer organization is opposed to the bill.
Members of the trial bar, including the Association of Trial
Lawyers of America (ATLA), are opposed to the bill. The
American Medical Association (AMA), which has traditionally
supported federal tort reform bills, is opposed to the
legislation. I strongly urge my colleagues to reject this bill
and to focus the Senate's energies on policies that are more
likely to achieve the goals of ensuring Y2K compliance, and
avoiding potentially widespread computer failures.
Legislation is Substantively Flawed
I have provided below a few examples of how this legislation
will substantively provide enormous advantages to defendants in
Y2K actions to the detriment of aggrieved parties.
I. Major Definitions (Section 3)
DEFINITION OF A Y2K ACTION
Y2K action is defined as any civil action that involves an
alleged harm or a loss resulting directly or indirectly from an
actual or a potential Y2K failure. Allegations that a claim is
associated with a Y2K failure can be made by the plaintiff when
filing a pleading, or by a defendant when responding to a
plaintiff's complaint. As a result of the advantages provided
to defendants by the legislation, they will have strong
incentives to designate as many civil suits as possible as Y2K
actions. The broadness of the definition, which permits any
claim that is remotely related to a Y2K failure to be governed
by the bill, means that defendants will have wide latitude in
defining civil claims as Y2K action.
DEFINITION OF A Y2K FAILURE
A Y2K failure is defined as any device or system, including
computers and computer parts, such as microchips and embedded
chips, as well as software or hardware, that fails to process,
calculate, compare, store, display, or receive date-related
data. These include, but are not limited to, failures of
computer systems to accurately process specific data in 1999,
2000, or 2001. However, the bill will not be limited to systems
disruptions in these years exclusively. A computer systems
failure in any year beyond enactment of the bill that is
related to a faulty transmission of date-related data will be
covered by the legislation.
II. Application of Legislation
COVERED ACTIONS
The legislation will apply to commercial and tort claims
involving property damage and personal injuries relating to
emotional distress. A potential class of emotional distress
cases includes persons whose medical records have been exposed
to the public because of a Y2K failure.
III. Caps on Punitive Damages (Section 5)
The legislation caps punitive damages at an amount equal to
the greater of three times actual damages or $250,000; however,
for entities with fewer than 25 full-time employees, and a
$500,000 or lesser net worth, the cap is the smaller of three
times actual damages or $250,000. This provision is
significantly more stringent than the punitive damage caps in
previous product liability bills. In those bills, the
multiplier was tied to all economic damages. Under this bill,
the multiplier is tied to actual damages only. Actual damages
under the legislation are limited to damages to tangible
property, along with replacement and repair costs.
Additionally, this means that in cases such as emotional
distress cases, punitive damages may be completely barred.
IV. Pleading Requirements (Title I)
PRE-FILING NOTIFICATION TO DEFENDANTS/ 90 DAY WAITING PERIOD FOR
PLAINTIFF (SECTION 101)
Before commencing a Y2K action, a plaintiff is required to
provide a written notice to each prospective defendant that
identifies, with particularity, (1) the manifestations of any
material defect that allegedly caused the harm; (2) the actual
harm or loss suffered; (3) the remedy plaintiffs plan to seek
in court; (4) the basis upon which plaintiff plans to seek that
remedy; and (5) the name, title, address and telephone number
of any individual who has authority to negotiate a resolution
of the matter. Once the pre-trial written notice is provided to
each prospective defendant, a plaintiff will be barred from
commencing the action in court for 90 days. This purportedly is
to give the defendant time to respond to the plaintiff's pre-
trial notice with recommendations to resolve the matter before
litigation ensues. However, the bill imposes no requirement on
the defendant to fix the problem. This means the defendant,
after acknowledging the receipt of the plaintiff's notice, can
sit and allow the 90 days to expire without taking any remedial
action.
This provision also will result in a significant change to
current law. Although in some contract cases plaintiffs are
required to provide pre-trial notices to defendants, they are
normally not required to wait three months to file their claims
in court. This provision will be advantageous to defendants. It
will permit them to prepare their defense before plaintiffs can
officially pursue formal discovery. Considering the likelihood
that many small businesses will not be able to wait three
months before filing a claim, defendants are likely to use the
provision to pressure small business plaintiffs into accepting
unreasonably low settlements.
Mark Yarsike, owner of a produce store, encountered problems
because of the failure of a newly purchased computerized cash
register to process credit cards with expiration dates of 2000
and beyond. Yarsike, who testified at the Committee's February
9, 1999 hearing, has stated that if this rule was in place at
the time he filed his claim, he would have been virtually put
out of business.
V. Elimination of Joint and Several Liability (Section 104)
The bill abolishes joint and several liability in all actions
covered by the legislation. Defendants will be liable only for
their specific share of harm that the plaintiff is able to
prove in relation to all other actual or prospective
defendants. The Justice Department has advised that this
provision will place considerable burdens on the plaintiffs'
ability to recover their full damages.
VI. Rules Governing Contract-Related Claims (Title II)
ENFORCEABLE CONTRACTS (SECTION 201)
The legislation will require enforceability of all contracts,
including written disclosures and disclaimers of warranties,
unless the court determines the contract, as a whole, is
unenforceable. Generally, contracts can be nullified by courts
if they are found to violate public policy, especially as it
concerns fairness with respect to bargaining power of the
parties. For example, if one party, such as a large business,
has enormous bargaining power in comparison to the other party,
a court may act to overturn the contract upon evidence that the
disadvantaged party was placed in an unconscionable position,
notwithstanding the written agreement.
REASONABLE EFFORTS DEFENSE FOR DEFENDANTS (SECTION 202)
The legislation grants defendants a ``reasonable efforts''
defense with respect to any Y2K contract action. Under this
defense, a defendant is permitted to introduce evidence that
its efforts to implement the contract were reasonable under the
circumstances, for the purpose of limiting or eliminating its
liability. Generally, under contract law, the defendant's
conduct is immaterial to a breach of contract. Normally, the
only relevant issue is whether the product is defective or the
service lacks the required performance standard. It is not
clear how the actions involving reasonable measures will be
determined, since there is not much history regarding these
types of cases. What is likely, however, is that the standard
will be measured by like parties (the manner in which
defendants generally seeks to respond to potential problems).
No matter how minimal or ineffective such efforts might be in
informing plaintiffs, to the extent such conduct becomes common
among potential Y2K defendants, it could be used to exonerate
defendants from any damages owed to a plaintiff.
VII. Rules Governing Tort-Related Claims (Title III)
GOOD FAITH DEFENSE FOR DEFENDANTS (SECTION 302)
In all tort claims covered by the bill, a defendant will be
permitted to offer into evidence, as a complete defense to any
damages, that it acted in good faith and took reasonable
measures under the circumstances to prevent the Y2K failure
from occurring. This provision will likely have the same effect
as Section 202 relating to contract suits. The main difference,
however, is that the reasonable efforts defense relating to
contract suits allows defendants to use the defense to reduce
damages, with the possibility of eliminating all damages. The
good faith defense relating to tort claims, however, operates
as a complete defense, precluding any possibility of damages
being awarded to plaintiffs.
HIGHER BURDENS OF PROOF FOR PLAINTIFFS IN TORT SUITS (SECTION 302)
The legislation will require plaintiffs to meet a substantial
burden of proof to recover in tort cases. The bill provides
that in any tort action involving the plaintiff's state of
mind, the necessary burden of proof will be clear and
convincing evidence that the defendant knew, or recklessly
disregarded a known and substantial risk, and that the failure
would cause the actual and specific injury suffered by the
plaintiff. This is one of the highest standards of proof
required in a civil action. It is generally reserved for
punitive damages. However, because it is tied to any case
involving the defendant's state of mind, it will apply even in
cases involving ordinary negligence. The ordinary negligence
standard requires plaintiffs to prove that the defendant knew,
or should have known, that a product in a certain condition
could be defective, which involves proof of a defendant's state
of mind. However, not only must a plaintiff meet this burden to
prove simple negligence, the plaintiff must also prove the
defendant was aware of the specific injury that the plaintiff
suffered. This standard will make it extremely difficult to
recover damages in property loss cases. Moreover, the burden of
proof is not in lieu of, but in addition to, any burdens of
proof the plaintiff is required to meet under state law.
