Year 2000 Readiness and Responsibility Act

SPEAKERS       CONTENTS       INSERTS

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62–310

2000
YEAR 2000 READINESS AND RESPONSIBILITY ACT

HEARING

BEFORE THE

COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

ON
H.R. 775

APRIL 13, 1999

Serial No. 5

Printed for the use of the Committee on the Judiciary

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For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR S. SMITH, Texas
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB GOODLATTE, Virginia
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina
MARY BONO, California
SPENCER BACHUS, Alabama
JOE SCARBOROUGH, Florida

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JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York

THOMAS E. MOONEY, SR., General Counsel-Chief of Staff
JULIAN EPSTEIN, Minority Chief Counsel and Staff Director

C O N T E N T S

HEARING DATE
April 13, 1999

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OPENING STATEMENT

    Hyde, Hon. Henry J., a Representative in Congress from the State of Illinois, and chairman, Committee on the Judiciary

WITNESSES

    Andrews, Walter, Esq., Wiley, Rein and Fielding

    Bender, Lisa, Information Systems Manager, Falcon Plastics, Inc., on behalf of the National Association of Manufacturers

    Cramer, Hon. Robert E., Jr., a Representative in Congress from the State of Alabama

    Davis, Hon. Thomas M., a Representative in Congress from the State of Virginia

    Dooley, Hon. Calvin M., a Representative in Congress from the State of California

    Dreier, Hon. David, a Representative in Congress from the State of California

    Grady, Mark, Esq., Dean, George Mason University School of Law

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    Greenberg, Sally, Senior Product Safety Counsel, Consumers Union

    Greenup, H. William, Mayor, City of Fredericksburg, VA

    Harden, Michael P., Ph.D., President and CEO, Century Technology Services, Inc.

    Kappelman, Leon, Co-Chair, Society for Information Management, Year 2000 Working Group

    Lewis, Bill, CEO, Prospect Technologies

    Moran, Hon. James P., a Representative in Congress from the State of Virginia

    Mulhern, Joan, Legislative Counsel, Public Citizen Congress Watch

    Nations, Howard, Esq., Law Offices of Howard L. Nations

    Pearl, Marc, Esq., Senior Vice President and General Counsel, Information Technology Association of America

    Rothfeld, Charles A., Esq., Mayer, Brown & Platt

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    Sandlin, Hon. Max, a Representative in Congress from the State of Texas

    Stapleton, Walter K., U.S. Court of Appeals for the Third Circuit

    Wylie, Janet, President and CEO, HCL James Martin

    Yarsike, Mark, President, Produce Palace International

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

    Andrews, Walter, Esq., Wiley, Rein and Fielding: Prepared statement

    Bender, Lisa, Information Systems Manager, Falcon Plastics, Inc., on behalf of the National Association of Manufacturers: Prepared statement

    Conyers, Hon. John, Jr., a Representative in Congress from the State of Michigan: Prepared statement

    Cramer, Hon. Robert E., Jr., a Representative in Congress from the State of Alabama: Prepared statement

    Davis, Hon. Thomas M., a Representative in Congress from the State of Virginia: Prepared statement

    Dooley, Hon. Calvin M., a Representative in Congress from the State of California: Prepared statement

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    Dreier, Hon. David, a Representative in Congress from the State of California: Prepared statement

    Grady, Mark, Esq., Dean, George Mason University School of Law: Prepared statement

    Greenberg, Sally, Senior Product Safety Counsel, Consumers Union: Prepared statement

    Greenup, H. William, Mayor, City of Fredericksburg, VA: Prepared statement

    Harden, Michael P., Ph.D., President and CEO, Century Technology Services, Inc.: Prepared statement

    Jackson Lee, Hon. Sheila, a Representative in Congress from the State of Texas: Prepared statement

    Kappelman, Leon, Co-Chair, Society for Information Management, Year 2000 Working Group: Prepared statement

    Lewis, Bill, CEO, Prospect Technologies: Prepared statement

    Moran, Hon. James P., a Representative in Congress from the State of Virginia: Prepared statement

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    Mulhern, Joan, Legislative Counsel, Public Citizen Congress Watch: Prepared statement

    Nations, Howard, Esq., Law Offices of Howard L. Nations: Prepared statement

    Pearl, Marc, Esq., Senior Vice President and General Counsel, Information Technology Association of America: Prepared statement

    Rogan, Hon. James E., a Representative in Congress from the State of California: Prepared statement

    Rothfeld, Charles A., Esq., Mayer, Brown & Platt: Prepared statement

    Sandlin, Hon. Max, a Representative in Congress from the State of Texas: Prepared statement

    Stapleton, Walter K., U.S. Court of Appeals for the Third Circuit: Prepared statement

    Wylie, Janet, President and CEO, HCL James Martin: Prepared statement

    Yarsike, Mark, President, Produce Palace International: Prepared statement

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APPENDIX
    Material submitted for the record

YEAR 2000 READINESS AND RESPONSIBILITY ACT

TUESDAY, APRIL 13, 1999

House of Representatives,
Committee on the Judiciary,
Washington, DC.

    The committee met, pursuant to call, at 10:07 a.m., in Room 2141, Rayburn House Office Building, Hon. Henry J. Hyde (chairman of the committee) presiding.

    Present: Representatives Henry J. Hyde, F. James Sensenbrenner, George W. Gekas, Howard Coble, Lamar Smith, Charles T. Canady, Bob Goodlatte, Ed Bryant, Steve Chabot, William L. Jenkins, Asa Hutchinson, Edward A. Pease, James A. Rogan, John Conyers, Jr., Howard L. Berman, Robert C. Scott, Melvin L. Watt, Zoe Lofgren, Sheila Jackson Lee, Martin T. Meehan, William D. Delahunt, and Tammy Baldwin.

    Staff Present: Thomas E. Mooney, Sr., general counsel-chief of staff; Diana Schacht, deputy staff director-chief counsel; Joseph Gibson, counsel; Rick Filkins, counsel; Steve Pinkos, counsel; Becky Ward, office manager; Michele Utt, administrative assistant; Samuel F. Stratman, communications director; James B. Farr, financial clerk; Sharon L. Hammersla, computer systems coordinator; Ann Jemison, receptionist; Shawn Friesen, staff assistant/clerk; Michael Connolly, communications assistant; Ray Smietanka, chief counsel; Jim Harper, counsel; Samara Ryder, minority counsel; and Perry Apelbaum, minority general counsel.

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OPENING STATEMENT OF CHAIRMAN HYDE

    Mr. HYDE. The committee will come to order. If there are any members in the back, I wish they would come forward at a fast pace—or any pace.

    Good morning. Our entry into a new millennium will be a landmark event, one which stirs anticipation, excitement, and a sense of beginning. However, behind that anticipation and excitement there is widespread concern about whether segments of our economy which depend upon computer technology will continue to function when the Year 2000 arrives. Unless you have been living under a rock, you know that this is because of the so-called Year 2000 problem which arises because some computer programs cannot recognize dates in the Year 2000 and will either shut down or perform incorrectly beginning January 1, 2000.

    To avoid Year 2000 disruptions, businesses, governments, and other organizations have been working around the clock to update and test their systems to ensure they will work. Just this past week, the FAA successfully tested its air traffic control systems; and PEPCO, our local electric utility, conducted trial run-throughs of how its systems would operate on January 1st. There is no doubt that the potential problem is being taken seriously.

    PEPCO alone will spend more than $12 million to safeguard the system that serves the District of Columbia and the Maryland suburbs. The United States Government will spend over $33 billion to reprogram its computers. Businesses in the United States will spend some $50 billion with Fortune 500 companies planning to spend over $11 billion fixing the problem.

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    Unfortunately, no business operates in a vacuum. A company might do everything necessary to make its systems Year 2000 compliant, but if it relies on another company which has not fixed the problem, the Year 2000 compliant company may still not be able to do business or to serve its customers.

    Because the Year 2000 failures of one company can set in motion the unraveling of all its business partners, it is vital for everyone to act responsibly and remediate their own problems. Companies that have made every reasonable effort to become Year 2000 compliant but experience failures anyway could end up in court and be put out of business by the costs of litigation. Experts have estimated that the total cost of litigating Year 2000 liability will exceed $1 trillion. Legal costs associated with the Year 2000 litigation are predicted to exceed that of asbestos, breast implants, tobacco and Superfund litigation combined.

    In light of these projections and the potential diversion of these tremendous resources from fixing the problem to litigating over who is to blame, Congress is considering measures to regulate how cases based on the Year 2000 failure should be conducted. Since the best alternative to Year 2000 litigation is remediation, we must be sure that whatever we consider would encourage people to take responsibility for themselves and fix any noncompliant Year 2000 systems under their control. And in the event that Year 2000-related disruptions do occur, we should encourage constructive discussions among prospective plaintiffs and defendants which emphasize fixing the problem over assigning blame.

    The bill we are considering today, the Year 2000 Readiness and Responsibility Act, is designed to meet these goals. It also is intended to provide clear legal rules for assigning liability for Year 2000-related injuries. The hope is that with clear rules and specific pleading requirements, we can deter frivolous litigation and keep the courts open to hear the cases that legitimately deserve their attention.

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    I look forward to hearing the testimony of our many witnesses on this subject, and I would yield to any of the minority who wish to make a statement.

    Mr. SCOTT. Mr. Chairman, I believe Mr. Conyers will be here a little later, so if we could——

    Mr. HYDE. Reserve? And then when he is here, he can make his statement. Very well.

    The opening statement of any other member will be inserted in the record.

    [The prepared statement of Mr. Rogan follows:]

PREPARED STATEMENT OF HON. JAMES E. ROGAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

    Thank you Mr. Chairman. I am pleased to be a co-sponsor of H.R. 775, the Year 2000 Readiness and Responsibility Act. As the millennium nears, it is crucial that we do everything possible to protect our nation's computer systems from the year 2000 problem. This legislation encourages remediation efforts that will prevent Y2K computer failures that could severely impact our economy and public safety. Moreover, H.R. 775 creates a dispute resolution mechanism that will limit transaction costs and ensures that legitimate claims have recourse.

    As we all know, American businesses are investing tremendous resources to see that they are prepared for any Y2K problems. However, the fear of potential litigation may prevent some businesses from effectively addressing potential problems. Further, despite some companies' best efforts to prepare for the year 2000, they may be held responsible by other business that depend on those companies should they fail to succeed. Consequently, an unending drum beat of litigation would easily result. The Year 2000 Readiness and Responsibility Act creates a legal framework by which Y2K-related disputes can be resolved by all parties and at the same time help to protect the public from possible Y2K problems.

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    Finally, I want to recognize and thank my colleagues, Congressmen Tom Davis, David Drier, Chris Cox, Jim Moran, Bud Cramer, and Calvin Dooley for their commitment and leadership on this significant national issue.

    Mr. HYDE. We will forego opening statements beyond Mr. Conyers, because we have, as you know, a very crowded witness docket, and we would like to move forward.

    So, without further ado, on our first panel of witnesses we will hear from five of the six principal sponsors of H.R. 775 in the order in which their names appear on the bill. That means we will lead off with Congressman Tom Davis who serves as one of the four cochairs of the Information Technology Working Group and represents Virginia's 11th Congressional District.

    Then we will hear from the distinguished chairman of the House Rules Committee, Congressman David Dreier of California. Congressman Dreier has been a moving force behind this legislative effort, and we thank him for appearing today. Following Congressman Dreier will be Congressman Jim Moran of Virginia's 8th Congressional District and C-SPAN fame—I listened to you this morning with great pleasure and profit. I was listening on the radio—who has consistently worked on a bipartisan basis to address problems associated with our litigation system. We certainly look forward to working with him on this and other important reform issues before Congress.

    Then we will hear from Congressman Bud Cramer of the 5th District of Alabama and Congressman Cal Dooley of California's 20th Congressional District, along with Congressman Chris Cox. These five members have taken the lead in promoting a solution to the Year 2000 litigation problem.

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    Then we will conclude this panel with the testimony from the distinguished Congressman from the 1st District of Texas, Congressman Max Sandlin. We thank you in advance for your testimony, and we request that you limit your oral testimony to 5 minutes; and your written statements will be entered into the record in their entirety.

    As is this committee's normal policy, there will be no questions directed to this panel of Members.

    Mr. HYDE. Congressman Davis?

STATEMENT OF HON. THOMAS M. DAVIS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA

    Mr. DAVIS. Thank you, Mr. Chairman. I won't take the full 5 minutes, but I ask unanimous consent that my entire statement be made part of the record.

    Mr. HYDE. Without objection.

    Mr. DAVIS. As the chairman knows, I was an information technology executive before I was elected to Congress and have had a lot of experience in this area. And it is the fastest growing part of the American economy. Take a look at the stock markets; you take a look at where the economy has been and where the job production. It has been in our information technology industry.

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    The Gartner Group has recently estimated that nearly a trillion dollars could be spent on litigation relating to the Y2K problem under our current legal system. A figure that is even more outstanding when you compare it to the roughly $300 billion to $400 billion spent each year on all civil litigation in the United States. And this is uniquely a national problem, particularly because of the embedded chip problems that we are finding in so many items that are out there in public use today.

    What this legislation does is—it is very modest when you compare to what some of the States have done. States like Nevada make Y2K liability almost an act of God where consumers get nothing. Consumers who are hurt in this particular case will get full compensation. What we do is we limit punitive damages. And so many of these are by their nature contractual in nature and not tort, before some lawyer gets a hold of them and takes some theory to get it into court and move it into tort law.

    We cap punitive damages. We take away the joint and civil liability, because so many different companies have touched computer programs over a 20- or 30-year period, and we think it is uniquely wrong to hold the deep pockets responsible where in many cases they haven't caused any problem but have only enhanced the utility of these systems; and we move to something called proportional liability. And, of course, in the class action suits we take those suits and at least make the people who are being represented by attorneys have notice that they are being represented. I think that is something in this case that ought to be required.

    We are not reforming tort law. We are taking the unique case of the Y2K problem, because it is unique. It is something that we have never faced before on this planet and may never face again. But we recognize that the fastest growing part of this economy—if they start taking that trillion dollars and have to invest it into court suits and liability and settlements instead of investing it in training and retaining American workers and new products to compete in the global marketplace really threatens the American economy in a unique fashion.

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    This legislation also has loans for small businesses so they can meet their obligation. We tried to get into mediation. It aims at solving the problem where you have notice and cure provisions. We think it is a good bill. We think it is a modest bill when you compare it to some of the activities that have gone on in some of the States, and I hope my colleagues will support it.

    [The prepared statement of Mr. Davis follows:]

PREPARED STATEMENT OF HON. THOMAS M. DAVIS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA

    Good morning, Mr. Chairman and my distinguished colleagues on the Judiciary Committee. As the chief sponsor of H.R. 775, the Year 2000 Readiness and Responsibility Act and on behalf of my fellow co-sponsors, I want to thank you for holding a hearing today on this critical bill. It is with great concern that I am here this morning, along with Congressman Jim Moran from my neighboring district in Northern Virginia, Congressmen David Dreier, Cal Dooley, and Bud Cramer, to testify about the chilling effects that an estimated $1 trillion in Year 2000 litigation is currently having on Year 2000 remediation and testing.

    As a member of the Science Committee Subcommittee on Technology in the 104th and 105th Congresses, and of the Government Reform Subcommittee on Government Management, Information, and Technology for the past 3 years, I have participated in many hearings exploring the Year 2000 problem. I am also a former Senior Vice President and General Counsel of PRC, Inc., a high technology and professional services firm headquartered in McLean, Virginia. The Year 2000 Millennium Bug presents an intricate host of difficulties that is unprecedented in the breadth and effect that it will have on our global and national economies.

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    The Y2K problem is the result of a decision in the 1960s by computer programmers to use two digits to denote the year rather than four in order to conserve computer chip storage space. Despite its existence for nearly four decades, the world has awakened to the true ramifications of this design only in the last few years. The Y2K problem will surface on January 1st when computers interpret ''00'' to mean the Year 1900 rather than the Year 2000.

    With dates being critical to almost every layer of our economy, Y2K noncompliance will affect the free flow of information between consumers, between consumers and businesses, between business, and between industries. The underpinnings of our surging national economy depend on the easy circulation of data on a minute-by-minute basis. From the small retailer processing a credit card payment to the local mechanic diagnosing an automobile's onboard computer, full Y2K compliance by all businessesboth small and largein order to avert failures is crucial to America's continued economic growth and competitiveness well in to the next millennium.

    The Y2K problem is a unique phenomenon. Ordinarily when one thinks in terms of a national emergency, it is generally unexpected, taking us by surprise and challenging our infrastructure's ability to resolve the crisis and its consequences quickly. Or we have warning that a threat is pending but we have no way of determining when it will strike. The Year 2000 Millennium Bug, as many of us know by now, could have the potential to equal the magnitude of a national disaster. But its unique and defining characteristic is that we know it is going to strike and we know exactly when the vast majority of problems will arise.

    Last year, Congress passed the Year 2000 Information and Readiness Disclosure Act which was intended to promote the free disclosure and exchange of information for purposes of encouraging Year 2000 readiness measures. Despite this step, the fear of a Y2K litigation bonanza continues to be an obstacle for many businesses, particularly small businesses, which are finding it difficult to undertake aggressive Y2K repair work. In addition, for those companies who have been actively working to address the Y2K problem, there is real uncertainty that despite their good faith efforts and the more than $50 billion that businesses will spend on Y2K remediation, lawsuits designed to exploit the Y2K issue will divert labor and resources from Year 2000 solutions. The Gartner Group, a leading information technology consulting and research group, reported that Y2K spending will increase from 30% in 1998 to 44% of information technology budgets in 1999. That is money spent not on Information technology improvements, innovation, or other investments; those are dollars allocated expressly to Y2K repair work and testing. Despite aggressive Y2K efforts, under our current legal system, businesses who are the farthest ahead in achieving 100% compliance are as equally vulnerable as a company who has negligently failed to take any remediation efforts. In today's technological world, the interdependence of companies in exchanging data make disruptions inevitable as well as impossible to predict. It is this everpresent uncertainty that is impeding the Y2K progress that is so essential to our nation's ability to prepare for the Year 2000.

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    Small businesses in particular are behind in their Y2K efforts for a number of reasons. Many were simply not aware that their systems were susceptible to a Y2K disruption and have started remediation late. They also lack the in-house resources that large businesses employ; small companies spend 50% of the Year 2000 budgets on outside services. A Gartner Group study presented to the Senate Special Committee on the Year 2000 Technology Problem last fall found that of the 23% of all companies and government agencies that had not yet started any Year 2000 effort, 83% were small companies with fewer than 2000 employees.

    At this point, however, small as well as large businesses are eager to solve the Y2K problem, but are not doing so because of a legitimate fear of litigation. Legal uncertainty is proving to be a huge impediment for many entities who find themselves forced to set aside parts of their budgets in anticipation of frivolous litigation and out of budgets intended for Y2K preparation. According to the Gartner Group, nearly $1 trillion will be spent on litigation relating to the Y2K problem under our current legal system, a figure that is even more astounding when you compare it to the roughly $300 to $400 billion spent each year on all civil litigation in the United States.

    The Year 2000 Readiness and Responsibility Act provides a fair and predictable framework for resolving problems caused by Y2K failures while minimizing the potential explosion in litigation that would prevent important steps in Y2K remediation, hurt American consumers, and weaken our economic infrastructure. The mishmash of legal rules and outcomes that currently exist within our legal system would be replaced with a clear set of rules applicable only to Y2K disputes on a uniform basis. As opposed to the perverse incentives that discourage persons from engaging in remediation under our legal system today, H.R. 775 will encourage firms to take preventive measures that will minimize the risk of Y2K failures.

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    Let me make it clear that this legislation in no way prevents any plaintiff from receiving full compensatory damages for problems caused by a Y2K failure for which a defendant is found to be responsible. Our Y2K bill implements a prefiling notification period designed to encourage solutions rather than litigation without forfeiting a potential plaintiff's right to seek legal redress. Defendants have a defined period in which they can work with the plaintiff to resolve a Y2K problem without the distraction and expense of a lawsuit. Furthermore, our legislation encourages alternative dispute resolution, preserves contracts to which both parties agreed, and specifically exempts any personal injury claims from its provisions. Businesses will be expected to mitigate their damages and defendants would only be liable for the proportion of the Y2K problem caused by their actions. Our bill would also limit punitive damages that would otherwise threaten the viability of companies of all sizes and thus, our nation's current historic economic expansion. It also protects consumer rights in litigation by requiring lawyers to make full disclosure of fees and the actual services provided. Furthermore, it helps small businesses by providing federal regulatory relief from penalties for violations of Federal data collection requirements that are the result of a first time Y2K failure.

    By providing a clear set of rules, companies that ignore the problem are on notice that they will receive absolutely no protection under this legislation. If you fail to take reasonable efforts to achieve Y2K compliance, if you fail respond to a potential plaintiff's notice of a Y2K failure within the timeframe of the prefiling notification period, you will not receive the certainty provided by the Year 2000 Readiness and Responsibility Act.

    Congress has a duty to enact balanced and defined legal rules that will foster confidence in every single business, whether large or small, that they can conduct Y2K remediation and testing without fear of costly and excessive litigation. Failure to do so will have severe consequences to our consumers and our economy. First of all, massive litigation would put the reins on the fastest growing part of the American economy: information technology products and services. In addition to the high tech industry, every other sector of our economy would be forced to spend billions of dollars in costly litigation and settlements instead of investing their profits in workforce training, technological innovation, and global competition. This effect translates into a reduction in jobs for Americans, an increase in consumer prices, and a possible overall slowdown in our national economy. Every American has the right to expect this Congress to provide every incentive possible to foster 100% Y2K remediation and testing. The principles laid down in the Year 2000 Readiness and Responsibility Act will provide both plaintiffs and defendants with the assurances needed to resolve Y2K glitches quickly and to the benefit of both parties. Companies that have invested in Y2K repair and testing will get credit for having done so and consumers and businesses will have a defined avenue for receiving full compensatory damages caused by Y2K failures.

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    But of course, these reforms must be enacted as soon as possible so that businesses will have enough time to take advantage of the incentives provided in H.R. 775 in the remaining nine-and-a-half months of 1999. We want to work with you to pass a fair and balanced bill that will create certainty where there is now uncertainty, equity where there is potential inequity, and incentives where there are currently disincentives. Thank you again, Mr. Chairman, for moving quickly on this issue today.

    Mr. HYDE. Mr. Dreier.

STATEMENT OF HON. DAVID DREIER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

    Mr. DREIER. Thank you very much, Mr. Chairman. I want to compliment you on your opening statement and my colleagues, Tom Davis and Jim Moran and Bud Cramer and Cal Dooley who are here, along with Chris Cox and the others who co-sponsored this very important legislation.

    Your opening statement pointed to this $1 trillion figure. Tom mentioned it again. It is frightening when we look at the potential threat that is out there. Nearly a year ago, I introduced legislation similar to this to pursue this issue because it did move to the forefront then for more than a few people. Unfortunately, we were not able to get a lot of support for that. But later in the year, we were able to get my colleague Anna Eshoo from California to join and proceed with legislation, which we did get signed into law on basically the information disclosure aspect dealing with Y2K liability.

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    But if you look at where we are today, it is clear that the single biggest problem associated with the whole computer bug issue is uncertainty. No one knows exactly what the ramifications of this problem can be. But the predictions as you have said and as Tom has said are very, very dire; and I think need to be addressed.

    This legislation is important because there are some who believe that the only reason that companies are attempting to fix the Y2K problem is the threat of lawsuits, which to me is absolutely preposterous. The reason is that if you look at the companies that basically want to be in business as we approach the millennium, who want to meet the demands of their customer base, they obviously have a great interest in resolving this just as quickly as they possibly can.

    I believe that reducing litigation uncertainty will encourage the Y2K fixes, because the resources aren't going to be wasted on litigation strategies. Instead, they will be used for actually fixing the problem that is out there. And the broad range of private sector support for our legislation illustrate that the bill is not special interest legislation. It is a very thoughtful effort to reduce wasteful, unproductive litigation while protecting the rights of plaintiffs.

    The bill has been endorsed by a broad range of businesses large and small, manufacturing and service, from smoke stack industries to high-tech industries. It has earned the strong support of firms that are likely to be either plaintiffs or defendants in Y2K failure suits. The bill earned this broad support by establishing a fair and reasonable regime for settling Y2K failure disputes through compromise or mediation where possible or litigation where necessary.

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    It establishes a grace period for potential litigants to work toward compromise and encouraging alternative dispute resolution. If companies believe that the only way to resolve a dispute is through litigation, it preserves their right to sue.

    Finally, it is critical to ensure that America's high-tech companies are not bankrupted as scapegoats for a problem largely set in place decades ago. Should Year 2000 failures occur, a chain of litigation is likely to develop that leads to the American companies that produce computer hardware and software. And it is not a trivial fact that high-tech companies have been responsible for half of America's economic growth in recent years. That is an amazing figure. Half of the GDP growth in the last several years has been in that industry. The productivity revolution that has resulted in rising wages for American workers needs our technology industries. We cannot allow a load of unnecessary and unproductive litigation to jeopardize the economic growth that is so important.

    So I join in encouraging my colleagues to support this bipartisan legislation, and we hope that we can move it ahead just as quickly as possible.

    And, Mr. Chairman, I would like to ask the committee's forbearance. I have another meeting that I have to attend; and since you made it very clear you have so many witnesses, I want to free you of that burden by at least one.

    Mr. HYDE. Well, drop back if you get a chance. Thank you, Mr. Dreier. Congressman Moran.

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    Mr. DREIER. You sure you want me back?

    Mr. HYDE. Sort of.

    [The prepared statement of Mr. Dreier follows:]

PREPARED STATEMENT OF HON. DAVID DREIER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

    Mr. Chairman and Members of the Committee, I'm pleased to be able to add my voice of support for the Year 2000 Readiness and Responsibility Act. I became involved in this issue last spring, introducing H.R. 4240, the first Year 2000 liability reform bill introduced in the Congress, as well as sponsoring H.R.4455 with Representative Anna Eshoo, which was largely enacted into law as the Year 2000 Information and Readiness Disclosure Act last fall

    I believe that H.R. 775 represents bipartisan, consensus-building legislation that will provide important incentives to fix Year 2000 computer problems before they cause destructive failures. It is very important to understand that the coalition of organizations supporting this measure—over 80 different organizations—represents a cross-section of the private sector. It has been endorsed by small and large businesses, by manufacturers and service companies, by smokestack industries, high-tech companies, blue-chip firms and startups. Perhaps most importantly, it unites both potential plaintiffs and litigants in support of one straightforward and simple regime for settling their disputes. Anything less inclusive of the broad range of interests at stake would result in a far narrower range of supporters

    Mr. Chairman, the single most appropriate term to apply to the Year 2000 computer problem is uncertainty. We cannot know the extent of Y2K failures before they occur, and we cannot accurately judge the potential impact of such failures here in the United States. While the U.S. leads the world in efforts to prevent Y2K failures, we cannot estimate the potential impact here of Y2K failures abroad. We could find that we are unable for a time to import needed petroleum or other important raw materials, or we could find U.S. economic and strategic interests endangered by failures in hot spots around the world

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    With all of the real uncertainty surrounding the Y2K problem—the fact that in many cases we will not be sure problems are solved until we get past January 1, 2000—we need to reduce uncertainty where we can. The reality of the Y2K problem is that the threat of uncontrolled and unwarranted litigation is causing a lot of private sector uncertainty. My understanding is that Lloyds of London is projecting over a trillion dollars of Y2K litigation. That type of litigation threat is forcing companies to direct scarce resources to litigation strategies, when they would be better directed to technology strategies. This legislation can help change that equation so that the resources go to solving problems rather than preparing for lawsuits

    One of the key features of the Year 2000 Readiness and Responsibility Act links a firm's share of damages in failure suits to their role in causing the failure. This is a critical reform. Right now firms are just as likely to avoid Y2K litigation losses by ignoring potential problems as by acknowledging and fixing them. H.R. 775 will reward firms for their efforts to prevent Y2K failures, while the onus will be on other companies to explain why they ignored signs of potential trouble. The legislation also establishes a grace period to address problems before litigation, and encourages alternative-dispute mechanisms

    While I believe that changes in the Y2K litigation landscape can reap tangible rewards by encouraging more effective remediation efforts, I believe it is also critical to enact legislation to ensure that we do not allow America's high technology companies to be bankrupted as scapegoats for a problem largely set in place decades ago. If there is anything we know about litigation, it is that when big lawsuits are brought against a company or companies, they look around for other firms to sue to help reduce their potential losses. Should Year 2000 failures occur, a chain of litigation is likely to develop that leads to the American companies that produce computer hardware and software

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    It is not a trivial fact that high technology companies have been responsible for half of America's economic growth in recent years. They have been key to our growing exports. The productivity revolution that has resulted in rising wages for American workers needs our technology industries. The United States enjoys unparalleled world leadership in these industries. Simply put, we cannot allow an orgy of unnecessary and unproductive litigation to forfeit our stake in the 21st century world economy by allowing scapegoating this industry. Enactment of H.R. 775 will help to ensure that these companies are only liable for damages in proportion to their share of creating the problem

    Mr. Chairman and Members of the Committee, the Year 2000 Readiness and Responsibility Act is a reasonable and responsible measure that will encourage companies to do all they can to fix Y2K problems, deter frivolous litigation, and ensure that resources are channeled into Y2K fixes. In doing so, it is clearly in the interest of consumers. Additionally, it is supported by every sector of the business community. I look forward to working with you toward passage of this critical legislation

STATEMENT OF HON. JAMES P. MORAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA

    Mr. MORAN. Thank you very much, Mr. Chairman. Thanks for having the hearing on this important legislation today. By any objective measure, the costs associated with Y2K lawsuits pose a threat to the Nation's continued economic prosperity as we enter the new millennium. It is essential that individuals and companies that suffer legitimate economic injuries due to Y2K disruptions retain the right to sue. That is an essential part of our legislation.

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    But left unchecked, strident litigators could discourage preventive actions by businesses and stifle innovation and economic growth. And so that is why we urge the members of the Judiciary Committee to support this reasonable, bipartisan legislation that will lessen the economic impact of the Y2K problem, encourage businesses to fix their problems now with their resources instead of using those resources in defending lawsuits. And it will help to ensure a balanced, fair and efficient outcome to the potentially massive Year 2000 litigation.

    That kind of excessive litigation and the potential negative impact on targeted industries threaten the jobs of American workers and the position of American industries in the world market. Unless legislation is enacted very quickly within the next couple of months, Y2K-related problems could result in as much as a trillion dollars in litigation expenses, as both Mr. Davis and Mr. Dreier have said. In fact one technology consulting firm has estimated that the amount of litigation associated with Y2K could be $2 to $3 for every dollar actually spent on fixing the problem. In other words, we could spend two to three times as much litigating the problem as we will spend fixing the problem.

    Currently, American businesses, governments, and other organizations are tirelessly working to correct potential Y2K failures. But as diligently as America is working on the problem, it remains a daunting task. It involves reviewing, testing, and correcting billions of lines of computer code. It has been estimated by a Federal Reserve official that the U.S. Government will spend over $30 billion making its computers Y2K compliant and American businesses will spend an estimated $50 billion to reprogram their computers.

    Despite these efforts, some failures are bound to occur due to time constraints, lack of knowledge, or simply ignoring the problem. This legislation will not protect companies that have reason to know they are going to have failures and do nothing to correct those failures. Companies who simply run out of time will still be contractually liable for the economic damages that they cause. But we have to understand that many of the Year 2000 computer failures will occur because of the interdependency of the United States and other world economies. Every Y2K failure will have a compounding effect on other organizations that are dependent upon it.

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    We are all interdependent in this global economy. Those disruptions will in turn cause disruptions to other such interdependent organizations and individuals and will have an exponential domino effect. So many companies are bound to find themselves being sued or wind up suing others. That is going to be a drag on our economy. Every dollar spent on litigation and frivolous lawsuits is a dollar that cannot be spent on investing in new equipment and paying additional workers and training those workers or paying dividends to shareholders.

    So we feel that this legislation needs to be enacted very quickly. We don't see it as setting any kind of damaging precedent. As Robert Atkinson of the Progressive Policy Institute said, ''It is a unique, one-time event best understood as an incomparable societal problem rooted in the early stages of our Nation's transformation to the digital economy.'' It has to be done now, and this is the way that we can make sure that it is done most efficiently and effectively.

    I want to say—you know, we want to emphasize if you are planning on suing, you have to give people 30-days' notice; and then if they are working diligently to correct the problem, they have 2 months in which to fix it. We allow small businesses to borrow up to $50,000 to fix the problem. It relieves those small businesses from regulatory fines due to Y2K problems.

    It has been endorsed by 80 organizations. You are going to hear from a lot of them, from the National League of Cities to the Information Technology Association and the U.S. Chamber. We know we have got broad-based support for this. As the President said, we cannot let this be the last headache of the 20th century—we need to make sure this is the last headache of the 20th century, not the first crisis of the 21st. I thought that was a good quote; too bad I bungled it.

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    So this is a real challenge for the Congress. We have the ability to make sure that as much as a trillion dollars is spent constructively instead of destructively. We appreciate your support. We hope you can get the legislation passed quickly. Thank you, Mr. Chairman.

    Mr. HYDE. Thank you, Mr. Moran.

    [The prepared statement of Mr. Moran follows:]

PREPARED STATEMENT OF HON. JAMES P. MORAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA

    Mr. Chairman, and members of the Committee, thank you for the opportunity to come before you today to discuss the ''Year 2000 Readiness and Responsibility Act'' (H.R. 775).

    By any objective measure, the costs associated with Year 2000 (Y2K) lawsuits pose a threat to the nation's continued economic prosperity as we enter the new millennium. It is essential that individuals and companies that suffer legitimate economic injuries due to Y2K disruptions retain the right to sue. But left unchecked, strident litigators could discourage preventative action by businesses and stifle innovation and economic growth. Today, I urge members of the Judiciary committee to support reasonable, bipartisan legislation that will lessen the economic impact of the Y2K problem, encourage businesses to fix problems now, and help insure a balanced, fair, and efficient outcome to Y2K litigation.

    Excessive litigation and the potential negative impact on targeted industries threaten the jobs of American workers and the position of American industries in the world market. Unless legislation is enacted quickly, Y2K related problems could result in more than one trillion dollars in litigation expenses. In fact, one technology consulting firm has estimated that the amount of litigation associated with Y2K will be $2 to $3 for every dollar spent actually fixing the problem.

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    Currently, American businesses, governments, and other organizations are tirelessly working to correct potential Y2K failures. As diligenty as America is working on the problem, it is indeed a daunting task. It involves reviewing, testing, and correcting billions of lines of computer code. It has been estimated by a federal reserve official that the U.S. government will spend over $30 billion to make its computers Y2K compliant. American businesses will spend an estimated $50 billion to reprogram their computers.

    Despite these efforts some failures will occur due to time constraints, lack of knowledge, or ignoring the problem. This legislation will not protect companies that have reason to know they will have failures and do nothing to correct them. Companies who simply run out of time will still be contractually liable for the economic damages that they cause.

    But we must understand that many of the Year 2000 computer failures will occur because of the interdependency of the U.S. and world economies. Every Y2K failure will have a compounding effect on other organizations that are dependent on it. Those disruptions will in turn cause disruptions to other interdependent organizations and individuals, thus having an exponential domino effect. Many organizations (both Y2K compliant and non-compliant) will, therefore, find themselves suing and being sued for the entire amount of damages caused by the business interruptions. This is a serious problem that could create a substantial drag on our economy. Every dollar that is spent on litigation and frivolous lawsuits is a dollar that cannot be used to invest in new equipment, pay workers, train workers or pay dividends to shareholders.

    In addition to the potentially huge costs of litigation, there is another unique element to the Y2K problem. In contrast to other problems that affect some businesses or even entire industries engaged in damaging activity, the Y2K problem will affect all aspects of our economy, especially our most productive high tech industries. This problem is, in the words of Robert Atkinson and Joseph Wards of the Progressive Policy Institute, ''a unique, one-time event . . . best understood as an incomparable societal problem rooted in the early stages of our nation's transformation to the digital economy.''

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    The ''Year 2000 Fairness and Responsibility Act'' is designed to protect American workers and industries in critical ways. First, it encourages more activity designed to fix Y2K proplems before they occur by diverting critical resources away from litigation preparation to actually fixing the problems before they occur. Proportional liability will encourage more firms to get involved in fixing problems and will protect business owners who make good faith efforts to become Y2K compliant from liability by limiting punitive damages recoveries and holding parties accountable only for their proportional fault.

    The bill also requires that potential plaintiffs contact potential defendants and describe the problem and identify the relief sought before filing a lawsuit. The defendant would have 30 days to respond and to describe the actions it plans to take to remedy the problem. If the potential defendant is not satisfied with the potential defendant's response, it could bring suit after an additional 60 days. The provision only affects defendants seeking money damages. It will not affect plaintiffs seeking injunctive relief. The delay in money cases will keep disputes off litigation track for a reasonable period so that parties have a chance to resolve differences between themselves before getting courts involved and incurring large legal expenses.

    Additionally, the bill makes it easier for small businesses to get access to the funds they need to ensure their readiness for the year 2000 by allowing them to borrow up to $50,000 through the Small Business Administration. It also relieves small businesses from costly regulatory fines they may incur due to a Y2K problem.

    The bill does not prevent economic damages recoveries. Injured plaintiffs will still be able to recover all of their damages and defendant companies will still be held liable for the entire amount of economic damages that they cause. Additionally, all personal injury claims are exempt from the legislation.

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    It is time for Congress to act to protect American jobs and industry. This legislation has been endorsed by an impressive coalition of 80 organizations that are likely to represent both plaintiffs and defendants in Year 2000 litigation including the Information Technology Association of America, the National Federation of Independent Businesses, the U.S. Chamber of Commerce and the National Association of Manufacturers.

    The goal of Congress should be to encourage economic growth and innovation, not to foster predatory legal tactics that will only compound the damage of this one-time national crisis. Congress owes it to the American people to do everything we can to lessen the economic impact of the worldwide Y2K problem and not let it unnecessarily become a litigation bonanza.

    In his state of the Union Address, President Clinton urged Congress to find solutions that would make the Year 2000 computer problem the last headache of the 20th Century, rather than the first crisis of the 21st. The Year 2000 Readiness and Responsibility Act is an important part of that solution. By promoting remediation over unnecessary litigation, we can help bring in the next milennium with continued economic growth and prosperity.

    Thank you again, Mr. Chairman and members of the committee for the opportunity to appear before you today.

    Mr. HYDE. Congressman Cramer.

STATEMENT OF HON. ROBERT E. CRAMER, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ALABAMA

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    Mr. CRAMER. Thank you, Mr. Chairman. I appreciate the opportunity to come before this committee to talk about this bill. We have worked very hard to scrub this bill to make sure it was as unobjectionable as possible. Here we are in April 1999; we are a few months before the Year 2000. I come from a high-tech district in north Alabama. My small businesses particularly have been expressing a lot of anxiety. They are affected by the media hype, the overspeculation about what might happen. But they are scared of lawsuits and the domino approach to this as well.

    I have submitted for the record letters from three of my small businesses. There they say they are bending over backwards, expending money to make sure that they are Y2K compliant. But they are worried about their liability, based on the domino effect and what will happen in case some of their other partners in trade are not Y2K compliant.

    So we think this is the reasonable and responsible thing to do. It is an effective partnership with small business. It looks at the liability issue. It does not protect those businesses that are negligent or irresponsible. There will be an orderly process, a legal process to allow their claims to be litigated within the system. But it does reassure small businesses that they will be protected. And rather than having them focus on lawsuits and the expense of lawsuits, what it allows them to do is to look forward to curing the problem.

    So, I eagerly join my colleagues to make sure that we express our bipartisan opinion that this is something that we urge our colleagues to support. Thank you, Mr. Chairman.

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    Mr. HYDE. Thank you, Mr. Cramer.

    [The prepared statement of Mr. Cramer follows:]

PREPARED STATEMENT OF HON. ROBERT E. CRAMER, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ALABAMA

    Mr. Chairman, I am grateful for the opportunity to come before you and your esteemed committee today, to share with you some of the reasons why I join with my colleagues in strong support of this bipartisan bill.

    First, let me tell you what this bill will do. This bill will provide limited-liability for those hard-working, responsible, businesses which are making honest, good-faith, efforts to solve the year 2000 problems. What this bill will not do is to provide any added protection for people or businesses that act irresponsibly or negligently in preparing for the Y2K problem.

    I represent a high-tech district in the state of Alabama where the Y2K issue is at the forefront of a lot of people's minds. State officials in Alabama have recently announced that our state is behind schedule on the Y2K problem. Our people are looking for leadership on this issue—and this reform bill is a responsible step in the right direction.

    I respectfully must disagree with those who think this is an ''inside the beltway'' issue. I have brought three letters from Alabama companies, which illustrate the concern of businessmen and women across this country.

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    A letter from an electrical contracting company in Decatur, AL, states ''We are deeply concerned and apprehensive about what may happen to our computer-controlled society when the year 2000 begins. . . . While we believe that our company, and most companies, will avoid this problem, it only seems fair that legislation be enacted to prevent frivolous and costly litigation in a situation of this type.''

    Let's focus on the words ''prevent frivolous and costly litigation'' for a second. This bill requires that a majority of the members in a Y2K class action must have suffered a real injury before a year 2000 class action can be brought. It also states that damages awarded in a Y2K action must exclude any damages awarded in a Y2K action must exclude any damages that the plaintiff could reasonably have avoided. This bill will help ''prevent frivolous and costly litigation.''

    Another letter, this one from Vulcan Threaded Products in Pelham, AL, states, ''At very considerable expense to us, our company has gone to great lengths to make sure that we are Y2K compliant, but we do expect problems will be passed on to us. A mountain of litigation could create untold amounts of time and expense which could be the hole that 'sinks the ship'.''

    Mr. Chairman, let's focus on the words ''have gone to great lengths.'' Under this bill, defendants cannot be held liable in tort or other non-contract actions if they establish that they took reasonable steps to prevent the Y2K failure. This bill will recognize good-faith efforts.

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    The final letter, from National Windows in Birmingham, AL, states, ''It is unreasonable to allow a legal structure that can make me liable for problems that are a result of circumstances beyond my reasonable control. This legislation . . . will provide some protection to people like myself.''

    Mr. Chairman, this letter is referring to the domino effect, where the Y2K failure of one company can temporarily restrict the ability of its business partners to fulfill their contractual obligations with their own customers. Under this common-sense bill, in tort actions other than claims for personal injury, each defendant is only liable for the plaintiff's loss in direct proportion to such defendant's responsibility for the harm. This bill will place responsibility where responsibility belongs.

    In conclusion, it is we, the lawmakers, who would be irresponsible and negligent in Y2K preparations if we sat back, did nothing, and allowed a flood of frivolous and costly lawsuits to significantly strain the resources of our businesses, not to mention our legal system, as we go into the new millennium.

    Mr. HYDE. Congressman Dooley.

STATEMENT OF HON. CALVIN M. DOOLEY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

    Mr. DOOLEY. Thank you, Mr. Chairman. And I am here today as a proud supporter of this legislation, and I look forward to the committee's consideration. And while I would admit it is probably not a perfect piece of legislation, I hope that in the course of your deliberations that you will be able to make some modifications to it that will ensure that it will be able to receive the majority support on the House floor.

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    Like most of you, I spent the spring recess talking to folks in my district as well as having an opportunity to speak with some people in the financial services community in New York, as well as people in the technology sectors in both Silicon Valley and Seattle. As I was talking with those folks—and it didn't matter whether they were a small business owner or consumer or technology executive or Wall Street financier—they all delivered the same message and expressed the same concerns regarding the Y2K challenges.

    First, they all committed to fixing any problems associated with Y2K and are investing tremendous amounts of resources, whether it is a small business person or, again, a major corporation, to prevent Y2K failures. But they also want to be treated fairly if there is a problem, and many of them are both potential plaintiffs and defendants.

    They want assurances that potential problems will be fixed quickly and with minimal disruptions. They also want to ensure that they will be accountable for remedying their share of any potential problem that develops, but they don't want to be expected to cure problems that were not of their making.

    And third, they are looking for some level of predictability. Businesses and consumers alike are troubled by the current atmosphere of uncertainty and are looking for a predictable process to remedy potential Y2K problems and to mediate Y2K disputes. And that is what this legislation is all about. It does not preclude anyone from being held responsible for the problems that they create. We are not placing any limitations on any economic damages that arise from a Y2K problem.

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    This legislation in many ways embodies some of the same principles that were part of the securities litigation reform legislation that was enacted in the last Congress because it makes sure that people are responsible for their share of any Y2K problem that they cause, but not problems caused by others. And the Y2K Readiness and Responsibility Act would assign what is most importantly proportional liability for the Y2K problems and its failures.

    I don't need to belabor the points that my fellow cosponsors of the legislation made, but I think that this is a responsible approach to trying to ensure that we provide the incentives to fixing the problems and ensuring that people will have the opportunity to receive just compensation for the real economic damages that result from a Y2K problem.

    Mr. HYDE. Thank you, Mr. Dooley.

    [The prepared statement of Mr. Dooley follows:]

PREPARED STATEMENT OF HON. CALVIN M. DOOLEY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

    Mr. Chairman and members of the Committee, I appreciate having the opportunity to testify in support of H.R. 775, The Y2K Readiness and Responsibility Act. The Y2K transition presents a very unique set of challenges, and that is why we have developed a very specific, narrowly crafted piece of legislation targeted to address this one-time situation.

    The Y2K Readiness and Responsibility Act embodies a few key principles: accountability, fairness and predictably. It represents a strong bipartisan effort targeted at addressing the potential Y2K challenges facing our nation's businesses, consumers and public agencies by providing incentives and resources to ensure that businesses continue with their Y2K mitigation efforts. The bill also develops a road map for navigating potential Y2K glitches that may occur after December 31, 1999.

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    Some have estimated that U.S. businesses and public agencies will invest a total of more than 50 billion dollars to fix potential Year 2000 failures. It is essential that those efforts continue, and our bill provides resources and strong incentives to ensure that all parties move forward with their Y2K compliance plans. But considering the magnitude of the Y2K bug, in all likelihood we will experience some disruptions during the initial transition period. Amid this atmosphere of uncertainty, our legislation presents a commonsense framework to resolve future disputes arising from the Year 2000 problem.

    Like most of you, I spent the Spring recess in my district meeting with constituent groups. I also had the opportunity to meet with representatives from the financial services sector in New York and high-tech leaders in Silicon Valley and Seattle. And whether I was talking to small business owners or consumers, technology executives or Wall Street traders, they all delivered the same message and expressed the same concerns regarding Y2K challenges. First, they are all committed to fixing any potential problems associated with Y2K and are investing all necessary resources to prevent Y2K failures. Second, they want to be treated fairly. Many of them are both potential plaintiffs and defendants. They want assurances that potential problems will be fixed quickly and with minimal disruptions. They also want to ensure that they will be accountable for remedying their share of any potential problem that develops, not expected to cure problems that were not of their making. And third, they are looking for some level of predictability. Businesses and consumers alike are troubled by the current atmosphere of uncertainty and are looking for a predictable process to remedy potential Y2K problems and to mediate Y2K disputes.

    Make no mistake. The Y2K Readiness and Responsibility Act holds businesses and individuals responsible for their products and their actions. It ensures that individuals and companies who experience Y2K problems have their problems fixed as quickly and orderly as possible, and that they recover any economic loss that results from Y2K failures. There are no limits on economic damages, so plaintiffs are eligible to receive all potential economic losses resulting from Y2K problems.

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    Like the securities litigation reform legislation that was enacted in the last Congress, the Y2K Readiness and Responsibility Act makes sure people are responsible for the share of any Year 2000 problem they cause, not problems caused by others. The Y2K Readiness and Responsibility Act would assign proportional liability for Y2K problems and failures.

    Our legislation encourages mitigation and remediation over litigation by creating a 90 day cure period to fix the problem before resorting to litigation. The legislation would require the submission of a written notice outlining the Y2K problem, give the defendant 30 days to propose a remedy to the problem, and would allow the plaintiff to sue if a plan had not been put forward within the 30 day period or within 90 days if they were not satisfied with the defendant's remediation offer. In addition, the bill promotes the use of Alternative Dispute Resolution.

    Some have argued that there is no demonstrated need for the legislation. In fact, Y2K litigation is already on the rise. According to a recently published story in Time magazine, the filing of Y2K lawsuits has increased dramatically with at least 78 suits filed to date and nearly 800 legal disputes in the process of formal negotiation. Lloyds of London insurance has projected that worldwide claims could exceed $1 trillion, which would prove to be a considerable drain on our strong economy by diverting resources from investment, research and income growth.

    We all hope that when the New Year comes that the investment in Y2K fixes will have paid off and that we will be faced with relatively few problems. The Y2K Readiness and Responsibility Act simply establishes a set of ground rules to minimize the potential effects of Y2K problems of businesses and consumers alike if failures do occur.

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    Finally, as we are demonstrating here today, this is truly a bipartisan effort. We are committed to work with the committee, our colleagues in the House and Senate, and the Administration to enact Y2K legislation. I look forward to working with you, Mr. Chairman, and the members of the committee to advance this important legislation.

    Mr. HYDE. The gentleman from Michigan.

    Mr. CONYERS. Thank you. I don't want to take advantage of the last distinguished colleague from Texas, but I did want to put my statement in the record and just point out to all of the anxious colleagues of mine that are before me today that the business groups that wrote this special legislation, as Roll Call mentioned, are taking advantage of the uncertainties surrounding the Y2K problem to advance, I am afraid, their broader legal immunity agenda.

    Their exaggerated claims about the need for liability protection in this area now are a tactic designed to create Federal precedent for even more sweeping products liability legislation in the future. That is what I am afraid of.

    I think we can work this out, but here we are telling State courts and—conservatives are telling State courts what to do once again. The tort laws in the several States already provide adequate safeguards against frivolous legislation of Y2K cases, should such situations occur. So far there is only a trickle. You don't even know whether there is going to be a lot or a little. Nobody does. And there is no need for Congress to step in and dictate to State legislatures and State courts how to handle tort and contract cases in this one area.

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    Now, I want to work this thing out; but I am not going to be bullied by this nonsense about how bad this problem is and that we have got to grant massive protection against liability when the uncertainties are quite unclear.

    With that, I will put in my statement, and I apologize for interrupting the gentleman from Texas.

    [The prepared statement of Mr. Conyers follows:]

PREPARED STATEMENT OF HON. JOHN CONYERS, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN

    As presently written, ''The Y2K Readiness and Responsibility Act,'' which I prefer to call the ''Y2K Overreaching Act,'' is little more than a warmed over product liability reform bill, disguised as legislation to address the Y2K problem.

    Unfortunately, the Y2K problem is a legitimate public policy issue that has been turned into a political tool by the Republicans. The information technology community is being used as pawns in this political game. For example, a February 11, 1999, Roll Call article observes that ''[Republican] leadership sources said the bill [is intended to] help raise [Tom] Davis'' profile inside the business community and could provide a windfall of contributions to the NRCC. ''There are millions of dollars at stake here over the long run,'' said one Republican. ''The Y2K bill is the perfect launching pad for a new relationship with the high-tech guys,'' added a leadership aide.

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    Let me be clear, I have worked with the high tech community in the past, and I expect to continue to work with them in the future. I am an original co-sponsor of encryption legislation, I was a strong advocate of the copyright reform bill, which passed last year, and I will continue to work on patent reform during this Congress. I also worked with the Administration on the Y2K disclosure bill. All of these legislative initiatives will help our nation and its workers maintain its competitive edge in this critical industry.

    But H.R. 775 goes well beyond reasonable or needed reform. It is unprecedented, unconstitutional and unjustified. In fact, Assistant Attorney General Eleanor D. Acheson has testified that ''. . . this bill would be by far the most sweeping litigation reform ever enacted if it were approved in its current form. Among other things, this bill fails to protect consumers, shields grossly negligent defendants and harms innocent plaintiffs. Worst of all, instead of creating positive incentives to fix problems, it creates new reasons to avoid remediation. In short, it makes the Y2K problem far worse than it already is.

    However, I am not averse to developing legislation to address legitimate concerns. For example, I believe there is a role for enhancing the role of ADR and arbitration. I also believe the government should help small businesses in their Y2K compliance efforts. And, I am willing to consider an appropriate cool down period, the need for pleadings with specificity, and whether the jury should be able to take into account a plaintiff's effort to mitigate and a defendant's effort to remedy. These are reasonable steps to we can take without undermining the fundamental strength of our state civil justice system.

    As it currently stands, this legislation is ''dead on arrival.'' But if the information technology industry and the majority are willing to compromise, I am ready to roll up my sleeves to develop a federal legislative response which doesn't exacerbate the problem I look forward to today's testimony.

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    Mr. HYDE. Not at all. And the gentleman's full statement will be included in the record without objection.

    And now, Mr. Sandlin.

STATEMENT OF HON. MAX SANDLIN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS

    Mr. SANDLIN. Thank you, Mr. Chairman. And I request permission to revise and extend my remarks.

    Mr. HYDE. Without objection.

    Mr. SANDLIN. Thank you, Mr. Chairman, for the opportunity to appear before you and this distinguished committee concerning H.R. 775, the Year 2000 Readiness and Responsibility Act. Obviously, there is a wide range of potential civil liability that could result from Y2K noncompliance.

    Further, there should be absolutely no objection to the intent of this legislation if that intent is to curtail frivolous actions and to encourage business and individuals to identify and remedy the Y2K defect in advance. However, in addressing this problem with legislation, we must be responsible and measured in our response and not bar from the courts small businesses and consumers who have legitimate claims.

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    Mr. Chairman, the proponents of this legislation have made a very strange choice indeed. Rather than acting to protect the responsible businesses and innocent persons who will be harmed by the Y2K defect, the authors of H.R. 775 instead propose an extraordinary grant of legal protection for the irresponsible parties who knowingly failed to correct the defect and who are thoroughly responsible for the harm.

    Various sections of this act place a greater burden of proof upon Y2K plaintiffs in these lawsuits. It creates new defenses and significantly limits damages that may be recovered. Even if a defendant clearly is at fault, several sections appear to preclude liability or recovery. This is not fair to American business. It is not fair to American consumers.

    Obviously, to those responsible businesses or individuals that suffer Y2K loss, this legislation offers only further disadvantage. While their right to seek redress under existing law is substantially eroded, the wrongdoers are offered additional protections. It appears that American small business and American consumers may well bear the biggest burden concerning Y2K problems through no fault of their own.

    Mr. Chairman, there is a recent editorial analysis of this problem in Computer World, the recognized leading industry news weekly. That editorial said in part as follows: ''The problem belongs hook, line, and sinker to the vendors that capriciously ignored warnings from as long ago as the late 70's and that now are trying to buy a free pass from Congress. It is appalling to look at the list of recent software products that have Year 2000 problems. Vendors have had plenty of time to prepare for 2000. The fact that some were more preoccupied with quarterly earnings and stock options than in protecting their customers is no excuse for giving them a 'Get out of jail free' card now.''

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    To those wrongdoers, many of whom knew long ago about this problem, this bill makes a remarkable offer of truly unprecedented legal relief: sweeping Federal preemption of law in all 50 States; radical revision of contract law, including interference with existing commercial relationships; significant Federal preemption of the Uniform Commercial Code; radical revision of State tort law; and a significant reshaping of Federal and State Rules of Civil Procedure.

    It is especially disingenuous that this unprecedented special relief is justified as being necessary to achieve Y2K readiness, limiting in advance the liability of potential defendants. Announcing to those potential defendants in advance that their legal obligations are circumscribed and their damage payments will be limited does not create an incentive to fix Y2K problems. Far more probably, it creates a disincentive.

    It is very important to note that the contract law provisions of H.R. 775 allows modification of existing contractual relationships, a very dangerous and unfair precedent. Further, there is created a ''reasonable efforts defense'' in Y2K contract actions that is not available under existing law. It is a very novel contract theory, indeed, that parties to a contract need not live up to the contract as long as they make a reasonable effort.

    For a contract to mean anything, the terms must be enforceable. A contract is a contract. A breach is a breach. Upholding the sanctity of the contract is essential to commerce. It is essential to the rule of law.

    Clearly, Congress has a role in assisting legitimate Y2K remediation efforts. American business and American consumers deserve our help. I strongly support an expanded loan guarantee program to address the Y2K problems of small business. Further, we should look immediately to allow tax deduction for Y2K computer conversion costs of small business.

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    Above all, we must not do anything that would undermine Y2K readiness. Congress needs to exercise strong oversight responsibility regarding national and global readiness and remediation; however, it would be unthinkable for Congress to legislate special protections for those who deliberately ignored this problem.

    It is not a partisan issue. American business and consumers should be able to rely on our time-tested principles of law. The unique problems of Y2K issues should be addressed by Congress in a focused, deliberate, responsible, and balanced way. Thank you, Mr. Chairman.

    Mr. HYDE. Thank you, Mr. Sandlin.

    [The prepared statement of Mr. Sandlin follows:]

PREPARED STATEMENT OF HON. MAX SANDLIN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS

    Good morning. Thank you, Mr. Chairman, for the opportunity to appear before you and this distinguished committee concerning H.R. 775, the ''Year 2000 Readiness and Responsibility Act.''

    The Year 2000 problem is the result of software that designates the current year with two digits rather than four digits. After the year 2000, such software may not correctly display the date, with unpredictable and uncertain consequences. There are predictions of zeroing out financial balances, serious billing errors, health related systems shutting down, the loss of emergency services—the list goes on and on

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    Obviously, there is a wide range of potential civil liability that could result from Y2K noncompliance. Further, there should be absolutely no objection to the intent of this legislation if that intent is to curtail frivolous actions and to encourage businesses and individuals to identify and remedy the Y2K defect. However, in addressing this problem with legislation, we must be responsible and measured in our response and not bar from the courts small businesses and consumers who have legitimate claims

    Mr. Chairman, the proponents of this legislation have made a very strange choice. Rather than acting to protect the responsible businesses and innocent persons who will be harmed by the Y2K defect, the authors of the HR 775 instead propose an extraordinary grant of legal protection for the irresponsible parties who knowingly failed to correct the defect and who are thoroughly responsible for the harm. Various sections of this Act place a greater burden of proof upon Y2K plaintiffs in these lawsuits, create new defenses, and significantly limit damages that may be recovered. Even if a defendant is clearly at fault, several sections appear to preclude liability or recovery. This is not fair to American business and is not fair to American consumers

    Obviously, to those responsible businesses or individuals that suffer Y2K loss, this legislation offers only further disadvantage. While their rights to seek redress under existing law are substantially eroded, the wrongdoers are offered additional protections. It appears that American small business and American consumers may well bear the biggest burden concerning Y2K problems—through no fault of their own

    Mr. Chairman, there is a recent editorial analysis of this problem in Computer World, the recognized leading industry news weekly. That editorial said, in part as follows: ''The problem belongs—hook, line and sinker—to the vendors that capriciously ignored warnings from as long ago as the late '70's' and that now are trying to buy a free pass from Congress. It's appalling to look at the list of recent software products that have year 2000 problems... Vendors have had plenty of time to prepare for 2000. The fact that some were more preoccupied with quarterly earnings and stock options than in protecting their customers is no excuse for giving them a get out-of-jail free card now.'' To those wrongdoers, many of whom knew long ago about this problem, this bill makes a remarkable offer of truly unprecedented legal relief: sweeping federal preemption of the law in all fifty states; radical revision of contract law, including interference with existing commercial relationships, as well as significant federal preemption of the Uniform Commercial Code; radical revision of state tort law, and a significant re-shaping of federal and state rules of civil procedure

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    It is especially disingenuous that this unprecedented special relief is justified as being somehow necessary to achieve Y2K readiness. Limiting in advance the liability of potential defendants—indeed, announcing to those potential defendants, in advance, that their legal obligations are circumscribed and their damage payments will be limited—does not create an incentive to fix Y2K problems. Far more probably, it creates a disincentive

    It is important to note that the contract law provisions of H.R.775 allows modification of existing contractual relationships—a very dangerous and unfair precedent. Further, there is created a ''reasonable efforts'' defense in Y2K contract actions that is not available under existing law. It is a very novel contract theory, indeed, that parties to a contract need not live up to the contact as long as they make a ''reasonable effort.'' For a contract to mean anything, the terms must be enforceable. A contract is a contract. A breach is a breach. Upholding the sanctity of contract is essential to commerce, essential to the rule of law

    Clearly, Congress has a role in assisting legitimate Y2K remediation efforts. American business and American consumers deserve our help. I strongly support an expanded loan guarantee program to address the Y2K problems of small business. Further, we should immediately allow a tax deduction for the Y2K computer conversion costs of small businesses. Above all, we must not do anything that will undermine Y2K readiness

    Congress needs to exercise strong oversight responsiblity regarding national, even global, readiness and remediation. However, it would be unthinkable for Congress to legislate special protection for those who deliberatly ignored this problem, and then proclaim to oursleves and our constituents that we have meaningfully advanced a solution

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    This is not a partisan issue. American business and American consumers should be able to rely upon our time tested principles of law. The unique problems of Y2K issues should be addressed by Congress in a focused, deliberate, responsible and balanced way.

    Mr. HYDE. This concludes the testimony of the first panel, and our custom is not to ask questions, tempting as it might be. And so if you gentlemen will accept our appreciation, we will have the second panel.

    Mr. MORAN. Mr. Chairman, would you yield for just 15 seconds?

    Mr. HYDE. Absolutely.

    Mr. MORAN. I just wanted to address a comment that the very distinguished ranking member from Michigan made with regard to an unfortunate article in Roll Call magazine that suggested that this bill was written by the business community. That was the reference made. I wanted to say for the record that while the business community was consulted, I know they didn't write this. This bill was written by our staffs, our bipartisan staffs. It would have been a very different bill if it had been written by the business community, I understand.

    Mr. CONYERS. Was it made better or worse?

    Mr. MORAN. Well, that is from one's own perspective. But I wanted to correct the record. The bill was written by our staffs, not by the lobbyists that were suggested in the article. Thank you for enabling me to correct that, Mr. Chairman.

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    Mr. HYDE. Thank you, Mr. Moran. Thank you, all of you.

    Our first panelist on the second panel is Lisa Bender, an information systems manager for Falcon Plastics Incorporated. Ms. Bender is here today also on behalf of the National Association of Manufacturers, a major manufacturing trade group with 14,000 member companies.

    Ms. Bender was responsible for managing the testing for, and remediation of, her company's Year 2000 problem; and she will talk about how Year 2000 problems might affect her company.

    Dr. Bill Lewis will be next. He is president and chief executive officer of the Washington, D.C. company Prospect Technologies and is a member of the U.S. Chamber of Commerce small business council. His company is involved in providing software and information solutions for corporations and government agencies and the manufacture of computer hardware. Potential liability results from the Year 2000 problem affects Prospect Technologies, both as a client and as a customer and as a supplier of products and services.

    Our third panelist is Janet Wylie, president and chief executive officer of HCL James Martin, an information technology consulting and professional services company which assists client companies in overcoming the Year 2000 computer problems. Ms. Wylie will talk about consequences that runaway Year 2000 liability could have for her company and her industry.

    Mark Yarsike is president of Produce Palace International, a small business in Michigan which has been, and could continue to be, negatively affected by the Year 2000 computer problem. Mr. Yarsike encountered problems because of the failure of a newly purchased computerized cash register to process credit cards with expiration dates of 2000 and beyond.

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    We are pleased to have William Greenup, mayor of the City of Fredericksburg, Virginia. He is here to represent the National League of Cities. Mayor Greenup's city has established a Y2K preparedness committee to identify and correct Frederickburg's Year 2000 compliance problems in its most critical service areas, but is troubled by the potentially devastating liability which could be wrought by extensive Year 2000 litigation.

    Joan Mulhern joins us today on behalf of Public Citizen for which she serves as legislative counsel. Public Citizen is a nonprofit public interest advocacy organization that seeks to improve citizen participation in governmental decision-making.

    Sally Greenberg is senior product safety counsel in the Washington, D.C. office of Consumer's Union, publisher of Consumer Reports magazine. She works to ensure that consumers receive the best possible information about the safety of consumer products and that dangerous products are removed from the market.

    Our final panelist is Charles Rothfeld, of counsel to the Washington law firm of Mayer, Brown & Platt. Mr. Rothfeld graduated from the University of Chicago law school and has published extensively in the areas of constitutional law and Federal jurisdiction.

    He served as law clerk to Supreme Court Justice Harry Blackmun and to D.C. Circuit Judge Spottswood Robinson, III. He is testifying as a participant in the Y2K Business Coalition which supports H.R. 775.

    My thanks in advance for all of your participation today. Your written statements will be entered in the record in their entirety, so I respectfully request you limit your oral presentation to 5 minutes.

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    Mr. HYDE. And with that, we commence with Ms. Bender.

STATEMENT OF LISA BENDER, INFORMATION SYSTEMS MANAGER, FALCON PLASTICS, INC., ON BEHALF OF THE NATIONAL ASSOCIATION OF MANUFACTURERS

    Ms. BENDER. Chairman Hyde and members of the Judiciary Committee, thank you for the opportunity to address you today regarding the Year 2000 Readiness and Responsibility Act. My name is Lisa Bender, and I am Information Systems Manager at Falcon Plastics; and I have been responsible for the Year 2000 project at our company.

    Mr. WATT. Mr. Chairman, we are having trouble hearing down on this end.

    Mr. HYDE. If the gentlewoman would pull the mike a little closer to her.

    Ms. BENDER. My name is Lisa Bender, and I am the information systems manager at Falcon Plastics and have been responsible for the Year 2000 project at our company. My mother-in-law and father-in-law, Don and Carol Bender, founded Falcon Plastics in 1975 with a 5,000 square foot plant and three employees. Today, we have 250 employees, 3 plant locations; and we anticipate sales of $20 million in 1999.

    My background is in computer science; and as the IS manager for our company, I have been responsible for managing the remediation testing and planning for Year 2000 compliance.

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    I am also here on behalf of the National Association of Manufacturers, the Nation's largest national broad-based industry trade group that represents 14,000 members, which include 10,000 small manufacturers who produce 85 percent of the manufactured goods here in the United States.

    The National Association of Manufacturers also is cochair of the Year 2000 Coalition, a large multi-industry group that supports this legislation. I would like to talk about what we did at our particular company.

    I was personally responsible for the Y2K remediation. We had an internal team that inventoried and prioritized our systems, and we have finished all of our testing and all the necessary upgrades and are currently working on finalizing our contingency plans. We have notified our customers, vendors, and suppliers that in order to continue a productive partnership that we needed to know the status of their Year 2000 readiness and that it was important to our ongoing relationship.

    The National Association of Manufacturers has been concerned about the readiness of American business and has surveyed its membership. In April 1998, only 20 percent of small businesses were not working on making their shop floor Y2K compliant. Then in November 1998, the majority of large and small companies surveyed felt that they would be remediated by June 1999.

    In a recent survey, 25 percent of the small and medium manufacturers said that, although they may be ready, they cannot determine if their vendors and suppliers will be Y2K compliant. Despite the passage last year of the Year 2000 Information and Readiness Disclosure Act, we believe that companies are not sharing information of their readiness due to fear of litigation. This fear is due to advice given by their counsel and from the fact that there are law firms advertising on how to bring Y2K lawsuits.

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    The Year 2000 is not just a liability problem. It is a serious national economic problem that will impact both large and small businesses. American business will invest billions of dollars in Y2K remediation. Our company has invested as least $100,000; and we are still working on our contingency plans. Litigation does not increase sales; it does not secure good business relationships, nor does it build the economy. Rather, litigation costs resources, severs relationships, and negatively impacts the economy. I would like to highlight some of the parts of the bill that we support.

    We support the 90-day prelitigation period. We like to let parties work out their problems before entering into contentious litigation. This legislation does not include personal injury, so legitimate injuries will be covered by current law. This bill focuses on where the bulk of the litigation will be—in contract law. It also honors the terms of existing contracts. It simply provides for a uniform system to handle Y2K problems and to recognize the incredible efforts of the American businesses that are getting ready for the century date change.

    We believe that Y2K is appropriate for proportional liability. Since most of the litigation will happen within the defined period surrounding January 1, 2000, and there could be multiple claims, we think a company should only bear the responsibility based on their percentage of fault. We believe a cap of punitive damages is important. It is not intentional or egregious conduct that will bring about the liability; but it is the result of fast-growing, highly sophisticated and technologically advanced economy. Any incentive for small business will benefit their ability to be prepared. A liability bill would encourage more remediation. Companies can devote funds earmarked for potential liability into compliance work.

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    Mr. HYDE. Ms. Bender, can you bring your remarks gracefully to a close?

    Ms. BENDER. You bet. This is a significant national problem and not a political problem. We truly believe the focus should be on remediation, not in litigation. So thank you for the opportunity to address the committee. I will answer any questions and provide any additional information as requested.

    Mr. HYDE. Thank you very much.

    [The prepared statement of Ms. Bender follows:]

PREPARED STATEMENT OF LISA BENDER, INFORMATION SYSTEMS MANAGER, FALCON PLASTICS, INC., ON BEHALF OF THE NATIONAL ASSOCIATION OF MANUFACTURERS

    Chairman Hyde and members of the Judiciary Committee, thank you for the opportunity to address the committee today regarding the Year 2000 Readiness and Responsibility Act. I am Lisa Bender, Information Systems Manager for Falcon Plastics, Inc., in Brookings, South Dakota. My mother and father-in-law, Don and Carol Bender, founded Falcon Plastics in 1975 with a 5,000 square foot plant and three employees. Today we have 250 employees, three plant locations and anticipate sales of $20,000,000 in 1999. My background is in computer science, and as the IS manager for the company I was personally responsible for managing the remediation, testing and planning of the company for Year 2000 compliance.

    Falcon Plastics is a member of the National Association of Manufacturers. The NAM is the nation's largest national broad-based industry trade group. Its 14,000 member companies and subsidiaries, including approximately 10,000 small manufacturers, are in every state and produce about 85 percent of U.S. manufactured goods. The NAM's member companies and affiliated associations represent every industrial sector and employ more than 18 million people. The NAM, on behalf of its broad membership, has been active in the Y2K issue and formed the Year 2000 Coalition, which includes more than 100 trade associations that represent virtually all business sectors including manufacturing, insurance, banking, securities and utilities as well as small and large business, public and private companies. The common bond for the coalition has been a concern with the potentially devastating impact of Y2K liability.

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    Before I address the specifics of HR 775, the Year 2000 Readiness and Responsibility Act, I would like to give you a thumbnail description of the work I managed to make our company compliant. First, we developed an internal team in 1997. Then we undertook an awareness campaign to inform our employees and suppliers about the importance and urgency of the problem. In-house, we inventoried all our software and hardware and inventoried customers and suppliers critical to our manufacturing. We set a priority of the inventoried items and plans and executed testing programs. When necessary, we implemented upgrades. If a supplier did not respond to our request for information, we sent a letter that indicated that failure to provide information could jeopardize our continued business relationship. To date we are in the process of finalizing our contingency planning.

    The NAM has also been concerned about the readiness of American businesses. They have done some internal surveying to determine the level of readiness within the membership. In April of 1998, the survey results were of concern, as 20 percent of small businesses had not started to fix their Y2K systems. In a follow-up survey in November, we were encouraged to find that the majority of large and small businesses believed that they would have their systems remediated by the end of the second quarter of 1999. The NAM also conducted another survey to determine if the members who believe they will be ready for Y2K believe that their vendors and suppliers will also be ready. This survey showed that 25 percent of the small manufacturers who responded do not know if their suppliers and vendors will be compliant. We believe that a big part of this lack of knowledge is prompted by concerns over Y2K liability.

    Despite the progress made with the passage of the Year 2000 Information and Readiness Disclosure Act (IRDA), we believe that the fear of litigation still impacts the free exchange of Y2K-readiness information. Many companies are still reluctant to share information because of the fear that the information might create a liability. This is not without reason, as many companies have been counseled that the information may not have enough protection and that the provisions under IRDA have not been litigated to see how far the courts will go in protecting information, and they are hearing from their lawyers that they need to be ready to be potentially both plaintiffs and defendants in Y2K litigation. Also, there are many law firms that are posting guidelines to bring Y2K litigation on the Internet. This fuels the ''fear'' factor that surrounds the Y2K issue—a problem that may well cause more economic damage than the underlying technical glitches.

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    Y2K is not only a serious liability concern; it is also a serious economic problem. Not only for small businesses like my company, but for all businesses, not to mention our national economy. That is why Falcon Plastics took preparedness so seriously and why we are making sure to send the same message to our customers and suppliers.

    However, we believe that part of the preparedness problem demands a focus on Y2K liability. Many of our detractors say that the existence of liability is what will stimulate companies to remediate their systems and that if a bill is passed, companies will think they don't have to do anything because they will face very limited or no liability. NOT SO. Businesses are preparing for Y2K because they want to be in business in January 2000. American companies will invest an estimated $800 billion in fixing their Y2K systems. We estimate our portion to date is at least $100,000, but rest assured it was a significant investment of resources in both dollars and time. It was, nonetheless, an investment we had to make. We are now finalizing our contingency plan. We do not want to be involved in time-consuming and lengthy litigation with customer and suppliers. Litigation does not increase sales, secure good business relationships or augment the economy. Litigation will cost business resources, sever long-term business relationships and negatively impact the economy.

    To that point, we are very supportive of the 90-day pre-litigation period provided for in HR 775. This will provide companies the opportunity to work out potential problems without immediately having to head to court. The bill has a stopgap for companies that try to beat the system. If a defendant does not respond to the notice required within 30 days, the plaintiff can immediately bring suit before the expiration of the 90-day period. We do not believe that the pre-litigation period will be a problem for businesses, particularly small businesses. Should there be failures or interruptions occasioned by the date change to January 1, 2000, most businesses would rather settle their problem as soon as possible and either get the problem fixed, receive delayed goods, or deliver products as expeditiously as possible rather than look forward to a period of filing and answering complaints, sitting for hours in depositions and waiting for a prolonged period before the case comes to trial.

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    The estimates are that the bulk of litigation involving Year 2000 will be business-to-business suits. We support the intent of this legislation to honor all terms of existing contracts. We also believe that it is appropriate to provide some mechanism for parties that have invested time and money in remediation to be able to provide evidence of these measures at trial. And we believe that plaintiffs should be required to take reasonable efforts to mitigate any Y2K problems. This is simply good business to try to work out problems rather than sitting back and increasing damages.

    We also believe that removing the threat of inestimable liability will assist in remediation. Companies that may fear liability can use reserves now being set aside for litigation to augment the monies being spent on fixing their systems. Reasonable legislative limits on damages could result in earlier settlements. Certainly, small businesses would prefer to have either a monetary payment or receipt of goods early in the year rather than wait for one to three years for the conclusion of their suit. By that time they may not even be in business.

    Also, proportional liability is reasonable for Y2K claims. As stated, the liability for Y2K will basically happen at a time certain and, with potential multiple claims, no party should be held liable for more than its share of responsibility. To do otherwise could jeopardize the viability of many businesses that have minimal liability but ''deep pockets.'' The uniqueness of Y2K makes it remarkably suitable for apportioning liability based upon fault. Never before in recent history has there been an event that presented such far-reaching liability across all business sectors at the same time. This supports the concept of proportional liability.

    There is also a provision for a cap on punitive damages. We support this concept, as we believe Y2K is uniquely appropriate to provide such a limitation. Punitive damages are designed to deter future egregious conduct. First, we do not believe that the majority of Y2K liability claims will arise out of intentional or egregious conduct. Also there is no future conduct to prevent, at least not for another 1,000 years! This all arises out of the rapid growth of technology and our economy. We do not believe that any one business sector, nor for that matter any public policy, set out to create this dilemma. We do know that many old systems have survived far beyond anyone's imagination. We have been told that many of the original computer code writers never expected that their programs would still be in use 30 years later. Our nation's growth as a world leader in technology begged for more technology and the faster the better. We have seen that happen in the growth of our own company. Unfortunately, the downside to this positive growth has been the Y2K problem.

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    However, this is not a time to encourage the ''punishment'' of the companies that have pushed our national economy, which has seen incredible growth in the last decade. Again, I can point to our company located in a relatively small community in South Dakota, to make my point. Technological advances have helped grow Falcon Plastics into a profitable and expanding business. Thus, we believe that it is no sacrifice of anyone's rights to limit the potential for punitive Y2K-related damages.

    There are also provisions in HR 775 for small-business loan guarantees and limited relief from regulatory fines when Y2K has hindered compliance. We are very supportive of provisions that will benefit small businesses, which often do not have extensive human or financial resources available to devote to remediation.

    The liability problem of Y2K is unique in that it will all occur in a defined period soon after January 1, 2000. Also, businesses are universally working at the same time to avoid problems by remediating their systems. This is not an occurrence or date that can be fixed by moving a date legislatively. Nor is this a problem that will allow for years of deliberation. This is a problem that needs to be addressed now. Taking a wait-and-see attitude will not work with Y2K, as it may be impossible to work out a reasonable liability system after the fact. But, a reasonable liability bill now can have positive impacts before the end of the year.

    In sum, on behalf of the National Association of Manufacturers and its 14,000 large and small members, we support HR 775 as a positive force to assist in getting American business to Y2K compliance. This bill will not affect any personal injury claims, and thus liability for legitimate injuries is unchanged. This legislation is a reasonable approach to providing a liability framework to deal with any potential failures or interruptions as a result of the century date change. We commend Representatives Davis, Dreier, Cox, Moran, Dooley and Kramer for sponsoring this bill, as they recognize that the Y2K problem is a serious national issue. There is an estimate of a trillion dollars in liability that could flow from Y2K. This is not only unbelievable—it is unnecessary! We welcome the committee's efforts to work on a pro-remediation, pro-economy bill. I am happy to answer any questions or provide any other materials that would be of assistance to the committee. Again, thank you for the opportunity to share my views on this legislation.

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    Mr. HYDE. Mr. Lewis.

STATEMENT OF BILL LEWIS, CEO, PROSPECT TECHNOLOGIES

    Mr. LEWIS. Mr. Chairman and members of the committee, I am Bill Lewis, president and chief executive officer of Prospect Technologies. Our firm employs 23 individuals dedicated to providing information solutions for corporations, government agencies, both here in the United States and internationally. Our business includes computer hardware manufacturing, computer software, and consultative services. I also come to you today as a member of the United States Chamber of Commerce's small business council.

    Working with organizations like United States Coast Guard, the Federal Maritime Commission, the Department of Defense, Princeton University, Enterprise Rent-a-Car, and McGraw-Hill, we provide solutions that helped dramatically improve business processes through the use of technology and the Internet.

    As we approach the new millennium, technology represents one of America's greatest accomplishments as well as one of its greatest challenges. Technology has helped American business to become much more efficient and more able to compete with our foreign counterparts. But as we have become so reliant on technology, we have become more vulnerable to the problems of that technology. I raise the issue of risk and reward as it relates to technology because each day Prospect Technologies must continually ensure that our products and services work to enhance our customers' business operations and not complicate, nor interfere with, their normal operations.

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    As a result, I am continuously challenged as chief executive officer to check and double-check that our products and services do not adversely affect our customers.

    I come to you today concerned about Y2K litigation because I am potentially both a defendant and a plaintiff in this matter. My clients rely on me to certify that the hardware and software that we manufacture and sell to them will not crash on January 1, the Year 2000. Because we are using the latest technology from corporations like Intel, Advanced Micro Devices (AMD), MicroSoft and others, we have been ensured that their microchips and software are in fact Y2K compliant. I am not necessarily concerned about the computers as they leave our manufacturing site. But I am concerned about what happens once they are shipped to our clients. And the clients begin loading their own application software and other operating software to run such things as payroll, scheduling, or some manufacturing system. If those programs are not Y2K compliant, most likely I will be the first one that they will call to report the problem because I am the manufacturer of that computer.

    In all of my company's business dealings, we have always approached the technical problems with the attitude as reasonable businesspeople we should reason together to find a solution instead of pointing fingers or looking for the blame. To put it another way, we want to fix the problem, not litigate the problem.

    We have taken this approach because, quite frankly, we have to. Unlike a Fortune 500 company, Prospect Technologies does not have a dedicated legal team or millions of dollars of reserve for such issues. Instead, I focus on what I do best, that is, providing leading edge technology solutions to make companies and government more efficient. As I mentioned before, I could also become a plaintiff in Y2K-related issues. Obviously, as a manufacturer of computers, I must rely on my suppliers to provide these necessary parts. If an issue occurs, I do not expect, however, to receive punitive damages because quite frankly I don't want to punish my suppliers. They are my business partners.

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    I reviewed the provisions of H.R. 775 and as a small business owner who can become both a plaintiff and defendant in the Y2K litigation, I fully support the bill's appropriate dealing with this complicated issue. Specifically and very briefly, number one: we support strongly the provisions dealing with alternative dispute resolution. Number two, we agree with the protection for the 30-day notice for potential defendants and allow them 60 days to fix this problem. And number three, concerning the caps on punitive damages, we strongly believe that this bill will discourage frivolous lawsuits for those seeking to get rich from someone else's misfortune.

    All the problems associated with Y2K, the least of my concerns is that can we fix this problem. My greater fear is having our limited resources used to defend our suit in case we as a firm are sued.

    Again, Mr. Chairman, I thank you very much on behalf of the employees of Prospect Technologies, and thank you for having me here today.

    [The prepared statement of Mr. Lewis follows:]

PREPARED STATEMENT OF BILL LEWIS, CEO, PROSPECT TECHNOLOGIES

    Mr. Chairman and members of the committee, I am Bill Lewis, President and Chief Executive Officer of Prospect Technologies a small business headquartered in the District of Columbia. Our firm employs 23 individuals dedicated to providing information solutions for corporations and government agencies both here in the United States and internationally. Our business includes computer hardware manufacturing, computer software, and consultative solutions. I also come before you as a member of the U.S. Chamber of Commerce's Small Business Council.

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    Working with organizations like the U.S. Coast Guard, the Federal Maritime Commission, the Department of Defense, Princeton University, Enterprise Rent-a-Car, and McGraw Hill, we provide solutions that help to dramatically improve business processes through the use of technology and the Internet.

    As we approach the new millenium, the greatest issue that we face as an ongoing concern is the Year 2000 computer problem. I would like to take a moment to commend you, Mr. Chairman, for holding this hearing. I also want to thank you and the other members of the Committee for the leadership you have provided on this and other issues important to the business community. In addition, I would like to take a moment to commend not only the members of this Committee, but also Representatives Davis, Dreier, Cox, Moran, Cramer and Dooley for their leadership on H.R. 775, the ''Year 2000 Readiness and Responsibility Act''—legislation that will help to encourage businesses to fix the Y2K problem rather than litigating over it.

    As we approach the new millenium, technology represents one of America's greatest accomplishments as well as one of its greatest challenges. Technology has helped American business to become more efficient and more able to compete with our foreign counterparts, but as we have become so reliant on technology, we become more vulnerable to problems with that technology. To my company's clients and me, the benefits far outweigh problems and we should continue to explore new opportunities for improving products and services as well as competing more efficiently around the world.

    I raise the issue of risk and reward as it relates to technology, because each day, Prospect Technologies must continually ensure that our products and services work to enhance our customers' business operations and not complicate or interfere with their normal operations. As a result, I am continually challenged as the President and Chief Executive Officer to check and double check that our products and services do not adversely effect one of our customers. I come to you today concerned about Y2K litigation as potentially both a defendant and a plaintiff.

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    My clients rely on me to certify that the hardware and software that we manufacture and sell to them will not crash on January 1, 2000. As a manufacturer of computers, each component must be certified that it is capable of knowing that ''00'' means the Year 2000 and not the year 1900. Because we are using the latest technology from corporations like Intel, Advanced Micro Devices (AMD), Microsoft, and others, we have been assured that their microchips and software are in fact Y2K compliant. We are also confident that all other components are in compliance.

    I am not necessarily concerned about computers as they leave our manufacturing site, but what happens to them once they are shipped to the client. Once we ship the basic computer, clients load their own application software and other operating software to run such programs as scheduling, payroll, and manufacturing systems. If those programs are not Y2K compliant, most likely I will be the first person they call to report a problem because I am the manufacturer of the computer.

    In all of my company's business dealings, we have always approached such technical problems with the attitude that, as responsible businesspeople, we should reason together to find the solution instead of pointing fingers or looking for blame. Put another way, we want to fix the problem and not litigate it.

    We have taken this approach because—quite frankly—we have to. Unlike a Fortune 500 company, I don't have a dedicated legal team or millions of dollars in reserve for such issues. Instead, I focus on doing what I do best and that is providing leading-edge technology solutions for companies wishing to have more efficient and productive business operations. I must say that with very few exceptions, my customers respect our approach to handling complications. They recognize that if my staff and I are in court defending our livelihood, it becomes almost impossible to provide the solutions that are going to make their businesses better.

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    As I mentioned earlier, I could also potentially become a plaintiff in Y2K related problems. Obviously as a manufacturer of computers, I must rely on my suppliers to provide the necessary parts according to our contractual obligations. A situation could arise in which a supplier's manufacturing system shuts down or is delayed thus preventing me from receiving the parts I need to meet my contracts. My first approach with the supplier would be to try to work out the problem. If that fails and I suffer damages, I would expect to have appropriate compensation for those damages. I do not expect, however, to receive punitive damages because—frankly—I don't want to punish my suppliers and there shouldn't be such damages in this instance.

    When I started the business, I knew I would take risks and hopefully be rewarded, but there were no guarantees. I understood this from the beginning and I instill this attitude in every one of my company's employees. In my business plan, I never said that even if I fail, I will get rich by suing someone for something they may have done wrong or for something outside of their control. This is not the attitude of an American businessperson but rather the attitude of a person looking to make a quick buck at the expense of others!

    I have a special obligation to the men and women that work for my company in that we are their livelihood. Their income provides their family and their community with the means to function. To that end, I am taking every precaution to ensure that the Y2K bug does not adversely effect their livelihood and that is why I support H.R. 775.

    I have had an opportunity to review the provisions of H.R. 775, and as a small business owner who could be both a plaintiff and a defendant in Y2K litigation, I fully support this bill's approach to dealing with this complex issue. More specifically:

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The provisions dealing with alternative dispute resolution will encourage business owners to work together and find alternatives to litigation for solving their Y2K problems.

Because I have faith in my customers to approach technology glitches with a sense of reason, I should also give my suppliers the same courtesy. To that end, I agree with the provision to provide a 30-day notice to a potential defendant and allow them 60 days to fix the problem. I suspect, however, that in many cases it will not even take 60 days. This provision corresponds with our company's philosophy of trying to come together and find reasonable solutions to fixing problems.

I don't think it comes as a surprise to anyone who has been in business, but unfortunately sometimes, it is necessary to threaten legal action to resolve an issue. The problem with doing so is that it requires me to prepare for such a suit and spend my limited resources to hire a qualified attorney. After the initial steps are completed, often, the defendant realizes that it must address the issue and the case settles. Unfortunately for me, I had to spend the money on an attorney and more importantly, it robbed me of valuable time that could have been spent working on my customer's needs.

I firmly believe that the notice and cure provisions of this legislation will help alleviate the vast majority of the problems associated with Y2K. I say this, because many business owners will appreciate the fact that once a problem is identified, they would have a specific length of time in which the issue would have to be resolved before having to go to court.

Concerning caps on punitive damages, I strongly believe that this bill will discourage frivolous lawsuits filed by those seeking to get rich from someone else's misfortune. Small business owners like me are working diligently to fix the problem. If, however, parties are able to play in a legal lottery and reap huge punitive awards from this situation it will truly represent a significant setback for the small business community.

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    Small business owners like myself fight every day to ensure payrolls are met, bills are paid, and that our competitors don't get ahead of us. Working 90–100 hours per week does not provide a lot of time for other things. If, during the course of the Year 2000 computer problem, I have to add days of time to become a plaintiff or defendant in Y2K legal proceedings, it will cause my corporation, my employees, their families, and their communities to suffer. Time spent in court will take precious time away from not only me, but also several of my employees. This time could be much better spent fixing the problem, innovating, and providing services to our clients.

    Of all the problems associated with the Y2K, the least of my concerns has been whether we can fix the problem. My greatest fear is having to use our limited resources to defend ourselves or file lawsuits. I encourage this Committee, members of the House of Representatives and the Senate to favorably consider and enact either H.R. 775, the Y2K legislation introduced by Senators Hatch and Feinstein or the Y2K legislation introduced by Senator McCain. This legislation will help to not only protect small business owners like me from frivolous lawsuits, but it will help protect future innovations that will provide incredible benefits for tomorrow. Both consumers and business owners should have the opportunity to seek damages caused by Y2K but this should not become a bonanza or payday for individuals looking to make an easy buck.

    Again, Mr. Chairman and the members of the Committee, on behalf of the employees and customers that I represent, thank you for having me here today and for your thoughtful leadership in dealing with this critical issue.

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    Mr. HYDE. Ms. Wylie.

STATEMENT OF JANET WYLIE, PRESIDENT AND CEO, HCL JAMES MARTIN, INC.

    Ms. WYLIE. Mr. Chairman and members of the committee, thank you for the opportunity to appear before you today and tell my story.

    My name is Janet Wylie. I am the President and Chief Executive Officer of HCL James Martin, which is a professional services firm in the information technology industry, headquartered in Fairfax, Virginia.

    HCL James Martin was formed in July 1996 to help companies transform their businesses through the use of information technology. Most of our work is in what we call systems redevelopment—upgrading, refreshing, and migrating existing technology versus building new systems. Currently, we have 127 employees that support clients in seven States and three countries. Most of our clients are Fortune 1000 companies.

    Because of the point in time that our company was formed, a significant part of our business has been in fixing Y2K problems for our clients. We perform business assessments, technical impact assessments, and we have engaged in testing the remediated systems.

    Since we are a new firm and mostly concentrate on transforming existing systems, it is important to note that our firm is not in any way responsible for any of the Year 2000 problems that exist today.

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    Like most of you, we have read the cost estimates for the Year 2000 litigation. The numbers are absolutely staggering, in the trillions of dollars. Some larger firms have actually refused to do this kind of work mostly because of the fear of litigation. Because we are a small firm and in our start-up phase during the period where our clients were trying to fix their Year 2000 problems, we did not turn this work away.

    As the chief executive of the company, I have tried to act responsibly toward my investors and shareholders by protecting the company as best I can when performing the Year 2000 work. We purchased errors and omissions insurance, directors' and officers' liability insurance, and we developed very tight warranty and limitation of liability clauses in our contracts. I cannot, however, be assured nor can I ensure my board of directors or my shareholders that even though we were not responsible for any of the Year 2000 problems that are out there that exist today, that we will not be bombarded with frivolous and excessive Year 2000-related litigation.

    I must tell you about a conference I attended in Amsterdam in September 1997. I was speaking about the use of automated tools, how clients can use tools to speed up the Year 2000 remediation in order to complete their projects on time. As I was flipping through the program notes I learned, much to my horror, that one of my fellow speakers was an attorney whose topic was how clients like mine can sue firms like mine to get their Year 2000 remediation work done for free.

    I immediately returned from the conference and once again reviewed our contract terms and insurance limits. I subsequently took out a personal liability policy to protect myself in the event that as a director and an officer, I am a target in excess of my company's limits of liability. I have done everything that I can to protect my firm. But what about other small firms who couldn't or didn't spend the several thousands of dollars in premiums or had several different attorneys review their contract clauses?

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    This is why I must support H.R. 775. All of us in the business world understand the obligation to our clients to provide effective and safe products and services, and we understand our contractual liability for failing to exercise due care in performing our obligations. But our clients are being bombarded by messages from attorneys—who, by the way, have started entire practices centered around Year 2000 litigation—that they can and, in fact, should sue anybody and everybody who has ever touched their systems in the past several years and recoup the cost of their remediation through litigation.

    Additionally, many insurance carriers have stopped writing this type of liability coverage, and in fact are notifying existing clients like me that their current coverage may not protect them. While we are very motivated by the desire to help our clients resolve their Year 2000 problems, I must keep in the forefront of my mind the possibility of litigation and what it could mean to a small company such as mine.

    If any of you have had the unfortunate experience of being sued, you know that frivolous and excessive litigation is both time-consuming and expensive and has a negative impact on your business and your life, even if in the end you win every case. H.R. 775 provides a fair, fast, and predictable mechanism for the resolution of legitimate conflicts. It limits liability to actual losses and provides companies with an opportunity to fix their problems in the computer room instead of the courtroom.

    Thank you.

    Mr. HYDE. Thank you, Ms. Wylie.

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    [The prepared statement of Ms. Wylie follows:]

PREPARED STATEMENT OF JANET WYLIE, PRESIDENT AND CEO, HCL JAMES MARTIN, INC.

    Mr. Chairman, and members of the Committee, thank you for the opportunity to appear before you and testify regarding HR 775, the ''Year 2000 Readiness and Responsibility Act.''

    My name is Janet Wylie, and I am the President and Chief Executive Officer of HCL James Martin, a professional services firm in the information technology industry.

    HCL James Martin was formed in July 1996 to help companies transform their businesses through the use of information technology. Most of our work is in systems redevelopment—upgrading, refreshing, and migrating existing systems, versus building new systems. Currently we have 127 employees that support clients in seven states and three countries. Most of our clients are Fortune 1000 companies.

    Because of the point in time that our company was formed, a significant part of our business has been in helping our clients overcome their Year 2000 computer problems. We have performed business assessments, technical impact assessments, have remediated code, and have been engaged in testing remediated systems. Since we are a new firm and have thus far concentrated mostly on transforming existing systems, it is important to note that we are not in any way responsible for any of the Year 2000 problems that exist today.

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    Like most of you, we have all read the cost estimates of Year 2000 litigation. The numbers are staggering—in the trillions of dollars. Some larger firms have refused to do Year 2000 work for their clients because of this threat of litigation. Because we are a small firm and were in our start-up phase during the period when most firms were correcting this problem, we did not turn this work away.

    As the chief executive of this company, I have tried to act responsibly towards my investors and shareholders by protecting the company as best I can when performing Year 2000 services for our clients. We have purchased errors and omissions insurance, directors and officers insurance, and have written very tight warranty and limitation of liability clauses in our contracts. I cannot, however, be assured, or ensure my board of directors or my shareholders that—even though we were not responsible for any of the Year 2000 problems that our clients may experience—that we will not be bombarded with frivolous and excessive Y2K-related litigation. I must tell you about a conference I attended in Amsterdam in September of 1997. I was speaking about the use of automated tools in Year 2000 remediation—how clients can use tools to speed up their Year 2000 projects in order to complete them on time. As I was flipping through the program notes, I learned, much to my horror, that one of my fellow speakers was an attorney whose topic was how clients can sue firms like mine to get their Year 2000 remediation work done for free!

    I immediately returned from the conference and reviewed once again our contractual terms and conditions, and our insurance limits. I subsequently took out a personal liability policy to protect myself, in the event that as a director and an officer, I am the target of litigation in excess of my company's insurance limits. I have done everything I can to protect my firm, but what about other small firms who couldn't or didn't spend the several thousands of dollars on insurance premiums or have several attorneys review their contract clauses?

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    This is why I must support HR 775. All of us in the business world understand our obligations to our clients to provide effective and safe products and services and understand our contractual liability for failing to exercise due care in performing these obligations. But our clients are being bombarded with messages from attorneys—who have started entire practices centered around Year 2000 litigation—that they can sue anybody and everybody who has touched their systems in the past several years, and recoup the costs of their remediation through this litigation. Additionally, many insurance carriers have stopped writing this type of liability coverage and are notifying existing clients that their current coverage may not protect them.

    While we are very motivated by our desire to help our clients resolve their Year 2000 problems, I must keep in the forefront of my mind the possibility of litigation, and what it could mean to a small company such as mine. If any of you have had the unfortunate experience of being sued, you will know that frivolous and excessive litigation is time consuming and expensive and has a negative impact on your business and your life, even if in the end, you win every case. I would be remiss as chief executive officer, if I did not evaluate every Year 2000 opportunity for risk and decline to help those clients whose possible litigation could put my company in jeopardy. Unfortunately, this situation is distracting and is counterproductive to building client relationships and growing a business.

    HR 775 provides a fair, fast, and predictable mechanism for the resolution of legitimate conflicts. It limits lawsuits by providing potential defendants with an opportunity to fix Y2K problems outside the courtroom. It limits liability to actual damages, and to those damages caused by the defendant, not by some other firm who may have done work in the past for the same client.

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    It does not radically reform the nation's tort law, but specifically deals with aspects that are unique to the Year 2000 challenges that businesses are facing. This is why I must support HR 775, and why I urge you to support it as well. Thank you.

    Mr. HYDE. Mr. Yarsike.

STATEMENT OF MARK YARSIKE, PRESIDENT, PRODUCE PALACE INTERNATIONAL

    Mr. YARSIKE. Chairman Hyde, Congressman Conyers, Members of Congress, I am a small businessman from Warren, Michigan. I am also the first person who ever filed a Y2K suit and, as you will hear, filing this suit was my absolute last resort that literally saved my business. It is an honor for me to appear before you today.

    Before I say anything else, I would like to express my thanks to you, Mr. Chairman, for inviting me here today. I think that with all due respect for those who make their living by lobbying and by supporting the interests of others, often the voice of real Americans, those who are directly impacted by the legislation that is passed in Congress, is not heard.

    I am encouraged to see that you would take the time to listen to someone like me. I have no ax to grind. I am not fighting for any agenda. I am just here to tell my story and to let you know how the Year 2000 affected one small businessman from Warren, Michigan.

    I am also here to tell you that this bill being considered, if through, would have put me out of business. It would have literally forced me to shut my doors and lay off all of my employees. I don't say this lightly. I know that Congress is trying its best to fix this difficult problem.

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    My message for you is this: Be very, very careful because the current system works. It worked for me. It works for thousands of others. Don't punish small businessmen like me who go to court for some measure of relief when a problem not of their making threatens their very existence. Don't make me a villain simply because I am given the title of plaintiff in remedying the situation.

    I own and am partners in a produce market in the Detroit suburbs. My parents opened a very small store in the Detroit suburbs after arriving in the States from Poland and taught me everything I know about business. They believed in hard and honest work and would be horrified to see the way some companies are profiteering off others in the Y2K craze. That is what happened to me, profiteering, plain and simple, and this bill would have prevented me from getting any justice.

    My parents had a cheap $500 dollar cash register in the store. It was basic, but it worked. When I opened my store, I decided to take advantage of the most current technology. I spent almost $100,000 for the best computer system available.

    The company that I purchased spent hours explaining the virtues of the system. They sent a salesman from Chicago. They sent me sales literature and they promised it would last well into the 21st century, and I believed them. Opening day, as soon as people began to choose their purchases, deep lines began to form. With horror, I realized the Y2K glitch in my brand new system was causing my registers to crash. This continued day after day. Lines were 10 to 20 people deep. People were getting full carts of groceries but couldn't pay. We could not process a single credit card, take cash or check. We could not make one sale. People began drifting out, leaving full carts of groceries behind. Many, I would venture, never returned. This happened over and over.

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    We did what anybody else would do. We called TEC America. We did not go to court. Going to court costs money. All we wanted to do was get the registers to work. We called them over 200 times. The company declared that it was doing its best to fix the problem but refused to give us another system to use while they fixed the broken one.

    Each time that their representative visited the shop, the company insisted that the problem was solved, only to have the registers fail hours again later. I lost thousands of dollars and hundreds of customers. I was on the brink of financial disaster. I could not focus on the day-to-day operations of my business. I think that it is fair to expect more for $100,000.

    I finally went out and bought a brand new system which cost $130,000. I should have bought the $500 registers my parents used when they arrived from Poland. At least those worked.

    The worst part is that after giving them over 200 chances to do the right thing, I was getting absolutely no satisfaction from the computer company which put me in this fix in the first place.

    I finally turned to the court system. I approached an attorney and filed a case in Macomb County, Michigan. The system worked perfectly for me. The company that caused all of this grief settled, once faced with the prospect of explaining their actions to a jury of my peers in Macomb County, Michigan. I was able to recoup some of my losses.

    I want to make it clear that I, like any businessman, only turned to the court system as a last resort. I didn't want to do so, but every businessman needs to know that the system is there for them if they need it. This bill would put up so many hurdles and delays that it would effectively take away that right from me. There are a number of very disturbing pieces of this bill which would quite literately put me out of business had this been the law at the time I had my Y2K difficulties.

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    First, the 90-day waiting period. Take it from a real small businessman who works day to day in order to make ends meet, waiting 3 full months to have the ability to even begin to bring a claim would destroy thousands of small businesses. While TEC dragged its feet, every single day I was getting closer to the point where I couldn't open my doors anymore; 90 more days would have been too much.

    Realistically, any small businessman is going to try and get the company to fix the problem before they turn to a lawyer. Why would I hire and pay for a lawyer before taking the simple step of making a phone call to the company? The problem is that some companies don't do the right thing once you call. I called over 200 times in 2 years, and they still couldn't fix my problem. After all of that and after trying to work with the company, I am supposed to wait another 3 months? That very well may be encouraging business people like me not to try to work out their disputes privately. You seem to be saying: Sue first and get the 90-day clock running if you want to resolve the situation.

    Next, why is everybody so worried about the software and hardware companies? What about the little guy who is the end user of a defective product?

    I am almost done, Mr. Chairman.

    Mr. HYDE. Surely.

    Mr. YARSIKE. The very people who caused this problem in the first place get all the breaks in this bill. They get to ignore the State law provisions that protect me against the unscrupulous in all other industries—implied warranties and State fraud statutes. They also get limitations on damages, limitations on joint and several liability. What do I get, besides a more difficult standard to prove if I finally manage to jump through the procedural hoops and get to court? And why are some in Congress so worried about protecting the Board of Directors and upper management of big Fortune 100 companies? Why is this the first thing that Congress does? What about the little guy?

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    Third, I would love to see legislation that holds the companies that are profiteering off of this problem be held responsible. The company that I bought my system from got away with their profit intact. If a company sells a faulty product and doesn't fix it, they should be held responsible. That is the way that I see this bill. Congress could pass a bill on June 1 to let the companies off the hook. Then on June 2 these same companies could put noncompliant products into the marketplace, knowing that when these products fail they will be protected. That is ridiculous. Let's actually do something that fixes the problem. Senator Bond's bill making more SBA loans available is a perfect example of a helpful bill.

    Finally, if Congress is hell-bent on passing some kind of liability protection bill for large software manufacturers, at least exclude small businesses who may end up being plaintiffs because they suffer commercial loss from software defects. Let the big guys cope with this new scheme if they want, but not us who have to make payrolls and who need the protection of State laws.

    I know that Congress is really trying to help. But before you act, I now hope you will consider what this legislation will do to the small businessman. I know that is why you have allowed me to share my story, and I am grateful you provided me the opportunity to testify today. I will be happy to try to answer any questions that you have.

    Thank you.

    Mr. HYDE. Thank you very much, Mr. Yarsike.

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    [The prepared statement of Mr. Yarsike follows:]

PREPARED STATEMENT OF MARK YARSIKE, PRESIDENT, PRODUCE PALACE INTERNATIONAL

    Chairman Hyde, Congressman Conyers, Members of the Committee, my name is Mark Yarsike, and I am a small businessman from Warren, Michigan. I am also the first person in the world to ever file a Y2K suit. And, as you will hear, filing this suit was my absolute last resort—but it literally saved my business. It is an honor for me to appear before you today.

    Before I do anything else, I would like to express my thanks to you, Mr. Chairman, for inviting me here today. I think that—with all due respect to those who make their living by lobbying and by supposedly representing the interests of others—often the voice of ''real'' Americans—those who are directly impacted by the legislation that is passed in Congress—is not heard. I am encouraged to see that you would take the time to listen to someone like me. I have no ax to grind; I'm not fighting for any hidden agenda. I'm just here to tell you my story, and to let you know how the Y2K issue affected one small businessman in Michigan.

    I'm also here to tell you that this bill being considered today would have put me out of business. It would have literally forced me to shut down my doors and lay off my employees. I don't say that lightly. I know that Congress is trying its best to fix a difficult problem. My message for you is this: be very careful, because the current system works. It worked for me. It works for thousands of others. Don't punish small businessmen like me who may well need to go to court to get some measure of relief when a problem not of their making threatens their very existence. Don't paint me a villain simply because I am given the title of ''plaintiff'' in remedying the situation.

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    I own a gourmet produce market in the Detroit suburbs. My parents, who opened their own small store in Detroit after arriving in the States from Poland, taught me everything I know about business. They believed in hard work and honest business, and would be horrified to see the way some companies are profiteering off of others in this Y2K craze. That's what happened to me—profiteering, plain and simple. And this bill would have prevented me from getting any justice.

    My parents had a cheap $500 cash register in their store. It was basic, but it worked. When I opened my store, I decided to take advantage of the most current technology. I spent almost $100,000 for the best computer system available. The company that I purchased the system from spent hours extolling the virtues of the system—they sent a salesman from Chicago, they sent me sales literature, they promised that the system would last well into the 21st Century. I believed them.

    Opening day. As people began to choose their purchases, deep lines began to form. With horror, I realized that a Y2K glitch in my brand new $100,000 system was causing all of my registers to crash. This continued day after day. Lines were ten to twenty people deep. People were waiting with full carts of groceries to pay but couldn't. We could not process a single credit card or take cash or checks. We could not make one sale. People began drifting out, leaving full carts of groceries behind. Many, I venture, have never returned. This happened over and over.

    We did what anyone would do. We called TEC America, which had sold us the registers. We did not go to court. Going to court costs money; all we wanted was to get registers that worked. So we called them over 200 times.

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    The company declared that it was doing its best to fix the problem, but refused to give us another system to use while they fixed these broken ones. Each time their technician visited our shop, the company insisted that the problem was solved—only to have the registers fail again hours later.

    I lost thousands of dollars and hundreds of customers. I was on the brink of personal and financial disaster. I could not focus on the day-to-day operations of my business. I think it's fair to expect more for $100,000. I finally had to go out and buy a brand new system. I should have bought the $500 dollar registers my parents used when they arrived from Poland—at least those worked. The worst part was that, despite having giving them over 200 chances to do the right thing, I was getting absolutely no satisfaction from the computer company which put me in this fix in the first place.

    I finally turned to the court system. I approached an attorney and we filed a case in Macomb County, Michigan. The system worked perfectly for me. The company that caused all this grief settled once faced with the prospect of explaining their actions to a jury of my peers in Macomb County. I was able to recoup some of my losses.

    I want to make clear that I—like any businessman—only turned to the court system as a last resort. I didn't want to do so—but every businessman needs to know that the system is there for them if they need it. This bill would put up so many hurdles and delays that it would effectively take away that right from me.

    There are a number of very disturbing pieces of this bill which would quite literally have put me out of business had this been the law at the time I had my Y2K difficulties.

 Page 82       PREV PAGE       TOP OF DOC

    First, the 90 day waiting period. Take it from a real small businessman who works day to day in order to make ends meet. Waiting three full months to have the ability to even begin to bring a claim would destroy thousands of small businesses. While TEC dragged its feel, every single day I was getting closer to that point where I couldn't open my doors anymore. 90 more days would have been too much.

    Realistically, any small businessman is going to try and get the company to fix the problem before they turn to a lawyer. Why would I hire and pay for a lawyer before taking the simple step of making a phone call to the company? The problem is that some companies don't do the right thing once you call. I called over 200 times and they still didn't fix the problem. So, after all that, after trying to work with the other company, I'm supposed to wait another three months? That very well may be encouraging business people like me not to try to work out their disputes privately. You seem to be saying: sue first and get the 90-day clock running if you want to resolve the situation.

    Next, why is everyone so worried about the software and hardware companies? What about the little guy who is the end user of a defective product? The very people who caused this problem in the first place get all the breaks in this bill. They get to ignore the state law provisions that protect me against the unscrupulous in all other industries—implied warranties, state fraud statutes. They also get limitations on damages, limitations on joint and several liability . . . what do I get, besides a more difficult standard to prove if I finally manage to jump through the procedural hoops and get to court? And why are some in Congress so worried about protecting the Board of Directors and upper management of big Fortune 100 companies? Why is this the first thing that Congress does—what about the little guy?

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    Third, I would love to see legislation that holds the companies that are profiteering off of this problem responsible. The company that I bought my system from got away with their profit intact. If a company sells a faulty product and doesn't fix it, they should be held responsible. The way I see this bill: Congress could pass a bill on June 1 to let the companies off the hook. Then on June 2 these same companies could put non-compliant products into the marketplace—knowing that when these products fail, they will be protected. That's ridiculous. Let's actually do something that FIXES the problem. Senator Bond's bill making more SBA loans available is a perfect example of a helpful bill.

    Finally, if Congress is hell-bent on passing some kind of liability protection bill for large software manufacturers, at least exclude small businesses who may end up being plaintiffs because they suffer commercial loss from software defects. Let the big guys cope with this new scheme if they want, but not us who have to make payrolls and who need the protection of state laws.

    I know that Congress is really trying to help. But, before you act, I now hope you will consider what this legislation will do to the small businessman. I know that is why you have allowed me to share my story, and I am grateful you provided me the opportunity to testify today. I will be happy to try and answer any questions you may have.

    Mr. HYDE. Mayor Greenup.

STATEMENT OF H. WILLIAM GREENUP, MAYOR, CITY OF FREDERICKSBURG, VA

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    Mr. GREENUP. Mr. Chairman, my name is H. William Greenup, and I am the Mayor of Fredericksburg, Virginia. I am pleased to be able to testify before the committee today on behalf of the National League of Citiess.

    NLC was founded in 1924 by State municipal leagues who sought national representation before Congress on municipal issues. NLC is the oldest and largest national organization representing municipalities and their elected officials, 135,000 mayors and council members from municipalities across the country.

    Over 75 percent of NLC's members are from small cities and towns with populations of less than 50,000, yet we also represent every one of the Nation's largest cities.

    We are grateful to Representatives Davis, Dreier, Cox, Moran, Cramer, and Dooley for their efforts in drafting the Year 2000 Readiness and Responsibility Act, which we believe to be a good and timely effort to resolve several important issues in the area of Y2K liability. On behalf of NLC, I would like to thank the House Judiciary Committee for the opportunity to discuss the concerns and needs of municipalities in the critical area of Y2K liability.

    Our Nation's cities and towns consider the millennium bug to be a very serious matter with potentially dire consequences, not just in the arena of possible systems failures, but also in the area of potential liability against municipalities for those system failures. NLC believes that costly and time-consuming litigation for Y2K-related system failures is not a mere threat, but a reality. In fact, the State of Alabama is already the named defendant in a Y2K class action suit. It is only a matter of time before cities and towns are sued because we are viewed as deep pockets. There is an urgent need for Federal legislation to protect local government entities where there is no State law to do so.

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    In my city of Fredericksburg, Virginia, we have set up a Y2K preparedness committee. The committee has formed working partnerships with neighboring jurisdictions as well as our State Department of Emergency Services in order to form a more regional approach to Y2K. Despite all of our well-intentioned efforts, however, a Y2K-related problem may still occur. In the event that this happens, we need to be protected from debilitating litigation costs. The more funds we are forced to siphon off for preparing to anticipate litigation, the less efficient and effective we will be in serving our taxpayers.

    Several States have already passed State immunity laws which protect municipalities from liability in the event of a Y2K systems failure. At least 29 other States are currently considering Y2K legislation during 1999 legislative sessions. It is important therefore that any proposed Federal legislation not preempt these important State laws. It is equally important for municipalities located in States without any Y2K liability protections to obtain the protections offered by this Federal legislation to the same degree that they are offered to the business community.

    It is crucial that Congress understands that the Y2K problem is not just a business or a corporate problem. It will impact local governments as well. Moreover, the more any Federal legislation protects businesses and corporations, the greater the liability which will be shifted onto the backs of taxpayers.

    The local government's protection from liability permits them to focus on carrying out their day-to-day functions and providing the all important services to the citizens of their communities free from the fear of costly and time-consuming litigation.

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    Fear of litigation should not be what motivates local government. Service to their citizens must remain their sole motivation. The sovereign immunity of our cities and towns granted to them by the States must be protected.

    NLC believes that the 90-day notification period contained in Section 101 of the act provides a valuable tool for avoiding such costly litigation. This notification procedure would promote remediation, not litigation. NLC strongly supports the inclusion of the ''good faith efforts'' defense presented in Section 302 of the act. It is crucial that cities not be held responsible for damages in Y2K-related cases absent actual knowledge or reckless disregard of a substantial risk. Additionally, the ''reasonable efforts'' defense outlined in Section 303 of the Year 2000 Readiness and Responsibility Act is critical to limiting the litigation concerns of local governments.

    Many cities and towns nationwide have addressed the Y2K problem. It is, however, impossible to know which systems will work and which will not, despite the best testing efforts, until the turn of the century. Unexpected problems can arise causing a Y2K problem, which were in no way foreseeable by the local government. It is for these reasons that NLC supports the inclusion of ''good faith'' and ''reasonable effort'' defenses contained in the act.

    Thank you again on behalf of the NLC for providing us with this opportunity to present our views to the committee. We look forward to working with you toward passage of a Y2K liability bill that will represent the interests of the cities and towns.

    Mr. GOODLATTE. [Presiding.] Thank you, Mayor, and as a fellow Virginian, I want to welcome you to the panel.

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    [The prepared statement of Mr. Greenup follows:]

PREPARED STATEMENT OF H. WILLIAM GREENUP, MAYOR, CITY OF FREDERICKSBURG, VA

    My name is H. William Greenup and I am the Mayor of Fredericksburg, Virginia, as well as a member of the National League of Cities' Public Safety and Crime Prevention Steering Committee. I am pleased to be able to testify before the Committee today on behalf of the National League of Cities. NLC was founded in 1924 by state municipal leagues that sought national representation before Congress on municipal issues. NLC is the oldest and largest national organization representing municipalities and their elected officials, 135,000 mayors and council members from municipalities across the country. Over 75 percent of NLC's members are from small cities and towns with populations of less than 50,000 yet we also represent every one of the nations largest cities.

    First, I am grateful to Representatives Davis, Dreier, Cox, Moran, Cramer and Dooley for their efforts in drafting the ''Year 2000 Readiness and Responsibility Act'' (H.R. 775), which I believe to be a good and timely effort to resolve several important issues in the area of Y2K liability. On behalf of NLC, I would like to thank the House Judiciary Committee for the opportunity to discuss the concerns and needs of municipalities in the critical area of Y2K liability. Our nation's cities and towns consider the millennium bug to be a very serious matter with potentially dire consequences, not just in the arena of possible systems failures, but also in the area of potential liability against municipalities for those systems failures. NLC believes that costly and time-consuming litigation for Y2K related systems failures is not a mere threat, but a reality. In fact, the State of Alabama is already the named defendant in a Y2K class action lawsuit. It is only a matter of time before cities and towns are sued because we are viewed as ''deep pockets.'' There is an urgent need for federal legislation to protect local government entities from liability where there is no state law to do so.

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In my city of Fredericksburg, Virginia, we have set up a Y2K Preparedness Committee which includes representatives from the fire department, fiscal affairs, Information Systems, Parks, Recreation and Public Facilities, Police and Public Works. To date, this committee has performed an audit of the Year 2000 services and equipment and the City has identified its critical services and equipment for compliance and is working to establish compliance dates. The Committee has also formed working partnerships with neighboring jurisdictions such as Spotsylvania, Stafford and Caroline Counties as well as the State Department of Emergency Services in order to form a more regional approach to Y2K. Despite all of our well-intentioned efforts, however, a Y2K-related problem may still occur. In the event that this happens, we need to be protected from debilitating litigation costs. The more funds we are forced to siphon off for preparing to anticipate litigation, the less efficient and effective we will be in serving our taxpayers.

Many states, including South Dakota, Georgia, Hawaii, and Nevada, have already passed state immunity laws which protect municipalities, as political subdivisions of the state, from liability in the event of a Y2K systems failure. Additionally, at least 29 other states are currently considering Y2K liability legislation during their 1999 legislative sessions. It is important, therefore, that any proposed federal legislation such as the Year 2000 Readiness and Responsibility Act, not preempt these important state laws. It is equally important for municipalities located in states without any Y2K liability protections, to obtain the protections offered by this federal legislation to the same degree that they are offered to the business community. It is crucial that Congress understand that the Y2K problem is not just a business or corporate problem. It will impact local governments as well. Moreover, the more any federal legislation protects businesses and corporations, the greater the liability which will be shifted onto the backs of the taxpayers. Providing a level of liability protection for cities will allow them to focus their efforts on averting potential disasters from Y2K-related problems or on contingency planning efforts.

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    For the local government entity, protection from liability permits them to focus on carrying out their day-to-day functions and providing the all-important services to the citizens of communities free from the fear of costly and time-consuming litigation. Furthermore, cities and towns must be free to allocate funds to those important services and functions rather than preserve them in a litigation fund in anticipation of multi-million dollar or even billion dollar Y2K lawsuits. The sovereign immunity of our cities and towns granted to them by the states must therefore be protected.

    For those municipalities located in states which do not have this sovereign immunity protection, the Year 2000 Readiness and Responsibility Act can help by providing an incentive for cities to become Y2K compliant while alleviating the fear of crippling litigation. It is important to remember that in the area of municipal liability, it is the taxpayer who ultimately foots the bill for the lawsuit. In the case of a multi-million dollar Y2K suit, a tax increase would be the only way to finance the cost of this litigation. Defending against Y2K liability further impedes a municipality from attending to it's daily responsibilities to its citizens by forcing it to allocate valuable resources and staff time to litigation. Cities and towns cannot carry out their daily functions and provide the level of services needed by their residents if valuable resources and funds must stay put in a ''litigation pot.'' Although this legislation does not contain a statute of limitations period, the National League of Cities believes that by providing a cut-off point after which no actions can be brought, we would provide our nation's cities and towns with the relief they need to free up these valuable resources and continue on with providing services and operations to their residents.

    NLC believes that the 90 day notification period contained in Section 101 of the Act provides a valuable tool for avoiding such costly litigation. By requiring that potential defendants in a Y2K action be given a ''cure'' period before a lawsuit could be filed is beneficial to local governments in that they can address the problem before being forced to defend against claims for damages in court. This notification procedure would promote remediation, not litigation.

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    NLC strongly supports the inclusion of the ''good faith efforts'' defense presented in Section 302 of the Act. It is crucial that cities not be held responsible for damages in Y2K-related cases absent actual knowledge or reckless disregard of a substantial risk. Additionally, the ''reasonable efforts'' defense outlined in Section 303 of the Year 2000 Readiness and Responsibility Act is critical to limiting the litigation concerns of local governments. Many cities and towns nationwide have addressed the Y2K problem by either fixing those systems with glitches to make them Y2K compliant and providing a backup or contingency plan in case the primary system components fail. It is, however, impossible to know which systems will work and which will not, despite the best testing efforts, until the turn of the century. Unexpected problems can arise causing a Y2K problem which were in no way foreseeable by the local government staff. For example, leaving cities and towns open to the possibility of litigation might actually serve as an inducement to hackers to create problems in order to promote such litigation. It is for these reasons that NLC supports the inclusion of the good faith and reasonable efforts defenses contained in the Act.

    NLC is also in favor of an alternative dispute resolution or mediation component to any Y2K legislation. Again, I reiterate that municipalities are not deep pockets. The money for litigation comes from the taxpayers. Any method of dispute resolution which would cut litigation costs is in the best interest of all of the parties. Along these lines, NLC is also in favor of a pre-trial notice period during which the local government has the opportunity to cure the Y2K problem before it can be sued.

    On a final note, any legislation on the subject of Y2K liability must exempt municipal elected officials from personal liability. Our mayors and councilmembers must be free to make decisions and act in the best interests of the municipality and their constituents without the fear of a lawsuit for acts done in an official capacity.

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    Thank you again on behalf of the NLC for providing us with this opportunity to present our views to the Committee. We look forward to working with you towards passage of a Y2K liability bill that will represent the interests of cities and towns.

    Mr. HYDE. Ms. Mulhern, welcome.

STATEMENT OF JOAN MULHERN, LEGISLATIVE COUNSEL, PUBLIC CITIZEN CONGRESS WATCH

    Ms. MULHERN. Thank you, Mr. Chairman, and members of the committee. We appreciate your invitation to Public Citizen to be here today to testify in opposition to H.R. 775, the Year 2000 Readiness and Responsibility Act.

    Y2K poses significant risks to consumers as well as governments and other institutions. We appreciate the efforts that you and many Members of Congress have made to date to bring attention to this issue.

    My written comments contain a more detailed analysis of the bill, so I will limit my remarks to five points.

    First, despite the title of this legislation, we believe H.R. 775 will not advance readiness nor promote responsibility. In fact, the sweeping preemption of State consumer law in this bill will remove incentives under existing law and reward irresponsibility. For example, the bill's limitations on joint and several liability and punitive damages will protect companies that have done the least to fix their Y2K problems, including those that have acted fraudulently recklessly, and negligently. We believe the fear of legal accountability has created much of the impetus to date to fix Y2K problems. Limiting liability will have the opposite effect.

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    Second, this bill is not narrow nor is it temporary. It defines a Y2K claim as a civil claim of any kind involving a Y2K failure. Personal injury is the only exception and the bill narrowly defines personal injury. The bill covers civil actions in which a plaintiff asserts a claim for Y2K damages or a defendant asserts that a potential or an actual Y2K failure is directly or indirectly related to the claim. The Y2K failure is the failure of a system to process any date-related information, not just the inability to process the Year 2000 date.

    In other words, this bill will create a permanent, federally prescribed legal regime in which defendants' claims that ''my computer failed'' will put almost any civil case under the bill's many caps and limits. This includes actions for breach of contract, warranty, consumer fraud, violations of State or Federal consumer protection statutes, environmental citizen suits as well as suits to recover property damages.

    Among those who could be hurt are consumers who have purchased products that won't work properly, such as fire and security systems, the failure of which could have severe consequences; small companies unable to access their accounts or process credit could lose money and possibly lose their businesses.

    Just last month the Chemical Hazard Safety Board reported that small- to mid-sized chemical facilities have the highest potential of catastrophic accidents from Y2K. Homeowners whose property is damaged in a chemical accident would have their rights curtailed by this bill. These are just a few of the many examples.

    Third, the bill is not only sweeping, it is so totally one-sided. Every provision benefits the defendants at the expense of injured parties. For example, in order to get any money damages whatsoever in a Y2K tort case, plaintiffs must prove by clear and convincing evidence that the defendant actually knew of the risk and/or had a reckless disregard of the significant hazard; knew or should have known that their actions would harm the plaintiff in the specific facts and circumstances of the case.

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    So if a chemical spill requires the evacuation of the neighborhood, the neighbors would be unable to recover their property damages unless they managed to find some smoking gun evidence showing that the chemical company not only knew there would be a system failure but knew of the injuries and the circumstances that would befall the plaintiffs.

    The bill favors defendants over plaintiffs at every turn. It requires plaintiffs to give 90 days' notice before they can sue, but doesn't require defendants to fix problems during that time. It erects problems for plaintiffs in class action cases. It limits the compensation of plaintiffs' lawyers but does not cap the amount that defendants can pay their attorneys. The list goes on and on.

    Fourth, the extent to which this bill would preempt traditional State law is extensive and unprecedented. It proposes not only to cap damages but to rewrite the standards for contract, commercial, and tort law developed by the court and State legislatures since this country began. It would be more than ironic to vote for Members of Congress who support States rights to vote for legislation that strips from State lawmakers that most traditional authority.

    Finally, if this committee wants to take steps to address Y2K problems in ways that truly promote readiness and responsibility, protects the public, and respects State laws, there are alternatives.

    For example, Congress could help consumers and small businesses who don't know if their products are Y2K compliant by requiring manufacturers to provide notice. Congress could combat Y2K profiteering. Congress could pass legislation protecting consumers and small business, supporting credit ratings from Y2K problems. These steps would all help to avoid litigation by limiting the negative consequences of Y2K failure, a better way to reduce lawsuits than taking away people's legal rights or resorting to extraordinary preemption of State laws.

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    In conclusion, Mr. Chairman, if H.R. 775 is enacted, consumers and small businesses who suffer losses in the wake of January 1, 2000, will undoubtedly question why their elected representatives cut off their legal remedies without even knowing what kinds of injuries could occur and which did not. In hindsight, proposals such as this are likely to be seen by constituents as extremely unwise and unjust.

    On behalf of Public Citizen, we urge you to reject this litigation. Thank you.

    Mr. GOODLATTE. Thank you.

    [The prepared statement of Ms. Mulhern follows:]

PREPARED STATEMENT OF JOAN MULHERN, LEGISLATIVE COUNSEL, PUBLIC CITIZEN CONGRESS WATCH

Note: Public Citizen is a nonprofit public interest advocacy organization with over 150,000 members. Public Citizen seeks to improve the health and safety of the public and to promote accountability and fairness in the marketplace, public availability of governmental information, campaign finance reform, and citizen participation in governmental decision-making. Public Citizen was founded in 1971 by Ralph Nader.

    Chairman Hyde, Mr. Conyers, members of the Committee, thank you for inviting Public Citizen to testify before the Judiciary Committee today in opposition to H.R. 775, the ''Year 2000 Readiness and Responsibility Act.'' The inability of widely-used products and computer systems to correctly process Year 2000 dates, and the potential for these systems to malfunction or shut down, poses significant challenges and risks for individual consumers as well as for governments and small and large businesses. We appreciate the efforts that many members of Congress have made to date to bring needed attention to this important issue.

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Despite the title of this legislation, we believe that H.R. 775 will not advance readiness nor promote responsibility with respect to Year 2000 computer processing failures. In fact, the sweeping preemption of state consumer protection and liability laws and impossibly difficult burdens on plaintiffs proposed in this federal bill would remove incentives for readiness provided by existing laws and will reward irresponsibility. The bill would make it difficult, if not impossible, for individual consumers and small businesses with legitimate Y2K cases to seek fair remedies in state and federal courts, a critical mechanism for maintaining balance and fairness in the free marketplace. This is the wrong approach for Congress to take to the challenge posed by the Year 2000 problem.

It is important at the outset to establish who is at fault for Y2K problems and who is likely to be hurt. Many business that make and sell electronic products, computer systems, and business software packages have notified their customers of potential Y2K problems and offered them free upgrades or have replaced products and systems that are non-Y2K compliant, but many others have not. In fact, we have heard examples of companies selling non-compliant goods as recently as one or two years ago, and there may be non-compliant products still on the market today. The high tech and manufacturing sectors have known about the Y2K problem for decades. While it may have been reasonable to assume that a software package sold in 1979 would be obsolete by the Year 2000, the same assumption about an expensive system sold in 1997 is not reasonable. Many individuals, small businesses, hospitals, governments and others who bought non-compliant systems in recent years were not told that their systems would fail in the Year 2000. It is not surprising that a large percentage of the few civil cases filed to date allege violations of state and federal consumer fraud statutes.

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    No one knows with certainty the extent of the injuries and disruptions that may be caused by Y2K failures, but they could be significant and widespread. Among those who could be hurt yet would have their legal rights curtailed by this bill include individual consumers who have purchased products and systems that won't work properly, not only items like PCs and VCRs but also their home security and fire systems. The failure of these kinds of safety products could have severe consequences for homeowners as well as small businesses. Small companies that are unable to access their accounts, inventory and other critical information could lose money and possibly lose their businesses.

    Just last month, the Chemical Hazard Safety Board reported that small to mid-sized chemical facilities have ''the highest potential of catastrophic process plant accidents resulting from Y2K-related failures.'' Homeowners whose property is damaged or a neighborhood that has to be evacuated because of a Y2K-related chemical release would have their rights limited by this bill. If this bill is enacted, consumers and small businesses who suffer injury and losses in the wake of January 1, 2000 will undoubtedly question why their elected representatives cut off their legal remedies without even knowing what kinds of systems failures would occur, or which companies acted responsibly and which did not. In hindsight, proposals to limit remedies for those injured by Y2K failures crafted without knowing what those injuries would be are likely to be seen as extremely unwise and unjust.

    Make no mistake about it—the scope of H.R. 775 is extremely broad. It defines a Y2K claim as a civil action of any kind involving a Y2K failure. Personal injury claims are the only exception from the scope of the Act, and the bill narrowly defines personal injury as physical injury to a natural person including death and specifically does not include mental suffering and other non-physical personal injuries. (It is not clear whether the definition of personal injury would exclude from the bill a case involving both a physical injury and a non-physical injury.)

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    The bill's definition of a Year 2000 failure includes any failure of a device or system to properly process date-related data, included but not limited to the inability to correctly read the Year 2000 date. The bill covers all civil actions in which a plaintiff asserts a claim for damages caused by a Y2K failure—or a defendant asserts that an actual or potential Y2K failure is directly or indirectly related to the plaintiff's claim. In other words, the bill proposes to create a new and permanent legal regime in which the defendant's claim that ''the computer failed'' will put any civil case under all of the caps and restrictions proposed by this bill.

    These civil cases will include actions for breach of contract or implied warranty of fitness, consumer fraud, anti-trust, racketeering or other causes of action under state or federal consumer protection statutes, environmental citizen suits, as well as suits to recover for property damages. In all of the potential civil actions swept under the bill's broad scope, the new federal Y2K rules and standards proposed in this bill will make it difficult, if not impossible, for individuals and small businesses to bring legitimate Y2K cases.

    It is not surprising—nor is it a coincidence—that this bill contains the types of caps and limitations on state law remedies that certain business groups have been promoting on Capitol Hill for years. It is not surprising because this bill was largely written by the same businesses and trade associations. We believe that the primary motivation of many of these interests is not really solving Y2K problems. They are trying to hijack the Y2K issue, to take advantage of people's concern about the Year 2000 problem to pass a law that will create a precedent for future efforts to federalize state liability laws for other industries. Indeed, not only have they left little out of this grab bag of liability limitations, they have included some provisions that go far beyond any federal liability limiting proposal we have seen before. While we understand that some members of this Committee agree and others disagree with Public Citizen's stance against federalizing state tort law, this vehicle is not a fair way of dealing with the broader issues of tort liability, nor is it a responsible way of addressing the Y2K problem.

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Sending the Wrong Signal

    Claims by proponents of this legislation that liability limitations are needed to induce companies to fix their Y2K problems reveal a fundamental misunderstanding of the incentives to avoid damages that are provided by our civil liability system. We believe that the fear of legal accountability has created much of the impetus to date for companies to resolve their Y2K problems, and limiting liability will have the opposite effect.

    A survey of the many legal resources about Y2K found on the Internet and elsewhere reveals consistent advice for corporations: to avoid liability, companies should investigate potential Y2K deficiencies, take steps to correct them, and maintain a record of their remediation efforts to provide evidence of due diligence. Prudent companies have already taken steps to address this problem or are acting now to avoid liabilities. Congressional interference at this time to limit corporate accountability removes a critical incentive for companies that have not yet repaired or replaced their systems and products to do so quickly. This bill will undermine readiness and is likely to increase the number of consumers and small businesses hurt by Y2K failures as well as leave those injured parties without adequate remedies at law.

Rewarding the Worst Actors

    H.R. 775 does far more to protect those companies that have acted irresponsibly than those that have behaved responsibly. For example, the bill's cap on punitive damages protects only those companies who have acted in the most deliberate and reckless manner. In every state and every legal jurisdiction in this country, punitive damages can only be awarded when a defendant has acted maliciously or in some other particularly egregious way. Setting a cap on these damages by definition gives the most benefit to companies whose potential for punitive damages liability is the largest because they have done the least to address their problems.

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    In fact, H.R. 775 not only protects wrongdoers by capping punitive damages but would impose new evidentiary burdens of proof that may effectively eliminate punitive damages in Y2K cases. State laws all require plaintiffs to prove, often by clear and convincing evidence, that the defendant acted in some outrageous way before a judge or jury can impose punitive damages. But, in addition to meeting the state standard, H.R. 775 would require plaintiffs in Y2K cases to also prove by clear and convincing evidence that the defendant specifically intended to harm the plaintiff. This requirement that the plaintiff prove the defendant meant to harm the plaintiff is akin to a criminal standard of intent, and is a nearly impossible evidentiary burden for a plaintiff to meet in a civil case. Like the cap, this will also protect companies that acted with the most reckless disregard for public safety.

    For example, if a chemical manufacturing facility knew its critical safety systems were non-compliant and that a chemical spill into the surrounding neighborhood was likely to occur, the company would not be liable for any punitive damages after a spill did occur and damaged the neighbors' property unless the neighbors could prove by clear and convincing evidence that the companies' decision makers specifically tried to harm them. Unless the plaintiffs managed to unearth a company whistleblower, a document showing the defendant meant to harm plaintiffs, or some other ''smoking gun'' evidence, the defendant in this case would not be subject to any punitive damage award. This is not a standard that protects the responsible but one that rewards the reckless and irresponsible.

    Punitive damages are rarely awarded in state courts but the possibility that they could be assessed performs two important functions in our civil justice system. They impose deserved punishment for outrageous and deliberate misconduct, and they deter others from engaging in similar behavior. Supporters of eliminating punitive damages awards in Y2K cases argue that the deterrent function of punitive damages isn't served in the Y2K context because this is a one-time event, but this again misapprehends the incentives provided by the civil justice system. The existence of punitive damages under state law is acting as a prod now to encourage companies to take reasonable efforts to fix Y2K problems. Limiting these damages in Y2K cases will send the wrong message to these businesses by lowering the cost of inaction. In addition, Congressional approval of this special protection in the Y2K context will set a dangerous precedent for future industry-specific immunities, encouraging other industries to spend less effort keeping dangerous products off the market and more time lobbying Congress for their own special immunity legislation.

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Protecting the Irresponsible at the Expense of the Injured

    Another way H.R. 775 protects companies that have acted irresponsibly is by requiring plaintiffs in all Y2K tort cases covered by the bill to prove key elements of their claims by clear and convincing evidence in order to get any money damages whatsoever, including compensation for economic and noneconomic losses. Generally in civil cases, plaintiffs must prove the basic elements of their case by a ''preponderance of the evidence.'' Under this bill, in order for an injured consumer to recover any compensation in a Y2K tort case involving a negligent defendant, the consumer would have to prove by clear and convincing evidence that the defendant actually knew of the risk or had a reckless disregard of a significant hazard and that the defendant knew or should have known that the defendant's action would cause harm to the plaintiff in the ''specific facts and circumstances of the claim.''

    Requiring a plaintiff to clearly prove the defendant had a certain state of mind and knew the specific injuries that would result to the plaintiff are exceedingly difficult and one-sided standards. Again, without some kind of ''smoking gun'' evidence—or proof the defendant had psychic abilities—it will be next to impossible for injured consumers and small businesses with legitimate, non-frivolous claims to clearly prove the defendant knew the plaintiff would be specifically harmed in the circumstances claimed in the case. This standard protects negligent and other wrongful conduct and will leave many legitimate claimants with no compensation.

    The bill's proposal to eliminate joint and several liability also benefits defendants that have acted negligently, fraudulently, deliberately or recklessly. Joint and several liability is a critical legal protection for injured parties. The joint and several liability rule developed in cases where more than one defendant was responsible for causing the plaintiff's injury and one or more of the responsible parties was judgment proof or could not pay compensation. The rule recognizes that it is fairer to require the parties responsible for the injury—and without whom the injury would not have occurred—to compensate the victim than it is to allow the innocent, injured party to suffer without full compensation. The rule also helps to put some burden on the named defendants to find and bring into a lawsuit other responsible parties; these defendants are usually in a better position than injured plaintiffs to have the best information about what other entities also might have caused the alleged harm.

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    H.R. 775 would completely do away with state joint and several liability laws in Y2K cases and mandate that each defendant is responsible only for its proportionate share of the harm. If one or more potential defendants in a Y2K case has gone out of business, does not have the resources to compensate the injured parties, or is a Y2K manufacturer that is a foreign corporation not subject to U.S. jurisdiction, then innocent injured consumers and small businesses will be forced to bear the brunt of any unrecoverable compensation. Even defendants that acted recklessly, intentionally or committed fraud are only held responsible for their ''share'' of the damages under this bill.

More Unfair, Anti-Consumer Provisions

    Other provisions that will protect wrongdoers include the creation of unprecedented, broad liability escape clauses for defendants in contract and tort actions, a requirement that plaintiffs give defendants 90 days notice before they can file suit with no requirement that defendants fix any Y2K problems during that time, and proposals to add new procedural and substantive burdens on plaintiffs in class actions cases, including burdensome ''opt in'' and notice procedures, a new ''materiality'' requirement, and the removal of most state law Y2K class action cases into the already overburdened federal courts.

    In fact, every provision in this bill is one-sided, favoring defendants over plaintiffs at each turn. Title V of the bill preempts state law regarding attorneys fees and regulation of lawyers to limit the compensation of plaintiffs' lawyers, but does not cap the amounts defendants can pay their attorneys. The bill requires plaintiffs in tort actions to prove elements of their cases by ''clear and convincing evidence,'' as discussed above, but places no heightened evidentiary burdens on defendants that take advantage of the new defenses created for them by the bill. And all of these one-sided, anti-plaintiff provisions apply to all Y2K cases covered by the bill, not just those involving defendants that tried to act responsibly.

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Massive Preemption of Traditional State Law

Not only is this bill unfair to consumers and small businesses, the extent to which it would preempt state law is unprecedented. H.R. 775 would fundamentally rewrite state law in contract, commercial and tort cases, mandating that state courts follow new federal standards and procedures in all civil cases directly or indirectly related to an actual or potential Y2K problem. In testimony before the Senate Judiciary Committee on March 1 on the Senate companion bill to H.R. 775, Assistant Attorney General Eleanor D. Acheson stated ''. . . our preliminary analysis indicates that this bill would be by far the most sweeping litigation reform ever enacted if it were approved in its current form. The bill makes extraordinarily dramatic changes in both federal procedural and substantive law and in state procedural and substantive law. . . .'' (Emphasis added.) It is the most intrusive proposal to rewrite traditional state law that we at Public Citizen can recall ever being taken up by Congress.

H.R. 775 goes far beyond even the preemptive liability bills introduced in previous Congresses because it proposes not only to cap damages but would completely change the legal standards for liability that have been developed by the courts and by state legislatures over the last 200 years. In testimony given before Congress in 1995 on another liability-limiting bill, the Conference of Chief Justices stated that ''. . . tort remedies must lie with State Courts and legislatures, which are most aware of and best suited to determine the social and economic impact of present law on their own communities.'' We believe the same logic and deference to federalism should be applied to this bill. It would be more than ironic for members of Congress who support states' rights and giving legal authority to state and local governments to vote for legislation that strips from state lawmakers one of their most traditional authorities.

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One-Way Preemption

    The claim that this extraordinary preemption is somehow justified by a need to provide uniformity in law across state borders for Y2K cases are disproved by the bill's one-way preemption of state liability laws—only overriding those states that provide greater remedies for consumers and small business plaintiffs and letting stand those laws that provide greater protection to defendants.

    For example, the bill's cap on punitive damages would only allow punitive damages at all to the extent they are already allowed under current state law. State courts and state legislatures have all considered the policy issues surrounding the imposition of punitive damages and have come to different conclusions about the best public policy for their own state. Most states—about thirty—have elected not to impose punitive damage caps in the kinds of cases covered by H.R. 775 (general tort and product liability cases.) Three states have caps that are more generous than allowed under this bill. These states' laws would all be preempted by the liability caps in H.R. 775. About a dozen states have caps that in some cases would allow awards of punitives greater than those in H.R. 775, but in other cases would cap punitives at a lower amount. This bill would partially preempt those states' laws to the extent they would otherwise allow higher punitive damages but not to the extent they allow lower punitive damages awards—overriding whatever balancing of interests those states' legislatures thought was fair and just. Six states do not allow punitive damages in most tort cases and one imposes caps that are lower than those in this bill. H.R. 775 would let these states' punitive damages law stand.

    H.R. 775 would not uniformly allow consumers in all 50 states to seek punitive damages of up to $250,000 or three times actual damages in Y2K civil cases, but would respect the laws of the states that do not allow any punitive damages at all or have caps lower than those in H.R. 775. Why should the policy decisions of the legislatures and courts in the minority of states be respected and those of the majority of states be disrespected and ignored? Other sections of the bill that preempt state law one-way only include the limits on corporate officer and director liability, which would cap the amounts these parties are liable for no matter how egregious, wrongful or injurious their acts, and the provisions limiting economic losses. This kind of one-way preemption seems particularly offensive to our country's tradition of federalism and states' rights.

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Increase in Litigation

Finally, if a goal of this Committee is to simply cut down on litigation and its costs, then H.R. 775 is not the right approach. The bill might reduce the number of potential cases, including legitimate cases, by making it harder for some consumers and small businesses to find legal counsel willing to take on these lopsided claims. But to the extent these Y2K civil actions do end up in court, the new standards created by this federal legislation coupled with the inconsistent ways this bill would interact with existing state law will lead to more litigation and appeals. For example, some sections of the bill replace state law, such as the section on notice and pleadings and the 90 day waiting period. Others preempt state law one-way only, such as the cap on corporate officers' liability. The provisions that would place new evidentiary burdens on plaintiffs in tort cases impose conditions that are in addition to the requirements of state law. Still other provisions preserve state law, but attempt to forever freeze the law in place as of January 1, 1999. Some sections do not provide any instructions, leaving it unclear whether the new standards are on top of or in lieu of existing state or federal law requirements. These varied legal standards imposed on the states will disrupt longstanding rules of law in state contract, commercial and tort cases and will undoubtedly take much litigation to sort out.

Alternative Approaches to Encourage Remediation and Help Consumers

If this Committee wants to take steps to address Y2K problems in a way that truly promotes readiness and responsibility, that protects the legal rights of consumers, small businesses and other potential plaintiffs, and that respects state law, there are alternatives to this bill that the Committee could consider.

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    For example, one problem that many consumers and small businesses face is a lack of information about which products and systems are Y2K compliant and which are not. Congress could consider requiring manufacturers and sellers of products that are not Y2K compliant to provide notice by mail to all buyers of the non-compliant systems who are known to the manufacturer or seller, and publish general notices in newspapers or on the Internet to warn others who may have purchased the devices or systems. This could cut down on litigation that could arise by giving customers warning and an opportunity to repair or replace defective systems. Reducing potential Y2K damages is a much better way to reduce litigation than taking away the rights of the injured.

    Second, Congress should consider taking steps to combat Y2K profiteering. We have heard of numerous instances of companies charging individuals and small businesses outrageous sums to fix Y2K problems in systems they sold to their customers in the last few years, which they knew at the time were noncompliant. Dr. Robert Courtney, a sole practitioner from New Jersey, provided one such example in his testimony before the Senate Commerce Committee last month. In 1996, he purchased a system called ''Medical Manager'' for $13,000. The system handled billing, tracked appointments and surgeries, and helped him run his practice. He was told when the system was installed that it would last ten years, but just one year later he got a letter from the company that sold him the system telling him it would not work in the Year 2000. The company offered to fix the problem—for $25,000—far more than he paid for it and more than he could afford. Only when he filed a class action lawsuit against the company did they offer a free fix to Dr. Courtney and the others who purchased the defective program.

    To cut down on cases like these, Congress should require companies that have knowingly manufactured or sold non-compliant products or systems after a certain date, maybe beginning in 1990 or 1995, perhaps depending on the reasonable expected life of the product, to provide a free fix or upgrade to the purchaser. This, too, could reduce the need for litigation in cases where there has been no other injury. Most consumers and small businesses just want to experience the date change to the Year 2000 with as little disruption as possible—they want the products and services they paid for to work. An anti-profiteering, free fix proposal would help them toward that end.

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    Third, another serious Y2K problem for many individual consumers and small businesses is protecting their credit ratings, avoiding defaults on their mortgages and other loans, and not having their rent payments credited to their accounts if Y2K failures erroneously show their payments are overdue. Congress could address this real concern by passing legislation to protect consumers' and small businesses' credit ratings from Y2K-related problems and protecting them from defaults or the possibility of wrongful evictions. This could help to avoid some litigation by limiting the negative consequences of some Y2K failures without taking away any parties' legal rights.

    Fourth, if there is a legitimate concern that there will be a large number of Y2K disputes, Congress could make grants available to state courts to set up temporary Alternative Dispute Resolution panels to hear Y2K cases brought by parties seeking remedies or compensation but who do not need to bring litigation. These forums could resolve many smaller Y2K disputes without resorting to extraordinary preemption of state law protections.

Conclusion

    There are certain to be failures in critical products and services due to Y2K, although no one knows exactly where they will occur or how serious the disruptions will be. In the face of so many unknowns, it is not responsible to pass such a sweeping bill as H.R. 775. On behalf of Public Citizen, I urge the Committee to reject this unfair and unwise legislation.

    Thank you again for the opportunity to testify on this important matter.

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    Mr. HYDE. Ms. Greenberg, welcome.

STATEMENT OF SALLY GREENBERG, SENIOR PRODUCT SAFETY COUNSEL, CONSUMERS UNION

    Ms. Greenberg. I appreciate the opportunity to share the viewpoints with members of the House Judiciary Committee here today.

    Consumers Union believes that what is needed to respond to concerns about Y2K failures is a commonsense approach to the problem. In our May issue, which is due to hit the stands in the next several days, Consumer Reports magazine advises consumers to take reasonable, measured steps to prepare for Year 2000, letting them know this is a time for prudent preparation, not one for extreme measures.

    We would extend that same advice to lawmakers seeking to address the threat of lawsuits arising from Y2K failures.

    While we applaud Congress' efforts to provide incentives that will enhance Y2K readiness, we must ask whether the many unknowns about what will happen in the Year 2000 justify making radical changes in current law. In fact, what we do know suggests that there would be no avalanche of lawsuits. In Y2K suits that have been litigated, consumers are not faring very well.

    According to yesterday's issue of The New York Times, there is a trickle of new lawsuits, between 50 and 80 at most. Most of those focus on whether hardware and software manufacturers have to pay to fix problems. In some cases consumers are being thrown out of court because of malfunctions that have not occurred yet, yet they know that there are malfunctions, or they are losing when they ask courts to require venders to pay for a Y2K fix.

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    In testimony before the Senate last month, the Department of Justice characterized H.R. 775, the Senate companion bill, as by far the most sweeping litigation reform measure ever enacted if it were approved in its current form. This bill calls for dramatic changes in both Federal procedure and substantive law, and in State procedures and substantive law as well, changes that we fear will cut off rights and do so without proof that there will actually be a flood of unnecessary and frivolous lawsuits.

    We have a solution to the problem. Consumers Union noted that the findings in the beginning of the bill relate exclusively to the sponsors' concern about the effect of Y2K failures on business. There is no mention of their impact on consumers. In that spirit, Consumers Union would like to see a consumer carve-out so that provisions of this proposal do not affect lawsuits from Y2K failures brought by consumers.

    There is a precedent for this carve-out language; it tracks the language in the Y2K Readiness and Disclosure Bill enacted last year. Our proposed language for accomplishing this carve-out is attached. If this carve-out language is not part of the bill, however, our analysis of H.R. 775 leads us to conclude that bill fails on fairness. It is weighted heavily against plaintiffs, many of whom may be innocent consumers who have suffered damages because of a Y2K failure, or being forced to bear the cost of fixing a Y2K problem that really should have been addressed by the manufacturer.

    While we are pleased that personal injury actions are not covered by this bill, consumers attempting to recover for tort or contract cases would be affected by the widespread changes in State and Federal law called for in H.R. 775. The heightened burdens of proof, the requirement that the plaintiff offer proof of defendant's state of mind, or that the defendant knew of the specific injuries that would result, places a nearly impossible burden on plaintiffs.

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    Further, it is the cornerstone of consumer protection today that consumers are covered by implied warranties and that unconscionable contracts or contracts of adhesion won't be enforced. H.R. 775 seems to call for enforceability of all terms of a contract, even if those terms override basic consumer protections like implied warranties or include terms that are unconscionable.

    The principle that is behind the current protections, that is, to shield individual consumers from egregious terms imposed on them by parties with greater economic power, are sound. We don't believe they should be summarily discarded.

    The issue of elimination of joint and several liability in this bill goes beyond the law that exists in most States, many of whom have preserved some form of joint and several liability. Many Y2K failures may prove very complex, with a large number of software and hardware manufacturers involved in the problem. If plaintiffs must locate all defendants, that not only puts them at a disadvantage, it also may result in many more lawsuits. Consumers Union fears that abolishing joint and several liability may well prevent injured consumers who prevail on a liability claim from ever recovering damages. In the absence of a provision taking consumers out of this bill, we feel that the provisions of H.R. 775, taken together, shift the burdens in the event of a Y2K failure unfairly onto the plaintiff and will make it difficult, if not impossible, for injured consumers to recover damages suffered by a company's negligent or reckless failure to identify and fix a Y2K problem.

    In closing, given the evidence that consumers are having a very hard time now winning cases under current law, we ask you not to use this legislation to inflict additional wounds on the rights of consumers pursuing Y2K litigation. Thank you.

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    Mr. GOODLATTE. Thank you, Ms. Greenberg.

    [The prepared statement of Ms. Greenberg follows:]

PREPARED STATEMENT OF SALLY GREENBERG, SENIOR PRODUCT SAFETY COUNSEL, CONSUMERS UNION

    My name is Sally Greenberg and I serve as Senior Product Safety counsel to the Washington office of Consumers Union(see footnote 1). I appreciate the opportunity to testify on this important issue.

    Consumers Union believes what is needed to respond to concerns about Y2K failures is a common sense approach to the problem. Consumer Reports magazine has advised consumers to take reasonable, measured steps to prepare for Year 2000, letting them know that this is an occasion for prudent preparation, not one for extreme measures.

    We would extend that same advice to lawmakers seeking to address the threat of lawsuits arising from Y2K failures. While we applaud the Congress' efforts to provide incentives that will enhance Y2K readiness, we must ask whether the many unknowns about what will happen in the year 2000 justifies making radical changes in current law. In testimony before the Senate last month, the Department of Justice characterized the Hatch-Feinstein Y2K proposal as ''by far the most sweeping litigation reform measure ever enacted if it were approved in its current form.'' H.R. 775 calls for extremely dramatic changes in both federal procedural and substantive law and in state procedural and substantive law, doing so without proof that there will actually be a flood of unnecessary and frivolous claims. 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 Consumers Union, this raises concerns about the rights of consumers to pursue legitimate Y2K claims in the courts.

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We have a solution to this problem. Consumers Union noted that the findings in the beginning of the bill relate exclusively to the sponsors' concerns about the effect of Y2K failures on business; there is no mention of their impact on consumers. In that spirit, Consumers Union would like to see a consumer carve-out so that the provisions of this proposal do not affect lawsuits for Y2K failures brought by consumers. There is precedent for this carve-out language: it tracks the language in the Y2K Readiness and Disclosure Act [PL 105–271] enacted last year. Our proposed language for accomplishing this carve-out is attached. If that carve-out language is not part of the bill, the following analysis highlights our concerns.

Section 104, Duty to Mitigate. This section turns the traditional tort principle on its head. Tort law does require a plaintiff to mitigate damages after an injury occurs. But this section requires plaintiff to mitigate damages before they are injured, even though the defendant has the best information about potential product defects. This provision may allow a defendant to avoid liability simply by showing that plaintiff was or should have been aware of information that would have enabled the plaintiff to avoid the injury. For example, if a defendant posts information to fix a Y2K problem on its website and plaintiff doesn't have access to the internet, that plaintiff could be out of luck because he failed to read about and employ the fix. Nowhere that we know of does tort law require plaintiffs to affirmatively seek out publicly disseminated information or lose their right to bring an action at all. This defense would appear to be available even when the defendant was clearly at fault. The way this provision is drafted, it will work to the advantage of defendants only.

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Section 201, Enforceable Contracts. This section appears to require enforcement of all terms of a contract, even if those terms disclaim warranties that protect consumers, are unconscionable, or are contracts of adhesion, which are normally not enforceable under the rules of contract law. So for example, if in 1999 a consumer buys a computer program, and on the package is the statement, ''This software is guaranteed to serve you well for years to come,'' but in fine print is a disclaimer of all warranties, express or implied, the consumer who would normally be able to pursue action based on breach of implied warranty could end up having no recourse under this legislation if the software wasn't Y2K complaint. This bill says that the written contract prevails, even if it limits or excludes warranties. Most state laws have adopted some version of the UCC which protects consumers by making certain warranty disclaimers unenforceable. These laws further protect consumers by preventing the enforcement of unconscionable contract terms and ''adhesion contracts.'' The principle behind these provisions is protection for individual consumers from egregious terms imposed on them by parties with greater economic power. These protections have become a cornerstone of consumer protection and should be preserved.

Section 202, Reasonable Efforts. This section would allow a defendant to offer a defense for having made ''reasonable efforts,'' even if the defendant otherwise breaches the terms of the contract. If that defense is offered, under this bill it could limit or eliminate a defendant's liability. Under the widespread rules of contract law, it doesn't matter whether the breaching party made ''reasonable efforts,'' parties to a contract are obligated to fulfill the terms of the contract and are liable for damages if they do not. Their subjective intentions are immaterial. This basic rule is part of the body of law that governs longstanding commercial practices, many of which are part of the Uniform Commercial Code, and they have been relied upon by parties with current contracts that extend into the year 2000. These provisions are unfair to those who have entered into contracts believing they would be protected against Y2K failures.

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    If the purpose of this legislation is to promote Y2K readiness, then this provision may serve the opposite purpose. That is, under this bill, a defendant could take perfunctory steps to remedy a Y2K problem, such as posting information on how to fix a problem on their website or calling customers with instructions on how to fix the problem, or offering a fix for a great deal of money—for what constitutes ''reasonable efforts'' is not defined in the bill—in the expectation that such steps might well meet the vague meaning of ''reasonable efforts'' and serve as a complete defense against breach of contract. These defendants might be able to reduce or avoid liability, even if Y2K malfunctions occur, as long as they made ''reasonable efforts'' to implement the contract. This provision may act to minimize contractual liability and could well serve to reduce incentives to meet the terms of the contract.

    Section 301, Elimination of Joint and Several Liability. In abolishing joint and several liability in favor of a ''proportional liability'' rule, H.R. 775 goes beyond the law that exists in many states. Joint and several liability exists in some form in most of the 50 states. Some states limit defendant's ''joint and several'' exposure to certain defendants who have the largest proportion of responsibility or to certain percentages. Many Y2K failures may prove very complex, with a number of software and hardware manufacturers involved in the problem. Placing the burden on plaintiffs to locate all defendants not only puts them at a great disadvantage, it might also result in more lawsuits, creating the opposite effect of what this legislation seeks to accomplish. Consumers Union fears that abolishing joint and several liability may well prevent injured consumers who prevail on a liability claim from recovering their damages.

    In Section 302, State of Mind and Forseeability. In this section, ordinary principles of standards of proof are discarded and replaced by much higher ones. That is, in a Y2K case for negligence brought today, a plaintiff would have to prove that the defendant ''should have been aware'' of the potential Y2K failure and/or its likelihood to injure the plaintiff. This section increases the burden on the plaintiff by requiring proof that defendant was ''actually aware'' or ''recklessly disregarded a known and substantial risk that such failure would occur in the specific facts and circumstances of the claim.'' Thus, any claim that lacked proof of culpability short of recklessness, i.e., claims for negligence, would be precluded under this provision. Are we really going to tell consumers that they will have no likelihood of winning lawsuits for negligence in the event of a Y2K failure? Further, requiring plaintiffs to prove that the defendant not only knew of the risk but of the specific facts and circumstances of that risk, and then proving that defendant knew or should have known that its actions would cause harm to the plaintiff is truly a near impossible burden to impose on plaintiffs.

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    This provision also discards the current standard of proof in most civil cases, ''by a preponderance of the evidence'' in favor of a more stringent one ''by clear and convincing evidence.'' Once again, these measures unfairly disadvantage plaintiffs in favor of defendants.

    Section 303, Reasonable Efforts. This section once again creates a ''reasonable efforts'' defense, this time in a tort context, if the defendant can show that it took measures that were ''reasonable under the circumstances to prevent the year 2000 failure from occurring'' or from causing damages. So that if a consumer's land is flooded and her flower beds destroyed because of a Y2K failure, or a community is exposed to radioactive waste because of a Y2K glitch and the value of the property drops, a defendant might only need to show that it undertook ''reasonable efforts,'' albeit unsuccessful, to prevent this from happening. This is true even if a defendant has recklessly disregarded a known risk of Y2K failure. In both of these cases, the homeowner could be left without a remedy.

    While we are pleased that personal injury cases are outside the scope of this legislation, we are concerned that damages for mental suffering, emotional distress and other non-physical injuries appear to be precluded. For example, it appears that a claim for mental suffering or emotional distress brought by someone whose positive HIV status or cancer is made public due to a Y2K glitch might be severely limited or barred. Further, it is not clear whether the definition of personal injury would exclude from the bill's coverage any case involving physical injury accompanied by a claim for damages for non-physical injury.

    Section 304, Punitive Damages. This section would require all punitive damages in Y2K cases to go into a Year 2000 Recovery Fund. Under certain circumstances, Consumers Union has supported using punitive damages for socially beneficial purposes related to remedying the harmful conduct at issue. However, this section goes on to cap punitive damages in Y2K claims, limiting damages against most defendants to the greater of $250,000 or three times the plaintiffs' actual damages, and limiting damages against individuals and small businesses to the lesser of $250,000 or three times the plaintiffs actual damages. Further, this provision would require the plaintiff to prove by clear and convincing evidence that the defendant specifically intended to cause injury to the plaintiff.

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    If the intent of this legislation is to promote Y2K readiness, capping punitive damages makes little sense. As the editor-in-chief of CIO Magazine, the magazine for chief information officers in Fortune 1000 companies, said in Senate testimony last month, ''We are concerned that most Y2K-related legislation could present significant risks of reducing the incentives to responsibly address Y2K issues and make contingency preparations.'' This provision does just that. Punitive damages are imposed only on the most egregious conduct. If companies know that punitives will be capped, this adds a level of predictability to the threat of these damages that could undermine their deterrent effect and exacerbate potential Y2K problems. Companies may find it becomes more cost effective to ignore known Y2K defects that could hurt consumers. Consumers Union believes that capping punitive damages sends the wrong signals. Moreover, the additional burden imposed on plaintiffs to prove the defendant specifically intended to cause injury to the plaintiff may be insurmountable, further reinforcing CU's belief that this legislation is weighted against plaintiffs.

    Economic Losses, Section 305 curtails the economic damages a plaintiff could recover should she establish liability in a Y2K claim, allowing only economic losses that are incidental to personal injury or property. As a result, consumers' claims for fraud or misrepresentation, including securities fraud, would be immune from recovery of economic damages because they are unlikely to be incidental to personal injury or property damage.

    Section 404, Class Actions. This section would grant the federal district courts jurisdiction as long as one of the defendants and one of the plaintiffs are from different states. Consumers Union is concerned that federalizing every class action could have a devastating impact on consumers who are part of meritorious class actions that would otherwise be resolved in the state courts. A federal court would be obliged to review the substantive law of many states to determine whether a class action applying those laws presented any common legal issues, and if those laws were dissimilar, and the court couldn't find sufficient common legal issues, the court would be unable to certify the class. In such cases, this provision calls for class actions to be remanded to their state courts, but stripped of their class allegations. For consumers whose claims are too small to be brought individually, they could be denied relief altogether. The practical result of this provision granting defendants the power of removal, then, may be to terminate meritorious state class actions and leave large numbers of plaintiffs, many of them likely to be individual consumers, without adequate redress for legitimate Y2K-related damage claims.

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    We are also concerned by the heightened class notice requirements imposed by Section 402. Requiring plaintiffs to send direct notice to every class member by first-class mail return receipt requested, and requiring plaintiffs to verify each class members' receipt of the notice may cripple the ability of consumers to bring class actions. This provision imposes significant costs on Y2K class action plaintiffs that no other class action plaintiff must bear.

    Client Protection. Finally, Title 5's provisions related to attorney-client interactions. As a matter of general principle, Consumers Union believes that consumers should be fairly and justly compensated for their losses and that attorneys are entitled to adequate compensation commensurate with the risk and nature of the work involved. In class cases, we believe the defendant rather than the class funds should pay legal fees whenever permitted by law and that every class action fee award should be reviewed and approved by a court, even if reached by settlement. The value to the attorneys should not substantially exceed the value to the class. Value can sometimes be hard to calculate, since it should sometimes include the value to future victims of stopping a practice. In addition, fees will sometimes be driven up by the defendant's decision to over-litigate the cases.

    In summary, Consumers Union's believes that this legislation's extreme changes in substantive and procedural state and federal law results in rules are heavily weighted in favor of defendants, even those who have engaged in reckless behavior. If the goal of the bill is to provide uniformity in dealing with Y2K cases, it isn't evident in the legislation: the bill preempts state law only to the extent that it benefits defendants.

    Most vendors have known about Y2K problems for more than 20 years and have had ample time to prepare for them. As Computerworld Magazine noted recently in regard to Y2K liability protection, ''The fact that some vendors were more preoccupied with quarterly earnings and stock options than in protection of their customers is no excuse for giving them a get-out-of-jail-free card now.''

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    And as the editor-in-chief of CIO Magazine, noted last month in testimony before the Senate, ''Any legislation that contributes to the Y2K solution should be fair to all parties while preserving existing rights and contractual relationships.'' This bill fails on fairness. Without a provision excluding consumers in this Y2K liability limitation legislation, H.R. 775 places unwise and unfair burdens on consumers, and in the event of a Y2K failure, is calculated to substantially hamper consumers' access to justice.

    Once again, I want to thank the members of the House Judiciary Committee for inviting Consumers Union to present testimony before you today.

RECOMMENDED CONSUMER AMENDMENT FOR H.R. 775, Y2K LIABILITY LEGISLATION

    Insert in Section 3, Definitions.

    ''The term 'consumer' means any individual who acquires a consumer product other than for purposes of resale.''

    Amend Section 4, Exclusion for Personal Injury Claims

    To read, Exclusion for Personal Injury Claims and Claims Brought by Consumers

    ''This Act does not apply to any action brought by a consumer for recovery for harm caused by a Y2K failure.''

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BIOGRAPHY

    Sally Greenberg is Senior Product Safety Counsel in the Washington D.C. office of Consumers Union, publisher of Consumer Reports magazine. She is lead advocate on all issues related to car safety, product safety, products liability, and auto choice legislation.

    Ms. Greenberg works closely with members of Congress, the National Highway Traffic Safety Administration and the Consumer Product Safety Commission to shape policy on such issues as vehicle rollovers and all-terrain vehicles. She works to insure that consumers receive the best possible information about the safety of their cars, appliances and other consumer products, and works to see that dangerous products are removed from the market.

    Prior to joining Consumers Union, Ms. Greenberg was a lawyer in the Justice Department's Foreign Claims Settlement Commission. Prior to that, she worked for more than a decade as Civil Rights Counsel for the Eastern States for the Anti-Defamation League in Boston. While in Massachusetts, she served on the Governor's Hate Crime Commission, the Governor's Commission on Technology and Computer Crime and the Governor's Commission on the Status of Women. From 1993–95, she served as President of the Women's Bar Association of Massachusetts from 1993–95.

    Consumers Union is headquartered in New York and has advocacy offices in Washington, D.C., California and Texas. The advocacy offices work to represent consumers in the executive legislative and judicial branches of government.

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    Consumers Union, publisher of Consumer Reports magazine, is an independent nonprofit testing and information organization serving only the consumer. Consumers Union is a comprehensive source of unbiased advice about products and services, personal finance, health, nutrition and other consumer concerns. Since 1936, the organization's mission has been to test products, inform the public and protect consumers.

    Mr. GOODLATTE. Mr. Rothfeld, welcome.

STATEMENT OF CHARLES A. ROTHFELD, ESQ., MAYER, BROWN & PLATT

    Mr. ROTHFELD. Thank you Mr. Chairman, members of the committee. My name is Charles Rothfeld, and I am a lawyer at the firm of Mayer, Brown & Platt. I represent the Semiconductor Industry Association and the accounting profession, both of which are members of the Y2K Coalition. That is a broad-based group of large and small businesses, some of which will be defendants in Y2K litigation, many of which will also be plaintiffs in Y2K lawsuits, and all of which support legislation that is designed to encourage Y2K remediation and to discourage insubstantial litigation.

    I greatly appreciate the ability to testify this morning about the steps that can be taken to address the danger that the Y2K computer problem will lead to an unparalleled wave of litigation.

    There are two points about that problem that I would like to touch on in my testimony this morning. First, I will look at the question of how much litigation would we actually be likely to see, something that has been raised this morning; and second, I will look specifically at the provisions of H.R. 775 and ask whether those provisions take reasonable and measured steps, as I believe they do, to address the problem, or whether in fact they would preclude people from bringing lawsuits, as has been suggested by some of the panel.

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    First, the question of how much litigation we are actually likely to see. We have all heard the $1 trillion estimate that has been discussed this morning. I think it might be more telling to see what is actually going on in the legal marketplace, what is going on now. There are lawyers on both sides, many lawyers, plaintiffs' lawyers and defendants' lawyers, who are frantically preparing in anticipation of Y2K litigation. As of last August, some 500 law firms, including my own, had created specialized Y2K practice groups, and that number has certainly grown substantially in the intervening months.

    It is literally the case that every week, probably every day between now and January 1, you could attend a different panel or seminar or panel discussion or presentation on how to conduct Y2K litigation, and lawyers across the country are busy preparing their clients to position themselves to initiate and defend against Y2K litigation.

    Now I think all of this activity in the legal marketplace is telling us something that we should pay attention to. I find it very unlikely that the creation of all of these Y2K practice groups is simply irrational exuberance on the part of law firms who are overly optimistic about the possibility of lucrative Y2K litigation. I think it is very unlikely that all of these sophisticated lawyers are simply completely off base when they imagine that there is an entirely new practice area which is about to open up. In fact, at this point, the preparations for Y2K litigation have developed such a momentum that the litigation inevitably will follow.

    That, I think, is the problem. There is going to be a Y2K litigation crisis. It seems to me that the provisions of H.R. 775 would take an important step toward solving that crisis.

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    Now, people who have raised objections to the bill, such as Mr. Yarsike, has in his testimony this morning, treated it as though it would prevent anyone who had been injured by a Y2K failure from ever obtaining relief from anybody who had caused that failure. If that is what the bill actually did, the Y2K Coalition, in which I participate, would oppose it. As I mentioned, many of the members of the coalition will almost always be plaintiffs in Y2K litigation. We have no interest in a bill that would prevent people who have actually suffered real injury from obtaining compensation and holding bad actors liable. That is not what this bill does.

    For example, I have looked at the complaint in Mr. Yarsike's case. I didn't see anything in his lawsuit that would have been affected in any way by any provision of H.R. 775, including a 90-day notice period. As he explained, he was dealing with a vendor in his case for some 2 years before he brought suit. Obviously, he satisfied the 90-day waiting requirement.

    I think we can go through each of the provisions of the bill and measure them against his lawsuit and see that none of them would affect the litigation. Now, each of the provisions of H.R. 775 actually does one of three things as I see it. First of all, some of them encourage businesses and individuals to take reasonable steps to prevent Y2K failures before they occur. That is the effect of the reasonable efforts defense, the mitigation requirement, and of the contract preservation provision.

    The second thing that they do is try to direct people away from litigation and toward the informal resolution of disputes that do develop in the event that there are Y2K failures. That is the effect of the 90-day prelitigation period, which is designed to push plaintiffs and defendants in the direction of settling their disputes out of court, off the litigation track, before both sides run up enormous litigation expenses. At the same time, that provision preserves the right of plaintiffs who are dissatisfied with the result to go into court and obtain complete relief.

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    Finally, some provisions of the bill are designed to screen out the most insubstantial litigation while not disturbing the rights of people who actually have suffered real injury. That is the effect of the pleading requirements, punitive damages limitation, the requirement that there be actual injury before classes are certified, and a number of other provisions. These provisions would help to discourage the strike suits that are sure to come by not taking away the right to recovery of people who have suffered a real injury.

    Now, as I see it, all of the provisions of the bill take measured and sensible steps to address Y2K litigation. I should say that I simply read the provisions differently than Ms. Mulhern and Ms. Greenberg do. They are reading more into the bill than is actually there. I should say some of the provisions of this bill have already been tested. A number of them are simply codifications that give uniformity to the long-settled common law rules. Some of them are taken directly from the Private Securities Litigation Reform Act that the Congress passed by an overwhelming bipartisan majority 3 years ago. Each of them is designed to inject some element of rationality into the machinery of Y2K litigation before that machinery grinds up literally hundreds of billions of dollars that are better devoted to more useful purposes. I think that is the step that Congress would be wise to take at this point. Thank you very much.

    [The prepared statement of Charles Rothfeld follows:]

PREPARED STATEMENT OF CHARLES A. ROTHFELD, ESQ., MAYER, BROWN & PLATT

    Mr. Chairman, I appreciate the opportunity to testify today about the litigation consequences of the year 2000 computer issue and, in particular, about H.R. 775, an important effort to address that issue. My law firm, Mayer, Brown & Platt, is one of the many in the United States that has created a practice group devoted to taking on Year 2000 legal issues. My firm also represents the Semiconductor Industry Association, Semiconductor Equipment and Materials International, and the accounting profession in connection with legislative efforts currently underway in Congress to address Y2K litigation. Each of these groups participates in the Year 2000 Coalition, a broad group of large and small businesses, including likely plaintiffs and potential defendants, that supports federal legislation to encourage remediation and discourage insubstantial or avoidable litigation.

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    The technical aspects and likely business consequences of the Y2K issue are, by now, generally familiar. It seems safe to say that, even if the United States avoids catastrophic computer and systems failures, the Y2K bug will cause glitches, inconveniences, and sporadic or temporary business shutdowns that will be felt throughout the economy.

    We are here today, however, to talk about a secondary effect of the Y2K phenomenon that ultimately may have more destructive, expensive, and long-lasting consequences for the nation than the millennial computer failures themselves: there is a substantial danger that Y2K glitches may generate an unparalleled wave of litigation. Certainly, that is the general expectation of lawyers who defend business cases. And knowledgeable plaintiffs' lawyers appear to agree; attorneys at Milberg, Weiss, Bershad, Hynes & Lerach, for example, one of the nation's leading plaintiffs' firms, have written that ''[a]mong lawyers in the United States, it is widely anticipated that there will be numerous system failures, leading to damages suffered by enterprises, and a concomitant effort to allocate liability—many a litigator's dream scenario.''(see footnote 2)

    Against this background, I'd like to touch on two points in my testimony today. First, I'll look at the volume of Y2K litigation that is likely, and the importance of legislative efforts to address that problem. Second, I'll consider H.R. 775 and ask whether its provisions offer a measured, balanced, and effective response to the serious problems created by excessive Y2K litigation.

A. THE LIKELY VOLUME OF Y2K LITIGATION

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    1. Likely Y2K Suits. The ubiquity of computers and the potentially pervasive nature of Y2K problems throughout the business world means that the sorts of lawsuits that might arise out of the year 2000 problem are virtually limitless. After all, there are any number of relationships that might be affected by the Y2K glitch. Most obvious is the connection between an information technology (''IT'') provider and its customers. But computer-related business interruptions also could affect dealings between any business and its suppliers or customers, causing domino effects up and down the distribution chain. In addition, companies may be affected by errors on the part of entities with whom they exchange electronic data. And Y2K failures may drive down company values, which inevitably will lead to second-guessing about the performance of corporate officers or directors.

    Litigation is possible—indeed, it is likely—at every stage of this process. While the variety of possible claims makes it impossible to offer a comprehensive compendium of Y2K suits, for present purposes it may be useful to break prospective litigation into four categories.(see footnote 3)

    First, the most obvious category of suits involves claims seeking remediation costs that are brought by technology users against entities that assertedly are responsible for the defects in non-compliant products. To date, most potential disputes between IT vendors and customers have been resolved amicably, with the bulk of vendors providing technical assistance, free upgrades or patches, and support in the testing process. But several dozen cases have been filed against IT vendors,(see footnote 4) and at least one suit has been brought against a consulting firm that assisted the plaintiff in the selection of computer systems.(see footnote 5) There is some reason to expect that the pace of this litigation will pick up in the future as larger companies turn their attention from carrying out remediation to recovering remediation costs, and as smaller companies that have been behind the Y2K curve begin to recognize that they have significant problems. In fact, some users who have spent large sums on remediation may conclude that they must sue vendors or consultants simply to fulfill fiduciary duties to shareholders.(see footnote 6) Claims in this category typically will allege breach of contract or warranty, relying both on express warranties and on implied warranties of merchantability and of fitness for a particular purpose. Plaintiffs also may assert tort claims based on negligence, product defect, fraud (including allegations of misrepresentations about the capacity of the IT product), and the like. Plaintiffs could make similar claims under state deceptive trade practices and consumer protection statutes.

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    Second, a potentially far larger category of suits would involve attempts to recover losses caused (directly or indirectly) by a Y2K failure. As might be imagined, cases in this category could involve an enormously broad range of possible parties and factual situations. Any company that makes use of IT products (which is virtually every business of any size in the United States), or whose suppliers or customers make use of IT products, could suffer an injury that is traceable to a Y2K failure. These suits are likely to advance contract, tort, and statutory claims of various sorts.

    Virtually all business-to-business relationships, and many business-to-consumer relationships, are governed by contract. As a consequence, essentially any Y2K problem that causes a company to fail in its business obligations could lead to a contract action. Examples would be suits by purchasers against IT vendors for damages caused by a Y2K failure (as distinct from suits seeking remediation expenses); actions by customers against suppliers that fail to deliver promised goods or services; claims by suppliers against customers that cannot accept delivery; and suits by companies against anyone whose nonperformance (or inadequate performance) made it more difficult (or impossible) for the company to operate. On the consumer side, customers could bring suit against financial institutions or securities firms whose operations were interrupted, or against IT vendors whose products were defective, or against other providers of goods and services who failed to perform as promised.

    Failures that cause an interruption of or interference with business also could lead to tort claims. The likeliest tort cause of action would be one alleging negligence, which plaintiffs could assert in a wide variety of settings: against a consultant or professional who assertedly failed to exercise due care in the provision of services; against an IT provider who is alleged to have failed adequately to test its products; against any business that harmed another because it was insufficiently attentive to Y2K issues. Plaintiffs also are likely to assert fraud claims, arguing that the defendant intentionally made false statements of fact. Such claims are possible whenever the defendant's statements about the Y2K status of its products, or about its own readiness, prove not to be true.(see footnote 7) Indeed, one commentator who practices in the field has noted that many of the inquiries that companies are now sending to other entities with whom they deal are transmitted ''precisely so that they can use them later as the basis for litigation. They may try to characterize statements made in responses as contract term—and thus the basis of contract claims, or as representations—and thus the basis of negligent misrepresentation or even fraud claims.''(see footnote 8) Depending on the circumstances, plaintiffs also might reach into a grab-bag of other tort claims, such as violation of a post-sale duty to warn,(see footnote 9) or departure from specialized duties that are said to govern particular relationships.(see footnote 10) Similarly, plaintiffs may base suits for business interruption or product defect on various statutory causes of action, including those provided by vague state unfair trade practices or consumer protection statutes.(see footnote 11)

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    Third, plaintiffs could bring fiduciary/derivative claims or securities actions. In the event of Y2K failures that damage a corporation, shareholders could sue on behalf of the corporation, asserting that directors breached duties of care or loyalty. Such suits could be triggered by failures that damaged the company's business operations and profitability, or that led to judgments against the company in Y2K litigation—and, in the event that the company is not damaged by Y2K problems, could even be based on allegations that directors wasted company assets by spending too much on remediation. A potentially broader category of actions involves securities fraud suits that would be based on asserted misstatements about Y2K readiness, or about alleged failures to disclose material information bearing on Y2K issues. Any alleged corporate misstatement (or omission) in SEC disclosures, or in other corporate communications, could form the basis of a suit against the corporation or corporate officers—and possibly against third parties, such as auditors, who arguably were involved in the review or formulation of the statement. Indeed, any drop in share prices following a Y2K failure could prompt a securities fraud suit based on the allegation that the defendant failed to disclose relevant information about the state of Y2K compliance.

    Fourth, a final category of suits—and, presumably, the last to be brought—will involve litigation regarding insurance coverage. Such litigation could involve claims brought under various types of policies for damages caused by Y2K failures, and also could involve claims that remediation costs are covered.

    2. The Volume of Y2K Litigation. While it thus is clear that a great many types of Y2K suits are possible under existing law, deciding how many actions actually will be brought necessarily involves a more speculative undertaking. But the signs and leading indicators point strongly towards the conclusion that the volume of litigation will be substantial.

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First, virtually every expert attempt to assess likely litigation costs indicates that the expense of Y2K suits will be enormous. The most widely cited figure suggests that litigation costs could approach $1 trillion.(see footnote 12) Even if that figure proves inflated, there appears to be a consensus among the analysts that the number of suits likely will be without parallel in recent experience. A panel at last summer's convention of the American Bar Association, for example, predicted that legal costs associated with the Y2K problem will exceed the combined litigation costs attributable to asbestos, breast implant, tobacco, and Superfund lawsuits.(see footnote 13) That amount exceeds the aggregate estimated annual cost of all civil litigation in the United States.(see footnote 14) Indeed, it is noteworthy that more than 50 lawsuits—only one of which alleges an actual Y2K failure—already have been initiated, more than eight months before the arrival of the year 2000. Moreover, Y2K litigation is likely to be protracted and expensive because it presents legal issues in a novel and very technical context.

Second, the legal profession is now engaging in frantic preparations for anticipated Y2K litigation. As of last August, some 500 law firms, including those on the plaintiffs and on the defense side, had established specialized year 2000 practice groups,(see footnote 15) and that number is sure to have grown in the intervening months. Seminars, presentations, and panels on how to initiate and litigate Y2K cases, with titles like ''Litigation Strategy for Year 2000,''(see footnote 16) ''Year 2000 Computer Crisis: The Litigation Summit,''(see footnote 17) ''Year 2000: Exposures and Coverage,''(see footnote 18) or ''Year 2000 Legal Liability Forum''(see footnote 19) are presented virtually every week. Specialized Y2K publications and treatises are multiplying.(see footnote 20) Law firms across the country are busily informing their clients how to best position themselves both to bring and to defend against Y2K litigation.(see footnote 21)

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    All of this activity in advance of the year 2000 is remarkable, and allows us to draw conclusions with some confidence about what is likely to happen after the date change. It is improbable that all of these sophisticated and intelligent attorneys are completely off base in preparing for lawsuits; the objective marketplace is telling us that a substantial wave of litigation is likely. And even if these lawyers are wrong in some objective sense about whether there should be many suits, this enormous investment of legal capital is acquiring a momentum that makes a wave of actions inevitable. Plaintiffs' lawyers are gearing up to sue, while defense lawyers have conditioned their clients to expect suits. The litigation itself is sure to follow.

    Third, experience shows that societal problems that have economic consequences almost always are addressed through litigation. The history of asbestos is one obvious example. But the Y2K issue has unique features suggesting it will impel a uniquely large volume of suits. The Y2K problem has consequences that are pervasive, potentially affecting almost everyone in the United States. And the problem has a lead time that (at least theoretically) allows potential defendants to take corrective action—meaning that, if something goes wrong, it will be possible in almost every case to allege (rightly or wrongly) that someone is at fault. In these circumstances, our legal culture inevitably will attempt to assign blame in the only way it can: through the medium of litigation.

    It should be added that the example of asbestos provides a frightening model of what could happen as a consequence of Y2K litigation. Pointing to the volume of asbestos suits, the Report of the Judicial Conference Ad Hoc Committee on Asbestos Litigation found that

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dockets in both federal and state courts continue to grow; long delays are routine; trials are too long; the same issues are litigated over and over; transaction costs exceed the victims' recovery by nearly two to one; exhaustion of [the defendants'] assets threatens and distorts the process; and future claimants may lose altogether.

Report at 3. The Committee added that ''[t]he transaction costs associated with asbestos litigation are an unconscionable burden on the victims of asbestos disease,'' citing a RAND Corporation finding that, ''of each asbestos litigation dollar, 61 cents is consumed in transaction costs * * * . Only 39 cents were paid to the asbestos victims.'' Id. at 13 (footnote omitted). These tremendous costs were found to diminish the funds available to compensate plaintiffs: ''[u]nfairness results because of the excessive transaction costs and the finite resources available to pay meritorious claims.'' Id. at 14. If translated to the Y2K setting, this would not be a happy state of affairs for plaintiffs, and it surely is not an outcome that we should be anxious to visit on the economy's high technology sector.

B. H.R. 775

Against this background, it is essential that Congress take limited steps to rationalize the inevitable Y2K litigation before it hits. Such legislation should be constructed around several principles. Because fixing Y2K problems is the best way to avoid litigation, legislation should encourage companies (and individuals) to take all reasonable steps to correct defects in their systems before problems develop. Because litigation inevitably involves waste and high transaction costs, legislation should give people an incentive to resolve their disputes quickly and informally in the event that computers do fail. And legislation should temper the possibility of a litigation crisis by screening out the most insubstantial lawsuits—the ones where there has no been no real harm—while preserving the rights of people who have suffered substantial injury.

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    In my view, H.R. 775 offers a balanced and comprehensive approach that is faithful to those principles. While a complete section-by-section analysis of this complex legislation is beyond the scope of my testimony, some of its more notable provisions warrant emphasis.

Section 101: Pre-Litigation Waiting Period.

    Under this provision, before bringing suit for money damages a potential plaintiff would have to contact the potential defendant, describing the problem and identifying the relief sought. The defendant would have 30 days to respond, describing the actions it proposes to take to remedy the problem. If the potential plaintiff is not satisfied with the potential defendant's response, it could bring suit after an additional 60 days have elapsed.

    This provision doesn't take substantial rights away from anyone. Plaintiffs who seek injunctive relief are not affected at all. The provision affects only plaintiffs who are asking for money damages. Even absent this provision, those plaintiffs would not get a judgment from a court for many months or years; they won't be hurt by a brief delay before bringing suit. But that delay will keep disputes off the litigation track for a reasonable period so that the parties have a chance to resolve issues between themselves, without getting the courts involved and forcing both sides to run up huge legal fees. By doing that, the provision focuses the parties on getting Y2K problems fixed, which is in everyone's interest. Plaintiffs who are not satisfied with the result may go to court, where they will be able to get complete relief for all damage inflicted by the defendant, including any damages incurred during the waiting period.

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Section 103: Requirement of Pleading With Particularity.

    This provision applies the pleading requirement that is part of the Private Securities Litigation Reform Act of 1995 (''PSLRA'') to Y2K suits. It provides that plaintiffs should state in their complaints, ''with particularity'': (1) the amount of the damages they seek and the basis for the damages calculation; (2) the nature of any material defect in a product or service; and (3) if proof of state of mind is required, the facts supporting the allegation that the defendant acted with that state of mind. In general, it provides that a plaintiff must provide some detail about the nature of its allegations before its suit may proceed.

    This procedural provision gives courts a tool with which to screen out insubstantial litigation while leaving undisturbed the rights of plaintiffs who have meritorious cases. Plaintiffs know and can easily explain what damages they have suffered. They can describe the ways in which a product isn't working. And it is unfair for a plaintiff to accuse a defendant of acting with an improper state of mind unless the plaintiff is able to articulate some factual basis for that allegation. This provision simply makes it easier to smoke out insubstantial claims at an early point, before the defendant runs up substantial litigation costs.

Section 104: Duty to Mitigate.

    Under this provision, the plaintiff in a Y2K action cannot recover damages that it reasonably could have avoided in light of information that the plaintiff knew or reasonably should have known.

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    Section 104 codifies a rule that is generally recognized by tort and contract law; under the UCC and related commercial law, for example, plaintiffs cannot recover consequential damages if they make no attempt to mitigate in cases of anticipatory breach of contract. And that rule reflects sound policy. Given the pervasiveness of Y2K problems, it makes sense to give remediation incentives to all people who are affected. Surely, if someone could easily avoid damage by taking simple steps of which he or she is (or should be) aware, it is perverse to allow that person to avoid taking those steps, to suffer the damage, and then to sue a third party for compensation. Because the provision makes use of a fact-specific ''reasonableness'' standard, unsophisticated consumers would not be expected to take extraordinary steps to educate themselves about the Y2K problem; the provision comes into play only when ordinary people in the plaintiff's position should have been aware of information that would have let them prevent the injury. The bottom line is that legislation should encourage remediation of Y2K defects, and both potential defendants and potential plaintiffs should be obligated to participate in that effort.

Section 201: Contract Preservation.

    Under this provision, the terms of written contracts (including limitations of liability) are enforceable, notwithstanding any other provision of law. The provision contains an exception, however, for circumstances in which a court determines that the contract as a whole is unenforceable.

    As a general matter, contractual provisions should be enforced—and judges should not be permitted to throw out pieces of a contract after the fact on the basis of ambiguous and amorphous ''public policy'' considerations. In comments on another provision of H.R. 775's companion bill in the Senate, the Department of Justice acknowledged that basic fairness requires the enforcement of agreements entered into by persons ''who prudently bargained for [particular] protection[s].''(see footnote 22) Section 201 attempts to do precisely that. Particularly in the context of negotiated contracts, it is fundamentally unfair to deny contracting parties bargained-for protections that may have been essential to their agreement to enter into the contract in the first place. Indeed, concerns that courts will override contractual protections on vague ''public policy'' and related grounds are slowing down remediation efforts now; many technical experts are reluctant to assist in curing Y2K problems because they are afraid that they will be caught up in litigation and that contractual liability limitations may be disregarded by the courts. At the same time, the exception to this provision guarantees that it will not apply to contracts of adhesion where there was no actual meeting of the minds between the parties.

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Section 301: Proportionate Liability.

Under this provision, which is modeled on the corresponding section of the PSLRA, the defendant would be held liable only for the percentage of the injury for which it is responsible. Thus, if a defendant is deemed responsible for only a small portion of an injury (an example might be a retailer that failed to adequately test a defective product that was manufactured by a third party), it would pay only a corresponding portion of the judgment.

Section 301 makes sense as a matter both of equity and of litigation management. It is fundamentally unfair to make a defendant pay for something that is someone else's fault and over which the defendant had no control—and that is particularly unfair when, as often will be true in Y2K cases, some of the responsibility for the injury is borne by the plaintiff. Without proportionate liability, plaintiffs' lawyers always will name a deep pocketed defendant in their suits so long as there is any chance that the people who really are responsible for the injury are judgment-proof; the lawyers will know that the deep-pocket will have to pay the entire judgment so long as a jury can be persuaded to find it even 1% responsible. As was true in the securities context prior to enactment of the PSLRA, that kind of scheme simply encourages strike-suit litigation by giving lawyers the leverage to bring abusive suits that the defendant will have no choice but to settle. Indeed, the Department of Justice acknowledges that a system of pure joint and several liability results in the defendant being held liable for ''more than its share of damages'' and may be ''unfair to defendants.''(see footnote 23) In that, the Department plainly is correct: there is nothing equitable in making people liable for damages that are not their responsibility

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Section 303: Reasonable Efforts Defense

    Under Section 303, a defendant may defend against liability in noncontractual suits by establishing that it took reasonable measures to prevent the Y2K failure from occurring or causing the damages upon which the claim is based.

    This provision is designed to prevent the imposition of strict liability in Y2K tort and related cases by codifying existing liability rules—in particular, the rules governing negligence claims. A defendant benefits only by showing that its actions were reasonable under the circumstances; by definition, Section 303 therefore cannot come into play if the defendant was at fault or if its acts were reckless.

    For that reason, Section 303 creates incentives to remediate. The evident intent of the provision is to give protection to persons who take actions that are reasonably calculated to prevent Y2K failures, and who exercise due diligence in doing so. Anything that encourages potential defendants to take such actions will lead to more remediation. Of course, for most companies the greatest incentive to remediate is their desire to stay in business and maintain good relationships with customers and suppliers. But for companies that have not been moved by those considerations, the creation of additional legal incentives can only help solve Y2K problems. And there is nothing fair in a regime that imposes liability on persons who have done all that can reasonably be expected to avoid Y2K failures.

Section 304: Punitive Damages Limitation

    This provision is in three parts. First, it has a state of mind requirement that would allow punitives to be awarded only where the defendant intended to cause injury to the plaintiff. Second, it would impose caps on punitives (the greater of three times actual damages or $250,000 for large defendants; the lesser of $250,000 or three times actual damages for small defendants). Third, it would place recoveries for punitive damages in a special fund that would be used to benefit small businesses, state and local governments, and nonprofit organizations that are affected by Y2K failures.

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The state of mind requirement in this provision strikes the proper balance. Truly bad actors would remain liable for punitives; for example, a company that claimed its products were Y2K compliant when it knew that they weren't would be committing fraud and therefore could be the subject of a punitive award. In the Y2K setting, making punitives more widely available is not necessary to give companies an incentive to fix their products and systems: they have to do that to stay in business and maintain customer relationships. On the other hand, any state of mind standard short of ''intent to cause harm'' does not meaningfully restrict punitive damages. In states that use a recklessness standard, it almost always is possible to get to the jury with a claim for punitives, and what juries will do with that claim is completely unpredictable because the recklessness standard is wholly subjective. For this reason, a number of states altogether refuse to allow the award of punitive damages. While H.R. 775 does not go that far, it recognizes that punitive damages have a limited role to play in solving a unique national problem like the one posed by the Y2K bug. Like the rest of the bill, this provision does not come into play in any case involving the most potentially dangerous misconduct, that causing personal injury.

The damages cap is eminently reasonable. Most people are familiar with out-of-control punitive awards like the one involving the notorious BMW paint job or the too-hot cup of McDonald's coffee. The possibility of hitting the jackpot by winning such an award will simply encourage lawyers to bring insubstantial cases, while driving up the settlement value of insubstantial claims. Yet there is no need to permit such jackpots: the prospect of paying a punitive award that is three times the plaintiff's injury surely will provide adequate deterrence of wrongful conduct. That is particularly so because it is unlikely that wrongdoing in the Y2K setting won't be discovered; it will be immediately obvious if products or systems are not Y2K compliant.

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Section 305: the ''Economic Loss Rule''

    Under this provision, a party bringing a tort suit may not recover economic losses (which principally are lost profits) unless (1) the plaintiff seeking to recover is a party to a contract that allows for recovery of economic losses; (2) the losses arise out of a personal injury claim; or (3) the losses arise out of damage to tangible property. In essence, the provision prevents a party from circumventing contractual limits by bringing a tort suit to recover economic losses that it cannot recover under a contract.

    Section 305, which simply codifies the common law rule that prevails in most jurisdictions,(see footnote 24) accomplishes three things. First, it brings valuable uniformity in a confusing area that is sure to be extensively litigated in the Y2K context. The doctrine varies in its details from state to state, and the exceptions to the doctrine ''are evolving and ill-defined.''(see footnote 25) Absent a clear federal standard, these uncertainties, and the likelihood that ''[c]reative plaintiffs may try to circumvent [the rule] altogether,''(see footnote 26) may make litigation about the applicability of the rule complex, protracted, and expensive.

    Second, Section 305 prevents a plaintiff from attempting to get out of a deal that it made by contract. The courts generally have recognized that the rights of parties who have entered into a contract should be governed by that contract, and not by tort rules that are outside of the agreement. If the contract specifically precludes the award of economic losses, there is no reason that a party should be allowed to evade the limit to which it agreed. And if the contract is silent on the question of economic losses, the parties will expect their rights to be governed by existing state contract law; if that law provides for economic losses (as it typically does, so long as the damages were foreseeable), the plaintiff will be made whole. Plaintiffs therefore will not be left without a remedy.

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    Third, where there is no relationship between the parties, this provision establishes that economic losses are available only when those losses grow out of personal injury or injury to tangible property. Courts have recognized that the prospects of economic losses in other circumstances are so remote and unforeseeable that it would be unfair to make defendants liable for them. While such suits likely will be rare, permitting them would allow for unanticipated and potentially limitless liability.

Section 306: Liability of Officers and Directors

    Under this provision, liability for officers and directors is capped at the greater of $100,000 or the amount of cash compensation received by the officer or director in the 12 months preceding the date of the act giving rise to liability.

    There is no need for limitless personal liability here. Y2K cases against officers and directors generally are not going to involve self-dealing and similar misconduct. Instead, such suits will challenge the business judgment of the defendants, arguing that they failed to take proper steps (or took the wrong steps) to safeguard their companies. This sort of second-guessing of business decisions should not lead to enormous personal liability. In fact, officers and directors are caught in a bind; it has been suggested that they will be sued if Y2K problems develop (on the theory that they should have spent more to combat the problem), and that they will be sued if Y2K problems do not develop (on the theory that they wasted corporate assets by spending too much on Y2K compliance). Fear of this sort of liability is making it increasingly difficult to attract conscientious directors to serve on corporate boards, a particular problem for start-up and high-tech companies that have volatile stock prices.

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    In theory, defendants in these types of suits are protected by the ''business judgment'' rule, which rests on ''a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action was taken in the best interests of the company.''(see footnote 27) But this presumption may be overcome by a showing of ''gross negligence,''(see footnote 28) a vague allegation that may be difficult for the defendant to rebut on a motion to dismiss. In the words of one attorney who written in the field, to take advantage of the business judgment rule ''the officer or director must take action and make an informed, reasonable decision in good faith. If no action is taken, or there is the absence of a conscious and documented decision, there is no protection.''(see footnote 29) The difficulty of determining whether that prerequisite is satisfied provides fertile ground for litigation.

Section 401: Class Action Minimum Injury Requirement.

    Under this provision, a year 2000 suit could not proceed as a class action unless the defect in the product or service that gave rise to the action was material as to a majority of the members of the class. For example, if a suit alleged that software did not function properly, the claim could proceed as a class action only if the alleged defect affected the operation of the program in a way that was significant to most of the class members. A trivial defect that would not be noticed by most class members could not support a class action.

    Without the limitations in this provision, lawyers would be able to manufacture essentially fictitious classes by finding trivial or theoretical defects in products and bringing strike suits to extort settlements. And by definition, this provision applies only when the defect is not material as to most class members, meaning that the defect will not have any significant effect on the operation of a product.

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Section 404: Class Actions: Federal Jurisdiction.

    This provision would create jurisdiction in the federal courts to hear class actions in which there is diversity between any defendant and any member of the proposed plaintiff class—that is, where a defendant and any member if the class are citizens of different states. The provision recognizes exceptions where (1) a substantial majority of the class members are citizens of a single state, the primary defendants also are citizens of that state, and the claims will be governed by the law of that state or (2) the aggregate amount at stake is less than $1 million.

    There is a compelling federal interest in having the suits governed by this provision decided by federal courts. These cases will be national class actions involving citizens of many states—and federal courts have far more experience than do state courts in resolving such claims. Moreover, the Y2K problem poses an extraordinary national challenge that will have profound effects on the national economy, and it essential that the issues in such cases get the sort of nationally uniform treatment that is possible only in federal court.



    If we are facing a tidal wave of Y2K litigation, these provisions certainly are not a panacea: they make only measured and incremental changes. But they are likely to place a renewed focus on remediation, while providing mechanisms to weed out the most insubstantial litigation. Legislation of that sort will both strengthen the economy and assist plaintiffs who have suffered real injury.

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    Mr. GOODLATTE. Thank you, Mr. Rothfeld. I would like to ask your opinions on what the best way to reduce the amount of litigation that takes place really from both your standpoints. Do you think that this legislation accomplishes that? For example, the litigation cooling-off period that would postpone the filing of a Y2K litigation for 30 to 90 days depending on whether the defendant agreed to fix the problem, would that unduly limit a plaintiff's legal rights?

    Ms. Bender.

    Ms. BENDER. No, I don't believe that it would unduly limit the plaintiff's legal rights. I think most businesses, most small businesses, really want to work things out together. They are in business to stay in business. We develop partnerships with our suppliers and our customers because we all benefit from each other. I think the cooling-off period just gives people adequate time to really work together and see if they can solve the problem. A lot of our problems will probably not come, I don't believe, from our own Y2K problems within our business, but from some third-party suppliers that we have no control over or have no knowledge if they are Y2K-compliant or not.

    Mr. GOODLATTE. Ms. Mulhern, you mentioned in your testimony your concern about this cooling-off period. But you didn't note that there was distinction made between those circumstances where the defendant responded within 30 days, in which case they could have a longer period of time than those in which they didn't. Would you address that point? Why wouldn't that be helpful in promoting cooperation between both sides to work something out?

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    Ms. MULHERN. I will address that. Thank you, Mr. Chairman. Under Title 1 of the bill, the only obligation on defendant after receiving a notice from the plaintiff is to send a response within 30 days to describe what actions it will take, if any, to address the problem identified by the plaintiff.

    So one of the problems here that we have a 90-day notice period is that the plaintiff could file the notice, the defendant could write back and say we will not do anything to fix the problem, or we will fix the problem in your $13,000 Medical Manager software system but we will charge you $25,000 to do so.

    Even if everyone were to agree that that is not a reasonable response of the defendant, this legislation still requires the consumer or the small businessman to sit for another 60 days. One of the concerns that we have about the cooling-off period is that it does not require defendants to take any steps within that period of time to actually fix the problem that the consumer or the defendant has identified within that period.

    Mr. GOODLATTE. Mr. Rothfeld, how would you respond to that?

    Mr. ROTHFELD. I think in a couple of respects. First of all, as I read the provision, if the defendant responded within the 30 days that he intended to do nothing, at that point that the lawsuit could go forward. I don't read the provision as insisting that the plaintiff at that point sit silent for an additional 60 days.

    I think more basically, though, in looking at the reality of litigation, there is an exception in the provision for people who are seeking injunctive relief, so people who are actually demanding immediate relief from the court can immediately go into court and get it.

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    If people are bringing the lawsuit to get money damages, given the way that the legal system works in the United States, they are going to wait for many years or months before they get relief in any event. Requiring a 30-day cooling-off period which forces the parties to interact, makes it possible that some of these cases then will leap off the litigation track entirely, because they will be worked out. I think that is something that is very useful.

    Mr. GOODLATTE. Thank you.

    Ms. Greenberg, surely you would agree that it is in the interests of consumers to hold down the amount of this litigation that both indirectly drives up the cost of goods to consumers when you have the proliferation, and it can cost them a lot of money to participate if they have to do that.

    Are there provisions in this bill that you like that would promote settlement?

    Ms. GREENBERG. I think it goes without saying that consumers want to resolve problems, not litigate them. Yesterday's article indicating that consumers are really looking for a fix—it is in the consumer's interest to get the problem solved. They are not looking to sue. This is not the end goal certainly of the consumers that we hear from. They would like to solve the problem. Certainly the ADR provisions are a positive.

    I would go back to some of the statements that have been made by Mr. Koskinen, who is the White House Y2K guru. He says that the best way to avoid lawsuits is for companies to address the problem and to fix the problem. We don't think this kind of legislation promotes readiness. It doesn't provide the proper incentives for companies to go forward with their Y2K readiness preparation. We think, in fact, it sends the wrong signals.

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    From our perspective this bill provides the wrong approach and, in fact, may provide protections for those companies that are doing the least.

    Mr. GOODLATTE. The ADR provisions are not mandatory. One side cannot oppose them, can they, as I understand it?

    Ms. GREENBERG. Yes, that is correct.

    Mr. GOODLATTE. I think that is desirable, you wouldn't want to force somebody with a legitimate cause of action to participate in a procedure they didn't———

    Ms. GREENBERG. Yes. Consumers Union is on record and has been for many, many years supporting ADR, but only in the context of voluntary ADR mediation. We don't believe in depriving consumers or anyone else of access to the courts if they should need to use the legal system.

    Mr. GOODLATTE. Thank you. My time has expired. The gentleman from Michigan, Mr. Conyers.

    Mr. CONYERS. I wanted to welcome Mr. Yarsike from the metro Detroit area. You have got a pretty good feel for what might have happened if this law had been in effect. I am impressed with that.

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    Why do you suppose that the small businessmen are being given such a difficult time, like yourself, if we get a bill like this through? All of these provisions, I have got about eight of them here, are one-sided. The beneficiaries are the companies that we are trying to get relief from; this bill gives the defendant 90 days before the plaintiff can file a suit, but there is no requirement that the defendant do anything about the problem during the 90 days. That 90-day period weakens the plaintiff's provision, doesn't it?

    Mr. YARSIKE. Yes, it does. The young man on my left, on the end, who spoke of the 90-day cooling-off period, well, after a year and a half of service calls, once I initiate a lawsuit I have to wait 90 more days. For a year and a half I have given them the opportunity to replace, repair, fix my system, keep my business running. This law states I have to wait 90 more days after that. That is ridiculous. Then it may take another half year to get into court.

    I don't know about anybody else on this panel—being in business, the success rate of a small business in this country is so small and so difficult. I had bleeding ulcers. I pulled my hair out. We worked around the clock to keep customers in the stores. They left their shopping carts and walked out. This panel is telling me I have to wait 90 more days on top of that——

    Mr. CONYERS. We want you to cool off, and you may have some hair left and some ulcers that are still repairable.

    The whole point, though, look, panel: I mean, this thing is a nightmare. I am being told by my counsel that some of the requirements go beyond what the computer industry wants. This is going back to tort and product liability changes that we have been making around here for a long time. This is seen by some, unfortunately, as an opportunity.

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    Let me ask Ms. Mulhern, who is an attorney. Here we have got a provision that would require that to receive punitive damages, any punitive damages, a plaintiff must prove by clear and convincing evidence that the defendant specifically intended to harm the plaintiff.

    Why would we give this kind of protection after there has been a contract in the first place? Why would we change the existing law, as Mr. Yarsike said?

    Ms. MULHERN. Mr. Conyers, we do not support those changes in punitive damages law. But I think that you are right to point to the extraordinarily high standard that this bill imposes. Not only does the bill cap punitive damages and override State laws that do not, but the legislation does contain the standard that in order to get any punitive damages, you have to show by clear and convincing evidence that the defendant specifically intended to harm plaintiff.

    Under many existing State laws, plaintiffs already have a burden to show, often by clear and convincing evidence or some other high burden of proof, that the defendant acted in some intentional or outrageous way in order to get punitive damages. That is true in every State.

    What is new here is that you are adding the requirement that not only do you have to show that the plaintiff acted in some intentional or outrageous way, but you have to show that they specifically intended to harm the plaintiff. Again, without some kind of extraordinary smoking gun evidence or document showing that the defendant meant to harm the specific plaintiff, this provision, I think, essentially eliminates punitive damages in probably all cases because it sets such a high burden. It is even beyond the cap. I think it would be impossible in most cases.

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    One of our concerns is that this gives the most protection to the companies that have done the least to solve Y2K problems. This protects companies who would otherwise be liable under State law for punitive damages. It is a very troubling provision.

    Mr. CONYERS. Thank you. I know there are more, but my time is up. Thank you, Mr. Chairman.

    Mr. GOODLATTE. Thank you. The gentleman from Pennsylvania, Mr. Gekas.

    Mr. GEKAS. I thank the Chair. I was struck by the testimony of Ms. Bender when she said that one of the initial steps that she or her company took was to expend or to allot $100,000 to prepare for the Y2K eventual problem. Is that correct?

    Ms. BENDER. We did not actually set a budget to begin with. We basically set out to do everything necessary to fix the problem within our company.

    Mr. GEKAS. I understand. I am not interested in your finances. What I wanted to know is what specifically were you looking for? Are you looking for a software solution or a hardware replacement?

    Ms. BENDER. The bulk of it was just the time it took for everybody to check every system that——

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    Mr. GEKAS. Would you pull the mike——

    Ms. BENDER. I am sorry. The bulk of the problem was all the time it took to go through and make sure we inventoried every software, every hardware, every vendor, every customer, every supplier that we could find, and to go through and search to make sure that there are not going to be any problems. Or if there were problems, to fix those problems. Whether it would be replacement or it would be upgrading. It took us a lot of time just to go through all of that and to do all of the testing to make sure that we hopefully will not have any problems and that we are working with the right businesses so that they won't have any problems either so that we will continue to stay in business past the Year 2000.

    Mr. GEKAS. Do you feel you succeeded? Forget this legislation for a minute.

    Ms. BENDER. I feel that we have, to the best of my knowledge. I would not say 100 percent because who knows what lurking embedded chip might be there that we are not aware of. Our biggest problem is our suppliers of raw materials that we are very dependent on. We have surveyed our first line of suppliers but we don't know who their suppliers are, and then who their suppliers are. We are all so interrelated that if a supplier five times removed has a problem, it would cause a domino effect that would eventually affect us and subsequently affect all of our customers, which we don't want to happen at all. We are supporting them.

    We are in business because we have customers. We want to make sure they stay our customers. Does that help to answer your question?

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    Mr. GEKAS. Yes, it helps my confusion.

    Mr. YARSIKE. May I say something?

    Mr. GEKAS. Yes.

    Mr. YARSIKE. It is just amazing to me that if a computer goes down today, pick up the phone like we did 10 years ago, call and get your order. People make things so complicated in this country. What happened to the old fashioned days? Fifteen years ago there were no computers in this country and this country ran beautiful, at a larger growth rate than it does today. I don't understand if their chip is down and our chip is down, we can't get the order business. I am going to get fruit in my store for my customer, no matter what happens.

    Mr. GEKAS. The 200 telephone calls that you testified to, were any of those service calls they came up for——

    Mr. YARSIKE. Service calls.

    Mr. GEKAS. Was each one responded to to your satisfaction?

    Mr. YARSIKE. Yes, they were. For about 2 or 3, 4 hours, and then it blew again. My problem with this bill is there are a lot of systems being sold out there today still on the shelf in warehouses that are non-Y2K compatible. They are cleaning their warehouses out on the public and they are ripping them off. That is the problem that I am having. Not people that have 10, 15, or 20-year-old systems that need to be upgraded to keep up with the day, time, and age of the Year 2000. I am talking about the thieves out there that sold me a system for $100,000 that was non-Y2K compatible. They told me it would take me through the next century.

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    I have a friend of mine that owns a business, bought a system a year ago, and it was non-Y2K compatible. $240,000. This is the problem that I am having.

    Ms. BENDER. Sir, I would like to——

    Mr. GEKAS. Mr. Lewis, you endorse the provision of this legislation to allow 60 days to fix the problem?

    Mr. LEWIS. Yes, I do, sir.

    Mr. GEKAS. That goes contrary to what Mr. Conyers was talking about, the fact that you would have to wait that additional time or that the plaintiff would be robbed of an earlier opportunity to enter the court system.

    Do you contest that notion?

    Mr. LEWIS. Unlike many of you, I am not an attorney. So some of the legal issues—there is a briefing paper that we have had and I have read from the Congressional Research Service which has helped explain a lot of some of these legal issues. I would like the committee to remember a couple of things. As a business person, my greatest asset, my source of income is my customer. If I annoy my customer, if I do something that is going to force him or her out of business, I will not have that revenue source, and I lose tremendously on this. I can never recoup that.

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    So I must treat that customer every day like gold because indeed that is where my income is coming from. That is number one.

    The second thing is that business person to business person, I have rarely ever been in a situation where, decisionmaker to decisionmaker, we could not come up with an amicable solution. Tell me the problem, clearly define what it is, and then let us work on it. I mentioned in my testimony that because we are a manufacturer of computers to, in addition, an Internet providing company, we get the first call. Many times when you investigate, it has nothing to do with my original product. It is something else, ancilliary, that my engineering will come in and fix. I strongly support this because it would allow reasonable business people to come in together and talk.

    Let me tell you the downside. If I have to go to court as chief executive officer of my company, I am not out there running my firm. I am not a gigantic corporation. My firm could go bankrupt because of being in this situation. So, yes, I do support that cooling-off period. I support where reasonable people can come together to a meeting of the minds to find a solution.

    Mr. GEKAS. I yield back the balance of my time.

    The CHAIRMAN [Presiding.] The gentleman is most generous. The gentleman from California, Mr. Berman.

    Mr. BERMAN. Well, thank you, Mr. Chairman. Ms. Bender said, in response to a question from Mr. Goodlatte, that she didn't believe that this bill in any way limited anyone's legal rights.

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    Mr. Rothfeld, is that your contention?

    Mr. ROTHFELD. Well, obviously, it changes the law in some respects——

    Mr. BERMAN. It limits people's rights in many different respects, doesn't it?

    Mr. ROTHFELD. Many of the provisions that you are probably referring to are codifications of existing common law rules.

    Mr. BERMAN. Wait. When you say that this bill will preempt and void State laws, we should adopt universal commercial codes which say that you cannot disavow a warranty of merchantability, isn't that a limitation of people's rights?

    Mr. ROTHFELD. If that is what the bill did, I think I might take issue with your interpretation of the commercial code which allows for disclaimers of warranties if they are done in particular ways. Obviously, at some level, some provisions do affect the rights of plaintiffs. There is no question about that.

    Mr. BERMAN. All right. As I understand the bill, it requires, with respect to claims for money damages, except personal injury, the defendant is liable only if the plaintiff establishes by a clear and convincing evidence, a higher standard; that the defendant knew or reasonably should have known that its actions would cause harm to the plaintiff in the special facts and circumstances of the claim, the specific facts and circumstances of the claim.

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    I would like one of you who is supporting the bill to tell me how that standard could ever be met when you are dealing with a manufacturer of an operating system which is in very wide use, Apple Computer, Microsoft Windows 98? How could a plaintiff ever establish that the defendant knew, given the wide and different and probably unforeseen uses of those systems, how can you establish that the defendant knew or reasonably should have known that it would cause harm to the plaintiff in the specific facts and circumstances of the claim?

    Mr. ROTHFELD. As I read the provision that I think you are referring to, there are two elements of it. There is the state of mind element, which requires knowledge; actual or constructive knowledge, I think, applies only to causes of action in which knowledge is an element of the claim. And so negligence suits, for example, would not be affected by that provision.

    Mr. BERMAN. I don't understand. The negligence suit with a traditional tort remedy for economic loss, for noneconomic losses, it seems to me is wiped out about this by this bill.

    Mr. ROTHFELD. I think I would respectfully disagree about the meaning of the provision. If that is what it did, I think people that I represent would not support it as we understand the provision. As I said, if I am referring to the same provision that you are, it is in two parts. One deals with causes of action in which actual and constructive knowledge is an element of the claim. Negligence is not such a cause of action. So it is not——

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    Mr. BERMAN. Tell me where under this bill you can sue for negligence and the judicial standard of negligence for nonpersonal injury claims, for economic losses or noneconomic losses? I would like to know where in this bill that is still allowed.

    Mr. ROTHFELD. The question would be is there something in the bill that prevents you from doing that because the cause of action is provided by State law. I don't see anything in the bill that would prevent you from bringing such a cause of action.

    Mr. BERMAN. If there is nothing in this bill that prevents an individual from suing in negligence, what is the purpose of this provision that we have been talking about?

    Mr. ROTHFELD. I think, as I understand it, it has two purposes. For causes of action in which actual or constructive knowledge is required, it establishes a particular state of mind. Recklessness would have to be satisfied——

    Mr. BERMAN. Where is it not required that that be the state of mind when you are suing for economic or noneconomic damages other than personal injury?

    Mr. ROTHFELD. If you are suing in negligence, I think actual constructive knowledge of potential harm is not an element of the claim. I think it is simply a pure breach of duty.

    Mr. BERMAN. Ms. Mulhern, could you respond to this because I don't understand. Your reading of the bill and mine are very different.

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    Ms. MULHERN. Mr. Berman, I agree with you that these provisions effectively wipe out simple negligence claims under State law. That is also the interpretation that the Department of Justice has given to these provisions. Under regular negligence, one element is what the defendant knew or should have known. We believe that is what is referred to in the section regarding constructive knowledge. Therefore we believe that negligence claims would be affected by these bills. You would have to show more than simple negligence, but what the Department of Justice has called recklessness plus, a higher standard than is required under simple negligence in ordinary State tort law.

    Mr. BERMAN. Mr. Chairman, my time has expired, but I do think that is a critical thing; that we should establish with some certainty about this legislation, the contention of whether or not a negligence lawsuit is still allowed for economic or noneconomic damages. Thank you.

    The CHAIRMAN. I thank you, gentlemen. The gentleman from Tennessee, Mr. Bryant.

    Mr. BRYANT. Thank you, Mr. Chairman, and I thank the distinguished panel. I would like to focus, if I could, on the notice provisions of this bill. We have a number of disagreements, meritorious on each side, between the number 2 panelist and the number 4 panelist, the two gentlemen there.

    Having practiced law before, I think it is important that before a defendant is sued, they at least have some sort of notice, at least in this type of situation, which is probably going to be one of the unique situations that we have had in this country in terms of litigation.

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    Mr. Yarsike, you make a good point about having to get back to your customer very quickly. You are not going to have time for your computer provider, let's say, in this case to delay you 90 more days. But in essence, as I understand this bill, you are giving them 30 days' notice in which they would tell you if they could come in and negotiate with you, work this thing out, fix it, whatever, solve your problem. And then if they say they will do this, then they have another 60 days——

    Mr. YARSIKE. I gave them 2 years of notice, 2 years. As a small businessman, my system cost over $130,000. Thank God I had the resources or my doors would have been closed. I was maxed out at the bank my first year with loans and borrowing money. I had no more purchasing power left or any credit left on my line. Thank God somebody pulled through for me.

    Mr. BRYANT. But in this bill, instead of delaying 2 years, you would only have to wait 30 days, no up or down.

    Mr. YARSIKE. Before the 90-day period begins.

    Mr. BRYANT. Before you file your lawsuit.

    Mr. YARSIKE. Then the 90-day cooling-off period begins after that.

    Mr. BRYANT. Let me get down to——

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    Mr. YARSIKE. I think once you file, according to what I am reading.

    Mr. ROTHFELD. If I could make a response to this.

    Mr. BRYANT. Mr. Lewis, down at the end, could you respond?

    Mr. LEWIS. Congressman, the way that I read according—from you own Congressional Research Services and the Library of Congress, as well as reading the bill—but within 30 days after receipt of notice, each defendant will be required to provide the plaintiff with a written statement describing the actions it will take or has taken if they need to address the problem.

    It seems that what this does is put in a very controlled period of time for communication between the two affected parties to work a solution. I think that is the part of the bill that says we have a cooling-off period. It is not a completely infinite period of time, it is a controlled period of time where there are controlled responses on both sides. It is not, oh my God, we are doing nothing for 90 days; let's go off and take a vacation. There is significant action that the bill specifies that must be taken. If I am not mistaken, that is in section 101 of the bill.

    Mr. BRYANT. Yes, ma'am. Ms. Wylie?

    Ms. WYLIE. Yes, I would like to add something to that. If I had a client with the problem—as Ms. Bender said, we live and die by our clients. Mr. Yarsike's experience was horrendous. Part of my job is to make sure that my clients never experience that. If my client has a problem, I would like to know about it, where I could fix the problem, rather than spend all of my time getting ready for court. If I am slapped with a lawsuit with no notice, I don't have time to fix their problem. I have to get ready to go to court.

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    If I have got a 30-day notice period and a 60-day cure period, I can probably fix their problem in that 90 days or make good progress toward it to show good faith.

    Mr. YARSIKE. Where were you the first 2 years?

    Ms. WYLIE. It wasn't me.

    Mr. YARSIKE. That is where lawsuits come in. We are not ignorant Americans. I am a simple citizen. But if I call you up 200 times and tell you my system is not working, get it up, get it up—if your transmission breaks in your car 5 or 6 times, there is a lemon law.

    Mr. BRYANT. I think we have had here the regular litigation and contract law in existence for years now. What we are anticipating, though, is a potentially unique, horrendous, voluminous number of possible cases.

    Mr. YARSIKE. You can't turn me down after 2 years.

    Mr. BRYANT. Your situation is a unique one to you. I am simply saying, it seems to me that you have the court system and your contract law available to you during the 2 years, and you just make the decision that you would give your man that long or that person that long to fix the computer rather than sue them. We are saying that because of the volume, potential volume of cases, it is going to be necessary to have this cooling-off period to see if we can't work some of these cases out short of litigation.

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    Mr. ROTHFELD. If I could offer a clarification of how the bill works, I think the 90-day period would have expired 90 days after Mr. Yarsike's first complaint to his vendor 2 years ago. So I think after 2 years of discussion, he could have gone straight into court. He would not have had to wait for an initial 90 days or an initial 30 days.

    Mr. YARSIKE. I am sorry; I asked a question and he interrupted.

    In section 5, client protection connects with the Year 2000 Act, according to this. According to this, in section 5 of this bill, no attorney would take my case.

    No attorney would take my case on contingency, only hourly, and I would be out of business today. I understand if I make a contractual agreement with my attorney on contingency for certain funds, whatever the outcome would be—and I am not an attorney; I am not fond of attorneys. I have been sued before. This has been my first lawsuit in 41 years on this planet, I am not one to go sue everybody in this world—this would take away my right and would really find it difficult for me to find an attorney to represent my business hourly, not on a contingency with the percentages that are done. And there are a lot of flaws in this bill.

    Mr. HYDE. The gentleman's time has expired. The gentleman from Virginia, Mr. Scott.

    Mr. SCOTT. Thank you, Mr. Chairman. Mr. Yarsike, you paid your lawyer on a contingent fee?

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    Mr. YARSIKE. Yes, I didn't have the funds to hire my own.

    Mr. SCOTT. Did the defendant pay any of your attorney's fees or did you pay your attorney's fees?

    Mr. YARSIKE. No, I paid my attorney's fees.

    Mr. SCOTT. And you paid a contingent fee? He got one-third of what?

    Mr. YARSIKE. Yes, he did. $260,000. My loss was 800- to 1.2 million.

    Mr. SCOTT. Okay. Now if this system was only a $5,000 system, what chance would you have had of ever hiring a lawyer?

    Mr. YARSIKE. None.

    Mr. SCOTT. So if you had been straight-up ripped off, you couldn't have hired a lawyer with the limitations in this bill?

    Mr. YARSIKE. Not at $200 an hour, no.

    Mr. SCOTT. Now, do you know what joint and several liability is?

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    Mr. YARSIKE. No, not exactly.

    Mr. SCOTT. If you have joint and several liability, that means everybody at fault, if you can find one of them, they pay the whole bill. And if they want the others who are equally at fault to contribute, it is their problem to go chase them and find them.

    Mr. YARSIKE. Okay.

    Mr. SCOTT. Suppose you had several liability and each individual in the chain of commerce was responsible only for his or her share of the damage. The person who had sold it to you said I am only 10 percent at fault. What would you have done? Do you know what you would have done? Do you have any idea of a clue as too what you would have done?

    Mr. YARSIKE. I am not sure if I understand the question.

    Mr. SCOTT. Suppose the guy who sold it to you hit them for the whole 240,000, and suppose they said the manufacturer was actually 90 percent responsible. You never dealt with the manufacturer.

    Mr. YARSIKE. That is who I went after. Yes, I did deal with the manufacturer. They had a representative in my store.

    Mr. SCOTT. Suppose there were others in the chain of commerce that were equally at fault. You had one that you knew about because that is the one you were dealing with. But if you had to chase down each and every one and prove that you were 90 percent at fault or 10 percent, you may be 5 percent at fault——

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    Mr. YARSIKE. I only went after the one that was at fault and that is the one that sold me the system, and that is TechAmerica owned by Toshiba of Japan.

    Mr. SCOTT. So you wouldn't support the idea that you would have to chase after everybody in the entire chain of commerce?

    Mr. YARSIKE. No.

    Mr. SCOTT. Because you would never get to the end of it, would you? If you had in your contract a guarantee that this thing would be Y2K compliant, would you want the Federal Government to inject itself into that contract and weigh what the contract should have been?

    Mr. YARSIKE. No. 41 years I have watched Michigan make great State laws to protect its citizens, and it has done a fine job.

    Mr. SCOTT. And if there is a contract which is illegal to be made under Michigan law because—or it is unenforceable under Michigan law because it is what is called an adhesion contract, that is, that you had no choice about the provision and it is contrary to public policy and Michigan ruled that unenforceable, you wouldn't want the Federal Government to come in and change Michigan law, would you?

    Mr. YARSIKE. No, I would not.

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    Mr. SCOTT. Ms. Greenberg, are the consumers asking for limitation on attorneys' fees?

    Ms. GREENBERG. Consumers Union actually has looked at those provisions and has not taken a position on the proposal in this legislation. We have some very specific guidelines for consumers on hiring attorneys: the kinds of things you should look for, the kinds of fee arrangements you should make in advance, those kinds of consumer informational provisions that will help consumers and lawyers to smooth the relationship. But as far as fees——

    Mr. SCOTT. If a consumer should be ripped off for just a couple of hundred dollars, how could the consumers get any justice without class action?

    Ms. GREENBERG. Yes, if you are referring to the class action section, we find that section problematic because many cases, as you pointed out, Congressman, would not be of sufficient interest to a lawyer because it wouldn't—it does not amount to much, each individual case. When consumers have been wronged either by fraud or by misrepresentation and there is a class of consumers, a core of people, then it is absolutely imperative that they have a right to bring class actions. And we do not like or agree with the provisions that would send all of those class action suits into Federal court. We think that could have a disastrous effect on those suits and could result in a number of meritorious claims being disbanded because of the complicated procedures that a Federal court would have to go through to interpret the various State laws.

    Mr. HYDE. The gentleman's time has expired. The gentleman from Georgia, Mr. Barr.

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    Mr. BARR. Thank you, Mr. Chairman. Do any of you all ever recall a principle called the Heisenberg Principle? Does that ring a bell with anybody?

    Mr. LEWIS. Being a physicist, yes, sir.

    Mr. BARR. This worries me a little bit. I don't know whether you share the same concerns. Maybe not. But it worries me. You all might look at that. Thank you, Mr. Chairman.

    Mr. HYDE. The gentlewoman from California, Ms. Lofgren.

    Ms. LOFGREN. Thank you, Mr. Chairman. I appreciate hearing from these witnesses and would note that all of us have been supplied with the statement for the record by the Department of Justice that I hope shall be made available to each of the witnesses, because many of the points the Department makes are worthy of consideration.

    In reading through the testimony, my take on it is that, while there have been issues raised, there is also a willingness to try to do something positive and reasonable. As I think Mr. Dooley said this morning, no bill is perfect. This bill may go through all kinds of changes, and I would recommend that this Justice Department statement be read by all the witnesses.

    I come from Silicon Valley and work very closely with Silicon Valley industries. I think there is much in this bill that is not necessarily at the top of the agenda of the high-tech industry. In some cases, individual issues came as a surprise to people I talked to at home.

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    I am therefore troubled. Permit me to explore one provision, the fee provision. It certainly has some populist appeal in a country that doesn't want people to earn a lot of money. I really don't know that I know any lawyers who earn $1,000 a hour, but I know plenty of CEOs who earn more than $1,000 an hour. And I have always resisted and not joined up on those bills that would seek to regulate the marketplace. It seems to me that the marketplace ought to drive compensation systems, rather than the Congress.

    So I want to solicit specific responses from the two representatives from business, from the Chamber of Commerce and National Association of Manufacturers. It occurs to me that, if in this case we say we are going to limit how much an employee can be paid because it is a class action and the individual plaintiffs may not be able to engage in that kind of decision-making, that same claim could be made in terms of the stockholders of publicly traded companies. Stockholders don't have the ability to negotiate compensation for CEOs. I want to know whether you are at all concerned about Congress getting into how much people earn in the marketplace and that this bill might set that precedent. Mrs. Bender, do you have a comment on that? Or you, Mr. Lewis?

    Mr. LEWIS. Two things. First off, as the CEO of a 23-person company, may I assure the committee that I do not make $1,000 an hour.

    Ms. LOFGREN. I didn't mean to suggest that you did. But let me tell you that there are plenty of people in Silicon Valley who do.

    Mr. LEWIS. And I won't argue about that. But let us go on to how I interpret what the limitation is. First off, there is a feeling that this one-time technology crisis which we are all facing——

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    Ms. LOFGREN. My time is about to run out. Could you address the issue of setting the precedent?

    Mr. LEWIS. One thinks of the fact that this is gouging and this is another attempt to try to mitigate the gouging that might take place in this occurrence.

    Ms. LOFGREN. So, Ms. Bender, you are not troubled that the government would decide compensation for employees in this and other areas?

    Mr. LEWIS. That is a very long debate. Let me show how I interpret what is going on and put some sensibility into not gouging a small business like myself.

    Ms. LOFGREN. Mr. Lewis, if I could ask Ms. Bender, because my yellow light is on and the chairman is going to call my time.

    Ms. BENDER. Same thing. I believe really he stated it very well. In South Dakota, I don't know of very many people that would make $1,000 an hour. And it seems like that is plenty. The point is the fact that when you are talking about a class-action suit, my understanding, limited understanding is that lawyers will think that—will say that this is a problem and then go after it and then find people that are interested in participating in this and, yeah, even then we don't have the right to negotiate fees with the lawyers—and part of their fees would then affect the compensation.

    Ms. LOFGREN. Actually, the plaintiffs have the ability to establish their relationship with their attorney through contract. But I guess the broader issue is: should the Government decide how much people should earn for a living in the private sector? And if you are saying yes, then I think you really are opening the door.

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    I mean, if you are the CEO of a high-tech company or a nonhigh-tech company and you are earning over $2 million a year in salary, which is not unusual, then if this were applied to you then you could not do this. I don't want to belabor this.

    Ms. BENDER. I consider this potentially for the smaller businesses that would run into that situation. I don't know very many small businesses that pay CEOs that much. So I consider this protection for a lot of the masses. Well, 85 percent are small businesses.

    Ms. LOFGREN. But the issue is what precedent are we setting? And I guess what you are saying is that it would be okay if Congress says this compensation is unacceptable to us, and that then we have the right to wade in and decide what people should be paid.

    Mr. HYDE. The gentlewoman's time has expired. The gentleman from Tennessee, Mr. Jenkins.

    Mr. JENKINS. Thank you, Mr. Chairman. Mr. Rothfeld, I understood your testimony, or part of it, to be that extensive preparations are being made by both the plaintiff's bar and the defense bar to prepare for this situation.

    Mr. ROTHFELD. That is certainly true.

    Mr. JENKINS. Is that what you believe is happening out there? In broad generalities do you agree that—of course it does other things, but the bill strengthens the pleading requirements, it raises the burden of proof, it restricts damages, and it employs comparative fault, those four things among other things that it does?

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    Mr. ROTHFELD. I am not sure that it has a comparative fault rule. It raises the pleading standard in a way that was directly parallel to what was done in the Private Securities Litigation Reform Act. It heightens the burden of proof for some types of claims, although not for all.

    Mr. JENKINS. If both the plaintiff's bar and the defense bar prepare adequately and properly, is there any reason why the present system couldn't handle this situation without all these changes in the law?

    Mr. ROTHFELD. I guess there are a couple of responses to that. First of all, I think the legal system has experience with disasters that cause enormous amounts of litigation. Asbestos situation is one example, in which the legal system simply was overwhelmed. In asbestos, for example, more than 60 cents in every litigation dollar ended up getting consumed in transaction costs. There were enormously long court waiting times. Plaintiffs had to wait a very long time to get compensation. Defendants became insolvent. I think that is not a good model for the high-technology sector.

    I also think that Congress has reacted in the past to circumstances in which the possibility or the reality of insubstantial litigation and litigation abuses has to be reacted to. That is, again, what Congress did in the securities area in 1995 and 1998 with uniform standards legislation.

    So I think that the existing tools out there are really not adequate to deal with the kind of unprecedented and unique disaster that we are facing with Y2K.

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    Mr. JENKINS. Is your firm going to be primarily defending, or are you going to be doing plaintiffs' work and defense work in connection with this, do you anticipate?

    Mr. ROTHFELD. I would guess that it would be primarily, although not exclusively, on the defense side.

    Mr. JENKINS. How important do you consider the notice provisions to be?

    Mr. ROTHFELD. I think those are extremely important. I think that the reality is—and again to address how it works as I understand it, the plaintiff is required to complain to the defendant and get some reaction from the defendant. And again—I mean, to respond to Mr. Yarsike's understanding of his situation, I think that once the initial complaint is made and the request for action is taken, that triggers the provision. And so in his situation, I think he could have brought suit years ago, years before he actually did.

    Mr. JENKINS. If we passed only one part of this legislation, would the notice part be the most important part in your mind?

    Mr. ROTHFELD. I couldn't pick out one as especially important. I think it is a balanced package and all the provisions serve useful, and to some extent, different purposes. And so I think the 90-day provision is an extremely important one and one all the members of the coalition, including small businesses, wholeheartedly support; but I wouldn't single it out as the provision that has to be enacted.

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    Mr. JENKINS. Thank you.

    Mr. PEASE [Presiding]. The gentlewoman from Texas, Ms. Jackson Lee.

    Ms. JACKSON LEE. I thank the chairman very much for holding what is an extremely vital hearing. I have had the opportunity as a member of the Science Committee to sit in on several hearings dealing with Y2K. Many of us are confronting this issue in our respective districts; and so let me offer my concern, sympathy maybe—not one where I am fully part of the software and computer industry. Obviously I am doing other things here in Washington, but realizing the important and pivotal role that they play.

    But I would like to go over some points that I think were enormously salient and, of course, noted by the gentleman from the Produce Palace. And since I like fruit, I have to check his particular business out; and I am glad his doors are still open. I would like to be able to ask to be able to submit my statement to the record. I ask unanimous consent.

    Mr. PEASE. Without objection.

    Ms. JACKSON LEE. Thank you, I was struck by some of the points that you made. You started out by noting that this particular glitch, which seems to be an enormous glitch, was poised to put you out of business. Why correct a system that works? And that is, of course, this legal system.

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    Small businesses like you need the present system, or at least need to have the opportunity after making a valiant effort, a very fair effort of 200 phone calls in 2 years to get a remedy. You need to have access to the courts to get a remedy. You spent $100,000 on the computer system. You wanted the system to last into the 21st century. And some good news is that FAA has tested their Y2K system, and it looks like we might get into a couple of years into that. You had customers lined up 20 deep, as I understand it, and I think the key element here was you wound up having to repurchase a system for $130,000. So I hear $230,000, but ultimately you went to court and got some form of settlement.

    So in actuality, you were not totally made whole. Can you help me understand that? Were you totally made whole, or did you have to suffer some economic loss because of this problem?

    Mr. YARSIKE. When the system went down, first of all, customers walked out of the store and left their shopping carts. We couldn't take cash, checks or any form of payment from the customers. Once we got the system up, there were times when the system would go down, but we couldn't take charge cards but we were able to take check and cash. And those customers left the store. I have hired three or four people on the front end of my registers—I have 12 registers in my store—to hand write—get signatures from the customer and let them go on good faith and taking a chance that the card is being good without checking them. Let them go and have people sit in my office for 2 years, call daily on every charge card number and okay them and do everything by hand the old-fashioned way.

    Ms. JACKSON LEE. So there were economic losses?

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    Mr. YARSIKE. Hundreds of thousands of dollars.

    Ms. JACKSON LEE. And in your final settlement, you didn't recover all that you lost?

    Mr. YARSIKE. No, I didn't recover all the loss.

    Ms. JACKSON LEE. I appreciate it. I heard a portion of my colleague from California, Congresswoman Lofgren—I think she mentioned something about a force or where this force may be coming from that is moving this legislation with such due and deliberate speed. And if she didn't say it, let me not put words in her mouth; but I guess I am thinking about Star Wars.

    But my concern is to find a common ground. I heard the mayor, and I have respect for the National League of Cities. I was a former board member. But yet not take apart some real judicial elements. The class-action provision seems to be enormously extreme; the caps on punitive damages; the burden that you put on the Produce Palace owner if you got rid of joint and several liability, because what he would have to do is step back and finish one lawsuit after another. And in fact it would be an enormous expenditure on his resources and waste of money to have him file a lawsuit, get through with that, file another lawsuit and get through with that. So I would simply say that we have a serious problem.

    And I conclude, Mr. Chairman—I see that my time is out—to mention that one of the major opponents to this is someone that I think should listen to and that is the Judicial Conference of the United States which wonders why we are altering the basic legal system—that is Judge Rehnquist—that we also have in place. And I can't understand why this bill is looking to do that and the notice pleadings in particular. I cannot understand why the bill is seeking to change the way lawyers practice law, the way you would get notice, because what that does is do basic damage to our judicial and legal system.

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    So I think we can work with the problem that you are talking about, but I think we have a bill that has a force beyond the need of the crisis or the issue that we are trying to confront. With that, Mr. Chairman, I yield back.

    [The prepared statement of Ms. Jackson Lee follows:]

PREPARED STATEMENT OF HON. SHEILA JACKSON LEE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS

    I would like to thank Chairman Hyde and Ranking Member Conyers for holding this important full committee hearing on Y2K liability legislation, and in particular, of H.R. 775.

    This issue is of special interest to me. As a Member of the House Committee on Science, I have already been attending, with some regularity, hearings on the impact of Y2K on the federal government and the private sector. I have also attended a hearing that specifically addressed the legal ramifications of the Y2K conversion in the private sector that was recently conducted by Chairwoman Morella and Ranking Member Barcia in the Technology Subcommittee.

    Having said that, I believe that I have developed an understanding of this issue, although I do not think anyone can properly predict the true magnitude of our problem until January of next year. Naturally, therefore, I understand the temptation, when drafting this bill, to make its scope as broad as possible, and to attack all at each point the problems caused by the ''millennium bug''. However, that does not mean that we should abandon each of the legal mechanisms that Congress and the Judiciary have crafted to deal with similar factual anomalies.

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For instance, while I applaud this bills efforts to encourage remediation, it should not do so in a manner which does not place an affirmative burden on the remediating party to perform. For instance, in section 101(a) of this bill, there exists a clause that provides defendants with an extended notice of 90 days before they can rightfully be sued—however, it fails to require that they actually fix the problem during that 90 days. That means that those wronged in these cases, like the one notorious case involving the Produce Palace in Warren, Michigan, a consumer of Y2K solution services can be forced to wait for almost three months before their problems are addressed. Although that may seem insubstantial, remember that in cases like the aforementioned one, small businesses can lose any operational efficiency that they may have developed over the years, and essentially revert back to a pen-and-paper system. They may lose all of their inventory data, they may lose their customer databases, they may lose their automated payroll systems—all for three months, without any mechanism to bring about a remedy.

Furthermore, the clause places additional burdens on the plaintiff to trigger even the 90 day waiting period. It requires that they state ''with particularity . . . the symptoms of the material defect; . . . the facts that lead the prospective plaintiff to hold [the defendant] responsible for both the defect and the injury; and [] the relief sought.'' While this seems like a minor burden for a technologically-savvy lawyer to deal with, we must remember that in many of these cases, small business-owners who have very little or no computer experience, besides purchasing a computer system, will be asserting these claims. Furthermore, the particularity requirement in this clause means that a business-owner in this case will have to hire a lawyer well before a legal action can even be filed.

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    Exacerbating that problem is the fact that even if a plaintiff successful in a lawsuit after those three months, there are limits to what the plaintiffs can recover. For instance, they are not allowed punitive contract damages unless they can prove intent to specifically harm the plaintiff by clear and convincing evidence. Even then, if a business-owner is able to meet that heightened standard, their damages are then capped at $250,000. That amount could not be nearly enough to save a small business that is reeling from three months of incapacity.

    Another stumbling block set up for those who are able to win in court, should they manage to survive the safe harbor period, is the elimination of joint and several liability. That means that a plaintiff must seek out each and every defendant who was wrongful independently. This can be quite burdensome in a time where a great deal of computer is done in multiple stages around the globe—the software may be designed in the United States, but the defective computer equipment may very well be built in Taiwan, Singapore, and Japan. Therefore, the plaintiff will have the burden to chase after each wrongful defendant, turning on its head our legal principle of righting a wronged party, and letting the defendants find indemnification amongst themselves.

    Already, there is significant opposition to this bill, perhaps, because of each of its aforementioned weaknesses, in addition to others. Most important among them, however, are the objections to this bill made by the Judicial Conference of the United States, which is presided over Chief Justice William Rehnquist. In a letter to the Chairman of the Senate Judiciary Committee, the conference stated that the class action provisions in this bill significantly erode the careful balance between the caseload in state and federal courts. In fact, the letter states that ''[t]here appears to be no substantial justification for the potentially massive transfer of workload under [this] bill[], and such a transfer would be counterproductive''.

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    Furthermore, the Judicial Conference has found that the changes in the pleading requirements for Y2K lawsuits depart significantly from our modern ''notice pleading'' requirements, and can lead a trap for unsuspecting lawyers who are accustomed to our standardized rules of procedure.

    Thankfully, we still have some time, albeit not much, to address these issues. I look forward to working with my colleagues on the Judiciary Committee to tailor legislation that will encourage Y2K solutions and not lawsuits—but that will not deny citizens their contractual or statutory rights. Thank you.

    Mr. PEASE. I thank the gentlewoman. The gentleman from Arkansas, Mr. Hutchinson.

    Mr. HUTCHINSON. Thank you, Mr. Chairman. I want to commend the sponsor of this legislation for addressing this issue, as far as bringing it to the table. I have read the legislation in its entirety, and I believe it is designed to address a significant problem that could be coming up. But I do have some concerns about some specific provisions in the legislation. I want to thank the panel for being here as well. I think one part that is good in the bill is the voluntary arbitration provisions that encourage but not mandate negotiations. I think it strikes a good balance and is a good provision.

    One point I did have concern about is the notice provisions. We are all limited by our experience, and in Arkansas there was a special statutory provision in medical malpractice cases in which a plaintiff suing a doctor would have to notify the defendant doctor 30 days in advance and give the defendant time to remedy. My experience has been that the insurance company simply used that as a means to extend the time, and really very, very little was ever done during that time period.

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    That does not necessarily happen in the business community, but that has been the experience in Arkansas. The provision was reviewed by the Arkansas Supreme Court. It was challenged and ultimately repealed. The courts were critical of it because it set up a special class of protections for a particular group of individuals.

    Another concern, and I will ask the panel to respond as I go through a couple of these. Another area of concern is the clear and convincing evidence standard. The bill allows certain defenses to be raised and puts the burden on the plaintiff to prove by clear and convincing evidence, which, of course, is a higher standard than in normal civil actions. I am not sure I understand the rationale for that unique clear and convincing evidence standard.

    Another question I want to address is Section 504's requirement that attorneys notify clients of particular elements of a contingent-fee contract or other fee arrangements. The question is whether that requirement applies both to defense counsel representing the client, the small businessperson, as well as the plaintiff's attorney. Are those reciprocal requirements? And certainly I think if there is a burden placed it should be on both.

    Finally I would point out that under Arkansas law the prevailing party in a contract action has the ability to recover attorneys' fees, and I don't believe that is the case in this legislation. And so under Arkansas law if this bill supersedes, then an Arkansas plaintiff would be deprived of the opportunity of recovering attorneys' fees from the responsible party.

    And so I will just put that out there. And I would ask anyone to respond that would like. If you would, raise your hand if you want to respond to the issues I raised. I want people who defend the law to respond. I see the consumer groups. Mr. Rothfeld?

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    Mr. ROTHFELD. Thank you. I think the answer to the first two of your points on the 90-day provision and the clear and convincing evidence standard are impelled by the same policy, which I think is that if one comes to the conclusion that there is going to be an enormous wave of Y2K litigation, as we certainly have, and therefore that particular and unusual steps should be taken to deal with it, I think both of those provisions are motivated by this understanding of what the problems could be.

    Mr. HUTCHINSON. But the idea is to avoid litigation. But if you are going to have litigation, do you want to make it more difficult for one side to recover than the other?

    Mr. ROTHFELD. Well, I think the 90-day period is designed to keep as much litigation from coming about as possible, as you say. And obviously we don't expect that all of these suits are going to get settled or go away, as your experience in Arkansas would confirm. But some of them will. And if the volume of litigation is as high as we anticipate, getting some of them settled amicably and informally is clearly a good thing.

    On the clear and convincing evidence standard, our experience, I think, is generally that if a plaintiff has a meritorious claim, they are going to be able to prevail under clear and convincing or under preponderance. What this does is give the judge a tool to knock out the most insubstantial suits at an early stage of the litigation before trial and save substantial expenses in that regard.

    Mr. HUTCHINSON. My time has expired and I yield back. Thank you.

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    Mr. PEASE. The gentleman's time has expired. The gentleman from Massachusetts, Mr. Delahunt.

    Mr. DELAHUNT. First of all, let me welcome a dear friend, Ms. Greenberg. She and I in our past lives have worked frequently on issues totally unrelated to this one, and it is good to see you here, Sally.

    During the earlier testimony by members, both sponsors and, I think, one member testifying in opposition, there was testimony that this is a trillion dollar problem. You know, we have a propensity in this institution to pull numbers out of the air. A trillion here, a trillion there, as someone once said, starts to add up to real money.

    Where is this trillion dollar figure coming from? Ms. Wylie?

    Ms. WYLIE. That is a number used by Gartner Group, which is an information technology consulting firm.

    Mr. DELAHUNT. And how did they get to this $1 trillion figure?

    Ms. WYLIE. The way that they arrived at it is the $2 to $3 of litigation costs for every dollar of remediation costs. And remediation costs are estimated at $600 billion.

    Mr. DELAHUNT. Now, how do you get that figure?

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    Ms. WYLIE. I think they got it from the trial lawyers.

    Mr. DELAHUNT. They got that from the trial lawyers? I am sure there are representatives of the trial lawyers present here.

    Ms. GREENBERG. Congressman Delahunt, my understanding—and I don't speak for the trial lawyers certainly, but my understanding from hearing past testimony is that this was an estimate made by a group called GIGA Consultants or some such name, and it was picked up by Lloyd's of London.

    Mr. DELAHUNT. And now it has become fact.

    Ms. WYLIE. If you say something long enough, people begin to believe it.

    Mr. DELAHUNT. I think we have to be careful about what we are talking about. It will be reported in the media that there is now a $1 trillion problem facing consumers and American commercial interests. And I dare say that without having any idea of the particular group that generated this particular estimate, that that is absurd. That is absolutely absurd.

    And I defy anyone to present that figure and defend it in a credible way. I am not saying there is not a problem. And I can sympathize with some of the concerns that have been articulated. But let's stop saying there is a problem when no one on this panel knows that there is a problem. We have got to start from that point. I take it, Mr. Yarsike, you were forced to sue and proceed legally to address the problem that you encountered. But to create a panic situation and talk about a trillion dollar problem, you know, is all too typical of this institution. Two or three years ago, we had a deficit that was in excess of $200 billion. In the space of 1 year it went from $200 billion to a surplus. And there were numbers from the Congressional Budget Office. I think that until we can clearly define that there is going to be a massive problem, we should stay away from using words and adjectives and descriptions that I would suggest are hyperbole.

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    I wasn't here for your testimony, Mr. Rothfeld, but I understand that you said that lawyers are getting ready. Well, they do that all the time. They think there maybe is going to be some business out there just like any businessman would in terms of trying to judge the market. But we don't have any idea if there is going to be a problem, and if there is going to be a problem what the dimensions of that problem are.

    Ms. BENDER. Mr. Delahunt, I totally agree with you. However, we are trying to be proactive.

    Mr. SENSENBRENNER [Presiding]. The gentleman from Indiana, Mr. Pease.

    Mr. PEASE. I don't know whether—Mr. Rothfeld, you are an attorney. Ms. Mulhern, are you or Ms. Greenberg? I would like the attorneys to respond to a question and that is how you understand that this proposed legislation might or might not interact with existing Uniform Commercial Code provisions dealing with warranty of merchantability and warranty for fitness of a particular purpose.

    Ms. GREENBERG. There are provisions—and the Justice Department has commented on this—there are provisions in this legislation which would, especially the provisions that protect contract—various understandings when parties sign contracts, including implied warranties, that would be disbanded, discarded as a result of provisions in this bill. So the UCC, which provides implied-warranty protections, would be overridden if the terms of the contract said that there were no implied or express warranties.

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    Even if, let's say, a consumer software maker sold a product that said this will last you well into the 21st century—but in the fine print there were statements to the effect that there are no warranties here—UCC, State law, and contracts common law provisions that might protect that consumer or that small businessperson. Under this bill, the terms of the contract would supersede, which is one of the issues that we pointed out in our testimony.

    Mr. PEASE. Thank you. Ms. Mulhern, do you agree or would you like to add to that?

    Ms. MULHERN. I would generally agree with that characterization of Ms. Greenberg, that is, that Title II of the bill says that all written contractual terms are applied, including exclusions of liability or disclaimers of warranty, unless the entire contract is silent on the issue or the entire contract is thrown out. I am reading from section 201 of Title II of the bill.

    So under the UCC, States that adopted UCC provisions forbidding, in most instances, the disclaimer of certain types of warranties would be preempted by this section of the bill.

    Mr. PEASE. I appreciate that. Mr. Rothfeld, do you read this in the same way?

    Mr. ROTHFELD. I think I have to respectfully disagree, at least in part, with the questions. The UCC allows disclaimers of warranties both of fitness and of merchantability, as I understand it, so long as it is done in a particular way at least as to the warranty of merchantability. And I think that is consistent with what this bill does. It would give force to the disclaimers.

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    The bill also, I think, specifically preserves implied warranties, because it provides that when the contract is silent on a particular issue, the contract is interpreted in accordance with existing State law. And to the extent that State law creates those implied warranties, they would be given force by the bill. So I think that the bill is substantially at least consistent with the UCC.

    Ms. GREENBERG. The key word is if the contract is silent. We know from a consumer perspective that there is going to be fine print; and the consumer may not be aware of the various disclaimers for the terms of the contract and may end up, as a result, losing out because of those disclaimers of warranty that would normally be available under UCC or State law.

    Mr. PEASE. I thank you. We just received this morning—and I confess I have not had a chance to review it—the Department of Justice statement. But I heard you say that you are largely in accord, at least at this point, with what was said by the DOJ. Mr. Rothfeld, have you had a chance to review Justice's statement?

    Mr. ROTHFELD. I have not. I did review the testimony that they provided to the Senate Judiciary Committee last month, and I think that I take issue with their understanding of how the provision applies. They read the provision as entirely reading out implied warranties, and I don't think that it does that.

    Mr. PEASE. Thank you all. Thank you, Mr. Chairman.

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    Mr. SENSENBRENNER. The gentleman's time has expired. The gentleman from New York, Mr. Weiner.

    Mr. WEINER. Thank you, Mr. Chairman. I have to agree with my colleague, Mr. Delahunt. I think that the hype on this issue has reached almost a crescendo at this point. And I am half surprised that we are not teaching the children at school that the Dark Ages were caused by the ''Y1K problem.'' This has really reached a point of frenzy.

    And perhaps we are wise to just reel ourselves in a bit. But I am also concerned about the message. If we assume, for a moment, this problem exists and that it is something that it is going to visit us with great wrath on the first of the year, what is the message this committee sends, this Congress sends, if we are, rather than encouraging in the strongest possible ways with our actions for those who have not been as active as they should in addressing this problem, for those who are perhaps hoping for the best rather than working to protect customers, working to protect people like Mr. Yarsike, shouldn't we be speaking with the voice that says, you know, that you folks ought to be fixing this problem or you guys are going to get whacked and whacked good. The law is going to come down on you like a ton of bricks if you are negligent. It is going to come down on you if you are lazy, if you are not prepared, if you are not doing everything possible to protect consumers.

    Isn't this exactly the wrong message that we send with this bill by saying that we are going to change many of the aspects of tort law that we have come to rely upon? Here we are 6, 8, 10 months away; and that is the message that the Congress seems to be sending with this legislation, that we are going to make it a little easier for you and let you breathe a sigh of relief.

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    And let's face it. If you are someone that is concerned about your liability, you are going to be happy about this bill. I think we would all agree with that, because it gives you added protections, makes it tougher for plaintiffs. It just seems to me to be speaking with the wrong voice right now.

    I think if we in Congress want to express to the private sector and express to programmers and to companies that are making products that they should be prepared, this is not the message that we should be sending. We should be sending an entirely different one.

    Let me just ask a question about the waiting period, the cooling off period, which I think it is a laudable goal, the idea of trying to get people to resolve these problems.

    Would the panel support the idea of having added punitive penalties if the defendant didn't fix it within that 90 days? There doesn't seem to be anything in this bill that says you have got the 90 days, you have got to fix it; and if you don't, you are going to get hit even harder. It seems that the 90-day period doesn't do anything that would put any added impetus on the part of the person that is the defendant to go ahead and settle the—solve the problem, fix the problem.

    I think Mr. Yarsike, just taking from his testimony, if he had some knowledge that, you know, what if I had this 90-day period and they absolutely positively had to fix this or there would automatically be triggered some kind of remuneration for him, I think then many of us would say that that provision actually makes some sense. It would be more balanced. Mr. Lewis, I see you nodding. Is there anything that requires them to fix that problem in the 90-day period?

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    Mr. LEWIS. As a small business owner, if I am taken to court and sued, my ability to fix the Y2K problem at any of my customers disappears. It goes down to zero. So does my chief technologist and the people of my staff because we are out preparing for a court battle. I don't have a permanent legal staff. What it does is makes it completely impossible for me to focus my——

    Mr. WEINER. So what happens during the 90 days? You are not trying to fix it anymore.

    Mr. LEWIS. Yes, we are. As I understand the legislation—as I understand it, there is a period of time in which the description is made, and then it is incumbent upon me to respond back and take some substantial actions. You asked what message this gives to the American people in terms of how the committee acts and votes today.

    We sit here as small business owners that are making jobs. You could put me out of business with one Y2K lawsuit; and all of my people and all the other people, the small businessmen out there could go out—and we will have to.

    Mr. WEINER. I understand that. You could make that argument—if I could just finish my thought, you could make that same argument for undermining all of our tort laws, and I think this might be a subterfuge for that intent.

    Mr. SENSENBRENNER. Thank you very much. That concludes your interrogation. Folks, we are sorry to have delayed your lunch hour a bit. On behalf of the Chairman, I would like to thank each of you for coming to Washington and spending your time testifying as to how this problem and this legislation affects you. This committee is deeply indebted to you for your input and thanks again.

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    We will now go to the third panel. Those on the third panel can step right up. We will begin this panel with Dr. Michael Harden, president and CEO of the Fairfax, Virginia company Century Technology Services, Inc. The company conducts research into the Year 2000 problem and develops solutions for companies to cope effectively with the problem. He will testify about the technological aspects of the Y2K problem.

    Walter Andrews is a partner in the Washington, D.C., law firm of Wiley, Rein and Fielding and is cochair of the firm's year 2000 practice. A graduate of the University of Chicago School of Law, Mr. Andrews is an expert on the liability insurance aspects posed by the Year 2000 issue and he has lectured and published extensively on the issue. He regularly counsels clients on the legal risks attendant to the Year 2000 problem, as well as strategies to mitigate exposure to liability.

    Dr. Leon Kappelman is a recognized expert in the field of information technology and specifically the Year 2000 problem. He is cochair of the Society for Information Management Year 2000 Working Group and is currently involved in solving Y2K problems in corporations and for 84 cities in Los Angeles County. He has published over 50 articles on information technology and edited three books on Year 2000 issues and solutions.

    Our fourth speaker is a noted Houston trial lawyer who practices personal injury law.

    Ms. JACKSON LEE. Mr. Chairman, I had asked for the privilege of introducing Mr. Nations, who is from Houston.

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    Mr. SENSENBRENNER. The gentlewoman from Texas.

    Ms. JACKSON LEE. Thank you very much, Mr. Chairman. It is always a privilege to be able to welcome Mr. Nations, but particularly Mr. Nations who is a lawyer from Houston who has practiced some 31 years, is a board certified attorney by the Texas Board of Legal Specialization as both a personal injury trial lawyer and civil trial lawyer. He is board certified on the national level as a civil trial advocate by the National Board of Trial Advocates and certified as a diplomat of trial advocacy by the National College of Advocacy. He received his law degree from Vanderbilt University and bachelor of arts from Florida State University and is listed in Who's Who in the World, Who's Who in America, and Who's Who in American Law.

    Mr. Nations brings many things to this hearing, but his diverse practice background includes medical malpractice, real estate fraud, insurance bad faith, will contest, breach of contract, child custody and many, many others. At the same time, he has been a speaker of great demand, having spoken in all 50 States, England, Mexico, Scotland, Bermuda, and six Canadian provinces.

    I believe if we are trying to truly solve this problem and be responsive to the Y2K issue, that Mr. Howard Nations and his broad depth of experience will provide us with the insight that we need, and I thank you for being here.

    Mr. SENSENBRENNER. I would add to that introduction that Mr. Nation is a past vice president of the Association of Trial Lawyers of America, and a past president of the Texas Trial Lawyers Association.

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    Mr. Marc Pearl is senior vice president and general counsel of the Information Technology Association of America, a trade group representing over 11,000 companies in the information services computer software Internet technology communications industries.

    A graduate of Emory University School of Law, Mr. Pearl coordinates the ITAA's intellectual property counsels committee and its Year 2000 legal advisory and legislative working groups and advises the ITAA's congressional information technology working groups.

    We are pleased to have with us Judge Walter Stapleton, who sits on the U.S. Court of Appeals for the third circuit in Wilmington, Delaware. Judge Stapleton is a graduate of Harvard Law School and holds a graduate law degree from the University of Virginia. Judge Stapleton is here on behalf of the Judicial Conference of the United States.

    Our final witness of the day will be Dean Mark Grady of the George Mason University School of Law. Dean Grady has taught and written extensively in the areas of torts and intellectual property, among others. He is a summa cum laude graduate of the University of California, Los Angeles, and obtained his law degree while he was a graduate fellow in economics at the UCLA Law School. In addition to his academic career, Dean Grady has held various positions with the Federal Trade Commission.

    I thank all of these witnesses in advance and ask that they keep their oral testimony to 5 minutes, meaning when the red light goes on, the gavel goes down. Without objection, all of your full written testimony will appear in the record prior to your oral testimony.

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    Mr. SENSENBRENNER. Dr. Harden, please proceed.

STATEMENT OF MICHAEL P. HARDEN, PH.D., PRESIDENT AND CEO, CENTURY TECHNOLOGY SERVICES, INC.

    Mr. HARDEN. Mr. Chairman and members of the committee, first of all, I would like to preface my statement by saying that I am in the Year 2000 business, and we do work trying to help companies solve their Year 2000 problems. I think that gives me a unique perspective over those that simply talk about the Year 2000 problem and are not actively involved in it, because I can speak as a practitioner and not from a theoretical point of view.

    I am pleased to be here today to discuss the Year 2000 Readiness and Responsibility Act. Over the last 2 years, I have listened to and studied a wide range of opinions being aired about Year 2000 litigation. With approximately 900,000 lawyers in this country, it is inevitable that litigation over this problem will skyrocket.

    Although some of the lawsuits will be without merit, perhaps even frivolous, it is certain that many will likely be justified. And I say this for the following reasons: first, the Year 2000 problem is predictable; and, second, the Year 2000 problem is preventable.

    The computer industry has been aware of the Year 2000 problem for at least 20 years; but even so, there were only a few voices sounding the alarm. In reality, we only began to pay attention to the problem since about 1995. By the end of 1996, if you hadn't heard about the problem you probably lived in a cave.

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    The Social Security Administration and many commercial banks have been working on it since the early 1990's. The fact of the matter is we have known about the Year 2000 problem for at least 5 years. We have known it was coming, and we know precisely when it will arrive. We also know how to fix the Year 2000 problem, and that is no insignificant point because it is not a technical issue. The problem is actually very easy to fix from a technological point of view. We have both the knowledge and the tools to implement corrections needed to eliminate this problem. Yet we are still faced with the likelihood of severe disruptions caused by the Y2K problem.

    So we know it is coming, we know precisely when it will arrive, and we certainly know how to stop it. How, then, can an organization fail to achieve compliance before January 1, 2000? There is only one word that explains it: choice. Many companies and organizations have chosen not to fix their systems in time.

    Let me explain that. If you know something is coming and you know how to fix it, why wouldn't you? The answer boils down to decisions made by an organization's management team. Management's failure to commit the necessary resources to solving the problem can be attributed to one or all of the following: denial, poor judgment, or greed. Now, I know that sounds harsh, but the facts speak for themselves.

    The only way you cannot fix the problem is to, one, deny it exists in the face of all information to the contrary; two, underestimate the scope of the problem or sit back and wait for some silver bullet or miracle to occur letting the days and weeks go by until it is too late to take any action; or, three, withholding the necessary financial and human resources to aggressively find and fix the problem.

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    Since no tangible financial gains are achieved by spending the money, many organizations have been reluctant to commit the capital to remediate their systems. After all, money spent on fixing Y2K problems comes right off the bottom line. Therefore, shouldn't companies that fail to fix their Year 2000 related problems be held accountable? Of course they should. But companies that willfully neglect to fix their Y2K problems are different from companies that put forth a good-faith effort yet still experience problems nonetheless. It is expected that few organizations will be able to find and fix everything, no matter how much money or effort they expend.

    This bill takes that into account. But what about the companies and organizations that commit themselves to fixing the problem, yet are impacted by their business partners that don't make the same commitment? Organizations can spend tens, perhaps hundreds of millions of dollars to fix their Year 2000 problems, only to find themselves debilitated by noncompliant business partners that provide them with raw materials, parts, services, or even data.

    Few people fully realize the interdependencies that are built into our society and business communities. No organization operates as if it were some isolated island of its own. It is these very interdependencies that will create many of the Year 2000 problems and litigation. When compliant organizations are adversely affected by business partners that fail to perform, the resulting disruptions will almost certainly impact the consumer. Who then is responsible for the damage? This is where I believe the Year 2000 Readiness and Responsibility Act——

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    Mr. SENSENBRENNER. The gentleman's time has expired.

    Mr. HARDEN. Thank you.

    [The prepared statement of Mr. Harden follows:]

PREPARED STATEMENT OF MICHAEL P. HARDEN, PH.D., PRESIDENT AND CEO, CENTURY TECHNOLOGY SERVICES, INC.

    Mr. Chairman and members of the Committee,

    I am pleased to be here today to discuss the ''Year 2000 Readiness and Responsibility Act.'' Over the last two years I have listened to, and studied, the wide range of opinions being aired on Year 2000 litigation. With approximately 900,000 lawyers in this country, it is inevitable that litigation over this problem will skyrocket. Although some of the lawsuits will be without merit, perhaps even frivolous, it is certain that many will likely be justified. I say this for the following reasons:

1) the Year 2000 Problem is predictable, and

2) the Year 2000 Problem is preventable.

    The computer industry has been aware of the Year 2000 Problem for at least 20 years. But even so, there were only a few voices sounding the alarm. In reality, we only began to pay attention to the problem since 1995. By the end of 1996, if you hadn't heard about the problem, you must have been living in a cave. The Social Security Administration and many commercial banks have been working on it since the early 1990s. The fact of the matter is that we have known that the Year 2000 Problem is coming for at least five years. And we know precisely when it will arrive.

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    We also know how to fix the Year 2000 Problem. This is no insignificant point, because it is not a technical issue. The problem is actually very easy to fix from a technological point-of-view. We have both the knowledge and the tools to implement the corrections needed to eliminate this problem. Yet we are still faced with the likelihood of severe disruptions caused by the Y2K problem.

    So, we know it is coming. We know precisely when it will arrive. And we certainly know how to stop it. How then, can an organization fail to achieve compliance before January 1, 2000? There is only one word that explains it: choice. Many companies and organizations have chosen not to fix their systems in time. Let me explain:

    If you know something is coming, and you know how to fix it, why wouldn't you? The answer boils down to decisions made by an organization's management team. Management's failure to commit the necessary resources to solving the problem can be attributed to one or all of the following: denial, poor judgement, or greed. This may sound harsh, but the facts speak for themselves. The only way you cannot fix this problem is to:

1) Deny it exists in the face of all other information to the contrary.

2) Underestimate the scope of the problem, or sit back and wait for some magic silver bullet type of miracle to occur; letting the days and weeks go by without taking any action until it's too late.

3) Withholding the necessary financial and human resources to aggressively find and fix the problems. Since no tangible financial gains are achieved by spending this money, many organizations have been reluctant to commit the capital to remediate their systems. After all, money spent on fixing Y2K problems comes right off the bottom line.

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    Therefore, shouldn't companies that fail to fix their Year 2000-related problems be held accountable? Of course they should. But companies that willfully neglect to fix their Y2K problems are very different from companies that put forth a good faith effort, yet still experience problems. It is expected that few organizations will be able to find and fix everything, no matter how much money or effort they expend. This bill takes that into account.

    But what about the companies and organizations that commit themselves to fixing the problem, yet are impacted by their business partners that don't make the same commitment? Organizations can spend tens, perhaps hundreds of millions of dollars to fix their Year 2000 problems only to find themselves debilitated by non-compliant business partners that provide them with raw materials, parts, services, or even data.

    Few people fully realize the interdependencies that are built into our society and business communities. No organization operates as if it were some isolated island on its own. It is these very interdependencies that will create many of the Year 2000 problems and resulting litigation. When compliant organizations are adversely affected by business partners that fail to perform, the resulting disruptions will almost certainly impact the consumer. Who then is responsible for the damage?

    This is where I believe the ''Year 2000 Readiness and Responsibility Act'' has real value. Section 301, which addresses proportionate liability, takes into account the interdependencies I have spoken about. It is inevitable that there will be claims against defendants for damages that occurred due to the failure of others over which they had little or no control. By tying the percentage of liability directly to the percentage of responsibility, the bill ensures that diligent companies that committed themselves to solving their Y2K problems are not forced to carry a disproportionate share of the liability. This, I believe, will reduce the number of frivolous suits, and place the burden for damages precisely where it belongs—on those companies that failed to commit themselves to fixing their own Year 2000 problems.

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    In conclusion, I have studied this bill in great detail, and believe it has a number of significant points that are beneficial to determining responsibility, limiting frivolous actions, and ensuring that an element of fairness is injected into the process. The bill:

Preserves existing contractual terms.

Promotes alternative dispute resolution.

Encourages organizations to provide Y2K disclosure.

Takes into account the difference between diligent organizations that make good faith efforts to resolve their Y2K problems and those organizations that disregard the risks.

Establishes proportionate liability.

    These provisions can only help to reduce what might otherwise be an effusive and overwhelming wave of litigation next year.

    Mr. SENSENBRENNER. Mr. Andrews.

STATEMENT OF WALTER ANDREWS, ESQ., WILEY, REIN AND FIELDING

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    Mr. ANDREWS. Thank you for asking me to testify at today's important hearing. It is an honor to be here. I am Walter Andrews, a partner in the law firm of Wiley, Rein and Fielding here in Washington, D.C.; and as cochair of the firm's Year 2000 practice, I regularly counsel clients on the legal risk they face as a result of the Year 2000 problem.

    My testimony today will briefly address three topics: first, the liability issues and legal theories that already have been raised; second, those legal issues we could expect to see in the future; and, third, what businesses can do now to mitigate their exposure to those liabilities. My testimony today will not address the technical aspects of the problem, nor will it address the particular legislation before this committee.

    However, having been a computer programmer in the 1970's and a litigator in the 1980's and 90's, I perhaps can uniquely appreciate that there are different perspectives regarding potential massive litigation regarding this issue, which has been estimated to range from $300 billion to $1 trillion in costs, in stark contrast with the costs we actually have witnessed in the 1990's for asbestos litigation, approximately $15 billion, and environmental Superfund litigation of approximately $18.4 billion.

    I would point out that even taking 5 percent of the $1 trillion figure discussed today would exceed the total litigation costs of the Superfund and asbestos litigation incurred this decade. At this point we still have only 8 months to go to January 1, 2000. Nonetheless, at least 60 lawsuits, most of them purporting to be class actions, have already been filed over alleged Year 2000 problems. In fact, this number probably represents a small fraction of the number of Year 2000 lawsuits that ultimately will be filed and probably is just the first wave of such litigation.

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    The largest category of cases filed to date involve software products that have not yet failed, but may cause harm if not remediated. Generally, these have been class-action suits against software developers. Most of the present litigation thus far has been unsuccessful due to the lack of any actual present injury or because the relevant contract between the parties expressly excluded such claims. It is important the contract should be the first point of reference to define the parties' rights and obligations in any Year 2000 dispute and courts should resist tortifying such claims by turning contract disputes into tort actions. Similarly, it is important that cases not be allowed to proceed where there is no actual injury, but the primary driving force is the seeking of legal fees.

    In addition, some Year 2000 suits have begun to raise negligence claims, in addition to contract claims, which is creating somewhat of a Year 2000 litigation spillover effect. In fact, the next wave of Year 2000 litigation, namely disputes over injuries allegedly caused by the Year 2000 problem, may be where the greatest costs eventually lie. When we begin to see the kinds of failures we have only been contemplating, the ensuing litigation arguably could reach just about any entity that experiences a failure in its computer system. We can expect eventually to see suits brought against suppliers, vendors, and service providers at every level of the chain of distribution. Professional malpractice claims and shareholders suits also are increasingly likely to be raised.

    What can businesses do now to minimize their liability exposure? Unfortunately, lawyers are often viewed as part of the problem for businesses by encouraging the Year 2000 litigation explosion, rather than as part of the solution. Businesses must recognize that obtaining counsel is part of the solution to the Year 2000 problems.

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    Clients have sought the assistance of Wiley, Rein and Fielding and other firms who have expertise in this area to help prepare their business for the year 2000. Our firm's Year 2000 practice group has been actively working for more than a year now on such liability issues and counseling clients and minimizing their legal and financial liability exposure.

    The bulk of a company's Year 2000 legal audit should consist of analyzing the liability exposure each company faces individually and then crafting legal strategies to minimize that exposure, specifically tailored to each company's situation. Clients have started this process by examining their obligations and liabilities to others in the event of a failure in their operations. They have also been analyzing existing contracts and legal relationships with third parties, including reviewing their web sites, marketing materials, and advertising for the Year 2000 disclosures. In addition, clients have been contacting third parties to obtain adequate assurances of compliance.

    In conclusion, the Year 2000 problem, because of its pervasive nature, presents potentially staggering liability costs for individual entities as well as for our society as a whole. Because of the magnitude of these costs, businesses must take steps now to reduce their level of exposure and risk. Comprehensive Year 2000 legal audits in conjunction with aggressive Year 2000 assessment or remediation programs are what businesses need to do in order to avert a potential Year 2000 liability catastrophe, both for themselves and for the economy as a whole. Thank you.

    Mr. SENSENBRENNER. Thank you, Mr. Andrews.

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    [The prepared statement of Mr. Andrews follows:]

PREPARED STATEMENT OF WALTER ANDREWS, ESQ., WILEY, REIN AND FIELDING

INTRODUCTION

    Thank you, Chairman Hyde, for asking me to testify at today's important hearing. It is an honor for me to be here.

    My name is Walter J. Andrews, and I am a partner at the law firm of Wiley, Rein & Fielding here in Washington, D.C. Wiley, Rein & Fielding has been actively involved in evaluating the legal and financial liabilities arising out of the Year 2000 problem. As Co-Chair of the firm's Year 2000 Practice Group, I have counseled clients on the legal risks that their businesses may face as a result of the Year 2000 problem, and have supervised Year 2000 legal audits designed to identify and mitigate liability issues in clients' businesses related to the Year 2000 problem.

    I appreciate the opportunity to testify today on the legal dimensions of the Year 2000 problem. I would like to note my testimony does not necessarily represent the view of any Wiley, Rein & Fielding client. Instead, consistent with this hearing's focus, my testimony will address three topics: (1) the liability issues and legal theories that already have been raised by the Year 2000 problem; (2) those legal issues we can expect to see in the future; and (3) what businesses can be doing now to mitigate their exposures to these liabilities. Having been a computer programmer in the 1970s, and a litigator in the 1980s and 1990s, I perhaps uniquely can appreciate that there are different perspectives on the potentially massive litigation regarding this issue.

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As many observers have noted, the Year 2000 problem presents the potential for liability exposure of an almost unparalleled magnitude. Throughout the U.S. and world economies, every link in the chain of commerce that is susceptible to a Year 2000 failure gives rise to vast liability exposure. Consider the widespread use of computers in every aspect of commercial life, and the widespread use of embedded microchips in all kinds of machinery, ranging from microwave ovens to merchant ships. We've all heard Year 2000 horror stories about the possibility of airplanes crashing, elevators failing, pacemakers malfunctioning, and widespread power outages. We also should keep in mind the potential for cascading effects resulting from Year 2000 failures in the distribution chain, which could affect the availability of water, food and medicine. I am sure the Members recognize the potential for Year 2000 failures causing harms ranging from the merely annoying to the potentially fatal, and the consequent potential for vast liability exposure. According to estimates cited in a recent report by the Organisation for Economic Co-operation and Development, the worldwide costs of Year 2000 remediation may reach as high as $600 billion. More importantly, the litigation costs of the Year 2000 problem have been estimated by the Gartner Group to reach up to $300 billion, and by Ann Coffou of the Giga Information Group to reach up to $1 trillion. Compare these figures to the costs we actually witnessed in the 1990's for asbestos litigation and environmental litigation, $15 and $18.4 billion respectively, and you will get some sense of the enormity of potential Year 2000 litigation costs.

My testimony today will not address technical aspects of the Year 2000 problem, nor will it address particular legislation before Congress or the need for such legislation. Rather, my testimony will focus on the legal issues posed by the Year 2000 problem, including the actual litigation we already have seen and the potential litigation we may see in the future. My testimony will also address our efforts at Wiley, Rein & Fielding to help clients prepare for and mitigate Year 2000 liabilities.

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Litigation So Far

    First, I would like to discuss the litigation that the Year 2000 problem already has generated. At this point, we still have over 8 months to go until January 1, 2000. Nonetheless, at least 60 lawsuits, most of them purporting to be class actions, already have been filed over alleged Year 2000 problems. In fact, this number probably represents only a small fraction of the number of Year 2000-related lawsuits that ultimately will be filed.

    The largest category of cases filed to date involves software products that have not yet failed but may cause harm if not remediated. Generally, these suits have been class action suits against software developers. They raise a combination of contractual claims, such as breach of contract, breach of express warranties and implied warranties of merchantability and fitness under the Uniform Commercial Code, anticipatory repudiation and failure to give adequate assurances. Non-contractual claims include fraud and deceit, breach of the duty of good faith and fair dealing, violations of the federal Magnuson Moss Consumer Products Warranty Act, and violations of state deceptive trade practices acts. The plaintiffs typically seek compensatory damages, usually the costs of remediation or upgrade of the non-compliant product, punitive or other exemplary damages, disgorgement of the defendants' profits, attorney fees and court costs. The plaintiffs also typically seek injunctive relief for free patches or upgrades to the software.

    Six class action lawsuits against Intuit, all of which have been dismissed, are typical of these suits against developers of allegedly non-compliant software. In the Intuit cases, the plaintiffs complained of Year 2000 defects in older versions of Intuit's Quicken personal finance software. The plaintiffs in these cases claimed that the software was unfit for the purposes for which it was meant to be used, for example to perform online banking functions or to maintain financial records accurately into the Year 2000. In response to these claims, Intuit generally asserted that: (1) the plaintiffs had failed to allege any actual injury because the Year 2000 defects would not cause malfunctions until the Year 2000; (2) that the plaintiffs had not given Intuit an opportunity to fix the alleged defects before bringing suit; and (3) that some of the plaintiffs had no contractual relationship with Intuit.

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    All six of the cases against Intuit were ultimately dismissed. In each dismissal, the court based its decision upon the lack of present, actual injury. Since few plaintiffs are likely to be able to allege present, actual injury in current Year 2000 litigation, the issue of the lack of actual injury likely will arise in other pending lawsuits alleging the Year 2000 non-compliance of software products.

    A significant legal question facing us about the Year 2000 problem is, whose responsibility is it to fix the problem? As the case of Paragon v. Macola indicates, courts are looking to contract terms to answer this question. Like the Intuit cases, the Paragon case was ultimately dismissed. Unlike these other cases, however, Paragon was not dismissed based upon the lack of injury, but on the legal merits. In Paragon, the plaintiff's accounting software, which had been developed by the defendant, was allegedly Year 2000 non-compliant. The defendant provided Year 2000 compliant upgrades, but at a price. The plaintiff sued, seeking damages and injunctive relief. The court dismissed the plaintiffs' suit primarily based upon language in the contract between the parties that contained an express disclaimer of warranties. Thus, contractual terms governed the parties' respective Year 2000 liabilities in Paragon.

    Contract terms also governed the liabilities of the parties in ASE v. INCO, a recent arbitration decision. In ASE, an arbitrator found that a systems developer was not liable under a 1995 contract for the purchaser's costs of remediating the system. The arbitrator found that Year 2000 remediation was neither addressed in the contract nor articulated as a goal of the project. Thus, as in the Paragon case, contract terms were found to govern the parties' liabilities.

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    Although it has not generally been the case, some of the Year 2000 suits have begun to raise negligence claims in addition to contractually based claims. For example, two of the class action complaints against the Medical Manager Corporation include claims of negligence. To date, there has been no judicial ruling on the standards of care relevant to the Year 2000 problem. The issue of standards of care for software date design is significant in the Year 2000 context because it may determine whether the original developers of non-compliant software are held to be negligent and therefore liable for the consequences of the Year 2000 problem. Moreover, this issue will play into a much larger one, as courts determine whether contract terms should govern the parties' respective liabilities, as in the Paragon and ASE decisions, or whether tort law—the general legal principles governing one person's responsibilities toward others—should determine the allocation of liabilities arising from the Year 2000 problem.

    A case involving Andersen Consulting LLP raised the standard of care issue squarely. Andersen had designed, customized and implemented a software package for J. Baker, a clothing retailer who later complained of Year 2000 problems in the system. Andersen argued in response that no Year 2000 compliant systems were available at the time it implemented the software. After mediation, Baker dropped its claims against Andersen, and thus no Year 2000 standard of care was judicially established. Because of its significance, however, the issue of standard of care likely will be litigated further in future cases.

    To date, most of the suits in the current wave of Year 2000 litigation have directly involved users and distributors of allegedly non-compliant software. The Intuit cases are a good example. But we are already beginning to see a kind of Year 2000 litigation spill-over effect. That is because, while the Year 2000 problem is at root a programming problem, it has the potential to affect every aspect of commerce that relies on date-related programming in software, firmware and hardware, even if only indirectly. Thus, direct purchasers of software are not going to be the only people affected by the Year 2000 problem. In fact, the next wave of Year 2000 litigation, namely disputes over injuries indirectly caused by the Year 2000 problem, may be where the greatest litigation costs eventually lie.

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Shareholder actions comprise the largest category of current lawsuits based on such indirect Year 2000 claims. Most of these shareholder suits have involved alleged misstatements about the probable success of a company's Year 2000 remediation products and services, allegedly resulting in inflated share prices. A derivative action also has been brought against Medical Manager Corporation, its principals and the brokers that handled its initial public offering, alleging that they failed to disclose the intention to shorten the life span of existing Medical Manager software and to replace it with a Year 2000 compliant version. These shareholder actions may mark only the beginning of the potential litigation spill-over effect. When the Year 2000 comes to pass, and we actually begin to see the kinds of failures we have only been contemplating, the ensuing litigation could ensnare just about any entity that experiences a failure in its computer system or other machinery, or whose operations rely on some such entity.

Future Litigation

At this point, I would like to describe some of the Year 2000 litigation that we can expect to see in the future. In addition to the current litigation against software developers and other developers of information technology, we can expect eventually to see suits brought against suppliers, vendors and service businesses at every level of the chain of distribution. And the legal claims that eventually may be pursued under the rubric of the Year 2000 problem span the range from contract and tort law to statutory claims. Common law breach of contract and breach of warranty under the Uniform Commercial Code have been the focus of much of the current litigation. Negligence and professional malpractice claims also are increasingly likely to be raised, for example against the designers of non-compliant systems. As I have indicated, negligence claims already have begun cropping up against software developer Medical Manager Corporation.

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    We can also expect claims of negligent and strict products liability for non-compliant products. In situations where, as is often the case, sellers have made representations about the continuity of their services or products operating into the Year 2000, we should expect to see claims of negligent misrepresentation or fraudulent misrepresentation raised, along with claims brought under state laws regarding deceptive trade practices. Where misrepresentations about consumer products are at issue, we can expect claims under the federal Magnuson Moss Consumer Products Warranty Act.

    As for securities claims, the cases already filed involve Year 2000 claims premised on materially misleading statements made by officers and directors of two types of companies, either those that sell Year 2000 remediation products and services, or those that sell non-compliant software products. In the future, as companies generally begin to suffer from Year 2000 failures, shareholder suits may be brought against any type of company, alleging that its directors and officers failed to take sufficient steps to fix Year 2000 problems or failed sufficiently to disclose their failure to take such steps. Similar Year 2000 claims premised on breach of fiduciary duties might be raised beyond the corporate context as well. For example, benefits administrators under the federal Employee Retirement Income Security Act (ERISA) might be sued for failure to take sufficient steps to remedy Year 2000 problems with respect to the pension and health plans they administer.

Legal Preparation for the Year 2000

    So far, I have discussed the potential for litigation and ultimate liability in the event of future Year 2000 failures. At this point I would like to address what businesses can do now to minimize their liability exposure. Businesses must take forward-looking, pro-active measures now to minimize their exposure to the Year 2000 problem. Naturally, technical remediation of systems and equipment affected by the Year 2000 problem should be given a high priority. The legal aspects of the Year 2000 problem, however, should also be given priority. Unfortunately, lawyers are often viewed as part of the problem for businesses, by encouraging a future Year 2000 litigation explosion, rather than part of the solution. Businesses must recognize, however, that obtaining legal counsel is part of the solution to their Year 2000 problems. Legal counsel can aid businesses right now in their Year 2000 efforts by helping them to minimize their liability exposure and to take responsibility for addressing the Year 2000 problems in their operations. In fact, legal counsel may even aid businesses in identifying areas of potential Year 2000 failures in their operations, going hand in hand with technical remediation.

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    Cognizant of the potentially devastating liability exposure posed by the Year 2000 problem, clients have sought Wiley, Rein & Fielding's assistance to help prepare their businesses for the Year 2000. In fact, our firm's Year 2000 Practice Group has been actively working for more than a year now on Year 2000 liability issues and counseling clients on minimizing their legal and financial liability exposure.

    Generally, clients have begun their Year 2000 legal preparations by focusing attention on the magnitude of the Year 2000 problem and on the need to commit to Year 2000 readiness at the highest management levels, both in terms of budget and personnel. Businesses also have been extensively documenting both their commitment to and their efforts toward being Year 2000 compliant. Furthermore, they have been centralizing and coordinating Year 2000 readiness efforts in one team to the greatest extent possible, operating across all levels and divisions. Besides fostering efficient compliance efforts and efficient distribution of information about those efforts, this approach has the advantage of protecting client rights in the event of future litigation. For example, centralizing Year 2000 efforts helps ensure that a client's Year 2000 statements are consistent, and that the client consistently invokes the protections of the recently enacted Year 2000 Information Readiness and Disclosure Act (also known as IRDA).

    To the extent that our clients are only beginning to become familiar with the Year 2000 problem, Wiley, Rein & Fielding's attorneys have provided guidance on the kinds of assessment, remediation and testing processes that businesses should institute to render their systems, products and services compliant. Certainly, businesses should begin by focusing their attention on mission-critical systems first, to identify those elements of their businesses which are essential to their continued operation.

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    These are some of the initial steps businesses have taken to prepare for the legal ramifications of the Year 2000 problem. The bulk of a company's Year 2000 legal audit, however, consists of analyzing the liability exposure each company faces individually and then crafting legal strategies to minimize that exposure, specifically tailored to each company's situation. Businesses have started this process by examining their obligations and liabilities to others in the event of a failure in their operations. They also have been analyzing existing contracts and legal relationships with third parties such as suppliers, vendors, customers and independent contractors. Businesses also have been reviewing third parties' websites, marketing materials and advertising for any Year 2000 disclosures. In addition, businesses have been contacting third parties to obtain adequate assurances or certificates of compliance stating that third party products and services will be available and functioning on and beyond problem dates. To obtain such assurances, businesses have been sending letters and Year 2000 questionnaires to their third party vendors and suppliers, along with follow-up letters when necessary.

    Businesses also have been renegotiating their contracts to include protections in the event of Year 2000 failures, for example, the inclusion of Year 2000 warranties in contracts with vendors. Often, legal counseling includes drafting definitions of what it means to be Year 2000 compliant, tailored to meet the needs of individual clients. Certainly, with respect to new contracts, clients have often included Year 2000 warranty and indemnification provisions, as well as explicitly spelled out obligations to repair and replace technology where necessary.

    Year 2000 legal counseling also extends to regulatory matters. As more and more government agencies are becoming familiar with the Year 2000 problem, these agencies are increasingly taking steps to asses the extent both of the Year 2000 problem and of remediation efforts. Some are also taking steps more directly aimed at minimizing the impact of Year 2000 problems within the areas of industry they regulate.

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    For example, the SEC last year released interpretive guidelines explaining public companies' obligations to disclose their Year 2000 problems and remediation efforts in financial reports filed with the SEC. Bank regulators are requiring banks to ensure that the companies to which they have loaned money are undertaking Year 2000 remediation efforts. The FCC has begun a series of efforts both to gather information about the Year 2000 readiness of the companies it regulates and to educate the industry and the public about the state of Year 2000 readiness in the communications industry. The FDA has given manufacturers guidance on its expectations with respect to the Year 2000 compliance of medical devices. In response to these and other regulatory initiatives, our clients have sought counseling to ensure that their operations, products and services comply with regulatory requirements related to the Year 2000 problem.

    Finally, clients have been focusing attention on the need to form emergency response plans in the event of a Year 2000 failure. The first part of such an endeavor is to establish an operational contingency plan, attempting to assure that mission-critical systems function in spite of possible failures. The second part establishes a legal contingency plan, which identifies avenues for responding to potential areas of liability along with immediate actions that clients must take to avail themselves of relevant legal protections in the event of Year 2000 failures.

    Hopefully, after undergoing a comprehensive Year 2000 legal audit, our clients will have minimized their liability exposure.

Conclusion

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    The Year 2000 problem, because of its pervasive nature, presents potentially staggering liability costs for individual entities as well as for our society as a whole. Because of the magnitude of these costs, businesses must take steps now to ensure that their systems are Year 2000 compliant and to reduce their level of exposure and risk. Comprehensive Year 2000 legal audits, in conjunction with aggressive Year 2000 assessment and remediation programs, are what businesses need to do now in order to avert a potential Year 2000 liability catastrophe both for themselves and for the economy as a whole. Legal counsel can be part of the Year 2000 solution by helping businesses to take responsibility for addressing their Year 2000 problems and to minimize their liability exposure.

    Thank you, Distinguished Members of the Committee. This concludes my testimony. I would be pleased to respond to any questions you may have.

FIRST CASES FORESHADOW LATER LITIGATION: READING EARLY RETURNS.

BY BOB BUTLER, MEREDITH FUCHS, WALTER ANDREWS, AND PRAVEEN GOYAL

Published in the February 25th Issue of Legal Times

    Even though a year remains before Jan. 1, 2000, the dreaded millennium bug has already caused an infestation—not of software failures, but of lawsuits anticipating such failures and their predicted consequences. From these cases, we can glean much about the issues that will arise when the real onslaught of Year 2000 litigation hits the courts next year.

    The largest group of lawsuits already filed allege that software design failures either have caused harm or may do so if not remedied. These actions raise many issues about the nature of injury, the types of damages recoverable, and privity of contract. The next largest category consists of shareholder actions claiming that Y2K statements have affected stock prices. Still other actions relate to alleged hardware failures, consultant mistakes, and insurance coverage disputes.

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    Typical of the litigation targeting software developers are the cases against Intuit Inc. Six suits—three in New York and three in California—have been filed against Intuit for alleged Y2K defects in its Quicken personal finance software. The suits generally allege some combination of breach of implied and express warranties, anticipatory repudiation, and failure to provide adequate assurances. Noncontractual claims include violation of the federal Magnuson-Moss Consumer Products Warranty Act, fraud and deceit, deceptive trade practices, and breach of the duty of good faith and fair dealing.

    The plaintiffs generally seek compensatory damages, disgorgement of Intuit's revenues from sales of noncompliant versions of Quicken, treble damages, punitive damages, attorney fees, and court costs. They also seek to compel Intuit to offer free Y2K compliant upgrades and to freeze Intuit's assets. See, e.g., Chilelli v. Intuit Inc., No. 98–013559 (N.Y. Sup. Ct., filed May 13, 1998); Issokson v. Intuit Inc., No. CV773646 (Cal. Super. Ct., filed April 28, 1998).

    The Intuit cases highlight the question: What is injury? The company argued in California and New York that the plaintiffs failed to allege any actual damages caused by the Y2K problems claimed to exist in Quicken. In fact, by the time the cases were heard, Intuit had notified Quicken users that free Y2K compliant upgrades would be available. The company contended that the plaintiffs had not given it an opportunity to cure before suing.

    Intuit sought dismissal or at least a stay of the complaints. The New York court agreed, dismissing three of the suits. The California court dismissed one, which was refiled, and is now considering whether to dismiss it and the other two pending before it.

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A Significant Defense

    In a similar case not involving Intuit, the court in Peerless Wall & Window Coverings v. Synchronics, No. 98–1084 (W.D. Pa., filed June 19, 1998), granted a temporary stay to permit the defendant to determine whether its software posed a Y2K problem and to remediate at no cost to the general public. The court noted that the plaintiffs had not experienced actual damage and that none was reasonably anticipated before the end of the calendar year. Taken together with the results so far in the Intuit litigation, this decision suggests that a plaintiff's inability to allege actual injury will be a significant defense prior to the Year 2000.

    By contrast, the plaintiffs in the now infamous Produce Palace International v. TEC-America Corp., No. 97–330–CK (Mich. Cir. Ct., filed June 12, 1997), alleged actual losses as a result of the defendants' noncompliant system. The Michigan Circuit Court denied the defendants' motions to dismiss, upholding all the claims against the retailer and those claims against the distributor for breach of warranties, negligent repair, and misrepresentation. The parties later settled after mediation.

    Rather than seeking damages for losses not yet sustained, some plaintiffs are asking for injunctive relief to force defendants to fix the problem before 2000. See, e.g., SPC Inc. v. NeuralTech Inc., No. 8:98–CV–521 (D. Neb., filed Oct. 23, 1998); Cobb & Shealey v. Equitrac Corp., No. CV–98–809–H (Ala. Cir. Ct., filed Nov. 13, 1998).

    Let's assume that a post-Year 2000 plaintiff will be able to prove actual damages. Intuit raised another significant defense that will surely come into play—the double bind of the ''economic loss'' doctrine and contractual privity. The economic loss doctrine limits a plaintiff in contractual privity with a defendant to contractual remedies if the loss alleged is purely economic. Intuit argued that the plaintiffs' tort claims for purely economic loss were thus barred. Then Intuit also contended that all contractual claims should be dismissed because several of the plaintiffs had obtained their software from middlemen and thus were not in privity with Intuit. Under this argument, only contract remedies are permitted because any losses alleged are economic, but lack of privity denies those contract remedies.

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    Where the economic loss/privity two-step does not apply, software developer defendants have focused on the language of the relevant agreements to limit liability. For example, in Paragon Networks International v. Macola Inc., No. 98–CV–0119 (Ohio C.P., filed April 1, 1998), the plaintiff, facing a privity argument similar to Intuit's, produced a copy of the defendant's license agreement. In response, the defendant argued that a disclaimer in the agreement barred all claims for breach of express and implied warranty. Paragon countered that it had no opportunity to negotiate the license terms prior to purchase and, thus, there was no meeting of the minds. Paragon further argued that the disclaimer at issue was unconscionable to enforce. Its claims were recently dismissed based on the express terms of the license agreement.

    Eight Y2K cases have been filed against the Medical Manager Corp. and related entities, raising claims involving Medical Manager software. All but two have tentatively been settled as of this writing. The two continuing cases suggest that plaintiffs lawyers are already learning lessons from the first Y2K actions.

    The earlier Medical Manager cases typically alleged breach of contract, breach of Uniform Commercial Code-implied warranties, Magnuson-Moss Act violations, and deceptive trade practices. The two remaining complaints also allege that the defendant promised free upgrades for software containing ''bugs'' and raise negligence claims not present in earlier suits. While they do not claim past or present Year 2000 injury, they do allege ''a clear and present danger of risk and potential harm to patients of medical specialists'' due to the specialists' reliance on the software for monitoring, notification, and treatment efforts. See Highland Park Medical Associates v. Medical Manager Corp., No. 98 C 7022 (N.D. Ill., amended complaint filed Nov. 5, 1998); MVA Rehabilitation Associates v. Medical Manager Corp., No. 98–30217–MAP (D. Mass., filed Nov. 12, 1998).

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Duty to Remediate?

    Does a software developer that sold products with the millennium bug in the past have a duty to remediate now? A recent arbitration decision may shed light on how courts will react to such a claim.

    In ASE Limited v. INCO Alloys International Inc., No. AAA 55–199–0127–98–DEU (Nov. 17, 1998)—the first known legal determination of liability relating to the Y2K problem—an arbitrator held that a systems developer is not currently liable under a 1995 contract for Y2K remediation damages. The purchaser sought to terminate the contract, initially for reasons other than Y2K noncompliance, and the developer filed suit. In response, the purchaser claimed that the developer was liable for the $3.9 million cost of making the existing system Y2K compliant. The arbitrator rejected the purchaser's arguments, finding that ''year 2000 remediation'' was neither addressed in the contract nor articulated as a goal of the project, and that a document exchanged between the parties indicated that ''year 2000 mitigation'' was not within the project's scope.

    Another broad class of Year 2000 claims is shareholder litigation. Within this class, the largest group of cases involves alleged misstatements about the probable success of a company's or a new acquisition's Y2K remediation products and services. See, e.g., Steinberg v. PRT Group, No. 98–CIV–6550 (S.D.N.Y., filed Sept. 16, 1998); Downey v. Chan, No. 1:98–CV–10578 (D. Mass.). There are two suits against Command Systems Inc. alleging that the company's initial share prices were artificially inflated by the company's false representations that it would focus on selling Y2K business solutions. See Doney v. Command Systems Inc., No. 98–3279 (S.D.N.Y., filed May 6, 1998); Steinberg v. Command Systems Inc., No. 98–3320 (S.D.N.Y., filed May 8, 1998).

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    Poller v. Micro Focus Group, No. 98–CIV–8619 (S.D.N.Y., filed Dec. 4, 1998), represents a second variation. This suit was brought on behalf of shareholders of a company that acquired a provider of Y2K remediation products and services, as well as shareholders who bought stock in the provider during the class period. The suit alleges that the provider artificially inflated share prices by making false and misleading statements about the retention of personnel critical to its Y2K operations.

    In a third variation, a shareholder derivative action was brought against Medical Manager, its principals, and the brokers that handled its initial public offering, in Ehlert v. Singer, No. 8:98–CV–02168 (M.D. Fla., filed Oct. 23, 1998). The complaint alleges that Medical Manager failed to disclose its intention to shorten the life span of its existing software and to promote a Y2K compliant version of the software. It also charges that the company failed to disclose the impact of not providing support for the noncompliant version.

    These days, Year 2000 litigation primarily involves software and systems developers, but they are not the only targets. Hardware manufacturers, consultants, and insurance companies are also seeing the beginning of what may be a deluge.

Readiness Disclosures

    Micron Electronics Inc. has been targeted for Y2K defects in its computer hardware products. See Hannah Films Inc. v. Micron Electronics Inc., No. CV98–05692 (D. Idaho, filed Oct. 26, 1998). While the claims are similar to those against software developers like Intuit, the Micron case may also raise issues under the recently enacted Year 2000 Information and Readiness Disclosure Act (IRDA).

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    The complaint refers to Micron's Web site statements about its products' Y2K compliance and to its Web site's offers to sell fixes for noncompliant products. After IRDA was signed into law, Micron retroactively converted these statements into so-called Year 2000 readiness disclosures. Under IRDA, such disclosures made in good faith are generally inadmissible in state or federal civil actions pending after July 14, 1998, to prove the ''accuracy or truth'' of any Y2K statement set forth in the disclosure, unless the disclosure provides grounds for anticipatory breach, repudiation of a contract, or a similar claim. The Micron case is pending.

    The most significant case involving consultants so far may be one brought by Andersen Consulting LLP and raising the issue of standards of care. Andersen designed, customized, and implemented a software package for clothing retailer J. Baker Inc. J. Baker later complained of Y2K defects in the system. Andersen, in a declaratory judgment action, argued that appropriate Y2K compliant software was unavailable at the time of its work for J. Baker, and that customizing an existing package would not have been economically viable. See Young v. J. Baker Inc., No. 98–01597 (Mass. Super. Ct., filed Aug. 28, 1998). No precedent for Y2K standards of care was established because J. Baker recently dropped its claims after mediation.

Enter Insurance Companies

    Year 2000 litigation has not involved many insurance companies—yet. In what surely is only a glimpse at the wave to come, the Cincinnati Insurance Co. recently filed a declaratory judgment action maintaining that it has no duty to defend or indemnify its policyholder Source Data Systems Inc. (SDS) in a Y2K suit. Earlier, Pineville Community Hospital had filed a separate suit against SDS, alleging they had misrepresented their MEDNET software as Y2K compliant, and making an array of contract and tort claims.

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    In its declaratory judgment action against SDS and Pineville, Cincinnati Insurance contends that Pineville's claims are not based on any ''occurrence'' or ''property damage'' that took place during the policy period. Moreover, the insurer argues, Pineville's suit is based on tortious conduct and breach of contract, rather than occurrences or property damage as defined under the policy. Cincinnati Insurance alleges that the claimed losses are barred under the policy as ''expected or intended from the standpoint of the insured, '' and that the loss was known, rather than fortuitous, from the viewpoint of SDS. Finally, Cincinnati Insurance contends that Pineville does not seek recovery for amounts paid ''as damages'' by SDS, as defined by the policy. See Cincinnati Insurance Co. v. Source Data Systems Inc. and Pineville Community Hospital Association Inc., No. C 98–144 MJM (N.D. Iowa, filed Dec. 4, 1998). This case is probably just the first of many that will arise out of policyholders' efforts to shift their Y2K costs on to insurers.

    Taken together, all these cases provide only a hint of the Year 2000 litigation to come. Apprehensive businesses everywhere are analyzing their commercial relationships for potential Y2K failures, whether they are their own or those of the parties with whom they deal. For now, their primary concern is being able to perform in the event of failures. But when the Year 2000 finally arrives, the ensuing flood of disputes may urgently demand their attention as well.


YEAR 2000 LITIGATION MAY BE THE TESTING GROUND FOR THE NEW RESTATEMENT OF PRODUCTS LIABILITY LAW

BY MEREDITH FUCHS, WALTER ANDREWS AND BRIAN RUSS

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Published by Mealeys Publications' Year 2000 Report

I. Introduction

    The Restatement (Third) of Torts: Products Liability (''Restatement'') was adopted by the American Law Institute on May 20, 1997 and has been both criticized and heralded by members of the plaintiff and defense bar. Although Restatements do not, on their own, have the force of law, both of the earlier Restatements of Torts have been relied upon by courts and have exerted substantial influence on the development of tort law. The Third Restatement's description of the state of products liability law and the persuasiveness of its recommended refinements to that body of law, however, have yet to be extensively tested.

    Litigation arising out of the much anticipated Year 2000 problem may provide some of the first opportunities for courts to apply the new Restatement. The Year 2000 problem likely will lead to a host of problems, including the corruption of data, malfunctions, and in some instances, complete system failures. The impact will be as widespread and varied as the use of computer technology itself. Air traffic radar screens, weapons control systems, medical equipment, and traffic lights could shut-down. Utility and communications companies may be unable to provide service. The Year 2000 problem could well cause personal injuries and deaths, and significant losses.

    Of course, such losses inevitably will breed litigation, and plaintiffs are sure to pursue relief in part under product liability theories. In particular, manufacturers and distributors of software and embedded chips—the two most likely sources of Year 2000 failures—may become frequent targets of product liability claims. Accordingly, Year 2000 litigation could pose an important early test for the new legal concepts and public policy choices embodied in the Third Restatement.

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    This article discusses the Restatement's potential impact on Year 2000-related products liability litigation. After providing a brief overview of the law of products liability, the article highlights several threshold issues that are likely to arise in Year 2000 cases. The article then examines the potential for Year 2000-related liability under each of the three categories of actionable product defects recognized in the Restatement—manufacturing defects, design defects, and failure-to-warn defects. In particular, the new Restatement incorporates several changes that may have significance in the Year 2000 context. This article highlights the effect that these changes may have on Year 2000-related product liability claims.

II. Products Liability Primer

    The law of products liability concerns the liability of commercial sellers for injury to persons and damage to property caused by defective products. The policy rationale underlying modern products liability law is that commercial sellers are in the best position to reduce the risks posed by defective products.

    Section 402A of the Restatement (Second) of Torts was one of the original sources for the products liability standards that have become the common law in most states. To provide sellers with a powerful incentive to curtail the risks associated with defective products, Section 402A imposed ''strict liability'' for products sold ''in a defective condition unreasonably dangerous to the user or consumer or to his property.''(see footnote 30) Liability under the section is ''strict'' in that a seller is accountable for defects even if the seller exercised all reasonable care in the preparation and sale of the product. Although the authors of section 402A focused on defects stemming from the manufacture of products, many courts attempted to apply the same standard of liability to so-called design defects and a seller's failure to provide a warning.

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    The Third Restatement modifies Section 402A's scheme of liability in several important respects. First, the new Restatement expressly defines three categories of defects for which commercial sellers may be liable: manufacturing defects; design defects; and warning defects. Second, although the Restatement retains strict liability for manufacturing defects, it abandons true strict liability for design and warning defects, and adopts standards of liability that require some degree of fault on the part of defendant sellers. For example, the Restatement requires proof of a reasonable alternative design in cases involving a design defect and eliminates the use of a consumer expectations test. Third, the Restatement appears to lessen the protection that commercial entities may gain by placing a prominent warning on a product that causes injury.

III. Likely Threshold Issues in Year 2000-Related Products Liability Litigation

    The Restatement establishes a limited scope of liability for manufacturers, distributors, and sellers of defective products. Under the Restatement, plaintiffs may assert products liability claims only against those engaged in the business of selling or distributing products that have caused harm to persons or property other than the product itself.

    Year 2000-related products liability litigation frequently may hinge on several threshold issues that arise from the boundaries of liability delineated in the Restatement. A Year 2000 defendant may rely on at least two arguments in attempting to convince the court that a claim does not fall within the Restatement's parameters. First, a defendant may argue that the plaintiff's claim is not cognizable under products liability law, because the software or embedded chip that caused the Year 2000-related harm is not a ''product'' within the meaning of the Restatement's definition of that term. Second, a defendant may assert that a plaintiff suffered no recoverable loss under the law of products liability, because the Year 2000-related failure caused no injuries to persons or to property other than the allegedly defective component itself. Each of these threshold issues will be considered in turn.

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A. Are chips or software ''products''?

    Courts may look to the Restatement in attempting to answer the threshold question of whether the computer chip or software alleged to be the source of a Year 2000-related injury qualifies as a ''product'' under the law of products liability. The Restatement provides: ''A product is tangible personal property distributed commercially for use or consumption. . . . Services, even when provided commercially, are not products.''(see footnote 31)

    A chip is a small piece of semiconductor on which an integrated circuit is embedded. Although there are many different types of chips, in general they are all devices used to control, monitor, or assist the operation of equipment or machinery. In computers, many chips are placed on electronic boards called printed circuit boards. Embedded chips facilitate the operation of a variety of equipment, from nuclear power stations and elevators, to home appliances and smoke detectors. Although a chip is composed of tangible material that can be touched or held, a defendant-chip seller may seek to avoid product liability actions by focusing a court's attention on the intangible software that makes the chip function, and may argue that the chip is merely the physical encapsulation of software, which is the true cause of the Year 2000 failure. Thus, a court's characterization of the source of the Year 2000-related injury may be crucial in determining whether a chip manufacturer, or someone before or after the manufacturer in the design and distribution of the chip, will be subject to product liability claims.

    Unlike embedded chips, software that is not contained in a chip clearly is not a tangible item that can be touched or held. The term ''software'' describes a number of things including computer instructions, data or anything else that can be stored electronically. Software storage devices and display devices such as diskettes, CD-roms, and monitors, are hardware. The Restatement recognizes that products liability law has not resolved whether software can be characterized as a ''product.''

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Accordingly, the categorization of software is likely to be a difficult and important issue in early cases involving Year 2000-related products liability claims against software manufacturers and distributors. Defendants generally will argue that software is the embodiment of an intellectual process or an idea, and that the production or development of software is a service. Products liability law generally has distinguished between intangible ideas and tangible items used for recording those ideas. For example, the words recorded in a book are considered intangible ideas, even though the paper on which they are recorded and the ink with which they are recorded may be products.(see footnote 32) Other seemingly intangible elements such as electricity, however, have been found to be ''products'' in certain limited circumstances.(see footnote 33) In addition, because software is not particularly useful without a chip or hardware, plaintiffs may argue that it is functionally analogous to tangible personal property. Plaintiffs also may argue that, regardless of its intangibility, public policy reasons support viewing software as a ''product.'' The Restatement provides some support for such arguments made in appropriate circumstances.(see footnote 34)

The Restatement acknowledges that the tangibility of software has been considered in the context of different areas of law and that courts may draw on these sources in products liability litigation. For instance, in cases involving claims brought under the Uniform Commercial Code (''UCC''), courts have had to consider similar issues with respect to whether software is a ''good.'' These cases generally hold that mass-marketed, ''off-the-shelf'' software is considered a ''good'' while customized software is considered a service.(see footnote 35) In the tax area, the issue has been considered as well. Tax cases have found software to be tangible and subject to sales tax or intangible based on a similar distinction being made between off-the-shelf and customized software.(see footnote 36)

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B. Did the Year 2000 failure cause harm to persons or to ''other'' property?

    Another threshold question in Year 2000-related products liability litigation will be whether the Year 2000 failure caused injury to persons or property other than the product itself. The Restatement excludes recovery for ''pure economic loss,'' including loss of the product that itself caused the injury.(see footnote 37) Often, in a commercial setting the only injuries will be economic losses such as damages for inadequate value, costs of repair, replacement of a defective product or consequential claims that are not connected to a claim of personal injury or damage to other property. At least one case has held that the loss of electronic data is an economic loss and not a loss of property.(see footnote 38) Mere economic loss cannot be the basis of a products liability claim.

    Under the Restatement's formulation, harm to surrounding property is harm to property other than the product itself, and thus recoverable.(see footnote 39) The determination of what constitutes ''other property'' often will be difficult in the Year 2000 context, however, where a non-compliant component of a product, machine or system damages the rest of the machine. The question of when a component is a separate product and when it is integrated into a larger product such that damage to the larger product is not considered damage to ''other property'' is likely to be the source of a great deal of litigation in Year 2000 product liability cases.

IV. Year 2000-related liability for product defects under the Restatement

    Product defects are divided functionally under the Restatement into three categories: manufacturing defects, design defects, and defects based upon inadequate instructions or warnings. The potential for Year 2000-related liability under each of these defect categories is considered in turn.

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A. Manufacturing defects related to the Year 2000 problem

A manufacturing defect exists ''when the product departs from its intended design even though all possible care was exercised in the preparation and marketing of the product.''(see footnote 40) In general, it seems unlikely that many Year 2000-related product failures will involve actionable manufacturing defects. In order to prove such a case, a plaintiff would have to show that the product was designed to be Year 2000 compliant, but implementation of that design specification failed and the product ended up non-compliant. Where a deliberate programming decision was made that involved two-digit year coding, it will be almost impossible to demonstrate that something unintended occurred in the manufacturing process.

B. Design defects related to the Year 2000 problem

A design defect exists ''when the foreseeable risks of harm posed by the product could have been reduced or avoided by the adoption of a reasonable alternative design by the seller or other distributor, or a predecessor in the commercial chain of distribution, and the omission of the alternative design renders the product not reasonably safe.''(see footnote 41) This formulation of the design defect definition has been widely interpreted as eliminating strict liability in design defect cases. As discussed above, strict liability is a concept that imposes liability on the seller or distributor of a product that caused injury without any finding that the seller or distributor is at fault for the product defect. The employment of fault-based concepts such as reasonableness and foreseeability in the Restatement's definition of a design defect, therefore, suggests that true ''strict liability'' is not available in design defect cases.

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    The Restatement's most controversial change is its requirement that a plaintiff establish the availability of a reasonable alternative design to demonstrate that the injury-causing product was defective. Plaintiffs' attorneys have claimed that this requirement imposes an impossible burden on plaintiffs, and improperly shifts the burden away from defendants who usually possess the technical resources and knowledge concerning the design process. To have any hope of meeting the standard, plaintiffs will be required to retain expert witnesses, which may be prohibitively expensive. Plaintiff's lawyers also have criticized this requirement as constraining the jury's role to merely comparing the merits of competing designs. In a world in which products are increasingly complex and involve technologies that are not understood by the ordinary person, lawyers may find it necessary to find new methods for explaining these difficult concepts to the average juror.

    The reasonable alternative design requirement, if adopted in the various jurisdictions, likely will be an important focus in Year 2000 litigation. On the one hand, a plaintiff in a Year 2000 case may try to meet this requirement by showing that it was possible to design software and chips to be Year 2000 compliant. On the other hand, defendants will argue, as has been argued in one of the early Year 2000 cases brought by a computer consultant, that such an option was cost-prohibitive.(see footnote 42)

    The Restatement suggests that the reasonable alternative design requirement should replace the ''consumer expectations'' test for design defects currently used in many states. Under the consumer expectations test, proof that a product failed to perform as safely as an ordinary consumer expected it to perform would constitute proof of a defective design. The argument for abolition of the consumer expectations test is that the test rests on subjective expectations of consumers, whereas the objective standard of an alternative design will be less vague. The consumer expectations test could be problematic for defendants in Year 2000 design defect cases as consumers largely will argue that they did not expect a product to suddenly stop functioning on January 1, 2000. In applying the consumer expectations test, courts may consider the length of product warranties, expected shelf lives, product life-cycles, maintenance schedules and the like. Courts also are likely to consider representations made in promotional literature and advertisements that would be far less significant under a reasonable alternative design standard.

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    For those plaintiffs who are unable to satisfy the reasonable alternative design requirement, the Restatement provides several alternative ''catch-all'' bases of liability for defects. Under the Restatement, a plaintiff may rely on circumstantial evidence to show that ''when the incident that harmed the plaintiff [occurred]: (a) [it] was of a kind that ordinarily occurs as a result of product defect; and (b) was not, in the particular case, solely the result of causes other than product defect existing at the time of sale or distribution.''(see footnote 43) A plaintiff also may rely on a product's failure to comply with product safety statutes or regulations if such noncompliance renders the product ''defective with respect to the risks sought to be reduced by the statute or regulation.''(see footnote 44) In the absence of any Year 2000-specific safety statutes and regulations, plaintiffs likely will look to general statutes and regulations that require products to be functional or operable. Conversely, under the Restatement, compliance with product safety statutes or regulations does not preclude a finding of product defect.

    Finally, the Restatement also allows a plaintiff to dispense with the need to establish a reasonable alternative design if the product is ''manifestly unreasonably dangerous.'' In general, to qualify for this exception a plaintiff must demonstrate that the product has low social utility and a high risk of danger. Plaintiffs may find it difficult to invoke this exception in the Year 2000 context because defendants generally will be equipped with convincing arguments regarding the social utility of computer technology.

C. Failure-to-warn defects related to the Year 2000 problem

    The final defect category established by the new Restatement concerns a commercial seller's failure-to-warn. A failure-to-warn defect exists ''when the foreseeable risks of harm posed by the product could have been reduced or avoided by the provision of reasonable instructions or warnings by the seller or other distributor, or a predecessor in the commercial chain of distribution, and the omission of the instructions or warnings renders the product not reasonably safe.''(see footnote 45) As with design defects, the use of fault-based concepts such as reasonableness and foreseeability indicates that true ''strict liability'' does not apply in failure to warn cases.

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    With respect to Year 2000 cases in which a plaintiff asserts a failure-to-warn claim, the most important battle may be fought over a single issue. Defendants likely will argue that they had no duty to warn, either because the risk of harm posed by the Year 2000 problem was not foreseeable, depending upon the point in time, or, conversely, because the conspicuousness of the risk obviated the need for a public warning. In evaluating foreseeability, courts will undertake a fact-driven inquiry into whether a particular defendant was aware of its product's Year 2000 noncompliance, and the consequential dangers. For their part, plaintiffs will seek to prove that the defendant knew or reasonably should have known of the problem, perhaps by offering testimony from retired or disgruntled former programmers and consultants of the defendant. Plaintiffs are also sure to seek extensive document discovery in the hopes of finding some long-forgotten, incriminating internal company memorandum on the Year 2000 problem.

    Regardless of a defendant's awareness of the dangers posed by Year 2000 non-compliant products, the Restatement provides that commercial sellers cannot be liable for their failure to warn of ''obvious'' or ''generally known'' risks.(see footnote 46) Over the last several years, the Year 2000 problem has been widely discussed, industry alerts have been issued, federal and state legislation has been proposed and enacted, and the trade and popular press have written hundreds of warning stories. Thus, a defendant may argue that it had no duty to warn, because plaintiffs who used computer technology, embedded chips, and software were well aware of the Year 2000 problem. Accordingly, the widespread publicity of the Year 2000 problem, along with commercial sellers' awareness of particular Year 2000 defects, will be key issues in determining whether a defendant had a duty to warn.

    A second issue that, although common in failure-to-warn cases, may be less important in Year 2000 cases, concerns the reasonableness of a defendant's warning. Under the Restatement, if a warning was required in the circumstances of the case, a defendant can escape liability only if it provided ''reasonable'' warnings or instructions. The reasonableness of a warning will depend to a great extent on the defective product's consumer profile. For example, in the Year 2000 context, the purchaser of a non-compliant embedded chip may be quite sophisticated in computer technology, and the threshold for a ''reasonable'' warning concerning the chip may be quite easy for the commercial seller to satisfy. Nevertheless, this will probably be a non-issue in Year 2000 products liability litigation, because it appears that, at least until very recently, sellers and distributors of software and embedded chips have not included Year 2000 warnings on their products (and doing so likely would not have helped sales).

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    For the same reason, Year 2000 defendants will likely be unable to take advantage of the protections from liability that the Restatement offers those who place prominent warnings on products. Under the Second Restatement, such a warning could insulate a manufacturer from liability because it was presumed that the user read the warnings and followed its safety guidance. The Third Restatement, however, indicates that warnings are not ''a substitute for the provision of a reasonably safe design,'' and are merely one factor to consider in assessing the defendant's liability.(see footnote 47) Again, because commercial sellers generally have not placed Year 2000 warnings on their products, they will likely be unable to benefit from these provisions.

    In addition to the duty to warn at the time of sale, the Restatement also recognizes a post-sale duty to warn ''if a reasonable person in the seller's position would provide such a warning.''(see footnote 48) According to the Restatement, a reasonable person would provide a warning if: ''the seller knows or reasonably should know that the product poses a substantial risk or harm to persons or property; and those to whom a warning might be provided can be identified and can reasonably be assumed to be unaware of the risk of harm; and a warning can be effectively communicated to and acted on by those to whom a warning might be provided; and the risk of harm is sufficiently great to justify the burden of providing a warning.''(see footnote 49)

    This post-sale warning requirement is likely to be implicated in many Year 2000 cases. In particular, the reasonableness of the method of communicating the warning may be important. For example, suppose a company that manufactures Year 2000 non-compliant medical devices recognizes that its products pose a substantial risk of harm to persons or property, but does not maintain a mailing list of users and, therefore, posts a warning on its web site. In a subsequent suit, the injured plaintiff might argue that the seller did not act reasonably by posting the information on its web site and instead should have taken some additional effort to warn individuals of the risk. On the other hand, the defendant may contend that posting on a web site is the only commercially reasonable means of notifying users because of the high cost of identifying and notifying individuals. In any event, the question of what is reasonable will be extremely fact-specific.

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V. Conclusion

    So far, only one Year 2000 case (which was not a product liability case) has alleged actual losses caused by a Year 2000 failure. When products begin to fail in the Year 2000, however, products liability law may be used to help apportion the costs of that failure among distributors and users of non-compliant components, and the new Restatement of Torts (Third): Products Liability may drive judicial decisionmaking.

    Mr. SENSENBRENNER. Professor Kappelman.

STATEMENT OF LEON KAPPELMAN, CO-CHAIR, SOCIETY FOR INFORMATION MANAGEMENT, YEAR 2000 WORKING GROUP

    Mr. KAPPELMAN. Thank you for inviting me to come and share my thoughts on the Year 2000 Readiness and Responsibility Act. I came because I am very concerned that there are damaging, unintended consequences that will result from this legislation that will really turn this into the Year 2000 Irresponsibility and Lack of Readiness Act. In other words, this bill will really make things much worse.

    Look, I am not an attorney. I am an educator and a research scientist. My clients and my students include people on every side of this issue. I work with software manufacturers, I work with the managers of information system assets, and I work with the consumers and users from clerks all the way up to ''Mahogany Row.''

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    There is a lot of confusion, a lot of uncertainty about this issue. But we know one thing for sure, and that is that we are here today because of the shoddy quality of software products and the mismanagement of information assets. Let's face a fact here. The best thinking of software companies, of hardware companies, and of other high-tech enterprises got us into this mess; and they are not doing a very good job of getting us out.

    One of the last panelists mentioned something about a lot of the stuff that is being sold today. The actual number is, according to a study released last month by Gartner Group, 81 percent of off-the-shelf business software is still not Year 2000 compliant.

    There are three areas that I would like to mention that I think have the greatest potential for egregious unintended consequence. One is the cooling-off period. The only thing this will cool off is our economy, because it will cool off the pressure on companies to do the right things and thereby increase damages and disruptions from Y2K problems.

    I will give you an example. A small businessmen, someone in your constituency, maybe a supporter, buys a piece of software tomorrow. Although it says it is Year 2000 compliant, it just happens to be one of those 81 percent that are not. January 1 comes along and it fails. It corrupts their data and shuts down their business and they cannot operate. They have backup data, but they cannot get to it because it is in a proprietary format that only their vendor's software can open and it doesn't work. They have 30, 15, 90—it doesn't matter how many days it is, they are going bankrupt. Maybe they do go bankrupt. What happens to the vendor? Nothing. They just go on misrepresenting their shoddy products. Surely that is not something we want to see happen here.

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    Second, the liability limits—I don't care if they are on damages, or on director and officer accountability, or because we raised the thresholds or the burden of proofs. The bottom line of all of this stuff is that these are perpetrator protection provisions. That is all they are. It is remarkable to me that this kind of legislation is being seriously considered here.

    And third, the one that I think can truly undermine the information economy, which let us face it the United States is really where this experiment is taking place, is the fact that the destruction of data is protected. Electronic data is, aside from people and their knowledge, the second most important asset of an information economy. And here is the scenario: I am a business; I am in the store above you. Okay? If I have a fire or my toilets overflow and it goes into your business and destroys your data, I am accountable and I have to make you whole. But if I destroy your data with defective non-Year 2000 compliant software, I am held harmless. It is ridiculous. It is truly ridiculous.

    In closing, let me ask you to please remember three things: one is Year 2000 is about defective products. When other industries regularly turn out defective or dangerous goods and services, society typically raises the standards of quality. It is why we have lemon laws. It is why we have Underwriters' Laboratory.

    Secondly, software is no different than any other manufactured good. It is not an art form any more than architecture or medicine or good product designs are art forms. And those manufacturers are held accountable, and certainly we should hold these accountable.

    And finally, if I may just have 15 more seconds, this is really about being accountable for your actions. Is this Congress going to grant legal dispensation to companies who harm others, or are you going to do what my mom always told me to do and that is: just clean up your own mess. Thank you very much, and thank you for those extra moments.

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[The prepared statement of Dr. Kappelman follows:]

PREPARED STATEMENT OF LEON KAPPELMAN, CO-CHAIR, SOCIETY FOR INFORMATION MANAGEMENT, YEAR 2000 WORKING GROUP

BIO

Leon A. Kappelman is a researcher, writer, teacher, speaker, facilitator, and consultant dedicated to helping organizations better manage their information, systems, and technology assets. Currently he is directing much of his energies and attention to helping enterprises solve their year 2000 computer date problems and make continuity preparations. Leon is an Associate Professor of Business Computer Information Systems at the University of North Texas, Associate Director of the Center for Quality and Productivity, co-chair of the Society for Information Management's (SIM) Year 2000 Working Group, was recently appointed SIM's Senior Advisor for Issues Advocacy, and is a founding members of the 3-person steering committee of the UN and World Bank sponsored YES (Y2K Expert Service) Volunteer Corps of the International Y2K Cooperation Center. His professional expertise also includes the management of information assets, information systems development and maintenance, management of change and technology transfer, project management, and information systems assessment and benchmarking. He has published over 50 articles and his work has appeared in numerous journals including the Communications of the ACM, MIS Quarterly, Journal of Management Information Systems, Decision Sciences (forthcoming), Project Management Journal, InformationWeek, Computerworld, National Productivity Review, Industrial Management, and the Journal of Systems Management. He authored Information Systems for Managers (McGraw-Hill, 1993); co-edited Y2K Endgame Strategies: Risk Management, Testing, and Contingency Planning (SIM International, 1998), Year 2000 Problem: Strategies and Solutions from the Fortune 100 (International Thomson Press, 1997), and Solving the Year 2000 Computer Date Problem: A Guide and Resource Directory (SIM International, 1996). He can be reached at kapp@unt.edu.

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SUMMARY

    What does H.R. 775 the ''Year 2000 Readiness and Responsibility Act'' really do and what are its potentially dire unintended consequences? The bill is largely designed to limit the penalties for those who fail to reduce and manage Y2K risks (corporate executives and high-tech manufacturers) and to protect those who are largely responsible for creating this costly Y2K problem (namely, much of high-tech industry, especially software manufacturers and other information technology (I/T) manufacturers).

    In every other industry a defective product is recalled and replaced or repaired by the manufacturer. Other industries are subjected to ''Lemon Laws'' for regularly selling defective products. Manufacturers of everything from aspirin and automobiles, to hammocks, highchairs, and zwieback have been subject to costly recalls of products known to be defective, dangerous or damaging. Are software manufacturers above the law? There is nothing special about software, or other high-tech products, or Y2K, that suggests that they deserve special treatment under the law. The ''software is an art form'' theory is just an excuse for the poor workmanship and shoddy products which have lead to debacles like this Y2K mess.

    There are three kinds of provisions that risk some of the most dreadful unintended consequences, and in fact make H.R. 775 the ''Y2K Anti-readiness and Ir-responsibility Act,'' namely:

(1) Liability limits on damages and executives: If enacted such provisions will punish consumers and business owners of all sizes by shifting to them the cost for the repairs made necessary by the poor programming and poor planning of those they depended upon in high-tech industries. Such laws will serve as incentives to NOT fix Y2K problems; moreover, they will condone hurting others so long as you do it with a computer.

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(2) Cooling-off periods: The result, from a business owner's viewpoint, of a cooling-off period before a consumer can take legal action, is this: ''The software company sold me a 'Y2K compliant' product, on January 1st 2000 it failed, I am going bankrupt, but the software company has more time to fix it.''

(3) Data destruction exempted: Perhaps the potentially most devastating unintended consequences to the long-term economic well being of our country, and to the information economy, are provisions that exclude damages to data if you do it with non-Y2K-ready I/T product. Destroy data with a match or a scissors and you're headed to jail, but do it with software and you're off free.

Of course there is room for positive Y2K legislation, just not the kind that lets I/T or any other industries off the hook when they sell defective goods, and especially not when they refuse to stand behind their products. Imagine an analogy to the auto industry: Would Congress have passed a law in 1914 placing wide-ranging limitations on the liability of automobile manufacturers and drivers, for unspecified damages, that they might someday cause to others? Software and other high-tech goods should be treated like any other products. Please, do not legalize hurting others or committing crimes with high technology in the name of trying to help with Y2K problems or in the hopes of furthering general tort reforms. Y2K places far too much at risk already, and we have neither time nor resources to waste on such diversions.

STATEMENT

Thank you for this opportunity to testify before the esteemed membership of the Judiciary Committee concerning H.R. 775, the ''Year 2000 Readiness and Responsibility Act.'' I am here today to offer you the perspective of someone who has been involved with information technology (I/T) since the mid 1960s and who has been helping government and industry solve their Y2K problems since early 1995. I have conducted several Y2K-related research projects, including a study that since 1996 has tracked the Y2K progress and practices of a sample of enterprises representing more than one-tenth of U.S. GDP (Gross Domestic Product); worked first hand with scores Y2K program directors from the public and private sectors; written several books, monographs, and dozens of articles; and made countless presentations all over the world. Since its inception in 1996, I have co-chaired the Society for Information Management's (SIM) Year 2000 Working Group, with members from major I/T consumer, I/T vendor, federal agency, state government, academic, religious, and legal organizations. Moreover, I am currently involved in the actual solving of Y2K problems at the corporate, city, state, and national levels through my participation in a Y2K community preparedness project with the 84 cities in Los Angeles County, a project that is also sharing its best practices with cities all over the world; my participation in the monthly conference call of state Y2K coordinators; as a participant in the Information Technology Association of America's (ITAA) monthly Y2K Task Group meetings as well as their legal/legislative task group meetings; and as one of the founding members of the 3-person steering committee of the UN and World Bank sponsored YES (Y2K Expert Service) Volunteer Corps of the International Y2K Cooperation Center.

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UNINTENDED CONSEQUENCES OF H.R. 775

    Although there are positive roles that legislation can play, legislation can not provide a simple solution or a quick fix to this complex set of interrelated problems we call ''Y2K.'' I am here today because I am convinced that some of the provisions in this ''Year 2000 Readiness and Responsibility Act'' currently under your consideration will have dreadful unintended consequences.

    These unintended consequences will result in more Y2K damages to your constituents and to our national economy because there are provisions in this bill that will greatly reduce the incentives to responsibly address Y2K, and will thereby promote less Y2K readiness and less Y2K responsibility. Possibly even worse because of the long-term and far-reaching unintentional effects, these anti-readiness and anti-responsibility provisions will fundamentally damage the future development of the reliable information-based society that the United States is pioneering.

    Civil society is based on trust and accountability, and the purpose of law is to ensure it. The purpose of H.R. 775 seems largely to grant accountability exemptions for those special interests who created and sustained the Y2K problem for the sake of their own short-term profitability. Eighty-one percent (81%) of commercial packaged software is NOT Y2K compliant according to a Gartner Group study released last month (March 1999)! Is there any good public policy reason to reward such behavior on the part of software manufacturers?

NOTHING SPECIAL ABOUT Y2K OR I/T PRODUCTS TO MERIT SPECIAL LAWS

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    A primary objective of H.R. 775 appears to be to take I/T and related high-technology products out of the realm of established legal precedents that have so far governed our society's ability to adapt to new technologies such as steam engines, railroads, automobiles, airplanes, electric power, pharmaceuticals, and so on. It is my understanding that in each of these cases, warranties and liabilities were enforced, exemptions were not granted before damages were incurred, and insurance coverage was sought as a way of transferring the risks.

    There is nothing special about I/T products, or Y2K for that matter, that in any way suggests that they deserve special treatment under the law. The ''software is an art form'' theory is just an excuse for poor quality workmanship and shoddy goods. Software is no more an art form than good architecture, or good medicine, or good scientific research are art forms—They all have their creative side, but they're also rigorously disciplined endeavors. So too is good software development.

    If this were any other product you would be considering recalls and lemon laws—But I/T IS just another product. Please, don't be fooled in to believing otherwise. I am reminded of a quote attributed to Thomas Paine, patriot, political philosopher of the American Revolution, and author of Common Sense, ''A long habit of not thinking a thing wrong gives it a superficial appearance of being right.'' If software is an art form, then we have bet our future economic well being, perhaps our very survival, on this art form—Certainly we are not that foolish or frivolous.

    H.R. 775 offers to I/T and related high-tech products a wide-ranging set of exemptions and legal ''dispensations'' from full economic accountability for damages they caused to others. Since the consequences of what could be damages arising from Y2K-related faulty dates could continue for decades, H.R. 775 offers relief from the usual accountability we have so far held for those who develop, deliver, and use technological innovations.

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    It is as if legislators would have passed a bill in 1914 placing wide-ranging limitations on the accountability for unspecified damages, a priori, that may someday be caused by automobile manufacturers and by automobile drivers. Would you have supported such a bill? I think not.

CAUSE, EFFECT, AND HUMAN NATURE

    Crafting laws is not my expertise. I do, however, know a bit about human motivation, have studied it in organizations, have developed instruments to measure it and some of the things that contribute to it, and have published several refereed journal articles about it. My concerns regarding H.R. 775 are largely related to provisions that will seriously reduce the incentives that enterprises have to reduce Y2K risks, get Y2K work done, and be prepared for Y2K contingencies.

    I do not believe that the U.S. Congress would seriously consider legislation that would tie the hands of the FDIC (Federal Deposit Insurance Corporation) or the SEC (Security and Exchange Commission) in keeping the pressure to reduce Y2K risks on the enterprises they regulate. It seems that the plaintiff's bar and the threat of litigation essentially provides that same external motivation to do the right thing, especially in less-regulated industries. Certainly Congress does not want to tie the hands of these pseudo-regulators by reducing the potential penalties on those who fail to do the right thing about reducing and managing Y2K risks?

    It's just basic human motivation, granted a negative incentive, but it works—Look how good the banks regulated by the FDIC are doing with reducing their Y2K risks; and how poorly the largely unregulated chemical processing industry is doing, or small businesses. And negative motivations (i.e., deterrents) are why we have laws against robbery, murder, assault, and things like that too.

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    Ask yourself why U.S. banks are in such good shape (e.g., less that 5% on the FDIC's unsatisfactory list, based on clearly define and published criteria, verified by external FDIC audits) when compared with U.S. electric utilities (e.g., 28% did not even have plans as of the January 11, 1999 North Electric Reliability Council/Department of Energy report, based on self-reported answers to vaguely worded question) or small businesses (e.g., 40% plan to do nothing according to a National Federation of Independent Business/Gallup study)? A big part of the answer is the pressure of external regulation, and the threat of externally imposed pain by the FDIC versus nothing whatsoever (in most every case) by state utility regulators.

    To risk reducing the present motivations to do the right thing about imminent Y2K risks, that we all agree are real although we may disagree as to their degree, in the name of preventing or controlling or reducing some possible future litigation that may or may not be frivolous and that may or may not ever even happen, especially if people do the right thing, seems callously reckless.

    If Congress were advised that the flow of illegal drugs into the U.S. was going to increase ten fold next year, would you pass a bill reducing the penalties on drug dealing? Of course not, it's ridiculous to consider such nonsense. Would you consider protective legislation if any legal industry came to Congress and pleaded for relief from future damages caused by their defective products? No, because that is equally ridiculous. Why then would you consider reducing the penalties on hurting U.S. citizens and businesses with defective I/T products? Is it any less ridiculous? I think not.

    And consider the long-term unintended dire consequences that would come from legislatively protecting the poor quality practices of most software developers. In physics we have the law of cause and effect, action and reaction. Remove the law of gravity and things float away. In the economics of this information age, if you remove the gravity of the consequences for manufacturing shoddy I/T goods, then quality will further deteriorate and you will get more shoddy I/T goods. It really wasn't any different in the industrial age, and that is why we did not exempt industries or technologies from accountability for their actions. Why would we choose to do so now? Can we can build a sound economic future on a poor quality art form? Certainly we are not that foolish or frivolous either.

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ANTI-READINESS & ANTI-RESPONSIBILITY PROVISIONS

Among the provisions that seem to run the greatest risk of unintended negative consequences by inadvertently creating disincentives to get Y2K work done are the following three:

(1) Eliminating or reducing officers and directors liability in Y2K cases: For too many Y2K projects it's just been too hard getting the attention of these executives and the resources they control allocated to Y2K work. The threat of litigation is a threat to their productive time (in depositions, court, and so on). There's is no good public policy reason to take the pressure off executives to do the right thing, in fact the SEC and FDIC and stepping up their pressures. Remove the gravity of the consequences if you fail to properly act in dealing with Y2K and spending for Y2K work will float away. Do your really want to promote, even reward, negligent behavior with these perpetrator protection provisions of H.R. 775?

(2) Creating a cooling-off period: At first it sounded like a wonderful idea, but what it will do is artificially extend the deadline for vendors and others to get their Y2K work done while customers (i.e., your neighbors, constituents, and voters) sit there in financial meltdown, hopelessly helpless, and going out of business. Seems the only thing it cools off is the pressure on vendors to get their Y2K repairs done in time while those who were depending on them to be done on time will be left to suffer.

Picture this unintended consequence of H.R. 775: A small business person in your community, one of your supporters, buys a software product tomorrow and is told that it is ''year 2000 compliant'' by the manufacturer. On January 1, 2000 the software locks up, corrupts their data, and refuses to work. Your constituent cannot do business and yet, thanks to H.R. 775, cannot take any legal action either to remedy their plight. They can not afford to hold out, their business fails, jobs are lost, and the software vendor gets to keep selling shoddy products and providing erroneous information about them. Is this really the outcome you want—Protecting the guilty at the expense of the innocent? This is likely to be the outcome we will get with H.R. 775's cooling-off periods.

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(3) Anything else that would reduce the penalties on harming others, like limits on punitive damages. Is there any good public policy reason to make murder or robbery or fraud legal if one commits such crimes with a computer? Of course not, but that is exactly what you are being asked to do in supporting these kinds of provisions in H.R. 775. Further, if enacted, such provisions would punish consumers and business owners of all sizes by making them financially responsible for the Y2K repairs caused by the poor programming and poor planning of those they depended upon in I/T and other high-tech companies. Moreover, these liability limits would unintentionally serve as ''disincentives'' to corporate America to fix their Y2K problems; now. After all, what's worse, the specter of a lawsuit with a $250,000 cap and other favorable legislated litigation biases, or developing a multimillion dollar fix for a systemic Y2K problem?

And perhaps the potentially most devastating unintended consequence to the long-term economic well being of the our country, and the information economy, is the provision that excludes damages to data entirely, since ''actual damages'' in H.R. 775 appear to include only injury to ''tangible property'' and data are often not considered tangible property. Think of it, the destruction or corruption of data, a principal asset of the information age economy, second only in importance to people and their knowledge (which is sometimes embodied in software products), is protected if you do it with non-Y2K-ready I/T products. Destroy data with a match or a scissors and you're headed for jail, but do it with software and you're off free and clear. Is that the intended consequence of this legislation? Of course not, but that will be the unintended outcome if such provisions become law.

CONCLUSIONS

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    The sad reality of the year 2000 problem is that this is the first time our information-based society is confronted with paying a demonstrable bill for the shoddy practices of information systems management and software development that have been with us for more than four decades. The fortuitous opportunity of the Y2K problem is that it provides us the motivation to change these enormously wasteful and unsustainable practices. In fact we are starting to see some positive trends in this regard already, and there are provisions in H.R. 775 that threaten to destroy the incentives for such improvements, and thereby unintentionally threaten the productivity, quality, and sustainability of U.S. economic well being.

    U.S. economic well being, as well as national security, rely on a dependable and fully accountable information infrastructure. Congress is being asked via H.R. 775 and similar bills to place elaborate limitations on the recourse any injured parties would have in the case of I/T created economic damages. The passage of H.R. 775 will have the unintended consequence of injuring technology progress by giving a special and unique set of exemptions from accountability that no prior technologies have ever received.

    There are possible positive roles for Y2K legislation, like encouraging alternative dispute resolution, achieving more fairness in proportionate liability, or somehow extending statutes of limitations so that the current focus can be on mitigation instead of litigation. Even corporate welfare provisions of questionable desirability like Y2K tax incentives can have positive motivational outcomes, assuming one can ensure that the dollars are spent on actually mitigating Y2K risks.

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    But H.R. 775 is a bill with provisions that will have some very detrimental and damaging unintended consequences. Dire consequences that will hurt many American consumers, small business owners, and investors. Even worse, are the dreadful unintended consequences that could compromise the ability of the U.S. to succeed in this age of information.

    If these anti-Y2K-responsibility and anti-Y2K-readiness provisions prevail, when history books are written our descendants will look at this as the time when the U.S. decided to yield our technological and economic progress to special interests seeking absolution from accountability for the consequences of their actions. If you happen to be a reader of Toynbee's history, you will recall that he singles out the institutionalization of special interest exemptions from taxes, legal obligations, and accountability for crimes as one of the contributors to the break down of once adventurous and vigorous civilizations.

    Software and other I/T products should be treated like any other products. Please, do not legalize hurting others or committing crimes with high technology in the name of trying to help with Y2K problems or in the hopes of furthering general tort reforms. Y2K places far too much at risk already and we have neither time nor resources to waste on such diversions.

    If I can answer any of your questions or provide you with any additional information, I am at your service.

    Mr. PEASE. [Presiding.] You are very welcome. Let the record show that the chair is in a generous mood today.

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    Mr. Nations?

STATEMENT OF HOWARD NATIONS, ESQ., LAW OFFICES OF HOWARD L. NATIONS

    Mr. NATIONS. Thank you, Mr. Chairman, distinguished members. Thank you for the opportunity to address you on this very important issue.

    My position on this is that there is no need for Federal legislation regarding Y2K liability because the common law principles, the State statutes and primarily the Uniform Commercial Code, provides all of the business rules and guidelines that are needed to measure the conduct of business entities, to provide motivation for immediate remedial actions, and to provide remedies for wrongdoing. The business law in question provides both rules and remedies.

    We need to think here in terms of the two types of leaders that we have had here. We have had responsible business leaders, and we have had irresponsible business leaders who have approached the Y2K problem. Responsible business leaders who have followed the business rules in matters relating to Y2K are entitled to rely upon the remedies which business law provides in order to recover from those who ignored the rules and who caused the damage.

    It is inherently unfair to change the Y2K rules with 2 minutes left in the fourth quarter in order to alter the outcome to the detriment of those who acted responsibly and followed the rules but will be damaged because of the failure.

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    Federal legislation in the area of business law is unnecessary because the Uniform Commercial Code has been adopted by the legislators of all 50 States, providing uniformity to Y2K business law.

    In the terms of the UCC, the manufacturers of defective systems and devices which are at the base of the Y2K problem are subject to the breach of implied warranty or fitness for a particular purpose, implied warranty merchantability, expressed warranties, and breach of contract. The UCC was originally formulated through the joint efforts of the best legal minds of the country. It has been effective enough to gain the confidence of all 50 State legislatures; and the rules, once adopted, have been finely honed by the appellate courts over the last 3 decades.

    We have seen the problem here this morning of people who couldn't agree on what this legislation means. Can you imagine the morass of interpretations that we are going to get into? The Uniform Commercial Code has been interpreted by the law, by the State courts in all 50 States. The rules are well-known, and they are very well formulated. They are taught in business schools.

    Since most of the Y2K business litigation would hinge on the breach of implied warranty of written contracts, the UCC implied warranty rules provide a great impetus to business leaders to make every effort to become Y2K compliant before the damage occurs.

    Let me address just very quickly Mr. Yarsike's situation as an example. The abolition of joint and several liability really bothers me for this reason: The Senate committee, Senator Bennett's committee, has said that the committee is greatly concerned about the international Y2K picture. Several U.S. trading partners are severely behind in their Y2K remediation efforts. We are running a very real risk here of leaving our American consumers, and American small businesses particularly, without a remedy. It happens in this situation.

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    Mr. Yarsike, for example, his product was manufactured in Japan. If there is not joint and several liability, what we have a lot of times in a lot of products that are manufactured overseas is you have FOB Yokohama. Those people are not doing business in the United States. They are not subject to being sued in the United States.

    If that was the situation in Mr. Yarsike's case, he would have no remedy. The reason that the joint and several liability rules exist is so that Mr. Yarsike can go back against the man who sued him. They can go back against the people—they go right on up the chain where they have a paper trail to follow.

    The people dealing ultimately with the manufacturer in Japan in the United States are contracting with them, and they have the right to contract for submission to jurisdiction in the United States. Mr. Yarsike doesn't have that right. The people on up the line from Mr. Yarsike can bring the Japanese manufacturers into court in America. Consumers, end users who are not in privity of contract with them cannot.

    I suggest to you that there are several other issues that I have covered in my paper. But let me just say that in this atmosphere there is a lot of it. There is a lot of misinformation, the idea here that frivolous lawsuits are the only kind of lawsuits that are going to result from this.

    I will reserve the rest of my remarks. Thank you.

    Mr. SENSENBRENNER. [Presiding.] Thank you, Mr. Nations.

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    [The prepared statement of Mr. Nations follows:]

PREPARED STATEMENT OF HOWARD NATIONS, ESQ., LAW OFFICES OF HOWARD L. NATIONS

    Distinguished Congressmen, thank you for the opportunity to address your committee on this very important issue. Today's hearing addresses legislation to extend special legal protections to defendants in cases involving Y2K-defective products. Such legislation is unnecessary, harmful to the civil justice system and would actually eliminate important incentives for businesses to become Y2K ready.

    Examination of the rules of business law, by which the conduct of business entities is measured, reveals that the law, as it exists in all fifty states, encourages business leaders to immediately address their Y2K problems. Business leaders are held to a standard to take honest, informed, good faith efforts to seek immediate Y2K solutions in order to avoid causing damage, both to their own company and to those with whom they do business. Through avoiding the causation of Y2K damage, entities can avoid liability. It seems reasonable to assume that the desire to avoid causing damage and the fear of liability arising from such damage should provide sufficient motivation to reasonable business leaders to immediately address Y2K solutions.

    America's time honored common law principles and the statutory laws of all fifty states have been promulgated by the best legal minds of the past two centuries, carefully honed in court on a case by case basis, applied in jury trials with sworn testimony and rules of evidence, fine tuned by trial judges and honed into strong legal principles by the appellate courts of this land. The resulting business principles which have emerged from the cauldron of American justice are time tested and tempered and should be applied to resolve the business problems arising out of Y2K just as they have been applied to business problems in America since its inception.

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    There is no need for federal legislation regarding Y2K liability because the common law principles, state statutes and the Uniform Commercial Code, which has been passed by the legislatures of all fifty states, provide all of the business rules and guidelines needed to measure the conduct of business entities, provide motivation for immediate remedial action, and provide remedies for wrongdoing. The business law in question provides both rules and remedies. Responsible business leaders and consumers who have followed these business rules in matters relating to Y2K are now entitled to rely upon the remedies which business law provides in order to recover from those who ignore the rules and cause damage. It is inherently unfair to change the Y2K rules with two minutes left in the fourth quarter in order to alter the outcome to the detriment of those who have acted responsibly, and followed the rules but will be damaged because of the failure of others to act reasonably.

    To focus on the issue of how liability will affect an entity's ability to fix its Y2K problems, we need only understand the function of the business judgment rule, the duty of due care, the Uniform Commercial Code, and the concept of joint and several liability which have controlled business transactions of this type for several decades.

    The directors of a corporation owe a fiduciary duty of care to the corporation and its shareholders in carrying out their managerial roles. That is, they must exercise the same degree of care and prudence that ordinary persons in a like position under the same or similar circumstances would use.

    The business judgment rule requires that business persons take informed, honest, good faith actions in the best interest of the company which they presume to lead. Corporate directors who investigate, evaluate, deliberate and document as required by the business judgment rule and the duty of due care will be immunized in their efforts to remediate their Y2K problems. Absent an abuse of discretion, the judgment of directors in making a business decision will be respected by the courts. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). This does not seem to be an unduly harsh burden to place upon corporate directors. These rules certainly should motivate officers and directors to act promptly and reasonably to remedy Y2K problems.

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Federal legislation in this area of business law is unnecessary because the Uniform Commercial Code has been adopted by the legislatures of all fifty states, thus providing uniformity to Y2K business law. Under the terms of the Uniform Commercial Code the manufacturers of the defective systems and devices which are at the base of the Y2K problem are subject to liability for breach of implied warranty of fitness for a particular purpose, implied warranty of merchantability, express warranties, and breach of contract. The Uniform Commercial Code was originally formulated through the joint efforts of the best business law minds in the country. The UCC has been effective enough to gain the confidence of fifty state legislatures and the rules, once adopted, have been finely honed by appellate courts over the past three decades. The rules of the UCC have also been taught in business schools and used in business practice over the past three decades. Y2K presents precisely the type of legal disputes which the UCC was designed to resolve. Most of the Y2K business litigation will hinge on breaches of implied warranties or written contracts. The UCC implied warranties rules should provide a great impetus to business leaders to make every effort to become Y2K compliant before damage occurs.

Additionally, a party who reasonably fears that the other party will not be able to perform is given protection by the U.C.C. in that the party may demand assurances that performance will be forthcoming at the proper time. If these assurances are not received within a reasonable time, the party seeking assurances can treat the contract as repudiated and suspend its performance. Thus, the U.C.C. clearly provides adequate remedies for buyers and sellers of all goods, including any good covered by proposed Y2K legislation. To remove the provisions of the UCC from the law controlling Y2K can only serve to remove motivation for timely compliance of those who have already procrastinated in addressing Y2K solutions.

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In light of such protections which currently exist in the laws of all fifty states, liability will attach only to those corporate officers and directors who fail or refuse to act with due care and do not follow the business judgment rule. Hence it is incredibly disingenuous for a business leader to claim the inability to repair Y2K problems because such repair may, in some mysterious way, predicate liability. It is respectfully submitted that these business leaders should be concentrating on limiting the damage which they are about to cause instead of seeking limitations on the damages which they fear they will have to pay. The best way to avoid paying damages is not to cause damage. This can be accomplished by focusing, in the limited time remaining, on the remediation process, which they should have undertaken years ago.

Currently, the law in most states provides for joint and several liability of parties in the chain of distribution of a defective product, with the accompanying right of indemnification of downstream defendants by upstream parties until the costs of the damage is ultimately placed on the original tortfeasor. There are sound business and legal principles which predicated the development of this rule and its acceptance by the courts. There has seldom been a greater need in American jurisprudence for maintaining the rules of joint and several liability than in the Y2K litigation field. The reason is that many of the defective products and business systems in America are manufactured by foreign vendors. As reported in the U.S. Senate Special Committee on the Year 2000 Technology Problem's Report, there is grave concern about the level of Y2K remediation outside of the United States and among many of our most frequent trading partners:

The Committee is greatly concerned about the international Y2K picture . . . Several U.S. trading partners are severely behind in their Y2K remediation efforts. S. Rpt. No. 105–106–10 at 6 (1999).

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The biggest Y2K impact may occur internationally. While the U.S. should have started its Y2K preparations earlier, worldwide preparations generally lag even further behind. S. Rpt. No. 105–106–10 at 1 (1999).

    If small business and consumers are left with only several liability against foreign vendors, there will be no remedy and the loss will be absorbed completely by the American consumers and businesses. Many of the products which are marketed in the United States are sold f.o.b. at the dock in the shipping country, e.g., f.o.b. Yokohama. Joint and several liability permits recovery by the end user from the seller in the United States and a cause of action by the seller against the foreign manufacturer. The U. S. distributor will be contracting directly with the foreign vendor and will generally contract for venue in American courts to resolve disputes, with local state law applying to the dispute. Contracts should also contain provisions for submission to the U. S. courts by the foreign vendors for dispute resolution. End users have no such contracts and the abolition of joint and several liability will leave many American consumers and businesses without a remedy for Y2K damage done to them by foreign vendors.

    The Y2K problem confronting responsible business leaders in America who have followed the U.C.C. and sound business rules is that they are now facing losses generated by non-compliant vendors, many of whom are foreign.

    Possibly, examination of the application of existing laws to real life Y2K situations will serve to illustrate how effectively current law functions in the Y2K world and why there is no need to reject the U.C.C. and change the law.

    As of April 10, 1999, there have been sixty-one law suits related to Y2K filed in the United States. Many of those cases have been consolidated into class actions so that the total number of actual lawsuits is closer to thirty. Most of the lawsuits are class actions by small businessmen or consumers against vendors who are seeking excessive prices for Y2K upgrades on products which should have been Y2K compliant at the time they were sold. For example, Dr. Robert Courtney is an OB/GYN solo-practitioner in New Jersey. In 1987, Dr. Courtney purchased a computer medical system from Medical Manager, Inc. for tracking surgery, scheduling due dates and billing. In 1996, the computer crashed from lack of sufficient memory. At that time, Dr. Courtney replaced his old system with a new state of the art Pentium system from Medical Manager for $13,000, a sizeable investment for a small town solo-practitioner. The salesman assured Dr. Courtney that the new computer system would last at least ten years. One year later, Dr. Courtney received a letter from Medical Manager telling him that the system which he had purchased was not Y2K compliant and it would not be useful to him as of January 1, 1999. In order to solve the Y2K problem which Medical Manager had built into their 1996 model system, Dr. Courtney would have to pay an additional $25,000 for an upgrade.

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After the company ignored Dr. Courtney's request for a free upgrade of his 1996 system, he retained an attorney and sued Medical Manager seeking to have them either repair or replace his computer system at their cost. Dr. Courtney was designated as a class representative and it developed that Medical Manager had 17,000 other small businessmen-medical practitioners from whom they were demanding $25,000 for Y2K upgrades. Not surprisingly, within two months after filing the class action Medical Manager offered to settle by providing all 17,000 customers who bought a non-Y2K-compliant system after 1990 with a free ''patch'' that would make their old systems Y2K compliant. The sudden appearance of the software ''patch'' rendered it unnecessary for 17,000 doctors to buy a new upgraded system at the cost of $25,000 each. Application of current law not only saved $425,000,000 in unnecessary costs to small businesses but also avoided $425,000,000 in profiteering by Medical Manager through the sale of unnecessary Y2K upgrade systems when a software patch was obviously always available.

This is typical of the type of profiteering which currently confronts small businesses, even prior to January 1, 2000. Small businesses will be a large segment of the plaintiffs in Y2K litigation. For many small businesses, an outlay of $25,000 or a delay of ninety days during which they are out of business as a result of a non-Y2K-compliant product will be fatal to the business and lead to bankruptcy. This will be particularly true if the damages which they can recover from the provider of the non-Y2K-compliant device or product are limited. Courtney is an excellent example of how well the current civil justice system works. Within sixty days of filing the lawsuit, the profiteering by the defendant ceased, the demand for $25,000 from 17,000 small businessmen was withdrawn and shortly thereafter, a free patch was distributed to 17,000 doctors which magically made their old systems Y2K compliant.

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Another type of damage which will arise out of Y2K will be the result of negligence by the creators of the system software or programmers of the embedded chips. It is possible that we have seen a preview of coming attractions in New Zealand. At 12:01 a.m. on February 29, 1996, in the largest industrial plant in New Zealand, all of the steel manufacturing machinery which was controlled by computers ceased to operate. The problem was that the computer system manufacturer had failed to program 1996 as a leap year. As a result of this negligence, millions of dollars in machinery was ruined and the plant was out of business until new machinery could be obtained. This may be typical of the type of failures which we will see after January 1, 2000 across America. Serious consideration should be given to where the financial losses arising out of such negligence should be placed, on the negligent system software provider or on the business which purchased the software in the good-faith belief that it would function properly. If a situation such as the New Zealand steel mill occurs in the United States and either H.R. 775 or H.R. 1319 is passed, the elimination of economic damages as a remedy in tort against manufacturers would mean that only a small fraction of the mill's losses would be compensated. These damages limitations would result in millions of dollars in losses to the innocent party. A ninety day notice period would add insult to injury. These changes in the law would be particularly devastating since the insurance industry has indicated that they will deny coverage across the board on Y2K related losses.

Over centuries of well-reasoned law, it has been determined that losses of this type are better placed on the tortfeasor whose negligence caused the damage than on the party which suffers the loss. This is the current law in America which would control Y2K situations such as this one and it is respectfully submitted that such law should not be changed in order to protect the wrongdoer at the expense of the innocent business victim. Retention of this law should provide motivation to business leaders to seek immediate Y2K repairs.

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    Thus, it is respectfully submitted that the law as it currently exists is far better suited to the resolution of Y2K claims than a complete overhaul of these time-honored principles, created without adequate time for reflection, amid a morass of misinformation and under the pressure of special interest groups who seek to protect themselves from the consequences of their own actions.

    The U.S. Senate Special Committee on the Year 2000 Technology Problem has acknowledged the level of misinformation as follows:

The Committee has found that the most frustrating aspect of addressing the Year 2000 (Y2K) problem is sorting fact from fiction. . . . The internet surges with rumors of massive Y2K failures that turn out to be gross misstatements, while image sensitive corporations downplay real Y2K problems. S. Prt. No. 105–106–10 at 1 (1999).

    One of the myths surrounding the Y2K litigation is the often cited Lloyds of London estimate of one-trillion-dollars in litigation costs. The one-trillion-dollar figure emanated from the testimony of Ann Coffou, Managing Director of Giga Information Group before the U.S. House of Representatives Science Committee on March 20, 1997, during which Ms. Coffou estimated that the Year 2000 litigation costs could perhaps top one-trillion-dollars. Ms. Coffou's estimate was later cited at a Year 2000 conference hosted by Lloyds of London and immediately became attributable to the Lloyds organization rather than the Giga Group. Obviously, those who want to use the trillion-dollar estimate for their own legislative purposes prefer to cite Lloyds of London rather than the Giga Group as the source of this estimate. There has been no scientific study and there is no basis other than guesswork as to the cost of litigation. The trillion-dollar ''estimate'' by the Giga Group is totally unfounded but once it achieved the attribution to Lloyds of London, the figure became gospel and is now quoted in the media and legislative hearings as if this unscientific guess by this small Y2K group should be afforded the dignity of scientific data. This is just another of the many myths that surround Y2K and certainly should not be given any credibility for changing 200 years of common law, and setting aside the U.C.C., the business judgment rule, the duty of due care and joint and several liability.

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    Thus, in this atmosphere of misinformation, a short time-line and the pressures of special interest groups, it seems appropriate to inquire as to whether this is the proper time, place and forum in which to change 200 years of well-established common law and override the Uniform Commercial Code.

    A further inquiry worthy of examination before changing the well-established rules by which business is conducted in America is what is the nature of the ''crisis'' with which we are dealing, what is the cause of the ''crisis,'' and does it warrant the pre-emption of state laws and the Uniform Commercial Code.

    Y2K is a computer problem which has been known to exist for decades. The business community has had decades of notice and an equal amount of time to address the solution to Y2K.

    The Y2K crisis is not a computer crisis but rather a crisis of corporate leadership which irresponsible business leaders seek to compound with a crisis of corporate accountability. We are in this situation because business leaders have made the conscious decision to ignore the Y2K problem and to procrastinate in implementing solutions until what began as a business problem has now become a business crisis. Consider the findings of the U.S. Senate Special Committee on the Year 2000 Technology Problem regarding procrastination:

Leadership at the highest levels is lacking. A misconception pervades corporate boardrooms that Y2K is strictly a technical problem that does not warrant executive attention. . . . S. Prt. No. 105–106–10 at 3 (1999).

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Many organizations critical to Americans' safety and well-being are still not fully engaged in finding a solution. . . . Id at 1.

Most affected industries and organizations started Y2K remediation too late. . . . Id at 2.

In discussing why many business leaders have been reluctant to ''champion difficult and complex issues,'' the Senate Special Committee found that:

Y2K competes poorly against issues such as . . . market share and product development. It lacks familiarity, and in a results-driven economy, Y2K remediation costs are difficult to justify to . . . shareholders. Additionally, few wished to be associated with the potential repercussions of a failed Y2K remediation attempt. Id at 7.

Thus, irresponsible business leaders have chosen to concentrate on market share and profits while ignoring the necessity of addressing Y2K remediation. Their procrastination in seeking Y2K solutions will now damage those with whom they do business. These are the leaders who are now seeking Congressional endorsement of their procrastination in the form of legislation which will absolve them of responsibility for the losses and damages which they are about to cause. This is particularly damaging to their consumers and business affiliates since the insurance industry has indicated the intention to deny Y2K coverage across the board. Therefore, Congressional absolution to the procrastinators, tortfeasors and wrongdoers will simply shift the damage to their customers and victims. It is respectfully submitted that the U.C.C., the law in fifty states, should not be rejected in favor of a federal Procrastinators Protection Act.

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    There is no acceptable excuse for businesses not being Y2K compliant other than their own procrastination in addressing the problem. A brief examination of the Y2K time-line indicates that the Y2K problem has been well known and steadily approaching for decades. In the late 1950's when magnetic tape format allowed greater memory capacity and less concern with space problems, programmers who were aware of the distant Y2K problem assumed that technical advances would eliminate the problem prior to 1/1/2000.

    In 1960 Robert Bemer, a pioneering computer scientist, advocated use of the four-digit rather than the two-digit date format which is the basis of the Y2K problem. He was joined by forty-seven other industry specialists in an effort to devise computer programming standards that would use a four-digit rather than a two-digit date field. In 1964, IBM had the opportunity to correct the problem when the revolutionary system/360 mainframe came on line and set standards for mainframes for years to come. However, IBM chose to maintain the two-digit date field.

    In 1970, Robert Bemer and eighty-six technical societies urged the Bureau of Standards to adopt the four-digit rather than the two-digit date field in order to avoid Y2K problems. The Bureau of Standards, at the urging of the same entities who now face the Y2K problem, adopted the two-digit standard.

    In 1979, Robert Bemer, writing in Interface Age, again reminded the computer world that the inevitable Y2K problems would occur on 1/1/2000 unless the defect was remedied. Mr. Bemer's warnings were again ignored.

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    Notice again went out to the industry in 1984 when Jerome and Marilyn Murray published Computers in Crisis: How to Avoid the Coming Worldwide Computer Collapse. The Murrays recognized the problem when they attempted to calculate annuities beyond the year 2000 and were unable to do so because of the Y2K date field problem. This notice by the Murrays put the entire manufacturing and computer industry on notice that this was a problem which needed to be addressed and timely remediated.

    In 1986 a South African programmer, Chris Anderson, placed a magazine ad decrying ''the time bomb in your IBM mainframe system'' in reference to the two-digit date field. This occurred thirteen years ago at a time when responsible business leaders should have been seriously considering the remediation of impending Y2K problems. Instead, IBM responded to the magazine ad in 1986 by stating, ''IBM and other vendors have known about this for many years. This problem is fully understood by IBM's software developers, who anticipate no difficulty in programming around it.''

    In 1989, the Social Security Administration computer experts found that overpayment recoupment systems did not work for dates after 2000 and realized that thirty-five million lines of code had to be reviewed. In 1994, the Social Security Administration timely began a three-year review of their software and today the Social Security Administration is the leader among government agencies in software remediation, having timely undertaken the management of the problem. In doing so, they set the standard of responsible conduct against which to measure those confronted with Y2K remediation problems.

    In 1993, two events occurred which placed both the federal government and the business world on notice that the Y2K problem needed to be addressed immediately. The first event was the testing by engineers at North American Aerospace Defense Command of the NORAD Early Warning System. As the engineers set computer clocks forward to simulate 12:01 a.m. on 1/1/2000, every NORAD Early Warning computer screen froze. Additionally, in 1993, Peter De Jager wrote ''Doomsday 2000,'' which was published in Computerworld concerning the Y2K defect. In this article, Mr. De Jager stated, ''We and our computers were supposed to make life easier. This was our promise. What we have delivered is a catastrophe.''

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Responsible business leaders followed the lead of the Social Security Administration and heeded the warnings of Robert Bemer, the technical scientific community, and authors such as the Murrays and Peter De Jager. They timely undertook remediation of their Y2K problems in the early 1990's when there was sufficient time and talent available to solve the problems. Unfortunately, a large contingent of corporate leaders procrastinated, and failed and refused to follow the business judgment rule and to act with due care for the best interests of their corporation and are now to be found in the halls of Congress lobbying for Congressional forgiveness for the breach of contracts and the consequences of the negligent manner in which they have approached the Y2K problem. Such Congressional seal of approval on procrastination and corporate irresponsibility would send the wrong message to the voters, the wrong message to the public, and the wrong message to those who will soon be victimized by such corporate irresponsibility.

It is respectfully submitted that rather than pre-empting the law of the fifty states controlling business activities, this Honorable House of Representatives may effectively help businesses who are actively seeking remediation and who have already undergone the cost of remediation and repair by considering the following types of legislation:

1. Legislation to aid in remediation and repair.

a. Suspend the enforcement of the portion of the antitrust laws which would prevent the sharing of Year 2000 repairs and technologies within vertical industries because of the impact on competition. Currently, the impact on competition which may result from sharing Y2K technologies and repairs may constitute a technical violation of the anti-trust laws. Any action which promotes the more expeditious repair of Y2K problems without adverse impact on other companies, should be encouraged without regard to the impact on competition.

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b. Create a federal repository for Y2K remediation solutions which could be traded across industries. There are more than five hundred programming languages and thirty-six million programs to be remediated. Offer a tax benefit to a company which achieves a remediation solution and places the solution in a repository for use by others with similar problems. The tax credit may be based upon the number of users who are aided by the remediation solution.

c. Suspend application of §482 of the Internal Revenue Code which requires that Y2K repairs by one division of a company be treated as a taxable asset if used by other divisions of the same company. This would promote the use of repair tools or software packages between divisions without such transfer between divisions being a taxable event;

2. Tax Relief.

a. Allow the option to amortize the cost of Y2K repairs over several years or be treated as expenses in the year incurred;

b. Issue a directive to the Internal Revenue Service that they are to minimize the risk to taxpayers from punitive IRS actions in the event that their withholding information or interest information is incorrectly recorded due to the Year 2000 errors;

c. Provide additional corporate tax relief for businesses to compensate, to some extent, for the cost of the Y2K repairs;

3. Relief for Governmental Agencies.

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There is a basis for concern about the impact of Y2K on governmental bodies ranging from small cities to larger cities and states. Governments at every level are confronted with a double impact on solvency. First, each government has to budget its own costs for remediation of governmental Y2K problems. Secondly, the financial impact on taxpaying citizens and businesses will adversely affect the bottom line of taxes collected by governmental bodies. Thus, each governmental body will be confronted with more bills to pay and less tax revenue with which to pay them. In order to avoid interruption of vital infrastructure services to our citizens, it is respectfully suggested that an emergency financial relief system be established for aiding governments which find themselves unable to deliver vital services as a result of this double financial impact.

4. Y2K Compliance.

It is respectfully suggested that a considerable amount of confusion and possibly even litigation may be avoided in the future by the adoption of a standard definition for ''Y2K Compliant.'' At the present time the term is used very loosely without precise definition and businesses who are seeking to ascertain whether their vendors or those with whom they do business are ''Y2K Compliant'' should be cautious to ascertain that they and their vendors are defining the term in the same manner. It is respectfully suggested that the best definition for the term ''Y2K Compliant'' is found in the Federal Acquisition Regulation {FAR), part 39.002, published in Federal Acquisition Circular (FAC) 90–45:

''Year 2000 compliant means information technology that accurately processes date/time data (including, but not limited to, calculating, comparing, and sequencing) from, into, and between the twentieth and twenty-first centuries, and the years 1999 and 2000 and leap year calculations. Furthermore, Year 2000-compliant information technology, when used in combination with other information technology, shall accurately process date/time data if the other information technology properly exchanges date/time date with it.''

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    In addition to my general concerns about the nature of the proposed Y2K initiatives pending in the Congress today, I would also like to express my serious reservations regarding several of the provisions specific to the bill before this Committee today. The Y2K Readiness Act incorporates certain radical legal concepts that have never before been adopted, or even seriously considered, by the Congress before.

    One proposal calls for the creation of a Year 2000 Recovery Fund composed of the punitive damage awards granted by courts to successful Y2K plaintiffs. Looking beyond the unconstitutionality and blatant unfairness of taking court-ordered damages from injured plaintiffs to create a Y2K repair fund, it is obvious that the effect of dispossessing successful plaintiffs of their recoveries would be to discourage the future pursuit of such court actions. In addition, the Y2K Readiness Act is unfortunately a one-way only preemption of state law that requires that plaintiffs prove by clear and convincing evidence that the defendant specifically intended to cause injury to the plaintiff. This double-barreled procedural and substantive standard creates a virtually impossible standard.

    Although punitive damages are extraordinarily rare and account for only the most egregious instances of bad faith activity, we should remember that they serve an important public policy function in punishing bad actors and deterring future egregious conduct. The Y2K Readiness Act eviscerates this important judicial mechanism.

    Another provision of the Y2K Readiness Act which strikes me as unreasonable is the provision designed to protect corporate officers and directors from personal liability in Y2K actions. State laws already afford these corporate chiefs adequate protection from personal suit, and there is no need to override them. The bill before this Committee today provides even greater protections for corporate CEOs than the already overprotective provisions of the Senate bills by deleting a provision in the Senate versions which excludes from liability protection directors or officers who demonstrate a specific intent to harm a plaintiff and who make materially misleading statements or intentionally withhold material information concerning a material Y2K defect. Under the bill currently before this Committee, corporate directors and officers would be given unprecedented protection from liability for purposefully deceitful acts. I am afraid this type of approach takes on a special pleading aspect that has no place in any legitimate effort to pass legislation.

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    Finally, the Y2K Readiness Act includes unprecedented caps on attorney fees and new attorney disclosure requirements that go far beyond the customary requirements of an attorney-client relationship. For average Americans who do not maintain a war-chest to fight corporate wrongdoing, the contingency fee is the key to the courthouse door. It is one reason America has the best and most emulated legal system in the world

    The attorney fee proposal also violates well established principles of federalism. Attorneys are part of a self-regulated profession, like doctors. There is oversight by the profession's own governing body, the bar, as well as by the state judicial system. Congress' proposal to regulate attorney fees is an intrusion into a self-regulating profession and the state judiciaries that oversee those bars. Congress should no more determine what your lawyer makes than it should what your doctor earns or what stock options and bonuses a CEO receives. If you want a race to the bottom for your professional services in law or medicine, then capping of fees is the way to do it.

    To return to the original inquiry, it seems obvious that in the time remaining before the inevitable arrival of 12:01 a.m. on January 1, 2000, business entities that have procrastinated for several years in addressing Y2K remediation could best spend their time in remediating Y2K problems rather than pursuing a Congressional Seal of Approval on procrastination. Already, they have been on the quest for four months; it's time to fix the Y2K problem and not create new problems in the courts.

    The law of all fifty states, the Uniform Commercial Code, the business judgment rule, the duty of due care and the concept of joint and several liability have been finely honed for decades to handle precisely the type of litigation which will be the hallmark of year 2000 lawsuits, business versus business. To set aside decades of law in order to protect those who brought about this crisis of corporate leadership would be unfair to the responsible business entities which are entitled to rely on the remedies which those well-established business rules provide. There is no need for federal legislation regarding Y2K liability.

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    Thank you for the opportunity to be heard on this important issue.

    Mr. SENSENBRENNER. Mr. Pearl?

STATEMENT OF MARC PEARL, ESQ., SENIOR VICE PRESIDENT AND GENERAL COUNSEL, INFORMATION TECHNOLOGY ASSOCIATION OF AMERICA

    Mr. PEARL. Mr. Chairman, I thank you for the opportunity to testify before this distinguished committee.

    The Information Technology Association of America represents companies at the forefront of the information revolution: telecommunications, electronic commerce and the Internet, enterprise solutions and software, systems integration and consulting. ITAA appreciates the opportunity to express our Association's strong support for and our perspective on the legislative initiatives designed, we believe, to appropriately confront the Y2K challenge.

    Although the clock is ticking and the window of opportunity is closing. We now have 262 days, 10 hours, and 55 minutes until January 1 of the Year 2000. Even though that is coming upon us very quickly, we strongly believe that there is still time to assess, to fix, and test many of the systems and to—and this is what the Y2K czar, John Koskinen agrees with—to develop contingency plans on the part of all of the people on the Y2K chain to prevent business disruption due to the century date change.

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    Fear of and preparing for litigation, however, is driving too many decisions currently. The hard question that this committee, the entire Congress, and the Federal Government as a whole must confront is whether you can create an environment which encourages fixover litigation. Addressing the Year 2000 challenge will, of course, be difficult and complex, as this hearing shows today, but allowing this issue to become one of the partisan political footballs of 1999 is not an option.

    Representative Conyers and Representative Sandlin at the beginning of today's hearing, I respectfully must say, have misread the bill and its intent. The Congress can pass and the President can sign into law a remediation encouraging, litigation discouraging bill, but it must be done in the first half of 1999. If you do that, you will have significantly contributed to being part of the solution which consumers, every business, large and small, and the overall American economy needs. The alternative will pit retailer against wholesaler, supplier against customer, provider against insurer, irreparably damaging business partnerships.

    This bill, H.R. 775, recognizes that the Federal Government can play an effective and constructive role to help businesses successfully confront the Year 2000 challenge. It understands that litigation and protracted court action will only benefit lawyers and will not fix a single system. This legislation will broaden the protection in last year's Information and Readiness Disclosure Act, which passed both Houses of Congress unanimously.

    The measure that you are considering today will continue to keep organizations focused on communication, and on fixing systems, not downstream litigation. This bill, in fact, every single bill that deals with this subject under active consideration in both the House and the Senate, will preserve the rights of parties who suffer real harm. It will not prevent or eliminate the recovery of damages where there is fraud, where there is recklessness, where there is personal injury. Every lawsuit already filed or resolved, including the Produce Palace, could have been filed and may have served as an early resolution catalyst if this bill was already law.

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    We believe acting on this legislation now will provide further incentives to repair the systems by focusing time, energy, and resources on fixing and testing. We believe the following key principles are essential elements:

    First, the bill creates incentives for companies to continue to assess and fix their systems before the problem develops.

    Secondly, it encourages contracting parties to resolve their disputes without litigation.

    Third, it will filter out insubstantial and frivolous lawsuits not based on material defects.

    And most importantly, it will provide business certainty through a uniform Federal approach that will offset onerous, uneven and inequitable state law.

    Mr. SENSENBRENNER. The gentleman's time has expired.

    [The prepared statement of Mr. Pearl follows:]

PREPARED STATEMENT OF MARC PEARL, ESQ., SENIOR VICE PRESIDENT AND GENERAL COUNSEL, INFORMATION TECHNOLOGY ASSOCIATION OF AMERICA

INTRODUCTION

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I am Marc Pearl, Senior Vice President of Government Affairs and General Counsel of the Information Technology Association of America (ITAA). Our Association represents over 11,000 direct and affiliate member companies in the information technology (IT) industry—the enablers of our technology-based economy and toolmakers for the Information Age. ITAA members are located in every state in the United States, and range from the smallest IT start-ups to industry leaders in the custom software, services, systems integration, telecommunications, Internet, and computer consulting fields. These firms are listed on the ITAA website at http://www.itaa.org.

ITAA appreciates the opportunity to express our industry association's strong support for the legislation being considered today addressing the legal aspects of the Year 2000 (Y2K) date change challenge. I am here to offer our perspective on the pressing need for Congress to consider and pass this legislation, and for businesses across the entire spectrum—in every part of every business sector's supply chain—to take advantage of and utilize the law's provisions so that our nation can take the responsible steps necessary to meet the Y2K challenge head on. In order successfully to make the transition into and through the new millennium, the Y2K challenge must be forthrightly addressed by all the affected stakeholders—governments, businesses, users and suppliers across all industries and enterprises around the globe. Though the clock is ticking, there is still time to assess, fix and test systems to avoid date failures, as well as develop contingency plans to prevent business disruption. It is incumbent upon Congress to establish the necessary framework to meet this challenge successfully—by encouraging remediation and discouraging litigation.

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    Most sector of American industry—small business and large companies alike—are already making significant—and in some cases, massive—investments to prepare for Y2K. An onslaught of unnecessary, costly, and time-consuming litigation at the turn of the century will, however, hinder rather than help efforts to cure potential Y2K problems. Rather than focusing on developing a litigation plan and figuring out whom to sue, organizations should be in a partnership enterprise—working with key suppliers and customers, finding the answers, fixing any problems, and settling disputes quickly in order to prevent business disruption.

OUR COMMON GOAL: REMEDIATION NOT LITIGATION

    Our common public policy goal should be to continue encouraging Y2K remediation, not litigation. While the Y2K technical challenge cannot be solved by legislation, well-conceived legislative initiatives, which implement a set of key principles, can play a constructive role. We believe that the Federal legislation that has been introduced in both the House of Representatives and the United States Senate reflects such broadly shared principles, and thus would achieve that objective. This legislation is supported by a truly unprecedented coalition of trade associations and companies, representing the broad spectrum of the U.S. economy. It represents a fair, reasonable and necessary approach to the Y2K challenge and has brought together a group of interested parties that includes potential Y2K plaintiffs, defendants and many of those that believe they could be BOTH!

    When passed and signed by the President into law the legislation you are considering today will preserve the rights of parties that suffer real harm—and will not prevent the recovery of damages where there is personal injury, fraud or recklessness. This legislation will also:

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1. Create further incentives for companies to spend the time remaining in 1999 to continue to assess, fix, and test systems for Y2K problems before they develop;

2. Encourage contracting parties to resolve Y2K disputes where there is only an economic loss—without litigation;

3. Screen out insubstantial and frivolous lawsuits not based on material defects; and

4. Provide business certainty through a uniform Federal approach to Y2K litigation, will thus we will discourage ''forum shopping'' and reject onerous, uneven and inequitable state legislative ''fixes.''

ITAA ON Y2K

Over the past four years ITAA has been the leading trade association voice on the issue of successfully confronting the Year 2000 challenge. We have long advocated that vendors and users become aware of and actively develop response mechanisms to identify the problems and remediate their systems. Our goal has been to make sure the parties receive the necessary information they require. We developed our own Y2K Product and Service Compliance Questionnaire over two years ago. In response to a specific request from Congress we established the first of its kind Y2K certification program for IT companies and enterprises that utilize IT to provide some certainty in a crowded and often confused marketplace. In the past two years, more than 100 user and provider organizations have successfully gone through the ITAA*2000 Certification Program. We have published and distributed free of charge a Y2K Solution Providers Directory—the 9th edition of which was just published this month. Our Internet website is the only place where the public and public policy makers can look to find all of the Federal and State bills on Y2K, and—unfortunately—all of the Y2K litigation.

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Last session, ITAA worked closely with the Senate, House and the Administration to write and unanimously get passed into law the Information and Readiness Disclosure Act because we and Congress were convinced that the threat of lawsuits was hampering the sharing of vital Y2K information between business partners. Organizations were afraid to share data; and they were not receiving information needed to successfully approach resolution of Y2K issues to ensure a seamless transition into the next century. Since the passage of the ''Good Samaritan'' law, ITAA has produced a set of special Y2K Guidelines and has sponsored an Internet webcast explaining how to take advantage of the Act's provisions. Companies across the country now have a tool that allows them to share company-to-company information. At same time, the rights of consumers remain protected, and the law did nothing to limit any cause of action that may grow out of actual Y2K-related losses.

The legislation your Committee is considering today will broaden the protections contained in last year's information-sharing bill and will continue to keep organizations focused on the fix—not downstream litigation. This bill will serve to encourage vendors of all types to continue to put the time and resources into Y2K remediation and testing efforts in 1999. It will also serve to provide protection to those enterprises that are impacted by Y2K glitches even though they attempted to get their systems on track. The bill would require, for example, an ''opportunity-to-cure'' period before a Y2K lawsuit can be filed. It would discourage class action suits not based on a material defect suffered by the plaintiffs. And it would permit defendants, having done everything they could reasonably be expected to do under the circumstances, to be ''Y2K-ready'' to plead—consistent with existing law—''Commercial Impracticability'' if a Y2K glitch causes them to breach a contract. By focusing their time, energy and resources on fixing systems, rather than litigating lawsuits, business partnerships will continue and disruptions will be minimized.

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    Inevitably, even if a party does everything possible between now and the Year 2000 to prevent a business disruption, failures and resulting disputes may still occur. Business relationships can survive these challenges, however, as long as the contracting parties work together towards a solution and approach the Y2K challenge as partners. Problems encountered should not lead to contract termination or litigation.

BILL CRITICISMS TURN BLIND EYE TO REALITY

    Let me take a moment to address three principle objections made by critics of this legislation. Contrary to logic and business practice, some have charged that legislation which gives companies a cure period is essentially an opportunity to delay, defer or deny that Y2K problems exist. Such a viewpoint turns a blind eye to the very nature of most business relationships, which is to do everything possible to assure customer satisfaction and a predictable revenue stream into the future. Meanwhile, bill provisions create clear incentives for both potential defendants and plaintiffs to take affirmative action on Year 2000—not hang back waiting for courtroom settlements. Consistent with existing principles found in most of the states, both plaintiffs and defendants have a responsibility to mitigate their damages and to make reasonable efforts to avoid anticipated problems in the event later claims are made. Buyers and sellers responding to these key provisions of the bill will implicitly reduce the size of exposures as well as actual damages and, as a result, minimize the need for lawsuits.

    Still other critics have pointed out that we have not yet seen evidence of the prognosticated flood of litigation, and therefore we are developing a cure in search of a disease. More than 500 law firms across the United States have set up Y2K practices. A stable of salivating legal factories is gearing up for something. I am in the ''Internet business'' so-to-speak, so I used my trusty web access search engine recently and got 11,051 ''hits'' when I typed in the subject: ''Year 2000 + Attorneys.'' I am invited to speak at or to attend 2–3 Y2K Litigation Seminars and Conferences every week. Is it prudent or responsible for Congress to wait for the inevitable flood or do what it can to provide sandbags now? Is not the best way to prevent litigation encouraging companies to fix their systems now?

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There are also some critics who contend that this legislation is unnecessary because companies, thank you, are moving ahead on a remediation path just fine without the bill. The senior members of ITAA's staff have been traveling throughout the country and the world for four years—speaking to every private sector group and government agency you can think of—and, I can tell you on good authority, we are not even close to full remediation. A recent ITAA Y2K contingency planning survey found that 87% of respondents, representing a wide cross section of industries, call Year 2000 a crisis for the nation and the world. Over 50% said Y2K will hurt their companies. Over one-third reported actual Y2K related failures.

Our research is supported by other studies and analysis:

In the government sector, the GAO reports 39% of federal systems are yet to be made Y2K ready. The National Association of State Information Resources Executives says that of 46 states included in a recent survey, most are not close to being compliant. A recent report from the National Association of Counties found 50% of its survey base do not have a Y2K plan.

A National Federation of Independent Business survey of small business owners in January of last year found that 37% of those polled have either taken no Y2K action or do not plan to.

A survey released this January by the Media Studies Center found that 53% of Americans agree that the Y2K problem is one of the most important problems facing the country—one percentage point more than had heard about the recent U.S. military action against Iraq.

A January 1999 USA Today/Gallup Poll found 34% of respondents predicting major problems from the date bug generally and 14% saying they expect to experience major problems personally.

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A Cap Gemini/Industry Watch Survey conducted late last year found on-time completion schedules for Year 2000 projects slipping for 90% of those polled. An October 1998 survey conducted by CIO Communications, Inc., found over 67% of the CIOs polled indicated that the job of the century will not get done on time, and that government officials and consumers should be getting prepared to cope with the consequences. Those consequences could include an economic slow-down in the U.S. Almost 75% of the respondents said Y2K has the potential to cool the economy. Over 50% thought the U.S. should be creating a disaster recovery fund and emergency management agency.

    The nation's Year 2000 glass is not half empty, but I think it is equally fair to conclude, as many of the more than 200 GAO Y2K Reports declare: that ''much work and many obstacles to success remain.''

    Litigation and protracted court action will not fix a single system. Lawsuits—particularly those based on frivolous, insubstantial grounds—will merely clog the court system. These suits will keep truly harmed plaintiffs from getting quick redress; expose companies to public criticism; cause numerous bankruptcies in every Congressional District; disrupt the economy; damage reputations; destroy supplier relationships; and divert attention and energy from technical corrections.

    It is for all of these reasons that large and small businesses—suppliers and customers, vendors and users, plaintiffs and defendants—have come together and urge you to pass this legislation as soon as possible.

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ESSENTIAL BILL COMPONENTS FROM THE IT INDUSTRY ''POINT-OF-VIEW''

Let me briefly highlight a few of the key principles contained in the bill, which are essential components of any legislative framework seeking to encourage continuing remediation efforts, to resolve the disputes that may arise and to discourage unnecessary litigation.

Contract Preeminence: American businesses operate with the fundamental expectation that they will be held to their contractual and statutory commitments. They expect their vendors, suppliers and customers to do likewise. Courts should not reject basic contract law principles, ''tortify'' contracts, or make new law regarding Y2K. Unfortunately, we are already witnessing a number of state legislatures attempt to pass Y2K measures that will disrupt the transactional status quo and force judges to abandon these basic principles. More than 120 Y2K liability bill in 40 states have been introduced in this legislative season alone. Contract principles should remain the first point of reference to define parties' rights and obligations in Y2K disputes. Where the parties have negotiated otherwise enforceable contract terms and conditions that spell out obligations and liabilities, those provisions should be adhered to.

A uniform set of federal guidelines will freeze into place state law and the terms and agreements the parties entered into when they formed the contract. It is neither fair nor appropriate to pass legislation that favors one industry sector over another, or vendors over consumers; or one that protects businesses which do not accept the proper responsibility for the tools they purchase. A Federal framework will discourage ''forum shopping.''

Vendors and suppliers of products or services must be permitted to respond to a problem identified by the prospective plaintiff and be given an opportunity to cure a Y2K problem before a lawsuit is filed. A ''reasonable period of time'' notice period is already embraced in existing contract law and the Uniform Commercial Code in 49 of the 50 states. It is in the overall interest of our society to provide the tools that will solve problems and disputes, not encourage litigation, which will not fix a single system.

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We welcome the provision in this bill that encourages parties to resolve disagreements through non-litigious means, such as voluntary, non-binding mediation and other alternative dispute resolution (ADR) methods. It is in the long-term best interest of contracting parties to maintain an ongoing business relationship, and use ADR, rather than litigation, to maximize resolution chances and minimize transaction costs.

The President told the nation last July that our nation's ability to respond successfully to the Y2K challenge requires sharing the responsibility of fixing the systems. All parties are encouraged by this legislation to continue their remediation efforts and to develop contingency plans because they will have a duty to mitigate Y2K damages they could reasonably have avoided.

In order to prevail, a potential plaintiff must be required identify and prove that it suffered economic loss from a material Y2K defect.

In any Y2K claim to recover economic damages resulting from a Y2K problem, a defendant should be permitted to plead and prove that it could not perform the contract if a Y2K problem outside of its control occurred, and be permitted to offer evidence that it used reasonable efforts in light of the circumstances to achieve Year 2000 readiness. This is already an accepted standard in negligence or tort actions and is an accepted element in contract ''Commercially Impracticable or Impossibility'' pleadings. The notion that in light of all the efforts made by the defendant, the plaintiff's economic losses were not damages that the defendant could have reasonably anticipated or prevented is neither novel nor unprecedented. It is our contention that this provision will encourage continued remediation efforts because the supplier of goods or services will know THIS YEAR that all of the time, resources and money that it puts towards fixing its systems and the efforts made to contact its suppliers can be entered into evidence if—for reasons outside of its control—a Y2K problem does occur NEXT YEAR and a lawsuit is filed. And that if no such efforts are made, no such defense is available.

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CONCLUSION: WORKING TOWARDS A CONSTRUCTIVE SOLUTION TO A DIFFICULT ISSUE

    I will conclude by observing that the century date change challenge is formidable, and our attention and resources should be trained on developing solutions. Relying on lawyers and the courts to solve the problem is certainly not the answer. The IT industry is committed to helping the marketplace work through this difficult issue in a positive, constructive manner. The legislation you are considering recognizes that establishing and maintaining partnerships with everyone in the ''supply chain''—upstream and downstream—will allow us to be able to confront the issue successfully and find ourselves enjoying January 1, 2000, rather than facing it with dread and trepidation.

    Thank you very much for this opportunity to appear before you today.

62310a.eps

62310b.eps

    Mr. SENSENBRENNER. Judge Stapleton.

STATEMENT OF WALTER K. STAPLETON, U.S. COURT OF APPEALS FOR THE THIRD CIRCUIT

    Mr. STAPLETON. Thank you, Mr. Chairman. I appreciate the opportunity to appear this afternoon to explain the position that the Judicial Conference of the United States has taken with respect to two aspects of H.R. 775. I will speak first about the class action jurisdiction provisions and then about the special pleading requirements. The Conference opposes these provisions in their current form.

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    No one knows how many Y2K actions are going to be filed. But the potential for a new massive litigation burden is clearly present; and indeed, as we have heard today, that is what occasions H.R. 775. Moreover, given the nature of the Y2K problem, we in the Federal judiciary expect that a large portion of that new litigation will be in the form of class actions. The nature of the problem is such that equal—similar injuries will be inflicted on innumerable people, and they will have claims against the same defendant or defendants and the claims will be aggregated in class actions.

    Now, where any flood of class actions is adjudicated is of great importance to us. State and Federal courts have traditionally played complementary roles. Today, the State courts in our country handle 95 percent of the judicial business. The Federal courts were designed to be courts of limited jurisdiction, and they are staffed and they are supported in a manner consistent with their being courts of limited jurisdiction.

    If the traditional relationship between the two systems is preserved in H.R. 775, it can be expected that much, if not most, of the additional class action litigation load will be handled by the State courts.

    However, H.R. 775 in its current form does not preserve the traditional relationship between the two systems with respect to Y2K class actions. As I am sure the committee knows, it eliminates the amount in controversy requirement for diversity jurisdiction, and it establishes minimal diversity as the sole requirement; that is, with one plaintiff and one defendant being of different States, you have Federal jurisdiction. It seems apparent to us that this is going to wind up with virtually all class action Y2K litigation being in the Federal courts.

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    That is cause for concern. If we are going to face a flood of class action litigation in the next decade, it doesn't make any sense to us to cut off the available judicial resources of the State systems. And if we do that, it is likely to result in dockets in the Federal courts that will delay and therefore deny justice, not only in Y2K cases but in all other kinds of cases as well.

    Now, we don't perceive any benefit to be gained from federalizing Y2K class actions that is commensurate with this risk to the Federal judiciary. To the contrary, our study of H.R. 775 convinces us that the approach in this bill supports a decision in favor of maintaining the traditional balance between the State and the Federal courts.

    H.R. 775 recognizes that the parties to Y2K litigation will have ordered their affairs on the basis of State contract law and State tort law and State insurance law and that it would be unfair and indeed prohibitively complex to substitute a whole new comprehensive scheme of substantive Federal law to govern this area. Accordingly, H.R. 775 allows plaintiffs injured as a result of a Y2K problem to seek relief based on State law but subject to a series of important but, nevertheless, a series of Federal adjustments tailored to the Y2K problem.

    Now, importantly, H.R. 775 recognizes that the State courts are fully competent to apply——

    Mr. SENSENBRENNER. Your Honor, your time has expired.

    Mr. STAPLETON. Thank you, Mr. Chairman.

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    Mr. HYDE. [Presiding.] Thank you very much.

    [The prepared statement of Judge Stapleton follows:]

PREPARED STATEMENT OF WALTER K. STAPLETON, U.S. COURT OF APPEALS FOR THE THIRD CIRCUIT

SUMMARY

    The Judicial Conference opposes those provisions in H.R. 775 that expand federal court jurisdiction over Y2K class actions. Eliminating the amount in controversy and permitting minimal diversity for Y2K class actions in federal court can be expected to shift most of this litigation into federal court. Federalization of class actions will deprive the judicial system of the contributions that state courts would otherwise make in meeting the substantial burdens that Y2K litigation may impose. One of the primary objectives of this legislation is to facilitate the resolution of Y2K claims. This proposed shift of class action litigation, however, holds the potential for overwhelming the federal courts, resulting in substantial costs and delays. In addition, the proposed Y2K class action amendments are inconsistent with the objective of preserving the federal courts as tribunals of limited jurisdiction and the reality that the federal courts are staffed and supported to function as courts of limited jurisdiction.

    In addition, the Judicial Conference opposes the special pleading requirements included in H.R. 775 that would require a plaintiff to state with particularity certain matters in the complaint regarding the nature and amount of damages, material defects, and the defendant's state of mind. Such requirements are inconsistent with the general notice pleading provisions found in the Federal Rules of Civil Procedure (i.e., Rule 8) and bypass the rulemaking provisions in the Rules Enabling Act (28 U.S.C. §2071–77). In addition, because the pleading requirements are contained in stand-alone statutory provisions outside the federal rules, they will cause confusion and traps for unwary lawyers who are accustomed to relying on the Federal Rules of Civil Procedure for determining pleading requirements.

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STATEMENT

    Mr. Chairman and members of the committee, I am Walter K. Stapleton, Judge of the United States Court of Appeals for the Third Circuit. I appear today on behalf of the Judicial Conference of the United States, which is the policy-making body for the federal courts. I chair the Judicial Conference Committee on Federal-State Jurisdiction, which considers issues affecting the jurisdiction and structure of the federal courts. I appreciate this opportunity to share with you the views of the federal judiciary concerning two aspects of H.R. 775, the ''Year 2000 Readiness and Responsibility Act'' now before this committee.

    H.R. 775, as well as similar proposals in the Senate, seeks to promote the resolution of potentially large numbers of Y2K disputes. The federal judiciary recognizes the commendable efforts of Congress to resolve Y2K disputes short of full-scale litigation so as to alleviate the burden of such litigation on private parties as well as on federal and state courts. These are clearly laudable public policy objectives.

    Some of the provisions, however, will affect and perhaps significantly disrupt the administration of justice in the federal courts. On March 16, 1999, the Judicial Conference, determined to oppose the provisions expanding federal court jurisdiction over Y2K class actions in bills (H.R. 775, S. 96, and S. 461) currently under consideration by the 106th Congress. In addition, because the Y2K pleading requirements included in these bills circumvent the Rules Enabling Act, among other reasons, the Conference also opposes these provisions.

Class Actions

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    H.R. 775 creates no federal cause of action. The bill is premised on the assumption that plaintiffs will rely on typical state causes of action to provide relief in Y2K disputes. Under the bill, individual plaintiffs, as opposed to class action plaintiffs, can bring their tort, contract, and fraud suits in a state court where they will remain until resolved. While federal defenses and liability limitations established in the legislation may be raised in such litigation, the bill recognizes that state courts are fully capable of applying these provisions and carrying out federal policy. This reliance on state courts, which today handle 95 percent of the nation's judicial business, follows the traditional allocation of work between the state and federal courts.

    Section 404 of H.R. 775 takes a radically different approach to Y2K class actions—one that would effect a major reallocation of class action workloads. The bill creates original federal court jurisdiction over any Y2K class action based on state law, regardless of the amount in controversy, where there is minimal diversity of citizenship—that is, where any single member of the proposed plaintiff class and any defendant are from different states. It also provides for the removal of any such Y2K class action to federal court by any single defendant or any single member of the plaintiff class who is not a representative party. While the bill identifies limited circumstances in which a federal district court may abstain from hearing a Y2K class action, it is unlikely that many actions will meet the specified criteria. The net result of these provisions will be that most Y2K class action cases will be litigated in the federal courts.

    This assignment of the class action workload to the federal courts is particularly troubling because the Y2K problem may possibly engender a very large number of class action lawsuits. While no one knows how many cases will be filed, Senator Robert Bennett, Chair of the Special Committee on the Year 2000 Technology Problem, has predicted that there could be a ''tidal wave'' of litigation resulting from Y2K problems. Given the nature of the Y2K problem, it is reasonable to expect that similar claims will often arise in favor of multiple plaintiffs against the same defendant or defendants. Thus, it can be expected that a substantial portion of these cases will be brought as class actions.

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    Responding to class actions, regardless of where they are filed, will likely be a monumental task. If the current class action provisions remain in H.R. 775, however, the important contribution the state courts would otherwise make to meeting this challenge will be lost, and the burden on the federal system will be correspondingly increased. The transfer of this burden to the federal courts holds the potential of overwhelming federal judicial resources and the capacity of the federal courts to resolve effectively in a timely manner not only Y2K cases, but other causes of action as well.

    Federal administration of these state-law class action claims will impose other substantial burdens. By shifting state-created claims into federal court, enactment of H.R. 775 into law would confront the federal courts with the responsibility to engage in difficult and time-consuming choice-of-law decisions. The Erie doctrine requires that federal district courts, sitting in diversity, apply the law of the forum state to determine which body of state law controls the existence of a right of action. The wholesale shift of state-law class actions into federal court makes this choice-of-law obligation all the more daunting as the sheer number of possible subclasses and relevant bodies of state law multiplies. Some federal courts have taken the position that such multiplicity of law itself stands as a barrier to the certification of a nationwide class action. Even where a district court agreed to certify a class, it would have to make choice of law and substantive determinations that would have no binding force in subsequent Y2K litigation in the states in question.

    In addition to the potential adverse docket impact on the federal courts, H.R. 775 infringes upon the traditional authority of the states to manage their own judicial business. State legislatures and other rule-making bodies provide rules for the aggregation of state-law claims into class-wide litigation in order to achieve certain litigation economies of scale. By providing for class treatment, state policymakers express the view that the state's own resources can be best deployed not through repetitive and potentially duplicative individual litigation, but through some form of class treatment. H.R. 775 could deprive the state courts of the power to hear much of this class litigation and might well create incentives for plaintiffs who prefer a state forum to bring a series of individual claims. Such individual litigation might place a greater burden on the state courts and thwart the states' policies of more efficient disposition.

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Federal jurisdiction over class action litigation is an area where change should be approached with caution and careful consideration of the underlying relationship between state and federal courts. The Judicial Conference Advisory Committee on Civil Rules has recently devoted several years of study to the rules governing class action litigation. One outgrowth of that study was the appointment by the Chief Justice of a ''Working Group on Mass Torts.'' The working group undertook a study and has recently issued a report that presents the complexities of litigation that aggregates large numbers of claims and illustrates the need for a deliberative review of the issues that must be addressed in attempting to improve the process for resolution of such litigation. Such issues involve not only procedural rules, but also the jurisdiction of federal and state courts and the interaction between federal and state law. Y2K class action litigation implicates some of the same complex and fundamental issues that the working group identified. Even for familiar categories of litigation, these issues can be satisfactorily resolved only by further study. An attempt to address them in isolation, for an unfamiliar category of cases that remains to be developed only in the future, is unwise.

Extending minimal diversity jurisdiction to mass torts may be appropriate if it is accompanied with suitable restrictions. The Judicial Conference has endorsed in principle the use of minimal diversity jurisdiction in litigation involving single-event mass torts, such as an airplane crash. There may be other situations in which the efficiencies to be gained from consolidating mass tort litigation in federal courts are justified. Expansion of class action jurisdiction over Y2K class actions in the manner provided in H.R. 775, however, would be inconsistent with the objective of preserving the federal courts as tribunals of limited jurisdiction and the reality that the federal courts are staffed and supported to function as tribunals of limited jurisdiction.

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    Judicial federalism relies on the principle that state and federal courts together comprise an integrated system for the delivery of justice in the United States. There appears to be no substantial justification for the potentially massive transfer of workload under H.R. 775, and such a transfer would seem to be counterproductive. State courts provide most of the nation's judicial capacity, and a decision to limit access to this capacity in the face of the burden that Y2K litigation may impose could have significant negative consequences for the efficient resolution of Y2K disputes.

Pleading Requirements

    Section 103 of H.R. 775 sets forth specific pleading provisions in Y2K litigation that would require a plaintiff to state with particularity certain matters in the complaint regarding the nature and amount of damages, material defects, and the defendant's state of mind. These requirements are inconsistent with the general notice pleading provisions found in the Federal Rules of Civil Procedure (i.e., Rule 8), which apply to civil cases. The bill's provisions bypass the rulemaking provisions in the Rules Enabling Act (28 U.S.C. §2071–77). They have not been subjected to bench, bar, and public scrutiny envisioned under that Act and are inconsistent with the policies underlying the Act, which the Judicial Conference has long supported.

    Not only do the statutory pleading requirements bypass the Rules Enabling Act, they do so in a particularly objectionable way because they are contained in stand-alone statutory provisions outside the federal rules. This will cause confusion and traps for unwary lawyers who are accustomed to relying on the Federal Rules of Civil Procedure for pleading requirements. It also would signal yet another departure from uniform, national procedural rules, following closely in the wake of similar pleading requirements contained in the Private Securities Reform Litigation Act.

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Conclusion

    Mr. Chairman and members of the Judiciary Committee, we appreciate the objective of H.R. 775 to limit wasteful litigation but hope you will consider our concerns regarding the class action and pleading requirements sections. Thank you again for this opportunity to present the views of the Judicial Conference at today's hearing.

    Mr. HYDE. Dean Grady?

STATEMENT OF MARK GRADY, ESQ., DEAN, GEORGE MASON UNIVERSITY SCHOOL OF LAW

    Mr. GRADY. Thank you very much, Mr. Chairman.

    I am here as a neutral commentator on this bill. I think it is quite an excellent bill. I must say that I have looked at the provisions for about 2 weeks. I have taught Torts for 17 years, and I believe that this bill is quite consistent with the common law.

    In particular, the bill reflects a special rule that is not very often noticed, but certainly which tort scholars have noticed, concerning correlated-loss situations. These are situations, like the Y2K problem, where property losses and economic losses occur in large numbers at the same time. Property losses and economic losses that are correlated with each other tend to fall under a special rule, namely one of scienter. That is basically the most radical thing that this bill does, but I don't even think that this thing is radical because it conforms to current law.

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    In my statement I go through a number of situations where exactly this type of correlated loss has arisen in the past. And there are some, beginning with railroad fires. In times when cities were extremely combustible, legal actions against railroads that started fires tended to fall under the same type of scienter requirement that is created by this bill.

    Another example is the New York blackout. That was also a situation in which there was tremendous litigation, there was tremendous economic loss, yet there were hardly any recoveries because the courts created a special negligence rule, which is extremely similar to the rule created by this bill.

    Consider also the Chicago Loop situation. That was a case where tunnels underneath Chicago, freight tunnels, were breached by a city contractor who was driving piles into the Chicago River. There was tremendous economic loss in that particular case and yet hardly any recoveries at all.

    None of these cases fell under the normal negligence rule. I believe there has been some confusion about the general applicability of that rule. In particular, I believe that Mr. Conyers earlier misstated the law on that doctrine. The ordinary negligence rule does not apply to all situations. Indeed, a very special rule has always applied to situations of correlated property losses and economic losses, and the bill is quite consistent with that special rule. What the bill does is merely clarify for the world that this special rule does apply to the Y2K situation and thereby heads off a torrent of litigation that would otherwise take place.

    There was the flood litigation in Chicago. I was living there at the time, teaching at Northwestern Law School. It consumed the courts, and yet it was the sound and the fury signifying nothing when everything was over.

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    Why go through that with Y2K?

    So the scienter requirement would apply both to pure negligence actions and also to warranty actions where third parties sue.

    The contract provisions are equally uncontroversial. They substitute a kind of reasonable-efforts defense for common-law doctrines that are equivalent but more vague, namely the impossibility doctrine and the commercial impracticability doctrine. This statute would apply a reasonableness standard to these situations, which is a far more understandable standard in the context of Y2K.

    In the same Y2K context, the impossibility doctrine and the commercial impracticability doctrine pose metaphysical questions that would be extremely difficult for courts to understand and would breed litigation simply because of the lawyers' lack of clarity of those standards.

    So I salute the sponsors of this legislation. They are really Congressmen in Northern Virginia, Congressman Moran and Congressman Davis. Congressman Davis represents the main university in Fairfax. Congressman Moran represents us down at the law school in Arlington. I think both of them have done a fine job in putting this legislation together which does not affect the common law but which will save us tremendous legal expense because of the Y2K problem.

    Mr. SENSENBRENNER. [Presiding.] The gentleman's time has expired.

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    [The prepared statement of Mr. Grady follows:]

PREPARED STATEMENT OF MARK GRADY, ESQ., DEAN, GEORGE MASON UNIVERSITY SCHOOL OF LAW

I. PREFACE

    Mr. Chairman, members of the Committee, my name is Mark F. Grady. I am the Dean of the George Mason University School of Law and the Chairman of the National Center for Technology & the Law at George Mason Law School. George Mason University established the Tech Center at the Law School to facilitate discussions and studies of legal policy issues raised by new technology. The Tech Center does not itself take positions on policy questions, but only serves as a platform for debate. Therefore, this is a personal and not an official statement. In March of 2000, the Tech Center will host the 2000 Global Internet Policy Summit, which will focus on how we can create a transnational legal and institutional framework for the Internet and for e-commerce. I cordially invite all those in the room to come to this conference, which will take place at the Fairfax Campus of George Mason University.(see footnote 50) We are especially grateful to our president, Alan Merten, for his leadership on these issues and for his efforts to make our university better serve the technology community into which Northern Virginia is becoming transformed.

    I salute the sponsors of H.R. 775, the Year 2000 Readiness and Responsibility Act, for their work in developing a workable solution to the legal difficulties created by the Y2K problem. As the new century gets nearer, these difficulties become more worrisome. Although I believe in the common-law process for the development of our general tort and contract law, I also think that the Y2K liability problem requires a legislative solution; the sponsors of the bill have done a good job in mediating the various interests at stake. I would particularly like to praise our own Congressman Tom Davis for his work on this bill. I know that he has carefully studied the Y2K problem and has worked closely with our Northern Virginia technology community. Indeed, he comes from that community and has brought to Congress much knowledge that will be useful in getting our computers started on January 1 and in solving the legal problems that will arise from that transition.

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II. CORRELATED LOSSES AND UNMANAGEABLE LIABILITY

A basic purpose of the negligence system is to prevent accidents by deterring them through the threat of liability.(see footnote 51) When people are liable, they have to compensate their victims. Thus, as a practical matter and as a matter of legal doctrine, accident prevention and victim compensation are two sides of the same coin. Because victims have the hope of compensation if they can prove negligence, tort law makes them private enforcers of safety obligations that would otherwise have to be enforced by the police or by regulators. Tort law is often a preferable system of social control because it is decentralized and requires less official surveillance of our daily activities than the forms of police regulation that would otherwise be more necessary.

The nature and extent of negligence liability differ sharply according to the circumstances. Even if a loss was negligently caused, the courts sometimes deny liability for it. In many of these cases, the courts have stressed that liability would yield a worse social result than no liability. These cases of immunity for conceded negligence have been hard for the courts to decide, but they seem very similar to many of the cases that might result from the Y2K problem. To get ahead of my story a little, consider a case in which Judge Cardozo, a great master of the common law, denied liability to a plaintiff who suffered a substantial economic loss from relying on an accounting firm's negligent audit of its client's financial books. The plaintiff was not a client of the accounting firm, so could not sue on the contract. In denying liability, Judge Cardozo said,

If liability for negligence exists, a thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class. The hazards of a business conducted on these terms are so extreme as to enkindle doubt whether a flaw may not exist in the implication of a duty that exposes to these consequences. We put aside for the moment any statement in the [audit] certificate which involves the representation of a fact as true to the knowledge of the auditors. If such a statement was made, whether believed to be true or not, the defendants are liable for deceit in the event that it was false.

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    This important principle of the common law is basically the one incorporated in the bill. To avoid creating an unmanageable obligation for accountants, Judge Cardozo created a scienter requirement that limited liability for economic losses. H.R. 775 adopts a similar approach and clarifies that limited liability exists for the Y2K problem; indeed, the circumstances under which Cardozo inferred this principle are analogous to the Y2K problem, as I will explain. In the absence of this bill or something like it, probably this same clarification would result from the common-law process, but it could be much more costly and disruptive to achieve.

    As Judge Cardozo understood, people cannot avoid committing thoughtless slips and blunders, which are negligent. If we leave aside complicated financial audits or computer systems, it would be impossible for most people even to drive an automobile for any considerable time without committing some thoughtless lapse, even if they perfectly foresee the possible bad consequences.(see footnote 52) Unfortunately, we all depend partly on grace and good luck to avoid negligence liability. For the times when we are negligent, we generally rely on market insurance, which is available to fallible people in most situations, though not all.

In explaining why negligence is so common, an English humorist has written:

  The Common Law of England has been laboriously built about a mythical figure—the figure of ''The Reasonable Man.'' In the field of jurisprudence this legendary individual occupies the place which in another science is held by the Economic Man, and in social and political discussions by the Average or Plain Man. He is an ideal, a standard, the embodiment of all those qualities which we demand of the good citizen. . . .

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  This noble creature stands in singular contrast to his kinsman the Economic Man, whose every action is prompted by the single spur of selfish advantage and directed to the single end of monetary gain. The Reasonable Man is always thinking of others; prudence is his guide, and ''Safety First,'' if I may borrow a contemporary catchword, is his rule of life. All solid virtues are his, save only that peculiar quality by which the affection of other men is won. For it will not be pretended that socially he is much less objectionable than the Economic Man. Though any given example of his behaviour must command our admiration, when taken in the mass his acts create a very different set of impressions. He is one who invariably looks where he is going, and is careful to examine the immediate foreground before he executes a leap or bound; who neither star-gazes nor is lost in meditation when approaching trap-doors or the margin of a dock; . . . who never mounts a moving omnibus, and does not alight from any car while the train is in motion; . . . . Devoid, in short, of any human weakness, with not one single saving vice, sans prejudice, procrastination, ill-nature, avarice, and absence of mind, as careful for his own safety as he is for that of others, this excellent but odious character stands like a monument in our Courts of Justice, vainly appealing to his fellow-citizens to order their lives after his own example.

  A. P. Herbert, Uncommon Law 1–5 (7th ed. 1950). For my own account, unfortunately less humorous, of why people are frequently negligent, see Mark F. Grady, Why Are People Negligent?: Technology, Nondurable Precautions, and the Medical Malpractice Explosion, 82 Nw. U. L. Rev. 293 (1988).

    Y2K problems are also common, though not all of them stem from someone's negligence. When computer memory was much more expensive than it is today, and computer calculations slower, it was not negligent to abbreviate dates in a way that would yield a problem only many years hence. Moreover, even today, if an old system can do little harm, it might not be negligent simply to leave it in place and see what happens on January 1. Nevertheless, some software has been negligently designed to include a Y2K problem that would foreseeably result in harm to property and to people. Other software has not been reasonably remediated or replaced now that the new century approaches. The most obvious cases of negligence, or product defect, would include software that could foreseeably cause major damage if it failed on January 1. Although the negligence system creates large incentives for people to avoid negligence, we know from common experience that negligent behavior constantly happens. To err is human.

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    Traditional common-law tort doctrine has wisely limited liability in situations analogous to the Y2K problem. These precedents, which I will describe, seem directly applicable to the Y2K problem itself, but many of them have never been totally glossed or indexed in the way that would be most helpful to judges deciding Y2K liability cases. Nevertheless, H.R. 775 seems quite consistent with these precedents.

    A modern name for the type of liability about which Judge Cardozo was concerned is ''correlated losses.'' ''Correlated losses'' are accidental losses that occur in large number at the same time.(see footnote 53) If all the cars in Los Angeles crashed on the same day, it would be an example of correlated losses. When L.A. cars crash on different days, it is a case of uncorrelated losses. When personal injury losses are correlated, courts often impose liability for them under standard negligence principles, even under strict liability principles. Familiar examples are the asbestos cases, the DES cases, the breast-implant cases, and so forth. Here the deterrence principle is just too important. Nevertheless, in the area of correlated property and economic losses, courts have often restricted liability in ways extremely similar to the limiting provisions of H.R. 775. Examples of correlated property and economic losses are the property damage and other economic loss from the Great Chicago Fire, from the New York blackout, and, somewhat more recently, from the flooding of the Chicago Loop. Although no one seems to have sued Mrs. O'Leary, the modern disasters all led to litigation explosions that, somewhat surprisingly, yielded few actual judgments. The courts applied specially restricted common-law rules that were extremely similar to those incorporated in H.R. 775.

    In the passage from the accountant's case just quoted, Judge Cardozo was concerned about correlated economic losses from a negligently conducted accounting audit. If everyone who relied on the audit could sue for his or her economic losses, it would create a penalty disproportionate to the negligent act or omission. When the courts make someone liable, they basically make that person an insurer. Correlated losses are much more difficult for tortfeasors to manage than are uncorrelated losses. A real insurance company like Allstate or State Farm serves an economic function by acquiring a portfolio of possible losses and by then compensating them over time as they occur. When losses are uncorrelated with each other, ideally when they occur randomly, the total risk of an insurance portfolio can be low even when the risk of an individual loss is high. The insurance function is similar to aggregating a set of diverse stocks and bonds into a single portfolio or betting that on 500 turns of a roulette wheel about half will come up black. An insurer of uncorrelated risks actually reduces their true economic risk and thereby adds value to the marketplace. Auto insurance can become a good deal because the insured avoids a situation in which he or she sustains a large loss in some random year, whereas the insurer adds to a portfolio of policies that may fall liable in a totally predictable and riskless way. A portfolio of uncorrelated risks is cheap for an insurer to hold and to manage.

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When losses are correlated, the insurance function becomes difficult and sometimes impossible. When correlated losses are aggregated into the insurer's portfolio, the economic risk now remains the same; it does not get smaller because of the aggregation. A heavily correlated portfolio is costly to manage. Typically, insurers try to exclude coverage for correlated losses. If, heaven forbid, a foreign country were to bomb L.A., a huge set of correlated property losses would result. Insurers, however, have responded by excluding from coverage losses from acts of war or due to foreign princes. Because of these underlying economic realities, it is extremely costly to purchase insurance for losses that are likely to be correlated. A good example is L.A. earthquake insurance, which is expensive. Sometimes a set of correlated risks can be aggregated with a different set of correlated risks to yield a portfolio of less correlated risks. Thus, an insurer might try to insure property losses from L.A. earthquakes by aggregating them with Mexican earthquake policies, maybe through a reinsurance transaction or through a complicated web of them. The resulting huge portfolio would be more costly to manage and still more internally correlated than a portfolio of uncorrelated auto casualty policies. Very recently, correlated losses have even been securitized. Maybe someday a Lloyd's broker can purchase a security representing a small fraction of L.A. earthquake risk and then hedge the bet by also buying bottled water stock. Obviously, this is a much more exotic transaction than a consumer's purchase of an auto casualty policy from Allstate. In sum, when losses are correlated, the risk is costly to throw off; if it is possible at all, it takes many specialized contracts, which increase the cost of the insurance function. Potential defendants cannot even enter many of these necessary contracts.

The Y2K problem is potentially the largest conceivable example of correlated losses. An enormous set of Y2K casualty claims could arise throughout the world during the same week. It could be impossible for a large insurance company to throw off this risk through aggregation. If even an insurance company could not deal with this type of liability, an ordinary individual or business firm would have no chance. Because the losses will all happen within a short window, the Y2K problem seems to be the epitome of uninsurable risk. Moreover, other ways of dealing with this risk are also impossible. For instance, to the extent that corporations own buildings, much of the risk of an earthquake can be thrown off through the stock market. Individuals can diversify their stock portfolios so that no single earthquake much affects an individual investor-owner. Y2K risk is again the opposite. To the extent that the problem is general, which it could be, entire stock portfolios will be hit on the same day by the same set of correlated losses.

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    Why should all this matter? When people are inevitably negligent some of the time, tort law makes them involuntary insurers, the functional equivalent of insurance companies, but without all of their resources. For this reason, when the insurance function accompanying liability becomes difficult or impossible, common-law courts have limited liability under a variety of legal doctrines. This was basically Judge Cardozo's point in the accountant's case mentioned above. Because even an insurance company would have a big problem insuring the risk that the plaintiff was trying to impose on the defendant, the court held that the defendant would not be liable for it, even though everyone conceded that the defendant had negligently created this risk. Legal scholars and lawyers have sometimes characterized these limiting doctrines as necessary to avoid ''crushing liability.'' They seem directly applicable to the Y2K problem, and in many ways H.R. 775 embodies them. Because, however, of the metaphorical nature of the legal precedents from which these limitations come, it might be difficult for courts to find the solution that H.R. 775 achieves.

III. THE COMMON-LAW RULES LIMITING LIABILITY FOR CORRELATED PROPERTY AND ECONOMIC LOSSES

    Under several doctrines and rubrics, common-law courts have limited liability for correlated property and economic losses. The most important are the negligence duty doctrine, the negligence doctrine of proximate cause, and the doctrine of economic loss. As I mention each case example of a correlated property or economic loss, I will explain briefly how the court announced a rule similar to the one that H.R. 775 would create. In the next part of my statement, I will examine this consistency in more detail.

    An historical example of limited liability for correlated property losses is Ryan v. New York Central R.R.,(see footnote 54) a case from 1866. The accident occurred on July 15, 1854, in Syracuse, New York. The defendant's engineer had negligently managed the defendant's locomotive so that escaping sparks started the defendant's own trackside woodshed on fire. The fire spread from there to the plaintiff's house, which was 130 feet from the woodshed, and burned it down, too. It is not clear from the opinion whether the destruction was more general, but the court obviously had that scenario in mind. Although the plaintiff's property loss was, in the conventional sense, the direct result of the defendant's negligence, the New York court nevertheless denied liability for it. It held that the railroads would only be liable for the first building burned. The court clearly had in mind the problem of the correlated losses, though it relied on the doctrine of proximate cause. It stressed that with the railroad technology of that era it was impossible to avoid negligent fires. Given the wooden construction then common, it would be easy for a large number of correlated property losses to arise from a single negligent act.(see footnote 55) Significantly, the New York courts abolished this special liability limitation for railroad fires after cities became less combustible and losses thus became less correlated.

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To sustain such a claim as the present [where the plaintiff had nevertheless proved negligence on the part of the defendant], and to follow the same to its legitimate consequences, would be to subject to a liability against which no prudence could guard, and to meet which no private fortune would be adequate. Nearly all fires are caused by negligence, in its extended sense. In a country where wood, coal, gas and oils are univerasally employed, and where children find their home in all houses, it is impossible that the most vigilant prudence should guard against the occurrence of accidental or negligent fires.''

The court also stressed the difficulty that railroads would face if they were obliged to insure homeowner against the railroads' inevitable negligence:

A man may insure his own house or his own furniture, but he cannot insure his neighbor's building or furniture, for the reason that he has no interest in them. To hold that the owner must not only meet his own loss by fire, but that he must guarantee the security of his neighbors on both sides, and to an unlimited extent, would be to create a liability which would be the destruction of all civilized society.

Id. at 216–17.

The Y2K problem is the functional equivalent of the old railroad fire—indeed, more extreme—and calls for the same limited liability. In fact, H.R. 775 creates basically the same liability standard that the Ryan case did. Although a literal interpretation of Ryan might suggest that claims of the second and subsequent building owners would always be barred, the opinion constantly stressed that the defendant's negligence had been inadvertent. If the Ryan defendant had been reckless, it probably would have been responsible for the property losses; in any event, that is the standard that H.R. 775 would create.

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A more modern example of limited liability for correlated property and economic losses comes from the New York power blackout on July 13, 1977. In an early case the New York Court held that Con Ed's negligence was gross, and this determination bound all subsequent litigation.(see footnote 56) Nevertheless, despite that conclusion, the courts severely limited Con Ed's liability (even for personal injuries,(see footnote 57) which are not at issue with this bill). In related litigation, the New York courts often refused to allow plaintiffs to recover for economic losses,(see footnote 58) but did allow some recoveries for perishable inventories ruined because of a lack of electricity to keep them cold.(see footnote 59) Of course, these plaintiffs had electricity service contracts with the defendant; H.R. 775 would also keep this type of contract liability in place. The New York courts denied many claims for economic losses, though not all, but most of the recoveries were in favor of people who had contracts with the defendant. H.R. 775 would also preserve this type of liability.

A still more modern example of limited liability for correlated property and economic losses was the Chicago Flood of 1992. An old system of freight tunnels runs underneath the Chicago Loop. A city pile-driving contractor breached the tunnel system as it passed under the Chicago River; the river rushed into the tunnel and, ultimately, into buildings connected to the tunnel. The city, which was a major defendant in these cases, owned the tunnels and knew of the critical break in enough time to fix it, but did not. Approximately 200,000 persons were evacuated from numerous Loop buildings. Thousands of workers could not return to their places of business for days or weeks while emergency repairs and cleaning took place. Class plaintiffs and insurance companies sought damages for various losses caused by the flood, including injury to their property; lost revenues, sales, profits, and good will; lost wages, tips, and commissions; lost inventory; and expenses incurred in obtaining alternate lodging. Again, the Illinois courts generally denied liability for all economic losses, but allowed recovery for perishable inventories destroyed by the flood.(see footnote 60) The effect of H.R. 775 would be similar, because that bill would also limit liability for economic and property losses incurred by people out of privity of contract with the defendant.

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Here is the main lesson of the cases just discussed. Even though the major purpose of negligence law is to deter accidents, the courts have recognized that people are imperfect and will sometimes be negligent. The same courts have then considered how manageable the liability in question would be for the defendants and for the courts. If it is easy for defendants to act as insurers, the courts make them liable; if it is hard for defendants to act as insurers, the courts usually limit their liability, at least for economic and property losses. Because it is extremely difficult for tortfeasors (even actual insurance companies) to insure victims against correlated property and economic losses, the courts, interpreting the common law, have limited liability in these situations, situations that have usually been much less extreme than possible Y2K scenarios. Making people bear uninsurable risks causes them to exit the industries in which the risks arise; in the process, prices rise and consumers lose. Without this bill, most courts would probably achieve about the same result as H.R. 775, but much time, effort, and expense would be lost considering and then dismissing the extreme legal theories that plaintiffs' lawyers would have an incentive to propose and litigate—in every jurisdiction in the country. Large legal stakes, which go hand in hand with correlated losses, give plaintiffs' attorneys great incentives to test extreme legal theories. When the stakes get high enough, as with some possible Y2K scenarios, these extreme legal theories can border on extortion. Plaintiffs' lawyers can force corporate managers to bet their companies on the probability that the courts will not create new common law. Predictably, some corporate managers will refuse the bet. In my view, this is the precise problem that H.R. 775 would solve. It should be stressed that courts have been willing to impose liability for actual personal injuries, even in mass-disaster or correlated-loss situations. It is a fiction to suppose that severe personal injuries can usually be compensated. Here the only answer is deterrence, whether the losses are correlated or not. H.R. 775 commendably preserves this harsh rule, which is addressed to an equally harsh reality.

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IV. HOW THE LIABILITY LIMITATIONS OF H.R. 775 ARE CONSISTENT WITH THE COMMON LAW

A. The Various Types of Y2K Lawsuits

We can distinguish several types of Y2K lawsuits. The following classification is useful in understanding how H.R. 775 would work. The first type of lawsuit is simply a contract action between businesspeople for the sale and purchase of goods and services other than software. The seller has promised to deliver the goods on January 7, 2000, but cannot do so because its production line will not operate because of a Y2K problem. A second type of lawsuit is a breach of warranty action brought by a purchaser of software against a software seller. Third is a breach of warranty action brought by someone who does not have a contractual relationship with the software seller. Finally, there are purely tort actions brought against a variety of possible defendants by people who do not have contracts with them. Although these are four different types of lawsuits, we can collapse H.R. 775's effect on them into two broad categories: privity cases and nonprivity cases. The privity cases are those in which the plaintiff and defendant had a contract with each other, and the nonprivity cases are those in which the parties did not have such a contract.

B. Privity Cases

Privity cases are classic contract cases, though in the context of this bill, it is useful to distinguish two subtypes: (1) sales of ordinary goods and services and (2) sales (or licenses) of software with a warranty. For all of these cases, in my opinion, the bill creates little legal change, but some highly useful clarification.

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    Section 201 says that contracts shall be interpreted according to the law in force at the time of the contract. It thus denies Y2K plaintiffs and defendants the benefits and burdens that they might have otherwise acquired from common law developments after the time of contracting. It seems doubtful to me that this provision would affect the results of very many lawsuits.

    Section 202(a) encourages courts to consider a reasonable-efforts defense. Specifically, the section provides:

[T]he party against whom the claim of breach [of contract] is asserted shall be allowed to offer evidence that its implementation of the contract, or its efforts to implement the contract, were reasonable in light of the circumstances for the purpose of limiting or eliminating the defendant's liability.

The section thus stops short of requiring courts to make the defendant's reasonable efforts a bar to the plaintiff's recovery.

    Contract and warranty liability is normally strict. Often, software sellers will have given express and implied warranties to their customers, and sellers of other goods and services will have promised to deliver them during a possible Y2K disruption. Normally, it makes good sense to give these sellers responsibilities to meet their contracts or else insure the bad consequences suffered by their customers. Nevertheless, in the Y2K context, the highly correlated nature of these losses will make failure insurance especially costly for contract defendants to offer. The main palliatives are the common-law doctrines of impossibility and commercial impracticability, which can excuse a defendant's nonperformance. The doctrine of impossibility is described Section 454 of the Restatement of Contracts in the following terms:

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§454. Definition of impossibility. In the Restatement of this Subject impossibility means not only strict impossibility but impracticability because of extreme and unreasonable difficulty, expense, injury or loss involved.(see footnote 61)

Some of impossibility cases seem influenced by the increased difficulty that a defendant would bear from insuring correlated losses. For instance, one case held that a seller's contractual performance was excused when a fire burned down its factory.(see footnote 62) In this scenario, the factory would have many correlated breach-of-contract actions filed against it.

On the doctrine of commercial impracticability, the Uniform Commercial Code provides:

Sec. 2–615. Excuse by Failure of Presupposed Conditions

Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance:

(a) Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

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(b) Where the causes mentioned in paragraph (a) affect only a part of the seller's capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable.

(c) The seller must notify the buyer seasonably that there will be delay or non-delivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.

Suppose that a manufacturer of widgets has contracted to deliver a shipment to a customer on January 7, 2000. The workers arrive at the widget factory on Monday, January 3, and discover that there is no power. In fact, due to a Y2K problem at the power company, the power stays off all week so that the company cannot deliver the widgets by the promised date. Suppose that the company does not ship the widgets until January 14. Let us say that the widget customer, which is practicing just-in-time production, then cannot ship its gidgets because of the widget shortage, and so on and so on. Each manufacturer that failed to meet its contract would theoretically be liable to its customers.

It is not totally clear how the impossibility doctrine would apply to a general Y2K breakdown or to a lesser one. The question would be whether a Y2K problem is analogous to a fire that burns down a factory. If so, the seller's performance might be totally excused. Correspondingly, the triggering question under the U.C.C.'s commercial impracticability doctrine would be whether the Y2K problem was ''the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made.'' Rather than send courts on the rather metaphysical inquiries posed by these two traditional common-law doctrines, it seems better to permit courts to allow sellers to show that they used reasonable efforts in the face of the Y2K problem. Especially if the Y2K problem turns out to be general and disastrous, the bill's approach seems more concrete and more practical than the highly theoretical and inevitably general approaches of the Restatement of Contracts and of the UCC. Their doctrines and rules were crafted to meet many generalized contingencies. Nevertheless, the bill's language also seems quite consistent with the results that courts could reach under either of these more traditional common-law doctrines.

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Because businesses know that Y2K litigation will be expensive, they will have an incentive to build inventories both in proportion to their expectations of actual Y2K problems and also in proportion to their expectations concerning the cost of Y2K litigation. The inventories prompted merely by the expectation that lawyers will have to be paid to settle close questions of impossibility and commercial impracticability are probably excessive inventories from a social point of view. H.R. 775 would reduce these excessive inventories by allowing courts to consider whether defendants behaved reasonably. This standard, which approaches a negligence standard, seems better tuned to the Y2K problem than the impossibility and commercial practicability doctrines, which could turn on unfathomable issues of what parties would have reasonably anticipated this year and last year, or ten years ago, about the early months of 2000. It is very difficult for anyone to predict even at this late point how disruptive the Y2K problem will be, and ex post assessments may inevitably be based on 20/20 hindsight. It is additionally difficult for companies to know now just how influential hindsight judgments will become. Without the bill, the fear of liability could induce firms to build unnecessary inventories, which could prove extremely costly to society.

C. Nonprivity Cases

In other Y2K cases, the plaintiff and the defendant will not themselves have entered into a contract. These cases also fall into two subcategories. The first kind of nonprivity case might be brought by someone against a software seller or system designer whose breach of warranty to someone other than the plaintiff caused an economic or property loss to the plaintiff. In other words, the plaintiff would be a third party seeking to sue a software company for its breach of warranty to someone else. The second subtype would be a pure tort. The plaintiff somehow would have been hurt by someone's negligent failure to deal properly with a Y2K problem. The first of these cases is like a tort and the second is a tort. Both would be legal actions described by section 302(b) of the bill, which provides that

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With respect to any year 2000 claim for money damages in which the defendant's actual or constructive awareness of actual or potential harm to the plaintiff is an element of the claim . . ., the defendant shall not be liable unless the plaintiff . . . proves by clear and convincing evidence that the defendant actually knew, or recklessly disregarded a known and substantial risk, that the plaintiff would suffer such harm.

Section 302(b) would seem to apply to all negligence actions because the reasonable-foresight proximate cause element makes negligence liability depend on the defendant's constructive awareness of actual or potential harm to the plaintiff.(see footnote 63) (Since section 302(b) essentially states that the scienter requirement applies to all actions to which the conventional reasonable-foresight limitation applies, it is potentially confusing that section 302(c) creates a heightened standard for reasonable foresight. Nevertheless, the proper interpretation seems to be that the trigger for section 302(b) includes reasonable foresight as well as other possible constructive or actual states of mind.) Section 302(b) also seems to describe a requirement for actions brought against third parties (parties out of privity with the defendant) who wish to sue as beneficiaries of the warranty. These actions are basically negligence actions that require the defendant to have foreseen the nature of the harm to the plaintiff out of privity. The bill treats them in the same way as negligence actions, which seems proper.

The conduct of the defendant's guard, if a wrong in its relation to the holder of the package, was not a wrong in its relation to the plaintiff, standing far away. Relatively to her it was not negligence at all. Nothing in the situation gave notice that the falling package had in it the potency of peril to persons thus removed.

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Scienter requirements avoid punitive and socially counterproductive insurance obligations that can arise when the normal negligence principle is applied in special correlated-loss situations. Under a wooden interpretation of the negligence doctrine, people could become insurers of correlated losses because they cannot always avoid ordinary negligence, which people commit inadvertently. Nevertheless, if we read section 302(b) together with section 302(c), a defendant in a Y2K negligence action becomes liable only if it has been reckless or intentionally negligent. Because people can avoid intentional negligence and recklessness much more easily than inadvertent negligence, if the bill is passed, they need not face liability for correlated losses.

In H.R. Moch Co. v. Rensselaer Water Co.,(see footnote 64) Judge Cardozo held that a water company with a city contract to supply water to fire hydrants was not liable to the owners of a warehouse that burned down because the defendant had negligently allowed the pressure to sink. Obviously this type of situation could have led to correlated losses, if several buildings had burned, though surely not as correlated as with the Y2K problem. Cardozo stressed that the defendant's negligence had been the ordinary, inadvertent kind. He said in his opinion that if the defendant had acted intentionally or recklessly, it would have been a different case.(see footnote 65) He created the same scienter requirement for fire-hydrant negligence that the bill would create for Y2K tort actions, apparently for the same reason. The accountants' liability cases also create scienter requirements when plaintiffs lack privity with the defendant accountant. The bill adopts the same approach.

We do not need to determine now what remedy, if any, there might be if the defendant had withheld the water or reduced the pressure with a malicious intent to do injury to the plaintiff or another. We put aside also the problem that would arise if there had been reckless and wanton indifference to the consequences measured and foreseen.

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Id. at 899.

D. Limitations on Economic Liability

The limitations created by H.R. 775 concern property destruction and economic loss, not personal injury. Section 4 of the bill provides that ''None of the provisions of this Act shall apply to any claim based on personal injury.'' The bill's admirable concern with limiting liability for economic and property losses is consistent with the common law. Because personal injuries cannot always be fixed or even compensated fully, no matter how much is paid, it is especially important to deter them. Conversely, it is easy to overdeter purely economic losses and in the process to expend too much in legal costs in the process.

Consider a travel agency in the Chicago Loop that had to close down for a week during the flood. This travel agency may have lost $50,000 of revenues during that time. Suppose that these losses could have been avoided if the city had invested in $40,000 of additional precaution (sandbagging or whatever). If the city were liable for these damages, it would have an incentive to invest in that precaution, because it could save $50,000 in damages (plus legal expenses) in return for a $40,000 precaution. Yet, from a social point of view, the investment might not make good sense.(see footnote 66) Other travel agencies outside the Loop remained open. During this same time, because the Loop travel agency was closed, they probably gained about $50,000 in revenue that they would not have otherwise earned. If this is so, encouraging the city to invest in precaution to prevent a purely economic loss would actual cause a loss in social welfare of $40,000 plus whatever legal expenses would have to be incurred to litigate the case. The precaution would not have prevented a real social loss, but only a transfer. It could be quite counterproductive to use the legal system to adjust all of the economic losses resulting from the Y2K problem. Many of these economic losses will not subtract from GDP in the same way that a personal injury or the destruction of property would. The latter types of losses have no silver linings; with purely economic losses for which H.R. 775 limits recoveries, it is often a case of one person's loss being another's gain.

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    Tort liability for purely economic losses can be positively counterproductive because it spends real social resources to prevent mere wealth transfers among businesspeople. A pension fund with a diversified portfolio is highly likely to be impoverished by this type of legal approach. Although one stock might gain, another would fall by a greater amount, to cover the legal bill. Liability for purely economic losses also deflects tort attorneys from their socially valuable business, which is to deter harms that do not have corresponding benefits.

    H.R. 775 takes a conservative approach to limiting liability for economic losses. Section 305(a) limits recovery to economic losses provided for in a contract or economic losses parasitic to personal injuries and damage to tangible property. This approach is more generous than the rule of Ryan v. New York Central R.R.,(see footnote 67) mentioned previously, which limited recovery even for physical destruction of property in a correlated-loss scenario that was far less radical than the Y2K problem could be.

V. CONCLUSION

    H.R. 775 is a sensible approach to the legal liability aspects of the impending Y2K problem. It is consistent with the type of approach that common-law courts have adopted in analogous, though possibly less extreme, situations. Its main purpose is to preserve incentives to fix Y2K problems while avoiding distorted responses based on the uncertain expectations that might exist in the absence of this legislation.

    Mr. SENSENBRENNER. We will now start the questioning under the 5-minute rule. There will be two votes in 15 minutes.

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    The Chair recognizes the gentleman from Tennessee, Mr. Jenkins.

    Mr. JENKINS. Thank you, Mr. Chairman.

    Mr. Pearl, in your comments you noted that there is a need for this legislation for consumers and businesses, large and small. Now, we have had an array of panelists here who disagree, consumers and businessmen, large and small. If your assessment is correct, why aren't they convinced?

    Mr. PEARL. Well, the selective sampling of individuals who represented themselves before this committee were, in fact, on both sides of the issue. The Y2K coalition is made up of small businesses. The NFIB, the retail federations, the potential plaintiffs, the small businesses that are suppliers and customers are all supportive of this type of legislation.

    I think that what is motivating them for this kind of uniform approach, sir, is very simple. Though we have common law and contract law, we also have over 120 Year 2000 different bills that have been introduced in state legislatures, 13 since this Congress went on recess March 25. We have uneven, inequitable—some good for the defendant, some good for the plaintiff, some good for the government. We don't see the kind of equity that we need, and we see judges and potential State legislatures applying new law, new approaches to this Y2K phenomena.

    What we are trying to do with this bill, I believe, is freeze law into place before January 1 of 1999, so that common law and contract law principals that Mr. Nations was talking about could, in fact, apply. That is where, if small businesses looked at that, I think they would support it wholeheartedly.

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    Mr. JENKINS. Mr. Nations, what would your answer to that be?

    Mr. NATIONS. My reaction to the statement by Mr. Pearl is that we have in place the law, a very evenhanded law, the Uniform Commercial Code of all 50 States. All 50 State legislatures have adopted it. Decisions by the appellate courts in all 50 of those States interpreting it are consistent with each other. There is evenhanded law in effect controlling precisely this type of contract dispute.

    The fact that there is 100, 150 legislative bills currently pending, I don't think that the object here is to rush through this real fast and beat the States to passing legislation. Legislation is there, it is in effect, and I think it is working, sir.

    Mr. JENKINS. Thank you, sir.

    Judge Stapleton, you spoke mostly about the thrusting of all of the class action cases into the Federal courts as opposed to the State courts. You didn't mention the frivolous lawsuit aspect that many people have mentioned here this morning, but let me ask you, do you feel that the present Federal rules are inadequate to stop frivolous lawsuits, the rules that provide for an award to be made to a person who has filed a frivolous complaint or action of any kind or engages in frivolous activities? Are those just totally inadequate to stop what has been referred to here as the avalanche of frivolous lawsuits?

    Mr. STAPLETON. I am not authorized to speak to that issue on behalf of the Judicial Conference of the United States.

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    Mr. JENKINS. We don't want you speaking about anything that you are not authorized to speak about.

    Mr. STAPLETON. My personal view is that the Federal Rules of Civil Procedure are adequate for the problems they are designed to come to grips with.

    Mr. JENKINS. Would you agree that most State court rules are adequate to deal with that problem, too?

    Mr. STAPLETON. I think so. I haven't studied that.

    Mr. JENKINS. Throughout these hearings on this bill and on others, we continuously hear that there are frivolous lawsuits out there that are totally out of control. I am of the opinion that we have had rules in place for quite a while that would prevent those. Mr. Pearl, do you have——

    Mr. SENSENBRENNER. The Chair is indulging the gentleman from Tennessee. We are going to be going back in session shortly, and we would like for other members to be able to ask their questions.

    The gentleman from Michigan, Mr. Conyers?

    Mr. CONYERS. Thank you very much.

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    I am delighted to hear their evenhanded, equal disposition of a bill that you think is great.

    Let me ask you, Judge Stapleton, does the nature of the Y2K problem really call for the federalization of State class actions, and is there a concern that you or the judges may have about the overburdening of the resources of the Federal court?

    Mr. STAPLETON. The Y2K problem undoubtedly presents issues that are of national commercial importance. But the fact of the matter is that, traditionally, we have relied on State law, the Uniform Commercial Code, other insurance law, and general corporation laws, to handle matters of commercial importance nationally. We have trusted our State courts to adjudicate those issues even with respect to nonresidents through long-arm statutes. As I was pointing out, this very bill, H.R. 775, authorizes the individual plaintiff Y2K cases to be filed in the State courts and be adjudicated by State tribunals.

    This is not a situation in which it has been concluded that it is feasible or even desirable in the interests of uniformity to substitute a new Federal scheme. It is not designed to produce uniformity and it won't produce uniformity, whether the Y2K class actions go to State court or stay in State court or go to Federal courts.

    Mr. CONYERS. Thank you so much.

    Professor Kappelman, the large corporations, the multi-nationals, they have market power to make the vendor or manufacturer fix the problem. But a small businessman obviously doesn't command the same interests.

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    Now, it seems in this bill—correct me if I am wrong—we are tipping the scales even further against small businesses. Is that your impression?

    Mr. KAPPELMAN. Yes. The consumers of information technology in general don't really have a voice. This will make it even harder for them to have one. It is interesting—ITAA, which I participate with, and they have done some wonderful things with regard to Y2K, they have 11,000 well-organized and very well-financed members. There is no equivalent on the consumer or user of information technology side to have their voice be heard. It is why this legislation so much tips power to the stronger hand.

    Ultimately, those consumers fund all of this. It is their money.

    Mr. CONYERS. Thank you so much.

    Attorney Nations, I think you really put into very visual description why joint and several liability and its curtailment will work a very serious harm on plaintiffs, especially small ones. I commend you because they are not going to be able to recover if they can't track this back to whomever it might be. They start off maybe not even being sure where the defendant is. But what about the notion that we may be actually rewarding irresponsible companies that have failed to take the remedy, to do something before now?

    We have had a chance—suppose this defect occurred last year or in the year 2001. What is so magic about Y2K that it takes on all of this aura of a special legislation?

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    Mr. NATIONS. May I point out, sir, that Y2K is an anomaly. It has become a crisis only because it is a crisis in corporate leadership, because business leaders failed to address it timely. If business leaders had timely addressed the Y2K anomaly, we wouldn't be here today. There would be no crisis.

    Mr. CONYERS. Thank you very much, Mr. Chairman.

    Mr. SENSENBRENNER. The gentleman from Virginia, Mr. Scott.

    Mr. SCOTT. Thank you, Mr. Chairman.

    Judge, you mentioned the pleadings. The present pleadings is you can just get these kind of notice pleadings. This bill requires very specific pleadings. If all you know is your computer system doesn't work, how do you have specific pleadings?

    Mr. STAPLETON. You can't. If you don't know, you can't plead specifically. The opposition of the conference, however, is consistent with its uniform position that there should be a national uniform set of rules that govern all litigation in the Federal courts that emanate from one source that is authoritative, namely the Federal rules, so that you don't get trapped or confused.

    Mr. SCOTT. Did I understand you to say that there was no jurisdictional amount?

    Mr. STAPLETON. That is true, for class actions.

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    Mr. SCOTT. There is a jurisdictional amount for an individual consumer case——

    Mr. STAPLETON. In the Federal courts——

    Mr. SCOTT.—under this bill?

    Mr. STAPLETON. I think, but I am not sure. I won't speak to that because I was focused only on the class action jurisdictional aspects of that bill.

    Mr. Scott. Does anybody know if there is a jurisdictional amount for an individual case?

    Mr. PEARL. No, there is not. All you have to show is the material defect.

    Mr. SCOTT. And Y2K——

    Mr. PEARL. Y2K was the cost.

    Mr. SCOTT. Let me ask you, if you went and bought $500 worth of software and it didn't work and you file suit and it is an out-of-town software, can they remove it to Federal court?

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    Mr. STAPLETON. Yes, no jurisdictional amount is required for diversity, then you would have access to a Federal court.

    Mr. SCOTT. Mr. Nations, do you know any exceptions, any precedents for good-faith exceptions to contracts where, if you have a good-faith effort to comply, therefore you get out from under liability?

    Mr. NATIONS. That undermines the entire concept of contracts between parties in this country. We expect contracts to be fully complied with.

    Mr. SCOTT. If you have this good-faith effort and you can't fix it in 90 days, what happens? But you are making a good-faith effort.

    Mr. NATIONS. The good-faith effort under this legislation gets you off the hook. This is written absolutely to favor those who have procrastinated and caused the problem in the first place. This is a classic procrastinator protection act.

    Mr. SCOTT. Professor, if someone were to sign an adhesion contract after this bill were to go into effect, would that adhesion be enforceable?

    Mr. KAPPELMAN. I don't know what an adhesion contract is.

    Mr. SCOTT. Let me ask somebody else who knows what an adhesion contract is.

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    Mr. GRADY. I think I can answer that question.

    It would depend on whether the jurisdiction had a provision of its common law prohibiting contracts of adhesion at the time of the making of the contract.

    Mr. SCOTT. Like most states do who have adopted the UCC, which all have?

    Mr. GRADY. Yes. So I assume that purchasers would be fully protected in that situation.

    Mr. SCOTT. This bill says you are stuck by the contract.

    Mr. GRADY. No, you are not stuck by the contract. You are stuck by the common law at the time of the contract.

    Actually, I would think that the common law would have been more liberal 10 years ago at the time some of these Y2K contracts were made. And so, if you are interested in protecting purchasers, I would think that you would be in favor of that provision.

    Mr. SCOTT. Let me see if I can get one more question in.

    Judge, you mentioned class actions. It is not just your testimony that class actions aren't a good idea, it is just you don't want them in Federal court. Is that——

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    Mr. STAPLETON. We are going to get plenty of class actions in Federal court. I am not against class actions. All we say is, let the State courts help us carry this load. If we are going to have a flood, don't take away access to 90 percent of the resources.

    Mr. SCOTT. Mr. Pearl, I cut you off.

    Mr. PEARL. With respect to the reasonable efforts, sir, all the bill says is that you can, in fact, introduce evidence to your reasonable efforts that were made for purposes of stating what you did to prevent Y2K failure. It was never intended to help, for example, IT companies. It was to help a trucking company. It was to help somebody in the middle of a food supply chain who, because of no fault of their own, had a Y2K glitch impact their ability to proceed on a contract, that they could introduce into evidence all of the efforts, all of the Y2K remediation things that they did in order to be Y2K compliant.

    It had nothing to do with an IT Y2K company saying that we are going to provide you with Y2K software. That will never make it in a reasonable efforts defense.

    You are absolutely right. It is what a trucking company or a manufacturer could do in terms of providing under a contract that a Y2K could impact that company. As a result of that, they would be able to introduce into evidence the reasonable efforts.

    They are allowed to do so under the commercial and practicability elements anyway. If I have breached the contract and it is impossible for me to perform, I am allowed under UCC and contract law principles today to introduce whatever reasonable efforts I did in attempting to fulfill the terms of the contract.

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    Mr. SENSENBRENNER. The gentleman's time has expired.

    The gentlelady from California, Ms. Lofgren.

    Ms. LOFGREN. Thank you, Mr. Chairman.

    I was interested, Mr. Nations, in your analysis of the joint and several liability issue. Although reasonable people could disagree on what the rule ought to be in America overall, I wanted to address the issue as it relates to the scenario that you outline. This Y2K situation may be a little bit different than some of the traditional tort law situations that we have run into.

    In your scenario, you have Toshiba, a provider of a computer from a different country. I don't want to smear Toshiba or any other company. But the allegation has been made that the United States is ahead in Y2K compliance, as compared to many other countries. If that is true, thinking about the public policy behind joint and several liability, when I was in law school my tort professor told me that really the idea was to spread the risk of this insured world so that an injured party could get compensated, even though the responsibility of an individual defendant might be relatively small.

    Joint and several may make sense in most jurisdictions right now, but consider the effect of that rule in your scenario. Let's say that you have a chip that was made by AMD, a different drive by somebody else and the computer by Toshiba. If you are going to have a 1 percent liability essentially as your public policy point, you are shifting the liability to American companies as opposed to foreign companies and that we may not want to do.

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    Have you considered the concept of having sort of a threshold on liabilities as is sometimes done in State law? For example, you have to be 10 or 20 percent proportionally responsible in order to be held liable jointly and severally. What are your thoughts on that as to the public policy and cost-shifting issues?

    Mr. NATIONS. Well, as opposed to a several liability, which is what this bill adopts, that would certainly be better. The problem that you get into is that when you have a problem that has manufacturers maybe in Taipei and Yokohama and in four or five different foreign countries and all of those parts are sold FOB in those countries, you have only several liability. There may be no one in this country who could be held liable at all.

    The liability of the people who manufacture the product or who put it together and market it, they have the ability to go back against those suppliers because they are their vendors. They can go back to Taipei. They can even have contracts that allow them to bring them into the United States, jurisdiction in the United States.

    You are putting two burdens upon the end user. The first is to get them into court in the United States, which they can't do; and, secondly, to identify all of the components and all of the failures and what failed and what part did this and what part did that when they don't have access to the manufacturers—to the original component manufacturers to find out all of that information.

    Ms. LOFGREN. If I could, Mr. Pearl, and I don't want to put you on the spot, but in terms of the broad public policy issue, cost shifting from offshore to U.S. vendors, do you have any thoughts on a proportional threshold?

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    Mr. PEARL. Well, I think that the committee has to focus on a key section of this bill, and that is the codification of the economic loss rule.

    Ms. LOFGREN. I couldn't hear you.

    Mr. PEARL. The codification of the economic loss bill in terms of the fact that, where there is a contract—and this is a principle that now exists in the majority of the States—that you don't want to tortify contracts. This only goes to economic loss. And so if there is economic loss you don't want to have trial lawyers all of a sudden tortifying contracts and put most of these cases into a tort law realm. Contract law will satisfy.

    So, therefore, Mr. Yarsike or any individual who has a contract with a party and is only claiming economic loss will be able to, in essence, bring their cause of action under a contract theory where all the limitations and all of the damages, that exist in contract and common law will be able to provide. So we believe that, in fact, that is a key provision that will take out most of the causes of actions that are going to be brought under economic law.

    Ms. LOFGREN. My time is expired. I have many other questions, so maybe I can get those answered in another form. Thank you.

    Mr. PEASE. [Presiding.] It is the Chair's intent to go ahead with the final series of questions from the gentlelady from Texas so that we can conclude before members have to go vote. Once we leave you may not get any of us back.

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    We are going to try to wrap up with the gentlelady from Texas, Ms. Jackson Lee.

    Ms. JACKSON LEE. Thank you, Mr. Chairman, very much.

    All of those bells ringing are us being called to the floor to vote, but this is an important issue.

    Before I start, I just want to read into the record in appreciation of the Judge's comments I believe a letter or a portion of a letter sent by the Judicial Conference of which I understand Chief Justice Rehnquist presides over. I believe the language said, the Conference stated the class action provisions in this bill significantly erode that careful balance between the caseload of State and Federal courts. In fact, the letter states, there appears to be no substantial justification for the potentially massive transfer of workload under this bill, and such transfer would be counterproductive.

    If I understand your testimony, that is the gist of what you are saying.

    Mr. STAPLETON. Exactly.

    Ms. JACKSON LEE. So that we can clarify not opposition to class action but recognizing the problem that it would create, let me build on that and simply note in Mr. Nations' testimony a gentleman that I was introduced to in another hearing, Dr. Courtney, a rural doctor, who had to wind up suing his computer company. He bought a $13,000 computer system from Medical Manager. I think he did some of the same things, tried to call, get a replacement.

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    I think it was supposed to be a system that would take him into the 21st century. He found out that it would not. He asked them to replace it, and they refused to do it. I think the key—I heard a gentleman in the first panel—so he would be shut down. His business would be shut down.

    I think it is important to realize the other impact, the rural doctor, the produce company, et cetera. There is an impact for those who would be shut down because of the glitches.

    The key that I wanted to mention is that Dr. Courtney then filed a class action and, ultimately, out of just filing that class action, wound up being victorious for all 17,000 doctors by getting what he called a free patch. That is all he has asked for, something to fix the system and couldn't get it until he filed that lawsuit.

    Mr. Nations, is that a State class action or do you know the procedures on that?

    Mr. NATIONS. Yes. There were seven lawsuits filed in seven different States because Medical Manager was doing the same thing all over the country. They were telling their doctors that they had to pay $25,000 to replace their equipment. After the lawsuit was filed, it was a State action in New Jersey, and they brought all of the other cases together into one class action. After it was filed, within 60 days all of a sudden a patch magically appears. It turns out they were not required to replace their $25,000 worth of equipment after all, that there was a patch that could cure it.

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    So, basically, the filing of the lawsuits stopped the profiteering to the tune of $425 million.

    Ms. JACKSON LEE. In essence, it was a good move that helped to cure a problem for 17,000 small business owners who were suffering under that burden.

    Mr. NATIONS. Exactly.

    Ms. JACKSON LEE. Let me then move quickly, because the bell is continuing to ring, on this clear and convincing standard that small business and plaintiffs would have to prove, particularly since I know the standard of the preponderance of the evidence.

    It seems that the plaintiff would have to have clear and convincing evidence of the defendant's State of mind, the injury, and the foreseeability. To me, that seems like an enormously high burden for a rural Dr. Smith or Produce Palace or Mrs. Jones' bakery to have to go in and enunciate particularly what this is. Could I get a comment from you and also, Judge, from you? Forgive me for not looking at my witness list.

    Mr. NATIONS. There is a catch-22 in that because, also, you have to plead specific facts that relate to the state of mind to show the intent of the defendant. But, on the other hand, all the defendant has to do is come in and file a motion to dismiss, and you are not allowed to do discovery then. So discovery is suspended, so you can't take the discovery necessary to find the state of mind.

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    Ms. JACKSON LEE. Mr. Chairman, can I let Judge Stapleton answer the final question?

    Mr. PEASE. Certainly.

    Ms. JACKSON LEE. Judge Stapleton, you mentioned something about motive. That may be the response——

    Mr. STAPLETON. I can't answer that. That is a policy issue that the Conference wouldn't take a position on. That is for you all to struggle with about what the rights are and what the burdens should be. We only become involved when we think that it is going to affect what goes on in the Federal courts.

    Mr. GRADY. Could I respond to that question?

    I think that one thing that has to be borne in mind, if you are interested in protecting small businesses, is that many, many of these information-technology businesses are small businesses. It is they who would be protected by this bill.

    There seems to be a common assumption that these Y2K cases will turn into situations where small businesses are suing large corporations. Often, it will be exactly the opposite, large corporations suing small businesses. So, in a very real sense, this bill supports small business or at least creates a level playing field for both types of businesses.

    In my view, as I have explained, the bill clarifies the common law. It does not create a radical change in the common law it thereby protects all businesses as well as consumers.

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    Ms. JACKSON LEE. Mr. Chairman, I am delighted that the witness answered the question, but I would also say that the preponderance of the evidence seems to be a reasonable standard, and if we have small businesses on both sides of the issue, we need to try to resolve it and not try to take a sledgehammer to kill a fly. That is what I think this legislation offers to us, a sledgehammer to kill a fly.

    Thank you, Mr. Chairman.

    Mr. PEASE. The gentlelady's time has expired.

    Thank you, members of the panel, for your patience and your presentations.

    The meeting is adjourned.

    [Whereupon, at 1:47 p.m., the committee was adjourned.]

A P P E N D I X

Material Submitted for the Hearing Record

PREPARED STATEMENT OF THE PHYSICIAN INSURERS ASSOCIATION OF AMERICA

    The following testimony is submitted on behalf of the 60 professional liability insurance companies that comprise the Physician Insurers Association of America (PIAA). The PIAA's member companies are owned and/or operated by physicians or dentists and collectively they insure over 242,000 doctors, 35,000 dentists and 450 hospitals. From this perspective the PIAA has always been very interested in resolving disputes without litigation and we support the intent of the legislation to preempt the anticipated proliferation of frivolous Y2K legal actions.

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    However, the PIAA would like to express concerns with the language of H.R. 775 as currently drafted. We believe that these concerns can be addressed and we have proposed an amendment that was unanimously accepted by the Senate Judiciary Committee during consideration of S. 461. We will continue to work with those Members and staff who drafted H.R. 775 to resolve our concerns and control liability actions that result from Y2K business disputes.

Basis for Concern

    Section 4 of the legislation provides that ''[n]one of the provisions of the Act shall apply to any claims based on personal injury.'' Our concerns relate to uncertainty regarding the scope of the personal injury exclusion.

    At the very least, this provision means that should a patient injured due to a Y2K defect in a medical device proceed directly against the manufacturer for the personal injury suffered, the limitations of the Act would not apply. However, should the patient sue the physician, hospital or other health care provider for the injury arising out of the alleged Y2K defect without also naming the manufacturer, the physician or other health care entity could be held liable for the entire injury. When the physician or health care entity brings an action against the manufacturer for contribution, indemnity or other damages arising out of the underlying personal injury action, the defenses, higher burdens of proof, limitations on damages and other provisions of the Act would appear to apply to this claim whether brought as a separate action or as a third-party claim in the underlying personal injury action.

    This result appears to be inequitable in several respects. First, the physician's or health care entity's liability arises out of the underlying personal injury action which has been excluded from the scope of the Act. Second, none of the Acts limitations would apply to the personal injury plaintiff had they brought the action against the manufacturer directly. As a result, it is only the physician or other health care entity whose liability may be wholly derivative that is potentially subject to the limitations of the Act.

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Potential Impact of the Act on Physicians and Health Care Entities

    The following are a few examples of the potential impact of the legislation:

    Secs. 101. 102, 103: These provisions illustrate why the scenario above is fundamentally different from the standard Y2K dispute contemplated by the legislation. The imposition of a waiting period, the option of pursuing alternative dispute resolution and new pleading requirements are designed to allow the manufacturer an opportunity to remedy the Y2K defect and encourage resolution by means other than litigation. These appear to be sensible approaches to resolving standard business disputes over software remediation. Yet they are of little use when the physician or health care entity is not seeking remediation of Y2K noncompliant software, but rather recovery for personal injury liability incurred due to such a failure.

    Secs. 302, 303: These provisions would subject physicians and health care entities seeking recovery for liability incurred due to an underlying personal injury action to new defenses and heightened burdens of proof when the plaintiff in the underlying personal injury action would be subject to no such requirements in proceeding against either the health care provider or the manufacturer.

    Sec. 305: Section 305(a) provides that ''a party to a year 2000 action making a tort claim may recover economic losses only upon establishing, in addition to all other elements of the claim under applicable law, that . . . (2) Such losses are incidental to a claim in a year 2000 action based on personal injury caused by a year 2000 failure.'' Presumably this provision is intended to allow recovery of economic loss including damages paid in settlement or judgment of a personal injury action. However, it is apparently contradicted by section 3(4)(A) of the legislation which defines ''economic loss'' in relevant part as ''any damages other than damages arising out of personal injury or damage to personal property.'' (Emphasis added). These provisions appear to be internally contradictory, and would therefore possibly deprive the physician or health care provider of the ability to recover for liability incurred in a personal injury action due to a Y2K defect. Moreover, the physician or health care provider would still be subject to the remaining limitations of the Act despite the fact that the providers liability stems from the underlying personal injury action which has been placed expressly outside of the scope of the Act.

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Possible Solution

    The PIAA believes that through legislative language, report language or some combination thereof, it is possible to craft a solution that is narrow enough to minimize the potential for abuse while protecting the interests of the health care community that could otherwise be faced with substantial personal injury liability due to Y2K failures.

    As a starting point, the PIAA has suggested the following language to clarify that third-party claims arising out of the underlying personal injury claim are excluded from the scope of the Act:

Sec. 4. Exclusion of personal injury claims

None of the provisions of this Act shall apply to any claim based on personal injury, including claims asserted by way of claim, counterclaim, cross-claim, third-party claim or otherwise that arise out of an underlying action for personal injury.

    The language above would expressly exclude claims ''arising out of an underlying action for personal injury'' from the scope of the Act. In doing so, this language would allow physicians, health care entities, or their liability insurers to recover for damages incurred as the result of an underlying personal injury action involving a Y2K failure without being subject to the limitations of the Act. All other claims, however, for standard business disputes involving actual or potential Y2K failures would continue to be subject to the Act. In this manner, the PIAA believes that Congress can encourage resolution of standard business disputes surrounding Y2K claims while at the same time protecting the health care community from the unintended consequences of the personal injury exclusion.

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We thank members of the Committee and their staff for holding this important hearing. We look forward to working with you to address our concerns make the legislation fair for everyone.

(Footnote 1 return)
Consumers Union is a nonprofit membership organization chartered in 1936 under the laws of the State of New York to provide consumers with information, education and counsel about good, services, health, and personal finance; and to initiate and cooperate with individual and group efforts to maintain and enhance the quality of life for consumers. Consumers Union's income is solely derived from the sale of Consumer Reports, its other publications and from noncommercial contributions, grants and fees. In addition to reports on Consumers Union's own product testing, Consumer Reports with approximately 4.5 million paid circulation, regularly, carries articles on health, product safety, marketplace economics and legislative, judicial and regulatory actions which affect consumer welfare. Consumers Union's publications carry no advertising and receive no commercial support.

(Footnote 2 return)
Spencer & Graziano, Year 2000 Computer Litigation.

(Footnote 3 return)
An attorney at Milberg Weiss has identified six stages of Y2K litigation, including ''Defective Software Litigation,'' ''Defective Hardware Litigation,'' ''Who is Responsible Litigation,'' ''Disaster Litigation,'' ''Breach of Duty of Disclosure Litigation,'' and ''Insurance Litigation.'' Kathrein, Year 2000 Litigation—The Perspective of Plaintiffs' Counsel.

(Footnote 4 return)
See, e.g., Paragon Network v. Macola Inc., Ohio Ct. Common Pls., Marion City, No. 98–CV–0119; Capellan v. Symantec, Calif. Super. Ct., Santa Clara Cty., No. 772147; Issokson v. Intuit, Inc., Calif. Super. Ct., Santa Clara Cty., No. CV 773646.

(Footnote 5 return)
J. Baker v. Andersen Consulting, No. 98–01597 (Mass. Super. Ct., Norfolk Cty.)

(Footnote 6 return)
Morris, An Overview of Year 2000 Litigation Risks Confronting Financial Institutions, in Y2K Adviser (Mar. 1999) (''Overview''), at 4.

(Footnote 7 return)
Id. at 7.

(Footnote 8 return)
Morris, The Year 2000 Problem: A Primer on Legal Risks, J. Internet L. (Oct. 1998) (''Primer'') 10.

(Footnote 9 return)
See cases collected at Products Liability: Manufacturer's Postsale Obligation to Modify, Repair or Recall Product, 47 A.L.R. 5th §2a (1997); Products Liability: Liability of a Manufacturer or Seller as Affected by Failure of Subsequent Party in Distribution Chain to Remedy or Warn Against Defect of Which He Knew, 45 A.L.R. 4th 777 (1993).

(Footnote 10 return)
See, e.g., Beshara v. Southern National Bank, 928 P.2d 280 (Ok. 1996) (banks owe elevated duty to customers).

(Footnote 11 return)
See, e.g., MGLA 93A, §2(a) (''unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade are hereby declared unlawful'').

(Footnote 12 return)
See, e.g., Atkinson & Ward, Avoiding a Y2K Lawsuit Frenzy 3 (PPI Mar. 1999). See Testimony of Sen. Orrin G. Hatch Before the Senate Special Committee on the Year 2000 Technology Problem 3 (Mar. 11, 1999).

(Footnote 13 return)
Carter, Lawyers Suit up for a Juicy Millennium Bug Feast, Austin American-Statesman A2 (Aug. 5, 1998).

(Footnote 14 return)
See Hatch Testimony, supra, at 2–3.

(Footnote 15 return)
Carter, supra, at A2.

(Footnote 16 return)
Presented by Law Journal Seminars (Apr. 12 & 13, 1999).

(Footnote 17 return)
Presented by Fulcrum Information Services (June and July 1998).

(Footnote 18 return)
Presented by Mealey's (Oct. 8 &9 1998).

(Footnote 19 return)
Presented by the Institute for International Research (March 22 & 23, 1999).

(Footnote 20 return)
E.g., R. Williams & B. Smyth, Law of the Year 2000 Problem: Strategies, Claims and Defenses (1999); Mealey's Year 2000 Report.

(Footnote 21 return)
See, e.g., Morris, Overview.

(Footnote 22 return)
Testimony of Assistant Attorney General Eleanor Acheson Before the Senate Judiciary Committee 5 (Mar. 1, 1999).

(Footnote 23 return)
Acheson Testimony, supra, at 10.

(Footnote 24 return)
See, e.g., East River Steamship Corp. v. Transamerica Delavel Inc., 746 U.S. 858, 874–876 (1986); Danforth v. Acorn Structures, Inc., 608 A.2d 1194, 1195–1200 (Del. 1992); Restatement (Third) of Torts: Products Liability, §1 (com. d), §21.

(Footnote 25 return)
Morris, Overview, at 4. See Cunningham, Orphans of the Economic Loss Doctrine: Tort Liability of Information Providers and Preclusion of Comparative Negligence, 8 DePaul Bus. L.J. 41 (1995); Nussbaum, The Economic Loss Rule and Intentional Torts: A Shield or a Sword, 8 St. Thomas L. Rev. 473 (1996).

(Footnote 26 return)
Morris, Overview, at 7.

(Footnote 27 return)
Kahn v. Roberts, 1995 WL 745056 *4 (Del. Chan. 1995) (citation and internal quotation marks omitted).

(Footnote 28 return)
Id. at *3. See also Rabkin v. Philip A. Hunt Chemical Corp., 13 Del. J. Corp. L. 1210 (Del. Ch. Dec. 17, 1987).

(Footnote 29 return)
Kathrein, supra, at 14.

(Footnote 30 return)
Restatement (Second) of Torts §402A (1965).

(Footnote 31 return)
Restatement (Third) of Torts: Products Liability §19 (1997) (hereinafter ''Third Restatement'').

(Footnote 32 return)
Cf. Winter v. G.P. Putnam's Sons, 938 F.2d 1033 (9th Cir. 1991) (mushroom enthusiast poisoned after eating mushrooms in reliance on information in book sued publisher under product liability theory; court explained that the information in the book was intangible and constituted ideas rather than a product). See also Restatement, §19 Reporters' Notes to Comment d, which cites similar cases concerning books, magazine articles, standardized forms, and sport event tickets.

(Footnote 33 return)
See Third Restatement §19(a).

(Footnote 34 return)
The Third Restatement recognizes that some commentators have urged that software be viewed as a product, in part for public policy reasons. See Third Restatement §19, cmt. d Reporter's Notes. See also Note, Strict Products Liability and Computer Software, 4 Computer L.J. 373 (1983); Note, Negligence: Liability for Defective Software, 33 Okla. L. Rev. 848, 855 (1980); Note, Computer Software and Strict Products Liability, 20 San Diego L. Rev. 439 (1983). In addition, as noted above, the Restatement provides that seemingly intangible concepts ''such as real property or electricity, are products when the context of their distribution and use is sufficiently analogous to the distribution and use of tangible personal property.'' Third Restatement §19(a).

(Footnote 35 return)
See Third Restatement, §19 Reporter's Notes to Comment d; Computer Software as a Good Under the Uniform Commercial Code: Taking a Byte Out of the Intangibility Myth, 65 Boston U. L. Rev. 129 (1985).

(Footnote 36 return)
See Linda A. Sharp, Annotation, Computer Software or Printout Transactions As Subject To State Sales or Use Tax, 36 A.L.R.5th 133 (1996).

(Footnote 37 return)
See Third Restatement §21.

(Footnote 38 return)
See Rockport Pharmacy, Inc. v. Digital Simplistics, Inc., 53 F.3d 195, 198 (8th Cir. 1995) (For purposes of the economic loss doctrine, loss of data constitutes ''commercial loss for inadequate value and consequent loss of profit'' rather than damage to property).

(Footnote 39 return)
See id. §21 cmt. e.

(Footnote 40 return)
Id. §2(a).

(Footnote 41 return)
Id. §2(b).

(Footnote 42 return)
See id. §2 cmt. d (noting that ''the test is whether a reasonable alternative design would, at a reasonable cost, have reduced the foreseeable risks of harm) (emphasis added). Cf. Young v. J. Baker, Inc., No. 98-01597 (Mass. Super. Ct. filed Aug. 28, 1998) (plaintiff sought declaratory judgment that it did not violate any duty owed defendant when it assisted in the selection, design, customization and implementation of a third-party retail computer software package that was not Year 2000 compliant, in part because making system Year 2000 compliant was not economically viable as there were no compliant mainframe software packages available, and customizing the then-available software packages would be more expensive than the cost of repairs alleged by defendant).

(Footnote 43 return)
Third Restatement §3.

(Footnote 44 return)
Id. §4.

(Footnote 45 return)
Id. §2(c).

(Footnote 46 return)
Id. §2, cmt. i.

(Footnote 47 return)
Id. §2, cmt. k, illus. 13(2).

(Footnote 48 return)
Id. §10.

(Footnote 49 return)
Id. §10(b).

(Footnote 50 return)
Those seeking more information about the Tech Center or the 2000 Global Internet Policy Summit can e-mail me at mgrady@gmu.edu.

(Footnote 51 return)
See Guido Calabresi, The Costs of Accidents (Yale Univ. Press 1970); Mark F. Grady, Accident Law Seeks to Limit Insurance Effects, 1 Mich. L. & Policy Rev. 11 (1996)

(Footnote 52 return)
One empirical study has estimated that a driver makes 200 observations per mile, 20 decisions per mile, and one error every 2 miles. Those errors result in a near collision one every 500 miles, collision once every 61,000 miles a personal injury to some individual once every 430,000 miles, and a fatal accident once every 16 million miles. Leslie George Norman, Road Traffic Accidents—Epidemiology, Control and Prevention (World Health Organization, Public Health Papers no. 12, 1962) 51. This study and similar ones are reviewed and analyzed in Trebilcock, Incentive Issues in the Design of ''No-Fault'' Compensation Systems, 39 U. Toronto L.J. 19, 31 (1989).

(Footnote 53 return)
See George L. Priest, The Current Insurance Crisis and Modern Tort Law, 96 Yale L.J. 1521 (1987).

(Footnote 54 return)
35 N.Y. 210 (1866).

(Footnote 55 return)
The court said:

(Footnote 56 return)
Food Pageant v. Consolidated Edison, 429 N.E.2d 738 (N.Y. 1981).

(Footnote 57 return)
Strauss v. Belle Realty Co., 482 N.E.2d 34 (N.Y. 1985) (Con Ed not liable to tenant of building who fell down stairs because of darkness since he had no contract for light in the area in which he fell).

(Footnote 58 return)
See Koch v. Consolidated Edison Co., 468 N.E.2d 1 (N.Y. 1984); Kirsch Beverage Corp. v. Consolidated Edison Co., 516 N.Y.S.2d 29 (App. Div. 1987).

(Footnote 59 return)
Kirsch Beverage Corp. v. Consolidated Edison Co., 516 N.Y.S.2d 29 (App. Div. 1987).

(Footnote 60 return)
In re Chicago Flood Litigation, 680 N.E.2d 265 (Ill. 1997).

(Footnote 61 return)
Quoted in Maple Farms, Inc. v. Elmira City School District, 352 N.Y.S.2d 784 (N.Y. Sup. Ct. 1974).

(Footnote 62 return)
Goddard v. Ishikawajima-Harima Heavy Industries Co., 29 A.D.2d 754 (N.Y. Sup. Ct. 1968).

(Footnote 63 return)
In Palsgraf v. Long Island R.R., 162 N.E. 99 (N.Y. 1928), Judge Cardozo held that a defendant could not be liable for negligence unless a reasonable person in the defendant's shoes would have been aware that the plaintiff could suffer the type of harm that actually materialized. This seems to be basically the same test that section 302(b) uses as a condition for the bill's imposition of a scienter requirement. It follows that the scienter requirement would apply to all negligence actions for which this type of proximate cause is an essential element, which seems to be practically all of them. In Palsgraf, Cardozo, J., wrote as his test:

(Footnote 64 return)
159 N.E. 896 (N.Y. 1928).

(Footnote 65 return)
He wrote for the court:

(Footnote 66 return)
See William Bishop, Economic Loss in Tort, 2 Oxford J. Legal Stud. 1 (1982).

(Footnote 67 return)
35 N.Y. 210 (1866).