Congress passes Year 2000 Legislation

Congress passes Year 2000 Legislation:
Will it Matter?

by Edmund B. Burke

On October 19, President Clinton signed the "Year 2000 Information and Readiness Disclosure Act" into law.

The Act does not generally provide an immunity against businesses which otherwise may have a Year 2000 liability. However, many businesses and other information technology suppliers wanting to minimize their risks in reporting Year 2000 problems may wish to avail themselves of the Act.

You are already familiar with the concept of an evidentiary immunity. In return for making a potentially damaging disclosure, a person is given immunity against the further use of the statement in legal proceedings. For instance, a witness may be reluctant to speak because of fear of a criminal prosecution based on the disclosure. The prosecutor may give the witness an evidentiary immunity for any statements made; this is a kind of guarantee that no such statements can be used against the witness in court. Such an immunity would also remove the Fifth Amendment's privilege against self-incrimination, because legally the witness no longer has any fear of criminal prosecution based on the statements made.

The Act uses a similar theory to try to encourage businesses to make Year 2000 disclosures. The central provision of the Act (Section 4) provides that no Year 2000 readiness disclosure is admissible, in whole or in part, in any civil action against the maker of the statement, provided that certain conditions are met. The Act also contains certain exceptions to the immunity granted, principally for statements made with the intent to deceive or with actual knowledge of the falsity of the statement.

The Act itself wound its way through Congress in record time. The Senate Bill, S. 2392, was unanimously adopted by the Senate and the House of Representatives essentially agreed to the Senate version. The purposes of the Act, according to its introduction, are to promote the free disclosure and exchange of information related to Year 2000 readiness and to lessen the burdens on interstate commerce by establishing uniform legal principles that apply to the disclosure and exchange of such information.

If a company or other service provider makes a Year 2000 readiness disclosure, then no part of that disclosure is admissible in court against the maker of the disclosure to prove the truth or accuracy of any Year 2000 statements contained in the disclosure. That is, a Year 2000 readiness disclosure can reveal all of the dirty laundry regarding the Year 2000 problems with a product or service, and those statements cannot be used in court against the maker of the statement.

What would be the advantage to a company in making such potentially embarrassing statements? Apart from the altruistic motives of trying to warn people regarding the Y2K problems that may exist with the company's product, there are obviously motives of self-interest as well. After all, one traditional defense against many forms of liability has been a warning issued to the potential victims.

For instance, let's assume that you make Christmas cookies for the school pageant, and sell them for $3 a box to interested parents. After you sell the cookies, you discovered, to your shock and horror, that you have accidentally included drain cleaner, instead of chocolate sprinkles, in the cookies. Unfortunately, you were making the cookies while your spouse was experimenting with the family eggnog recipe, and you may have over-indulged in sampling the new potion. Since you have negligently prepared a poisonous foodstuff and have then distributed it to the public in a commercial exchange, you will be liable in most instances for the damages caused.

But suppose you frantically telephone all of the parents and warn them regarding the cookies. A parent who (negligently or otherwise) eats the cookies after receiving the warning is unlikely to receive much sympathy from a court if the parent subsequently brings an action for damages. The parent may even have a duty to dispose of the poisonous cookies, or to take other affirmative action to prevent the harm that could arise from the cookies. In short, the cookie purchasers must take the warning into account. The parents cannot simply ignore the warning and expect to recover damages.

In the same way, the issuance of a warning to a purchaser of non-compliant software or services can serve to minimize the damages that could be claimed by the unhappy purchaser. Of course, these circumstances will not endear the supplier to its purchasers, any more than your friends will be impressed with your kitchen practices when you notify them of the accidental inclusion of drain cleaning granules in their Christmas cookies. However, for purposes of minimizing or foreclosing legal liability, the warning may be a very effective tool.

Congress passed the Act to remove some of the legal incentives for maintaining silence about Y2K problems. As a result of the Act, the statements made by companies in issuing their warnings cannot now be used against them in lawsuits.

The Act also provides an unusual method for bringing previously made "incriminating" statements within the protection of the Act. To take advantage of this optional "retroactive exculpation" provision, the statement-maker must take certain remedial action within 45 days of the Act's passage, certainly one of the shortest deadlines ever created by Congress. If a company re-issues any previous "incriminatory" statements it has made, on its Web site and by procedures otherwise in compliance with the procedures of the Act, it may also immunize itself against the use in court of these previous statements. These previous statements would then become inadmissible in evidence against the company, unless an injured person could prove a prior reliance on those statements and made a prompt written exception to the company's retroactive exculpation.

The Act also contains an antitrust exemption, whereby several companies in an industry may collaborate and cooperate, solely for the purpose of making responses to correct or avoid Year 2000 failures. While the antitrust exemption is to be construed narrowly, and will only apply to conduct that occurs after October 19, 1998, it could also encourage companies to collaborate for purposes of making disclosure statements, without undue fear of antitrust liability for collaboration between competitors.

It should be noted that the Act only provides an evidentiary immunity for civil actions between private parties. That is, the Act does not apply to civil actions brought by state or federal agencies, or to any criminal actions. These limited exceptions tend to dampen, to a limited degree, the protection and effectiveness of the Act. The Act also directs the Administrator of General Services to create and maintain a national Year 2000 Web site. The Administrator is required to submit a report to Congress within 60 days after the Act takes effect.

The Year 2000 problem has already generated several lawsuits, including class actions, and we will see many more Year 2000 lawsuits as the dreaded day approaches. It is impossible to predict whether the congressional action will in fact minimize or lessen the effect of the Year 2000 problem, or whether this legislation will be fully appreciated and used by the business community.