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MARCH 9, 1999, TUESDAY

SECTION: CAPITOL HILL HEARING

LENGTH: 26161 words

HEADLINE: JOINT HEARING OF THE TECHNOLOGY SUBCOMMITTEE OF THE HOUSE SCIENCE
COMMITTEE AND THE GOVERNMENT MANAGEMENT AND INFORMATION TECHNOLOGY
SUBCOMMITTEE OF THE HOUSE GOVERNMENT REFORM COMMITTEE
SUBJECT: Y2K COMPUTER LITIGATION
CHAIRED BY: REPRESENTATIVE CONSTANCE MORELLA (R-MD) AND REPRESENTATIVE
STEVE HORN (R-CA)
2318 RAYBURN HOUSE OFFICE BUILDING
WASHINGTON, DC
12:30 PM.

BODY:

REP. CONSTANCE A. MORELLA (R-MD): I'm going to call to order the Technology Subcommittee of the Science Committee. Today, our House Y2K Working Group, made up of the Technology Subcommittee and the Government Management Information Technology Subcommittee, is holding the first House hearing on the impacts of litigations on fixing the Year 2000 computer problem.
I am pleased to once again join with my distinguished colleague, Mr. Horn of California, in our series of ongoing Y2K hearings. I do want to point out that with the adverse weather situation, please know that this hearing is being broadcast on the Internet so that there may be people who still will have access to it. Three years ago, when we began our review of the Y2K problem, one of our very first joint hearings dealt with the consequences of Y2K failures, including legal liability. At that hearing, and at others, we discovered that the fear of potential legal liability created a disturbing chilling effect that froze private industry from sharing important Y2K information with each other, and with the American public.
Witnesses testified that the risk of failure, and it's liability consequences, including both punitive and compensatory damages, has created a large Year 2000 cottage industry for lawyers waiting to file suit. In fact, with the total corrective cost estimates ranging from the J. P. Morgan figure of $200 billion to the Gartner Group forecast of $300 to $600 billion, the Deger (sp) Group estimates that the total cost of litigation could amount to several trillion dollars if there are Y2K disruptions.
It should then come as no surprise that certain industries have refused to acknowledge or share Year 2000 information for fear that such disclosure could ultimately leave them vulnerable to negligence and warranty fees. By resisting the exchange of technical advice with one another, it delayed the pace of repair work, and that's why the Congress enacted the Year 2000 Information and Readiness Disclosure Act last year in an attempt to encourage the widest possible dissemination of Y2K information by giving limited immunity from law suits to companies that share information about the problem in good faith.
I think that last year's enacted law was a necessary first step in the congressional review of the year 2000 liability issue. And, while the act was narrowly tailored to address just the issue of information exchange, and does not affect the greater liability question, I think that it's important that we fully explore the legal issues associated with Y2K because the fear and costs of sending off law suits is blocking Y2K compliance efforts.
I see the numbing prospect of becoming a Y2K litigant is overtaking in scope and attention the corrective efforts necessary to be year 2000 compliant resulting in a great deal of uncertainty, even where there may be no actual Y2K failures. I know that addressing legal liability legislatively will not be an easy task. We must continue to encourage all businesses to devote their full resources and commitment to solving the year 2000 problem.
Businesses should not be sitting around in expectation of enacted legislation that has the potential of unburdening them from liability. If we are to eventually enact legislation, we must not provide companies an easy out for failing to perform Y2K remediation in a timely and effective manner.
It concerns me, and I think all of us, that the legal battles have already begun. For example, several software companies are facing law suits for breach of warranty, fraud, and unfair business practices because they charged clients for the upgrades necessary to correct the millennium bug. In a Warren, Michigan grocery store the produce teller sued the manufacturer of the cash registers because the machine rejected credit cards with year 2000 expiration dates.
Additionally, the Gartner Group has estimated that there has already been several hundred Y2K litigation settlements, and we are still 300 days away from the beginning of the millennium, when the great majority of Y2K failures, if there are any, would take place. The fact is lawyers know how to litigate and the year 2000 problem may open the flood gate for a new generation of law suits that will make asbestos or super fund litigation look like small claims court.
We have a very important issue before us this afternoon. I am looking forward to engaging in a dialogue with our distinguished panel. I welcome them despite having to brave today's snow storm, and particularly because they braved today's snow storm. Our first witness will be Mr. Tom Donohue, president and CEO of the United States Chamber of Commerce, the largest representative of small, mid and large businesses in our nation. Following Mr. Donohue, will be Professor Walter A. Effross, professor of law at the American University Washington School of Law, who is a colleague of my husband's, and the chairman of the American Bar Association's Subcommittee on Cyber Law.
Our third witness will be Ms. Abby Lundberg, who is the editor in chief of CIO magazine, which serves corporate and government chief information officers and chief executive officers. And, then, next on our witness panel will be Mr. Howard L. Nations, who is an attorney from Houston, Texas and the former vice president of the American Trial Lawyers Association. Our panel will conclude with Mr. Walter J. Andrews, partner and co-chair of the Year 2000 Practice Group at Wiley, Reign (sp), and Fielding, a law firm here in Washington, DC.
So, again, I thank you all for attending, and I now turn for any opening comments he may have to the co-chair of this hearing, Mr. Horn.
REP. STEVE HORN (R-CA): Thank you very much. We appreciate these fine facilities we're in in the Science Committee, and we look forward to the witnesses. I have read most of your statements, and they are immensely helpful.
What our most daunting challenges associated with the year 2000 computer problem involves the issue of liability. Despite the passage of the Year 2000 Information and Readiness Disclosure Act last October, some companies remain unwilling to share critical information that could assist others in preparing their computers for January 1, 2000. They fear being held legally responsible.
Hearing after hearing, witness after witness, we have heard of the difficulty that those in our federal government have had in obtaining Y2K status information from vendors and suppliers. Time and again, they attribute this lack of critical information to a genuine fear of debilitating law suits. Of equal concern, many companies fear sharing information that could be helpful to others also attempting to bring their computer systems into the year 2000 compliance. Again, the issue is liability.
Congress must cautiously find the delicate balance, if any, before we act and before we recommend legislation. Indeed, the potential liabilities appear limitless, even for those who are responsibly attempting to ready their computer systems for the year 2000. From contracts that ignore year 2000 liability to the denial of insurance claims, the avalanche of litigation could virtually eclipse the cost of the problem itself. Some estimates of year 2000 liability costs could reach $1 trillion. We cannot afford that cost, nor can we afford to fit consumer against business and business against manufacturer.
It takes highly unusual circumstances to justify the federal government's tinkering with the legal system, that although imperfect works. The global scope of the year 2000 computer problem may in fact be such a case. But, any change in the law must not relieve anyone or any company from the responsibility of updating their systems by the unstoppable deadline of January 1, 2000. The urgency of time, however, must not overshadow the need for careful deliberation of the liability issue.
I look forward today to hearing the testimony of our witnesses who represent our nation's business and legal community.
REP. MORELLA: Thank you, Chairman Horn. It's now my pleasure to recognize the distinguished ranking member of the Technology Subcommittee, Mr. Barcia.
REP. JAMES A. BARCIA (D-MI): Thanks very much, Chairwoman Morella, Chairman Horn. I want to join my colleagues in welcoming everyone to this afternoon's hearing. I'm not going to belabor the importance of the magnitude of the year 2000 computer problem. Everyone in this room is aware of the scope and seriousness of this issue, otherwise we wouldn't be here this afternoon.
We have come a long way together since our committee initiated it's series of Y2K hearings. The federal government has investigated a significant amount of time and effort into renovating it's computer systems.

Large, private sector companies have been acting aggressively to address their systems, then there is a general level of public awareness surrounding the year 2000 problem.
Today's hearing actually shows just how far we have come in this Y2K odyssey. Today's hearing doesn't focus on what government has or has not done, nor does it address private sector actions. Rather, this hearing focuses on what could happen after January 1, 2000 in terms of legal liability. The relevance of this liability issue has been highlighted by a few recent and well publicized Y2K related testing problems that have variously resulted in the operational shut down of a nuclear reactor, mistakenly sent bills, and heightened awareness of a myriad of problems associated with the health care industry.
Our review of today's testimony highlights two points. Like the interrelated nature of computer networks, this is a very complex issue, and, secondly, there is not a consensus on how to best deal with the Y2K liability issue. I hope our witnesses can address one very basic question today, and that would be how our Y2K liability concerns actually hindering companies' abilities to make their operations Y2K compliant.
I want to thank all of our witnesses today. They're a very distinguished panel of expert witnesses you've assembled, Madam Chairwoman, and Chairman Horn, on the Y2K issue. I want to thank all the witnesses for appearing before us today, and look forward to your testimony. Thank you.
REP. MORELLA: Thank you, Mr. Barcia. I am now going to recognize Ms. Biggert from the state of Illinois who is the vice chair of the Government Management Information Technology Subcommittee.
REP. JUDY BIGGERT (R-IL): Thank you, REP. MORELLA, for the opportunity to discuss this very important issue of Y2K liability. I commend both the chairman, and the Co-chairman Steve Horn, for the work they have done to bring this issue of Y2K readiness to the forefront. The subcommittee has held a series of hearings on Y2K compliance at federal agencies, and I believe it is because of the subcommittee's increased attention to this issue that many of our federal agencies have made significant progress in their efforts to ready themselves for the year 2000 date change. But, today's hearing is the kind which is first on a related Y2K issue, the issue of liability. I strongly support the committee's effort to address this issue, one that will affect all of our nation's businesses and consumers. Dozens of Y2K related law suits have already been filed in the United States, and estimates of the total costs associated with the Y2K litigation approach $1 trillion. Comparatively, the total annual direct and indirect costs of all civil actions in the United States is estimated to be $100 billion.
In my former life, I was an Illinois state legislator, and during my time in the legislator I sponsored several bills, including the Y2K Liability Reform, and General Tort Reform. And, I strongly believe that the Y2K liability has the potential to discourage effective actions on Y2K compliance. I believe that rather plaintiffs and defendants in Y2K legal actions need to work together to find solutions to the problem.
I look forward to the testimony in today's hearing to determine how the liability issue is affecting Y2K compliance. I am hopeful that our witnesses will be able to shed light on the specific legal challenges relating to continuing computer capacity in the new millennium. Thank you all for being here and we appreciate the opportunity here from your end to ask specific questions on the issue of liability.
REP. MORELLA: Thank you, Congresswoman Biggert. I now turn to Mr. Turner, the gentleman from Texas who is the ranking member of the Subcommittee on Government Management Information and Technology.
REP. JIM TURNER (D-TX): Thank you, Chairwoman Morella, and Chairman Horn, and our witnesses who have gathered here today. This is an important hearing, and it's one certainly on the minds of many members of Congress as we approach January 1, 2000. I am confident that there are many types of potential liability arising from Y2K failures, and that many of those potential cases of liability are very diverse and in many ways unknown.
They range from claims against hardware and software vendors, consultants, and service providers, claims for breach of warranty, misrepresentation and fraud, deceptive trade practice, and even personal injury and property damage, claims against corporate boards of directors and management for breach of fiduciary duties. All of these are indeed possibilities. Product manufacturers, insurance, banks and financial institutions, software licensees, and landlords of buildings with electronic or computerized systems all could have potential liability.
Because the potential scope of liability is so broad, and the factual circumstances of every conceivable case varies so widely, Congress should indeed move very cautiously in this particular area. The unintended consequences of legislation in this area could be as significant as the perceived consequences of inaction. And, as a former member of the state of Texas legislation, I fully appreciate how Congress must always respect the fact that states should have the first right to determine their own tort law, and to preempt state law is certainly something that I as a former member of a legislative body am very cautious about.
That is not to say that we do not have potential problems, and that they should not be addressed by this Congress. But, limiting the traditional standards of liability should not encourage companies to avoid their rightful responsibilities to inform their customers, and their users, of the products of potential problems. And, legislation should not be crafted that hinders appropriate repairs to systems that are currently non-compliant.
Small businesses should not be deprived of the protection of existing law that gives their vendors and consultants to those small businesses possible incentives not to disclose, and not to make the appropriate repairs before the new millennium. Unlimited liability protection could potentially cause some software companies, and other manufacturers simply to ignore the problem of small business.
So, in this area, I am convinced that while we need to be very mindful of the potential problems, we also need to be sure that the remedy we carve is not worse than to perceived problems. We must be careful not to deprive consumers and small businesses that experience Y2K related injuries and law suits the same rights and remedies that are afforded to other injured parties in our legal system. Thank you, Madam Chairwoman.
REP. MORELLA: Thank you, Mr. Turner. I now recognize Mr. Ose, the gentleman from California.
REP. DOUG OSE (R-CA): Thank you, Madam Chairwoman. I appreciate being here today. I have a couple questions, and they really boil down specifically to which I hope the panel will respond as to how to increase the supply of qualified contractors who are available to fix this problem. I don't know what the Section 505 stuff deals with, and I don't know how to ask a question about that. But, my concern is how do we increase the number of people who can help cure this problem. Thank you.
REP. MORELLA: Our panelists will probably in the course of their discussion attempt to respond to that. I am going to ask you if you would rise because we have a policy in the Science Committee, and the Government Reform Committee, that we swear in all of those who testify. So, if you would rise and raise your right hand. Do you solemnly swear that the testimony that you're about to give is the truth, the whole truth, and nothing but the truth? The record will show that everybody responded affirmatively.
We also try to ask our panelists is they would confine their comments to about five minutes, knowing full well that the full text of any testimony that is submitted will be in the record in total. You may want to synopsize, may want to change it around. So, proceeding in that regard, then it gives us a chance to ask questions. I will start off with Mr. Donohue.
MR. TOM DONOHUE: Madam Chairwoman, Mr. Chairman, ladies and gentlemen of the panel, thank you for inviting us here today to talk about this very unique and very compelling subject. I would take just a moment to recognize the fact that the chairwoman, and the chairman, and others here, and throughout the Congress, have taken a very unique and very aggressive approach to this subject. Mr. Davis, and Moran, and Mr. Kramer, and Mr. Cox, Mr. Dooley (sp), Mr. Dryer, and others have been very aggressive on this matter, and we appreciate their help.
I appear before the committee today in a very unique capacity. I represent whoever will be the claimants, and whoever will be the defendants, in suits between companies on this issue. You can appreciate how challenging that might be while we're sitting here trying to take a position on these important matters. Our overriding position is simple. Where there has been economic loss, there ought to be an opportunity for people to sue each other to recover damages that have caused problems to their business.
Now, as president and CEO of the chamber, I spend a large amount of my time visiting and communicating with small and large companies throughout this country. With 3,000 state and local chambers, and more than 1,500 associations for our members, and one thing has become abundantly clear. The Y2K problem has business owners and managers extremely concerned. It is broad based and unique totally across our economy. It is not one industry. It is not one service. It is not one product. It is universal.
They are facing a serious problem that has the capacity to eat away at the vitality of their business, of the American business system, and of our economy. The United States clearly is not alone. All around the world, leaders are grappling with the Y2K problem, or more importantly, they're not grappling with it, and it's impact on their economy. If our trading partners abroad are not Y2K compliant in a global economy, US business of every size is at risk. The global implications of this problem are particularly critical, and may I say parenthetically, the national defense implications in this country, and with our friends and adversaries around the world, are very serious.
Here and abroad, some still cling to the belief that the solution will be an easy one. Somebody will come along with a piece of software and plug it in and everything will be better. Or, that the easy solution would be to find people that can come and fix it. The problem is we don't know what it is, or where it is, in many of these long-standing computer programs all over this country and chips in every type of machinery and activity throughout our society.

The reality is very stark and very low tech. Computer codes, programs, chips, and other fundamental technology underpinnings of our society have to be found, and then revised, replaced or rewritten. All of this at tremendous cost. In fact, businesses have already spent hundreds of billions of dollars, and will get up to a number somewhere in the area of $1 trillion before the turn of the century.
Now, one of the roadblocks, not the only one, to serious correction of this problem is litigation. And, that's why the business community, and other affected parties, are not just faced with fixing the problem. The concern here is simple. It's money, expertise, and the fear of litigation, and the fear of litigation is a very important roadblock standing in the way of Y2K remediation. It's a threat in terms of runaway litigation costs.
Now, why is that so? And, there was an excellent question raised on that. It's because if you're hoping this is not going to be a major problem. Why would you go out and alert all of your vendors, all of your suppliers, all of your critics, everybody that wants to sue you that you're dealing with something that you really don't understand the answer to? You immediately become liable. And, what we need to do here is to look at this as a broad based societal problem. There are no bad guys in this deal. It is a technology problem of a growing and exciting society. And, we need to deal with this in a different way than other issues.
Why do we expect an explosion in litigation? Part of the attraction is the potential to reap huge amounts of money. Willy Sutton (sp) robbed banks because that's where the money was. That's what we're talking about. The greatest opportunity for litigation in recent times. There's an opportunity for unlimited punitive damages, and of massive class action law suits that are not going to help anybody.
At a recent AVA convention, a team of lawyers estimated that the amount of legal costs associated with Y2K could exceed all the money spent on asbestos, breast implants, tobacco, and super fund litigation combined. That's a lot of money. And, at the same time, it was reported that a participant considered Y2K to be the bug that finally provides the lawyers the opportunity to rule the world. I don't see that. We have a son that just became a lawyer. He has no intention to rule the world.
Now, let me not belabor all of the cost factors that you have already repeated. Let me just say a word that we believe there is a better way to address this problem without falling into a bottomless pit of litigation. The chamber, and the representatives of nearly every sector of American business, have after months of intense negotiations, and discussion, rallied behind a fair and reasonable approach to help solve this problem. Representatives from the chamber, and the National Association of Manufacturers, the National Federation of Independent Business, the National Retail Federation, the American Insurance Association, and all others, have come behind this legislation, this bipartisan legislation.
And, introduced by Congressmen Davis and Moran is a reasonable solution to the problem of excessive litigation. It's important to note, however, that this legislation addresses the problem of wasteful litigation. Wow, and let me say this, preserving the rights of plaintiffs to be fully compensated for their Y2K problems. And, yes, the trial lawyers can still earn a lot of money doing that. What this legislation seeks to avoid, however, is the debilitating affect of unscrupulous individuals and groups trying to exploit this problem. Grieved parties should be entitled to full compensation, but not the sort of lottery winnings that we have seen in too many other law suits.
Furthermore, and this is important, let me emphasize that this legislation does not affect the claim for personal injuries caused by any Y2K failures. In short, here is what we're talking about. Pre- trial notice and alternative dispute resolution, a common sense way to look at this problem, a mitigation of damages the legislation encourages plaintiffs to fix their Y2K problem before the failures, and plaintiffs would be precluded from receiving damages that could have been easily avoided.
Proportional liability, a defendant would be liable for their proportion of the fault. No more deep pocket issues here, we're looking at reality not hope. Punitive damage limitations, if you did everything you are supposed to do, no punitive damages. If you haven't been as astute as you should, limited punitive damages. Attorney fees, we suggest a limit of $1,000 an hour. And, Madam Chairwoman, at $1,000 an hour, in the hours you would work, you would make $4 million next year without charging any of your staff. You could use it. And, small business incentives, things to do now to help small businesses comply with this problem.
Now, I would like to conclude by saying that unlike other national emergencies that have hit us without warning, storms like the one we have outside, not quite a national emergency, but in this town, a serious problem, we have an opportunity to address this before it hits. We are forewarned. We are forearmed. All that we ask is that the Congress and the administration of the court work with the business community to assure that our precious resources are focused on avoiding disruption, and not squandered by unnecessary litigation.
We look forward to working with you, but I think it is important to focus on one final issue. We know when this is going to happen. And, so, to have an effect on it, we need to operate and move ahead now. Now, not six months from now because we need to set the line in the sand at this time. USA Today had a poll. Sixty three percent of Americans said that liability ought to be limited on this issue. Today, I'm not sure they fully understand the issues, but their instincts are just right.
The question at hand for the Congress is do we wish to fix and avoid this problem, or do we wish to litigate? Thank you very much.
REP. MORELLA: Thank you, Dr. Donohue. We did give you a little extra time because we know how passionate you are about the issue, and we aren't so rigid that we wouldn't allow a little more.
MR. DONOHUE: Thank you.
REP. MORELLA: I wanted to recognize two others who have joined our joint subcommittee to see if they wanted to make an opening statement. First of all, Congresswoman Sheila Jackson-Lee from Texas.
REP. SHEILA JACKSON-LEE (D-TX): REP. MORELLA, let me thank you and be cognoscente of the interest of time, and make two or three sentences, and ask unanimous consent to have my complete statement put into the record.
REP. MORELLA: Without objection.
REP. JACKSON-LEE: Let me thank you, and Chairman Horn, and the ranking member, Jim Turner, for your leadership as usual on this very important issue. This is an unusual hearing because we are talking about liability. Let me just indicate, and I note the very prominent members of the panel, and in fact, you have a constituent of mine, Mr. Howard Nations, who is both a leader in our community, and is very knowledgeable on these issues. I look forward to his presentation, but I accept Mr. Donohue's challenge.
Coming from a district that represents, or has a huge constituency of businesses, I would only turn this back, Madam Chairperson, and I conclude to simply say I am going to accept the challenge that we fix it because I think these are what these hearings have been all about, and raise the question of whether we should in any way alter our tort laws because we are presupposing the worst.
I believe this country has an obligation to it's businesses, and others alike, to fix the Y2K issue and work with the business community to have them fix the Y2K issue, and go into the millennium in a more positive way than thinking about what the negative responses will be. With that, Madam Chairperson, let me thank you for your time. REP. MORELLA: Thank you, Congresswoman Jackson-Lee, and you have been very attentive to this issue, and we appreciate it. I would now like to recognize the gentleman from across the river from me, Tom Davis from Virginia, for his comments.
REP. TOM DAVIS (D-VA): Thank you, Ms. Morella, I appreciate serving on your subcommittee in the last Congress, and on Mr. Horn's committee in this Congress, and note that I was a technology executive before I went into county government and came to Congress. And, as usually, my good friend, Ms. Jackson-Lee and I, although we were law school classmates, come at this from a little bit different sides as we look at it.
I want to thank the chamber, and the National Association of Manufacturers, for working together, and the NFIB, and a number of other business groups who want this problem fixed. They want to see whatever money they may be able to make over the next few years not channeled into law suits, not channeled into litigation, but put into training workers, putting it into technological solutions so America can remain competitive on a worldwide basis.
That is the point of this, and the legislation that has been introduced in this particular case really is there to get a solution because we have notices. We have peer provisions. We have loans to small businesses so they can be able to fix their problem. We do away with joint and several liability. One of the things that Mr. Nations and I will have an exchange in the question and answer, is that society has changed remarkably since the UCC was put in. We're in an information revolution right now, and a lot of the old rules really never contemplated what we are looking at today.
The interconnection, if you can fix your own system, you can test it, but you never know who you may have to interconnect with down the way. And, if something goes wrong, under current law, joint and several liability, you can be held liable just because you have deep pockets for the whole thing even though you've done nothing wrong. You've invested hundreds of thousands of dollars to fix it, and that's wrong.
So, we've come up with proportional liability on this. People who are injured will be able to get their full compliment of damages. That is not touched at all. But, obviously, we're not going to make this the next round of asbestos suits. We're going to put the money where it belongs.
One thing is certain, the incentives that drive our legal system, I believe, are working against our common national interest in solving the Y2K problem quickly.
We need to create an environment in which every single business in America, large and small, can confidently conduct Y2K repair work without fearing that their good faith efforts will eventually put them out of business because of the excessive cost and litigation.
We have companies now afraid to touch these other systems because they may be caught up and be sued. If we don't change the rules, we're going to find companies who, through no fault of their own, are sitting there with embedded chip problems, or problems they inherited in acquisitions, and they're going to be unable to find people to come in and fix the problem.
I ask unanimous consent that my entire statement be part of the record and I look forward to hearing from our witnesses.
REP. MORELLA: Without objection, so ordered. It's now my pleasure to recognize Professor Effross from American University of Washington College of Law. I noticed that you have a splendid testimony that you've submitted, but you also have even submitted an outline. I tell you, that really shows academic prowess. Professor Effross.
MR. WALTER A. EFFROSS: Thank you, Chairwoman Morella, Chairman Horn, ladies and gentlemen of the panel. I did have a few slides, but I brought an additional Power Point presentation. I'm told if I press this button, they'll come up on cue.
REP. MORELLA: I hope that you noticed that this is the one room that is really the high tech room. And, so, we have the visual effects as well as being on the web as we speak. Thank you.
MR. EFFROSS: It is tempting, particularly after hearing Mr. Donohue, and reading his written remarks, in which the word exploit appears not exactly in conjunction with lawyers, but reading between the lines you can find that fairly quickly, to conjure up images of lawyers as pigs, and vultures, and buzzards, and snakes, oh my. But, I think that actually, especially today on this snowy cold day, a more appropriate fable, or reference, involving animals would be The Grasshopper and the Ant.
A number of companies, and a number of firms, and a number of individuals are way behind where they should be, and they are the grasshoppers who are blindly figuring that winter is never going to come. Meanwhile, there are a large number of companies who are trying to do, and have done, very, very good jobs of keeping themselves in good situations legally, and they are the ants. And, lawyers represent both sides. And, in fact, of those 63 percent of the people in USA Today that Mr. Donohue referred to, a number of people who don't think that there ought to be a lot of liability here, some of those may well be consumers who may be hiring their own lawyers to defend their interests against manufacturers of software.
So, I suggest lawyers are not the evil ones here, but are, in fact, part of the solution. In my first slide, there is a -- which way do I point this? There is types of liability, and I don't think that we are really talking about a revolution in law as much as an evolution. All these issues, contract torts, fiduciary duty, intellectual property, securities law, liable, slander and defamation, all those issues are really on the books right now. The Uniform Commercial Code is very well established. These other laws are very well established.
One of the things lawyers value most is predictability. I would suggest we think very carefully before starting to change the rules here. There's a large number of different ways liability suits can be brought, and they're also very clearly interconnected. The causes of action, the different parties involved, just like in some way the technology is involved. But, again, the building blocks, the basic elements of the law, are really well established.
An hour ago, I called -- I was returning a call from a reporter who asked me is there such as thing as Y2K loss? And, I said, I don't really think there is. There will be a number of Y2K cases, but they're all going to involve existing principles. And, key among those principles will be first, issues of timing and causation, and second, issues of duty and standards. Under causation, there's going to be a massive questions as to what is approximately caused by the failure of a program to comply with Y2K. When did the damage happen? What should each party have known and when should they have known it?
There's a question, as I've detailed in my materials, as to whether in fact just because the industry was all producing non- compliant software, whether this is in fact something courts will just shrug at and say no claim here because everyone was doing it. The T. J. Hooper case that I've talked about in my materials suggests that that is in fact wrong. That a court can legitimately say no one should have been putting this software out there to begin with, at least not without warnings.
Computer malpractice, there are issues here about whether in fact there is such a thing as computer malpractice. And, Congressman Ose has suggested how do increase the number of people who can cure it. I would suggest that there may be a number of people who might not want to be seen so quickly as people who are able to cure these despite the massive amount of money that can be made in the days remaining until the year 2000 rolls in because they may not want to face up to certain standards of malpractice.
It's also fairly late in the day for people to start qualifying themselves as experts. A marathoner I know tells me that if you're in a marathon, and you're starting to get thirsty, it's way too late to drink enough water to finish that race without being dehydrated. I don't know if that's true not being a marathoner, but I think it's a nice analogy.
Three duties are going to intersect here. There are, as I've detailed in the materials, a substantial set of issues involving the user's duty to inspect the software itself, to not just query the manufacturer, but to set the date ahead on the computer or network, and see whether there will, in fact, be a problem, to buy commercially available software, some it from Symantec (sp), Corporation, which will allow you to diagnose your Y2K compliance of your systems. To go to corporation's web sites and download patches. That's not something you hear a lot about, but if I were advising companies, I would be telling them before you start suing, consider your duty to inspect.
There is, as has been mentioned, the developer's duty to disclose, and this is a concern that there may be some hindrance, as I understand it from reports I hear from industry, not a lot of people have come forth even with the new law in place and have said, well, fellas, I'm fessing up. Here is where we are. If I were a lawyer, I'm not entirely sure I -- I mean, if I were counseling these companies, I'm not entirely sure I would be telling them make a clean breast of this entire affair.
Finally, there is the director's and officer's duty to be informed, and if anyone is just waking up to this issue as a director or officer, I think they are essentially in a position of that thirsty marathoner. It's way too late now to discharge you fiduciary responsibilities to your corporation by now deciding it's time to get started on Y2K. There is going to be an enormous amount of litigation, and I think justifiable litigation, saying shareholders are going to say why didn't you get started early? Then, there is going to be a whole set of questions of when given each company's situation, and industry, and experience of it's board members, when was early enough and what should they have done?
In conclusion, I would like to say I have absolutely no idea of what's going to happen as we approach and begin the year 2000. But, whatever happens, I don't think we should forget the untold hours that software engineers, and specialists, are putting in as we speak to fix these systems, that legislators such as yourselves are putting in, and devoting to this issue, and how best to deal with it, and also to the lawyers who I think are not necessarily to be seen as a scourge of society, but as an incentive to people to do the right thing. Thank you for the opportunity to appear before you.

REP. MORELLA: Thank you, and thank you for bringing the illustrative slides to accompany your testimony. I'm pleased now to hear from Ms. Abby Lundberg, who is the editor in chief of CIO magazine.
MS. ABBY LUNDBERG: Madam Chairwoman, Chairman Horn, and members of the subcommittee, my name is Abby Lundberg and I am editor in chief of CIO magazine. CIO is a magazine that goes to chief information officers. These are the executives in companies, mostly large and midsize companies, in government, state, and local agencies. These executives are responsible for managing the information technology used in their companies. We write about current trends, and present case studies on the effective use of technology. And, I'm here partly representing my readers and to give you my point of view.
With less than 10 months to go to the year 2000, our focus should remain on fixing the computer bugs, and minimizing the impact of whatever problems might occur. As I understand it, the question being posed at this hearing is what effect the threat of liability will have on companies, and whether or not companies can reach these critical goals.
In preparing this testimony, I spoke with a number of CIO's at large and midsize companies in a variety of industries. One thing these CIO's agreed on is that no one, absolutely no one, can guarantee that their systems will be 100 percent Y2K compliant. However, every day they receive letters from customers, suppliers, and other trading partners, asking them to do just that.
As a result, companies have had to spend a tremendous amount of time documenting all the steps that have taken to try to make their systems Y2K compliant. One CIO told me he has a stack of paper 12 inches thick for each system that he has fixed. While this mountain of paperwork has certainly consumed a lot of time and energy, the CIO's who have been working on this problem for some time do not feel that the threat of liability has impeded their process to get the problem fixed. If anything, it has pushed them to be more rigorous.
For most large companies, and these are the companies that really have the most complex problems to address, we are now nearing the end of this long process. Last month, in a poll at one of our conferences, we asked 214 CIO's how far along they were in fixing their Y2K problem. Eighty five percent said they were 75 to 100 percent done. And, other surveys mirror these same results. And, this was anonymous. They didn't have to put their name on it, so there was no incentive to falsely give their answers.
The exception, of course, is with small businesses, many of which are only now facing up to the grim realities of Y2K. Most small businesses do not have a CIO or anyone to lead the Y2K charge. Many of these companies are at a loss as to where to begin.

Anything the government can do to mobilize help to these small companies would be well worth the investment of time and resources.
In a CIO magazine poll conducted last October, over 50 percent of 330 respondents thought the government should A, create a disaster recovery fund to deal with year 2000 emergencies, and B, create an emergency management agency like FEMA to coordinate crucial year 2000 planning and response.
Y2K failures will come in many shapes and sized, and so too will the liability issues. But, as one CIO put it, if a company commits to provide goods or services, it is responsible for doing so regardless of whether their employees go out on strike, their trains get lost, or their systems fail due to Y2K.
The answer is not to limit liability across the board. The answer is to let the legal system do it's job and decide which cases have merit and which haven't. The year 2000 Working Group of the Society for Information Management, a national CIO member organization, drafted a statement that reads in part we are concerned that Y2K related legislation risks reducing the incentives to responsibly address Y2K issues and make contingency preparations.
Perhaps the extent of this problem is so great that it calls for drastic measures. I don't know. What I do know is that CIO's, the businesspeople who are most close to this problem, do not believe that the threat of liability has impeded the process. On the contrary, it may have acted as a powerful stimulus for giving the problem the serious attention it deserves.
My recommendation is the government and businesses should one, focus on solving or minimizing the impact of Y2K. Two, provide critical information to small businesses and non-profits about how to fix the problem. Three, continue to encourage information sharing between companies about their own status. Four, take a good faith posture whenever possible and allow a reasonable grace period for a company to fix a problem before being sued. Five, consider mediation before litigation. And, six, protect consumers and businesses by holding companies responsible for not fixing their Y2K problems.
Thank you for the opportunity to speak to you today and to represent the viewpoints of CIO's readers. REP. MORELLA: Thank you for your testimony, Ms. Lundberg. I wanted to acknowledge the fact that Mr. Weiner from New York has joined us, and I now turn to Mr. Howard Nations for his testimony.
MR. HOWARD NATIONS: Madam Chairwoman, Mr. Chairman, distinguished members of the panel, thank you for the opportunity to address you on this most important issue.
There is no need for federal legislation regarding Y2K liability because the common law, the state statutes, and particularly the Uniform Commercial Code, which is in fact the law in all 50 states, provides the remedies and the methods that we need to measure the conduct of businesses just as it applies in all other business situations. And, it also should apply to create an impetus to the persons who are now worried about Y2K who are not Y2K compliant to become so.
The laws that we follow, the uniform laws that we have in this country through the 50 states, primarily the Uniform Commercial Code, provide not only rights, but remedies, and they have rules for businesses to follow, and a number of businesses in this country have followed those rules happily. A very large number of businesses in this country have followed those rules. They have become Y2K compliant or they have made vast efforts to become Y2K compliant. They followed the business judgment rule. They followed the duty of due care, which is what is expected of directors, and they are entitled to the remedies that are provided under the Uniform Commercial Code.
When they now find that as a result of being -- despite being internally fine with Y2K that they now are still having difficulties because of vendors with whom they do business. So, they're entitled to rely upon those remedies, which have always been there under the UCC. And, to take away those remedies that are available to the responsible business people who have already addressed this problem who have addressed it under existing laws, would be unfair.
We have the business judgment rule, the duty of due care, the UCC, the concept of joint and severed liability, and class actions, which are working very effectively. Those are business litigation, business solving rules. They were developed very carefully. They have been finely honed over the past decades, and they are the law in all 50 states, and I urge that there is no need to change those rules at this late date.
I would like to address another issue, one is that Mr. Donohue said that we know when Y2K is coming. We've also known when Y2K was coming for the last 40 years. The first report on this was written by Robert Beamer (sp) and published in 1960. And, there have been frequent reports of this every since 1960, so this is no great surprise. The Senate Committee on the Year 2000 Technical Problem has, as I quoted on my paper, said that the problem here is a problem of leadership, that corporate leaders have not focused on this problem because it's easier to focus on market share and profits.
Fortunately, most of our responsible business leaders have focused on the problem, and the result is that what we have now is not a computer glitch problem. This is a crisis of leadership. Now, we are trying to turn it into a crisis of corporate accountability. I respectfully submit that one way to approach this is to have legislation that would aid in remediation, and I suggest that a federal repository for Y2K remediation solutions, which could be used across industries, be established. In order to get people to put their solutions into that repository, we could possibly offer a tax incentive for doing so.
The problem is that there are 500 computer languages, 500 different languages that we're having to deal with, and there are 36 million programs. A lot of the companies are using the same language are working on solutions separately. If we could provide a tax incentive to businesses once they find a solution to put it into a federal repository, possibly a tax solution based upon the number of other companies that used that solution, then that might be an incentive to help out other companies.
The other would be to suspend -- there's a rule under the Internal Revenue Code, which I am sure has some good purpose, but is certainly a hindrance in Y2K, and that's under Section 482 of the Internal Revenue Code, which says that if you have a division in Michigan, for example, that creates a solution in a large corporation, and then you have another division in California, and another one in Florida, and they send that solution out to be used in California, and be used in a different division of their company in Florida, that the receipt of that solution is a taxable event to the other divisions. So, it could cost $1 million to create that in Michigan, and they receive it in Florida or California. It's a $1 million taxable event for each of them. So, even within their own large companies, corporations are not able to swap solutions because of 482.
I also suggest that there should be a suspension of the anti- trust laws in vertical claims such as the Ma Bell and the baby bells. So, right now, it's a violation of anti-trust laws for them to exchange information, and to exchange the solutions. I think that law should be suspended in order to encourage them to exchange solutions. And, again, their incentive for doing so may be a tax incentive, if the government could give a tax incentive for doing so, and those solutions could be put into the federal repository I talked about.
Finally, with respect to tax relief, allow the option to amortize the cost of Y2K are too expensive. Right now, Y2K expenses have to be expensed in the same year. A lot of businesses are finding that their expenses are running far more deductions than they need this year. If you allowed the opportunity to amortize, that would be helpful.

Finally, there is one -- the relief to governmental agencies. We all have to be concerned about three things. One is the infrastructure, which is provided by the government, the utilities and so forth. The other is your own internal repairs, and the other is the external disruptions. There is concern about the infrastructure because governments at every level from the federal government on down are about to take a double hit.
The first is obviously the cost of remediation of the governmental agency itself. The federal government, as I understand it, is spending $10 billion. But, also if the impacts upon business occurs, there will be less taxes generated. So, governmental agencies are going to be collecting less money on one side and spending more money to remediate Y2K on the other. That could, at the lower levels, cause damages to the infrastructures at small towns, cities, and so forth.
So, those are some of the thoughts that I had. In my paper, I also put one last suggestion, which is to adopt a standard definition for Y2K compliance because right now it's a term that's tossed around rather loosely. Are you Y2K compliant? Yes. Well, that can end up in big litigation if you find out that people don't have the same definition of Y2K compliance, and I have suggested one in the paper. Thank you.
REP. MORELLA: Thank you, Mr. Nations. Now, we turn to our last panelist, Mr. Walter Andrews, partner and head of the Year 2000 Practice Group.
MR. WALTER J. ANDREWS: Thank you, Chairwoman Morella, and Chairman Horn, and thank you for asking me to testify here today at this important hearing. It is an honor for me to be here. My name is Walter Andrews, and I am a partner at the law firm of Wiley, Rine (sp), and Fielding here in Washington, DC, a constituent of Mr. Davis's, and as co-chair of our firm's Year 2000 Practice, I regularly counsel clients on the legal risk and ramifications they face as a result of the year 2000 problem.
My testimony today will address three topics. One, the liability issues and legal theories that already have been raised. Two, those legal issues that we could expect to see in the future as a result of this problem, and three, what businesses can do now to mitigate their exposure to these liabilities. My testimony today will not address the technical aspects of the year 2000 problem, nor will it address particular legislation before Congress.
However, having been a computer programmer in the 1970s, and a litigator in the 1980s and '90s, I perhaps uniquely can appreciate that there are different perspectives regarding the potential massive litigation regarding this issue, which as Chairman Horn stated, has been estimated to reach up to $1 trillion in costs.

This is in stark comparison or contrast to the costs we actually witnesses in the 1990s with the massive asbestos litigation, which was about $15 billion, and environmental litigation of about $18.4 billion. This chart provides a sense of the enormity of the potential year 2000 litigation costs.
At this point, we still have nine months to go until January 1, 2000. Nonetheless, we currently have at least 55 law suits, most of them reporting to be class actions, already having been filed over alleged year 2000 problems. In fact, this number probably represents only a small fraction of the number of year 2000 related law suits that ultimately will be filed, and probably is just the first wave of such litigations.
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 brought against software developers. Most of the present litigation has thus far been unsuccessful due to lack of any actual present injury, or because of relevant contracts between the parties expressly excluding such claims.
It is important that contracts should be the first point of reference to define the party's rights and obligations in any year 2000 dispute, and courts should resist turning contract disputes into tort actions. Similarly, it is important that cases not be allowed to proceed where there is no actual present 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 has created somewhat of a year 2000 litigation spill over effect. In fact, the next wave of year 2000 litigation, which may be comprised of injuries indirectly caused by the year 2000 problem, may be where the greatest litigation costs will eventually lie.
When we actually begin to see the kinds of failures that we have only now been contemplating, the ensuing litigation arguably could reach just about any entity that experiences a failure in it's computer system. We could expect eventually to see suits brought against suppliers, vendors, and service providers at every level of the chain of distribution. Professional malpractice claims and shareholder 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 a year 2000 litigation explosion rather than being viewed as part of the solution. Businesses must recognize, however, that obtaining legal counsel is part of their solution to their year 2000 problems. Clients have sought the assistance of Wiley, Rine (sp), and Fielding, and other firms with expertise in this area, to help prepare their businesses 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 on minimizing their legal and financial liability exposure. The bulk of a company's year 2000 legal audit should consist of analyzing the liability 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 liability to others, in the event of a failure in their operations. They have also been analyzing existing contracts and legal relations with third parties, including reviewing third party's web sites, marketing materials, and advertising for any year 2000 disclosures. In addition, clients have been contacting third parties to obtain adequate assurances of compliance.
Clients also have been renegotiating their contracts to include protections in the event of year 2000 failures by, for example, the inclusion of year 2000 warranties in contracts with vendors. Finally, clients have been focusing attention on the need to form emergency response plans in the event of a year 2000 failure.
In conclusion, the year 2000 problem, because of it's pervasive nature, presents potentially staggering liability costs for individual entities, as well as for 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 and remediation programs, are what businesses need to do now in order to avert a potential year 2000 liability catastrophe and for the economy as a whole. Legal counsel can be part of the year 2000 solution by helping businesses take responsibility for addressing their year 2000 problems, and to minimize their liability exposure. Thank you distinguished members of the subcommittees.
REP. MORELLA: Thank you very much, Mr. Andrews. That was excellent testimony on the part of all of you. And, as Humpty Dumpty said and through the looking glass, it fills my mind with ideas. So, we'll start the questioning. Again, each of us will try to stick to five minutes of questioning, and come back maybe for a second round, or however number of rounds would be necessary. I wanted to probably start off with picking up on what you had said, Mr. Andrews, about the cost, which has been repeated. The fact that it may well be $1 trillion, and that would be ultimate litigation may cost $1 trillion assuming average legal costs and a 5 percent failure rate, and all of the various kinds of estimates that indicate that it would be pretty close to that litigation.
Then, the question of is year 2000 litigation inevitable? Well, when you note that some litigation appears to be inevitable because the Year 2000 problem which stems from the Gardner Group estimate that perhaps 50 percent of the companies with a Year 2000 problem will not become fully compliant by Year 2000, by January 1st in the year 2000. And the reason that so many companies in their Year 2000 corrective measures is that one, some of them are starting too late; secondly, they may not be devoting sufficient personnel and funds to this remediation; thirdly, there may not be enough trained programmers available in any event to fix all of the software code requiring correction; not enough time and resources will be devoted to the testing phase; which could be the most expensive quite frankly and time consuming facet of it for many companies.
Even if a particular company becomes fully compliant, it's systems could become contaminated by data or software that's supplied by the other third parties with which they interact who have not become compliant. Also the city, the geographic area in which the company has its offices may not have Year 2000 compliant telecommunication and electric utility systems resulting in infrastructure failure which negatively impact on the economy.
All of that being said, I tried to touch on why so many companies will probably not be compliant. See where you agree with me. But the cost could well be and we are here to talk about whether there are some remedies to it. And so I wondered if any of you have come up with in addition to your testimony in this short time what can be done.
For instance, there has been discussion about whether or not there should be a litigation cooling off period that would postpone the filing, for instance, of Y2K litigation for, let's say, 30 to 90 days, depending upon whether the defendant agreed to fix the problem and made attempts to fix the problem and unduly limit a plaintiff's legal rights.
I guess we'll start off with responding to that or I guess any or all of you briefly in any of the other comments that I made about the problems of the situation we'll be in with lack of compliance and why. Anyone like to start? All right, Mr. Andrews, we'll start with you.
MR. ANDREWS: Let me touch on the fist comment you are making in terms of whether there is going to be a failure and why and I think all the reasons you suggested are quite true. And in addition there is sort of a more pervasive, almost more innocent reason. I have been involved computer programming in one way or another for 25 years and also have been chair of our firm's own internal technology committee for several years. And I can assure that even with the best efforts and the best resources and best staffing and all our planning and thought being given to how to approach this, it is almost inevitable that any software conversion or change will end up with a certain of bugs that they call it or glitches or failures.
And what we're talking about now is having the entire economy change at once. So it's almost inevitable that there will be a series of failures. I think Professor Effross talked about the domino effect, the cascading effects so that those failures, even if small in isolation become much more magnified when they are affecting all the others who also have their own systems. And as you pointed out with the interoperability issues, they will affect others, the data will be sent to other systems and if the data becomes corrupt, will corrupt the other systems data.
And in terms of testing, as you point out, it's very hard to test when you are having operability issues that we now have a globally interdependent computer generated computer driven economy. So I do think there will be problems despite the best efforts. I think that should be kept in mind. It is not just a matter of companies or individuals not wanting to see this problem fixed.
REP. MORELLA: So you therefore said that litigation is somewhere we're going to be in inevitable.
MR. ANDREWS: I think a fair amount of litigation in today's economy with today's problems is inevitable. And I think what we'd like to see avoided is though is the creation of additional remedies when they weren't there to begin with. There are people always can and as I advised in my testimony and to my clients can reach a contract and determine by that contract what their respective rights are. Those contract rights should be the paramount concern. They should not become a tort action. You should not tortify if you will contract obligations and rights between parties.
REP. MORELLA: I will let each of you just give one comment to maybe in response to whether we could use the cooling off period since litigation appears to be inevitable and then I'll recognize my colleague, Mr. Nation.
MR. NATION: The problem with the cooling off period was indicated in the Produce Palace International case that you referred to of the gentleman with the cash register that didn't work. He testified in the Senate on this and he indicated that the day his cash registers failed, that he immediately, he started calling the computer programming company and tried to get them in. And he called he said called about a 150 or more times.

And over a period of two months, he got no response. And over that two month period he lost hundreds of thousands of dollars and he lost his customer base.
And that's the problem with the 90-day cooling off period is that this is going to be business versus business litigation. A lot of the plaintiffs are going to be small businesses such as the Produce Palace International and can they afford 90 days without the computers in his case, without his cash registers working. Can they afford 90 days of waiting in order to have something done about their problem? And I submit to you that there's no real purpose to be served by the 90-day cooling off period.
If you see where the litigation has been filed, the class actions, for example in the Courtney case, within 60 days after filing the class action in Courtney the matter was resolved. The agreement had been reached. But it was reached only after the lawsuit was filed. They tried for more than two months before filing suit, got absolutely nowhere, filed the lawsuit and the matter was resolved within two months after that. So the lawsuit was what spurred the resolution and the class action nature of it.
REP. MORELLA: You know the Produce Palace and I think that if they had had alternative dispute resolution they might have been able to resolve with it (saving?) money even faster. Would you agree? Is there any merit in that? I know we're getting into another facet of it.
MR. NATIONS: I think alternative dispute resolution is an excellent idea in Y2K cases. I think it's an excellent in all cases frankly so long as it is not binding arbitration that does allow you a right to trial by jury. As long as it's mediation, alternative dispute resolution, there's no problem with that. We use it very, very effectively in Texas for all types of cases and it's been a real blessing actually to relieve the clogged nature of our courts.
REP. MORELLA: Ms. Lundberg, do you want to comment?
MS. LUNDBERG: Yes, I agree very much with what Mr. Nations has said. In particular, if the system that is failing because of a Y2K failure is a mission critical system, my company could be out of business in a matter of weeks. There isn't time to really provide that grace period. So, while I really like the idea of the grace period, I think it's got to be pretty well contained and there's got to be some there has to be some limits around which kinds of systems and I don't know, you know, that's getting too complex, maybe but which kinds of systems you could apply it to because if it's a system that if my system is down for two days I'm going to lose half of my business and that's not going to be acceptable.
REP. MORELLA: Mr. Effross?
MR. EFFROSS: I would just add to what my colleagues on the panel have said and which I completely agree with. Looking at it from the point of view of the business which is trying within those 60 days frantically to fix things. First of all, this may not be the only problem that's being brought to their attention in which the 60-day clock is now running. It may not be the only product which they are trying drastically to fix. I mean, for instance, I know that it is way too late in my life to ever to be able personally to run a four minute mile, if I ever could. But if somebody told me, well, you have 60 days to give it your best shot, I couldn't still do it. As well, another issue to look at is around the time these suits start surfacing there are probably going to be problems being experienced by the defendants themselves in their own Y2K dealings the other entities which are disappointing them. And who knows what's going to be happening on a larger scale.
So if I had to figure out how to run a four minute mile at the same time as I was planning to get married, and moving my house, and buying a new car, I would never be able to do any of those well. Just as a final point on alternate dispute resolution, I think that's a good idea. I have also seen a number of references and recommendations made to it in some of the literature. I really would recommend it if I were counseling a potential defendant because I think one of the things defendants are going to have to worry about in these suits is I don't think it's all that tough for a jury to understand the Year 2000 problem. I think in five minutes a good lawyer can clue them in as to what the basic problem is without any special training on their part. And I also think there are no scientific issues here. There may be issues of what's the industry standard, what were people shipping, what was everybody expecting. There's no issue of tobacco was this dangerous, was it not? When did the study start surfacing? There's no issue of asbestos. When was there a scientifically shown problem here?
From day one, or at least from 1960 as Mr. Nation's has pointed out -- it was recognized within some elements of the software community -- this software has essentially an expiration date on it.
REP. MORELLA: I must give Dr. Donohue an opportunity. He's salivating.
MR. DONOHUE: Well, I just think I'd make three very quick comments. First of all, this legislation does not envision eliminating the right to sue. It contains the right to sue for damages, full damages, for physical loss of property or person and for any reasonable matter. What it constrains is the gold digging opportunity to collect massive amounts of punitive damages on a class around something that is far more complicated as the panel are beginning to hear just by listening to the testimony.
Second, I think it is important to begin to think about the scope of dollars we're talking about. If I had Alan Greenspan and asked him what happens if there's a trillion dollars worth of lawsuits filed, never mind the money for a minute, just think of the distraction from an economy that is leading the world and we are trying to keep moving by the way based on a technological system that has given us probably two or three points more on our productivity than is actually recognized.
And third, I think it is very, very important that we maintain some consistency in our argument. Our colleagues from the trial bar said that we have an excellent rule of law and a common code in which we can advance our arguments about who is liable and at what amount. On the other hand, in a lot of the suits they are going through the states and trying in legislation successfully to eliminate the assumption of risk and the need to produce actually injured persons as opposed to statistically injured persons. Only imagine when they use these factors in the Y2K issues. We are talking about a circus that is going to impede the national economy.
And all we're saying here in this legislation full suits, the damages -- nobody gets away. Reasonable accommodation, on time, on alternate dispute resolution, and not a gold mining on punitive damages. There's some common sense to this. The Congress is showing some leadership and we ought not be diverted from what we are trying to do to fix a significant worldwide problem. Look, I am willing to say that we go back to ground zero on every other tort reform issue. This is not a single product. This is not a single service. This is a globally integrated technology system that I suggest nobody in this room fully understands this integration. And we ought to be very, very careful.
REP. MORELLA: Thanks, Mr. Donohue. I am going to now turn to and recognize the Co-Chair of the Committee, Mr. Horn.
REP. HORN (R-CA): Thank you very much. Let me ask you across the board here, how many have had a chance to read the draft bill? Okay, most of you have.
Let me start with you, Mr. Andrews. If there is one thing in that draft bill that you would like to eliminate, what is it?
MR. ANDREWS: Well, I suppose I would go one step further than Mr. Donahue suggests and continue to eliminate all punitive damages. I don't see how punitive damages becomes an issue of public importance with respect to this problem. REP. HORN: Okay. Mr. Nations, what's the one thing you'd eliminate?
MR. NATIONS: The one thing I would eliminate is the proportional liability because of the necessity for joint and several liability to be the law in this particular Y2K litigation because of all the foreign vendors involved.
REP. HORN: Ms. Lundberg?
MS. LUNDBERG: The one place that gave me real pause and I'm not sure I'm reading the law right here but there seemed to be a limit on economic damages unless it was written into the contract that those damages were going to paid if it was written into the contract that Y2K compliance was guaranteed or that the monies would be paid if there was a Y2K failure. And that concerns me. If we were talking about situation that works maybe for a technology provider but that concerns me if we're talking business to business. And if a critical supplier of mine can't deliver the products and services that I need to do my business because of a Y2K failure that we hadn't anticipated when we wrote that contract that that might be a problem.
REP. HORN: Professor Effross?
MR. EFFROSS: I haven't read the bill carefully enough to give as an intelligent a response as I would like to but I would say, as a gut reaction, the institution of proportional damages bothers me because I think there is going to be a number of issues there that will be fought over endlessly.
REP. HORN: What are some of those issues?
MR. EFFROSS: For instance, how are going to if we're talking say about dividing liability between an Internet service provider and a software manufacturer, many of these products work in conjunction with each other.

So how are we going to start figuring out a business market share? Because we might know as opposed to some of the tort cases which particular person produced or group produced this piece of software that's being used. Are we going to be diving across different applications or within one set of applications? How do you go by when to figure out in either of those tests when the appropriate share should be measured? I'm not entirely sure it's something I feel comfortable with without looking at it a lot more carefully which as I admit I have not done.
REP. HORN: Mr. Donohue, is there any part you'd want to give up?
MR. DONAHUE: No. What I would like to do is shrink the time between the talking and the acting so that we can give some relief to all people, law firms, companies, governments that are trying very much to solve this problem. And if I may say one thing I would add to really get people to move in the right direction, I would make the government as liable as the companies if they don't perform. Then you have a serious problem. And your Committee has led the way in pressing our government to bring its own system in compliance.
REP. HORN: Thank you. As I moved around the country I find some of the general counsels of various firms of various size have advised the Chief Executive Officer, don't say a word on this Chief, then they can't sue you. If you were the general counsel to that firm, do you think that's good advice, Mr. Andrews? I'm going to leave this for the lawyers over here to (Laughter.)
MR. ANDREWS: I think that I want to be careful because I may have given that kind of advise myself. I think that truthful measured statements can only help because you want to make appropriate representations so that you're not hitting the ball but I think you do have to be careful about going to far and admitting things that you don't have to admit. So I think that's not a lawyer's answer but I think that there has been some efforts to protect with (safe harbor?) with the Information Readiness Disclosure Act. I still think that there are certain exposure out there that if misstatements are made, I think the problem is --
REP. HORN: Okay. My time, I see -- Mrs. Morella has it at 40 seconds. Mr. Nations? Okay. She'll give me a minute longer. (Laughter.) MR. NATIONS: Thank you, sir. I think that advice would not be necessary to a CEO because this litigation is going to be based on breach of implied warranty, breach of contract. It's going to be based on very specific things, not on what the CEO says or what the CIOS says or CFO says.
REP. HORN: Ms. Lundberg do you have a license as a lawyer? You're an excellent editor. I love your magazine. Professor Effross?
MR. EFFROSS: I don't practice criminal law but one lesson in criminal law I've learned from watching NYPD Blue over and over which I think is totally applicable to this is don't talk without your lawyer there or have him talk to you first. That's what I would tell my client.
REP. HORN: I watch Ally McBeal so I don't get the same advice. (Laughter.) Mr. Donahue?
MR. DONOHUE: Mr. Chairman, it's good legal advice; it's lousy business advice.
REP. HORN: Okay. Let me ask one last question here and that is should there be a specialized court set up even if there were a federal statute and you if some circuits could create find certain judges that would be used to this type of decision making? One could also say in a lot of circuits around America the state circuits, even though they have all the uniform laws, commercial aspects in their statutes, all 50 states, do we really need a specialized court to deal with this. Do you have a feeling on that, Mr. Andrews?
MR. ANDREW: I don't know whether we need it or not but I think the practicality of the matter is there is just no way we could realistically get one ready to go so that people could know how to deal with it in a timely fashion. And I think it's just impractical at this stage.
REP. HORN: Okay. Mr. Nations?.
MR. NATIONS: The answer, sir, is that we do not need specialized courts because this is going to be not technologically based lawsuit. This will be breach of implied warranty, breach of contract the type of business litigation that our courts handle every single day. We have no need for specialized courts to handle this, sir.
MR. EFFROSS: I agree with Mr. Andrews and Mr. Nations. I don't think that the technological issues are so difficult that courts and juries can't understand them. I think the law is really just building on what's already in place. What I would add is what Mr. Nations said as my statement points out. There is also a much wider variety than just contract menu of liability to choose from, particularly several very enticing tort entrees.

REP. HORN: Mr. Donohue.
MR. DONAHUE: Let the record show that the trial lawyers in the business community agree. We don't need a specialized court.
REP.. HORN: I thank you all and we have a conference going on so I'm going to have to leave right now and leave it to --
REP. MORELLA: I'll now turn to Mr. Barcia for his questioning. Any member who is not here or who is here and wants to submit questions we'll submit them to you. Is that all right with the panel? Thank you.
REP. J. BARCIA (D-MI): Thank you, Madam Chair. I direct my first question to Mr. Andrews. Since your law firm has been working on the Year 2000 liability issue and counseling your clients on minimizing their legal and financial liabilities exposure, in general terms, what types of clients are seeking this assistance? For example, if you can quantify for us are they large companies, small manufacturers, or service providers? In your estimation are large companies better prepared for the Year 2000 problem and is there really a need for Congress to react, of course, to address this problem in terms of Y2K litigation and liability issues?
MR. ANDREWS: I think that types of clients that come to us run the gamut and I think that they are illustrative of Chairwoman Morella's comments that this is an across the board issue. We've got large companies. We've small companies. We've got people in different industry segments. We've got radio broadcast stations. We've got drug companies. We've got steel companies. We've got hospitals. We've got insurance companies. The whole gamut I think everyone is waking up to this that we're trying to take it seriously. Everyone has something at stake here although obviously the types of issues involved differ greatly from a trade association to a radio station to a hospital. But they all have issues and they're all taken seriously.
REP. BARCIA: Thank you. I think I'll limit since we have a number of members also here who want to ask their questions. I'd like to direct this question to Mr. Donohue. In just briefly as you could, Mr. Donohue, comment from your perspective with the U.S. Chamber of Commerce, has your association done any assessments to date among its membership estimating the potential cost of liability and also the magnitude of the problem in terms of your membership. Like Mr. Andrews, I'm sure you will confirm that it is kind of across the board in terms of small businesses, manufacturing concerns, hospitals and insurance companies, financial institutions and costs. Would care to comment in terms of the possible impact if we don't act in terms of cost of liability?
MR. DONAHUE: Congressman, first of all it is across the board. It's a small farm. It's a large pharmaceutical company. It's a hospital, as Mr. Andrews indicated -- it doesn't matter what your business is because, after you look at all your own activities you have to figure out who you're linked up to, whether it's your bank or it's your supplier or it's somebody downstairs that's in your computing program that altered the program 20 years ago and you never knew it. It's a very difficult issue.
But the magnitude of this, as the members of the panel have pointed out, have come out in a lot of studies and are they talking about a trillion dollars or $500 billion or a trillion and half, I don't know. It's a hell of a lot of money. But the other thing it's going to be a lot of cases and it's going to clutter up the situation until we find a way to handle it. But if we can handle it on a simple business basis what are the contract requirements, stay out of the punitive business this thing will be done much better, much quicker and to the satisfaction of all except maybe a few.
REP. BARCIA: Thank you Madam Chair. That concludes my questions. I appreciate those responses.
REP. MORELLA: Thank you, Mr. Barcia. Now I am pleased to recognize Mr. Davis of Virginia.
REP. T. DAVIS (R-VA): Let me ask Mr. Nations if a company let's say a small dry cleaners or someone who bought a system years ago when the state of the art was perhaps just stored two digit dates they make a very good faith effort to fix it, spend a lot of money. My wife's gynecology has spent $20,000 to become Y2K compliant. If they made a good faith effort, why should somebody be able to recover some very punitive damages against you ought to be able to get your actual damages that the legislation will allow. Why shouldn't you be able to get punitive damages in a case like that?
MR. NATIONS: The answer is that they can't get punitive damages in a case like that.
REP. DAVIS: Okay.
MR. NATIONS: There's a standard for punitive damages and it's been tossed around as if this is just something you get in every lawsuit. The standard for a recovery of punitive damages is extremely high. It's very difficult proof to make and, secondly, very, very seldom in breach of contract cases do you have any punitive damages award no provision for it.
REP. DAVIS: And no matter what this legislation does is it says if you've made a good faith effort you don't get to come in under a tort appeal and you get punitive damages. So we're in agreement on that I think.

Let me ask Mr. Donohue could you talk to us why some of the small businesses are not taking the necessary steps to solve the Y2K problem? Is it affordability could you go into that?
MR. DONOHUE: Well, there's a whole raft of reasons. First of all, and I say this respectfully, it is the question of ignorance. We have tried very hard to alert people and they are looking at the busy as you know in your experience, Mr. Davis, when you're running a small business that's what you're doing. And second, the issue of dealing with connectivity many of them are hooked to their banks but many of them are hooked to the major companies who are their suppliers or to whom they supply. And third is fear. The fear of the unknown. The fear of lawsuits. The fear of what comes next.
And I think it's probably true that there won't be a great deal of lawsuits against the dry cleaner and what value can we get out of them other than to get your suit back when it was shipped to Asia or something.
REP. DAVIS: Well, if the damage you're seeking
MR. DONOHUE: In that instance I think you get it back. And I'm not worried about punitive against the dry cleaner in Montgomery County but I am worried about what happens to who they're hooked into and what they do to larger companies, perhaps the person that does the wholesaling part of that and cleans the shirts.
And I just think what this bill does you know this bill reeks of common sense. It says if you have an actual loss you can go sue them and get the money. It says that we want to limit though where this goes. And I think it makes a lot of common sense. One other think I am encouraged about with small companies many of them have new computers because small companies are often new. There's a lot of turnover in the business. And I'm encouraged by that. And I think that's one thing that will prevent they'll have fewer problems here than we'll have in other places around the world because of that.
MR. DAVIS: It's true. Some states like Nevada have almost Y2K failures and Act of God where the consumer gets nothing. So the bill that we have in this case allows people to get their damages. But what it does try to prevent is take it that next notch over and also in the class action suits it does have a notice provision where if you're suing on behalf of me or somebody else, I get to know about it ahead of time. It strikes me as pretty reasonable.
I wonder if you talk about the proportional liability issues Mr. Donahue, because that's been a couple of the panelists that is the most offensive part of this legislation if you could discuss that.
MR. DONAHUE: Well, if you look at proportional liability we deal with the reality that has become very prevalent in our society of joint and several liability. And when I ran the American Trucking Associations and Mrs. Morella knew a lot about what we were doing in truck safety I mean, you could park at truck behind a diner and go to sleep and there's an accident out front between a series of cars and a tire rolls off and hits the truck the truck is the only person with deep pockets and they end up paying everybody else. I mean, joint and several liability have been a fascinating part of our legal system in recent times. What we're saying here we can't take the act of a small company that really loused up everybody else's system and then go to somebody that was connected to them once a year for a delivery and get them to pay the whole deal.
I know that might upset the purists in the legal profession and I respect that very much. By the way you know, this whole country and our industry depends on 800,000 lawyers that keep the business of this country together. But I think we need to be realistic because if we take the joint and several to the extent that it has been applied we're going to reduce the lawsuits and the amount of money. That trillion dollars worth of lawsuits is going to go down in a big hurry because when there's not somebody with a big deep pocket, you don't find so much time spent on the matter.
REP. DAVIS?: Well, let me just add that thank all the witnesses that's really added to this and I appreciate everybody doing this. What makes this so different from every other type of activity out there is the interconnection if you will between the small guy and one person who fails along the way can in fact bring down the whole system. You can test most of this. You can go through your good faith effort. But if somebody gets hurt at the end, somebody who has done nothing wrong who was tested, who was paid a lot of money to get their system up, can actually be held liable unless you alter the current rules. And I can't believe that the people wrote the UCC really understood what the information revolution would mean in terms of some of these items and it's an opportunity to look at that.
But one thing I like about this bill is it's very, very narrow. It doesn't try to change your tort law or rely on medical malpractice or anything else. In fact, if you're injured you're outside of this act entirely. Personal injuries, because of Y2K, current law applies. But because of the interconnectivity of these issues it does carve out a cycle that recognizes technologies companies and the like. We should cut them -- treat them a little bit differently and allow them, encourage them to fix the problem, because if they don't make efforts to fix this problem, they don't come under the purview of the act. And secondly, if they do fix it, the consumer is protected. If there's any problem, the consumer is protected.
But finally, we're not going to tie this down with a lot of lawsuits that you file just to try to make somebody settle. There are companies who are carrying this economy right now are going to be able to put their assets into worker training. They'll be able to put their assets into further innovations so we can stay first in a global economy. And I think that's the purpose of this but I would welcome any constructive comments anyone has as this legislation moves its way through the Judiciary Committee. We'll be holding hearings on this. I expect it to go to the floor sometime in the next couple of months. We'd like to work with everybody here. If anybody has some comments, elements to their testimony, we'd appreciate it. Thank you.
REP. MORELLA: Thank you very much, Mr. Davis. I'm now pleased to recognize Mr. Turner.
REP. TURNER (D-TX): Thank you, Ms. Morella. Mr. Andrews mentioned in his slide the estimate of one trillion dollars in potential litigation costs, judgments I assume. Where does that number come from?
MR. ANDREWS: I think the particular number was one that Chairman Horn had mentioned from the Gardner Group but it's in a range of numbers that lots of different consulting groups have thrown out there from two or three hundred billion to two or three trillion. I don't think anyone can guess for sure. See the point of my slide there was to show that whatever that number is it's likely to be much greater the amount of litigation costs. The asbestos and superfund or environmental litigation -- which clearly kept a lot of lawyers busy and a lot of companies spending legal fees. So whether it's a hundred billion or a trillion or two trillion, it's a lot of money.
REP. TURNER: Well, how do you know that? What I'm looking for you know, we've heard that one trillion dollar number thrown around and it looks like, if that's a meaningful number, somebody could produce a study or something that has produced that.
MR. ANDREWS: I think the study that REP. MORELLA referred to was The Gardner Group (ph). And estimated -- based on a five percent failure rate and the average cost of litigation today, that would come up to about a trillion dollars. Again, it's just an estimate because no one can say for sure how many failures we're going to have. It's possible we won't have that many. I think that fact that you've got over 55 lawsuits today, 300 days before Year 2000 though is an indication there will be plenty of litigation over this issue.
But Chairman Horn and I have had extensive hearings regarding the status of government agencies in Y2K compliance. And to be quite frank with you after hearing all of the testimony from all of our government agencies, I'm not really sure yet how big a problem we're going to have. And it disturbs me somewhat to have us talking about big numbers when nobody seems to have produced any documented report of any type to base any number on. To simply say that there's going to be lawsuits. Obviously, there will be some. There have already 55.
But I think in dealing with entire issue, the thing that disturbs me. And I come from a rural district. We don't have any software manufacturers. WE don't produce this problem. A lot of my small business use computer software and may be the subject of software failures. But I don't represent people who produce it. And so I'm very sensitive to that.
REP. TURNER: You may be representing more of the plaintiffs than the defendants in this.
MR. ANDREWS: It may very well be. But I think for the reasons that I discussed with REP. MORELLA,, there's likely to be, unfortunately, a number failures. We don't know how many. I hope you're right, that there isn't a big problem, but it's hard to imagine there won't be some problems and if there some problems it's hard to imagine there won't be some litigation.
Let me approach it a little different way. Since I'm obviously not convinced as to the scope of the problem that we're going to have -- and let's not talk about Y2K. Let's say that a major software manufacturer produced a piece of software that couldn't read zip codes that began with "7". Now if that occurred and a major software company created that problem, why would I want to impose the limitations on liability that are in the proposed legislation to protect that particular software manufacturer against plaintiffs like I may very well represent in a rural district.
I'm not sure that you would.

I think that the idea and I think Mr. Donohue could speak to the legislation much better than I can, if I can speak more to the liability that we're witnessing, I think that the difference if any is that here we know have a large scale problem and we're trying to see, I guess, if there are ways that either through litigation avoidance, business client counseling or contract negotiation we can avoid some of that litigation ahead of time because we see the potential for it coming and that in your example, perhaps, if they saw it coming and had put in the contract certain requirements, certain specifications, then perhaps that could confine the litigation to the terms of that contract and perhaps you wouldn't need to have extraordinary tort actions or extreme punitive damage claims and the like.
REP. TURNER: Mr. Nations is there any reasons to differentiate between the Y2K bug and a bug that causes my software not to be able to read zip codes that begin with "7"?
MR. NATIONS: No, not actually. Could I, Representative Turner, address the trillion dollar question?
REP. TURNER: Sure. Certainly.
MR. NATIONS: The ideology of the trillion dollar estimate what this joint committee on March 20, 1997 when Managing Director and Co it's not The Garner Group, it's the GIGA(?) Group testify -- it's the GIGA Information Group testified before this Committee that the amount of legal amount of litigation associated with the Year 2000 is estimated to be $2.00 to $3.00 per dollar spent in repair. Well, first of all, we have no earthly idea what the dollars spent in repair will be and to say $2.00 to $3.00 you've got a substantial difference there when you're talking in terms of billions.
So this is a sheer guesstimate. And what happened was that her testimony was reported at a Lords of London conference in London. It was picked up by the press as being a Lords of Lord estimate and has been carried forward then from that time forward. It's now gospel that Lords of London says that this is going to cost a trillion dollars. The fact of the matter was it's a very small guesstimate based upon every assumption of which is subject to huge variances. It's a ridiculous number is the bottom line.
REP. TURNER: Well, I'm certainly one who is I'm skeptical about that number and I guess even beyond that the thing that is troublesome to me is when you take the words Y2K out of this discussion and you talk about the hypothetical I shared about not being able to read zip codes that began with "7", what I'm looking for is, in that circumstance, why would we change contractual rights under our current legal system to protect the manufacturer or the producer of that particular computer bug? And if there is a reason to do it, it would probably also apply to the Y2K bug.
But short of that I'm not sure exactly what we're doing here other than protecting a lot of folks that, from my perspective, I don't represent. And the criticisms that seem to be being discussed here today or the kinds of criticisms that we can hear directed towards the legal system generally in any kind of litigation so I'm looking for the specificity of the Y2K problem and why this remedy is important because of Y2K. Because I know there are going to be winners and there are going to be losers if we change the law and I personally think I may be representing the losers.
MR. NATIONS: The direct answer to your question is that that situation with the 7 zip code would be handled under existing law under the UCC as either a breach of contract or a breach of an implied warranty for ordinary use. There's no need for any further legislation to solve that problem just as there's no need for any other further legislation to solve the Y2K problem.
REP. TURNER: Mr. Donohue, I have two comments very quickly. The GIGA Group as was mentioned was involved in that. The Gardner Group also did a survey. In its study it said it would be $858 billion dollars. The American Bar Association at their convention had a series of polls and surveys and came out with some numbers near a trillion dollars. I don't think that any of these numbers are finite. But just my feeling in talking to business people all over the country and listening to the discussions of legal groups and others that this is going to be a very big number. All right. And I'll yield to you that maybe it's not a trillion dollars, maybe it's a trillion and a half, maybe it's $500 billion. It is a lot of money.
The second is and I would just make this point. I think there is a little difference between the 7 in the zip code issue and what we're talking about in the Y2K problem. Y2K is a universally integrated system of technology that brings everybody into the game. And you're in the game if you have a small company in your district who is tied into as a distributor to a national company and you're a small company -- maybe the person that screws up the whole deal if in fact something in their system is not picked up ahead of time and affects everybody else's system.
We're not sure really what's going to happen here and I would just turn for one second to the tremendous challenge that you have in dealing with our own federal government system. You're not comfortable that the greatest government in the world with more money than anyone else has to deal with this problem isn't going to screw up a whole lot of things that deal with your constituents in your districts. I don't think that simply looking at social security is going to say social security is protected. How is that integrated with the IRS? How is that integrated with Health and Human Services. I think we have a national issue here we ought to look at one time differently and it should not apply going forward to all the other tort reform discussions. This is a one time deal around one date and around one set of technology challenges and I think it can be looked at differently.
Ms. Morella, is my time up?.
REP. MORELLA: It is unless you need another minute because we'll have another round, too. REP. TURNER: I was just going to ask Ms. Lundberg (?) if she would comment on the same issue.
MS. LUNDBERG: Yes. Mr. Donohue address a lot of what I was going to say. The point I was just going to make was that it's not just an issue of technology vendors and providers, it's an issue as he said of company to company -- the companies who have bought the product, change the product, develop their own software and it's a very interconnected food chain that it's not just a matter of going out and buying a technology product that might have a bug in it, it's more of a business issue as well. That was the only point I was going to make.
MR. EFFROSS: If I could just add, Congressman Turner, I think one of the issues also that underscores a number of -- my colleagues on the panel have been saying is both in contract and in tort there is a question of reliance. Business people rely on, whether they own software or not, other people's treating them correctly or that the software that they were using or that other people was going to work here. But I think there's also underlying a number of the comments regarding this bill is a question of reliance on law. Is there in fact a reliance that's been built up on a number of these contracting parties on what the law already is? Should it not be asked are we somehow changing the rules of the game now and destroying what reliance they had and the predictability of their system, particularly when it's not quite clear to what degree there will be a technological problem or a legal problem. I happen to think there will be both. But one is clearly dependent upon the other and there are no clear parameters for deciding really either until it happens.
REP. TURNER: Thank you, Ms. Morella.
REP. MORELLA: Thank you, Mr. Turner. I going to turn to Ms. Rivers. But I do think Mr. Turner you have a little bit of a pollyanna attitude with regard to the fact that there won't be problems or a cost involved with lack of compliance, maybe inadvertently with Y2K and the litigation but that's what this hearing is about.
Thank you. Ms. Rivers?

REP. L. RIVERS (D-MI): Thank you, Madame Chairman. I have a lot of questions about the whole system as it exists and why we should make changes in particular. But before I do that, since we have been talking about some sort of compilation of expenditure, what we actually are going to have to pay for Y2K, I'm interested in knowing not just how much litigation will cost but I wonder particularly with the Chamber of Commerce if you have looked at what the cost to American business will be if every business effected truly has to wait 90 days for remediation. In other words, every restaurant has to close for 90 days, every dry cleaner has to close for 90 days, every grocery store has to close for 90 days, every doctor's office has to close for 90 days. What is the cumulative cost of those kinds of impacts on the United States?
MR. DONOHUE: Well, there is a cost tree. Coming up the tree, before we get to the Year 2000 -- and this, Congressman Turner, are numbers I can quantify we will spend close to a trillion dollars in the American business community -- and by the way that includes hospitals and universities and all going out to try and make sure we are Y2K complaint and in a great entrepreneurial society a lot of people have made good business out of that. The question of what the costs are following the Year 2000 or moving into it as people try and use credit cards to buy things that have payments in the Year 2000, those costs come in three areas. One is in the continued cost of fixing whatever it is that's not working right. Second is in the cost of lost productivity while people have gone off to fix that and are not going their actual business. And the third is the cost of any incremental litigation, either for actual losses or punitive damages.
Now when you put all those numbers together, considering that to get where we are on 2000, we have spent close to a trillion dollars -- you have a lot more of that going forward. This isn't all about litigation. I mean, we're going to spend a lot of money on this no matter what.
REP. RIVERS: Right. But I think it's important that when we talk about justification for the litigation because we're talking about a considerable financial impact, I think it's important for us to also understand what the financial impact of this particular piece of legislation in leaving a fairly long window for remediation.

MR. DONOHUE: Well, I think it raises a very good point about the issue of how long people have to wait to sue. By the way, I've read and heard and I was on the panel when the gentleman I think from Texas talked about his cash registers and everything that didn't work. I don't know who that company was but going to be very well sued and that's the sort of the horror story that I wondered why it took so long to fix.
But I believe here what we're saying is if everybody rushes to the courthouse the first time there is a problem here, there's not going to be any room in the courthouse. What we're saying is can you take some small period of time, call you up I run this restaurant you're talking about. I keep putting my credit cards in here for approval and American Express keeps going tilt and it doesn't work. Well, are we going to file 700,000 lawsuits the next day or are we going to give American Express some time to fix the access to their approval computer? There's no perfect solution but we just think there ought to be a small pause getting into the courthouse. Is 90 days right? I don't know.
REP. RIVERS: So the answer to my question is that we really don't know what the cost would be to balance as we look at the
MR. DONOHUE: That's right. I don't know what the cost is going to be one way or another. We're going to spend hundreds of billions of dollars.
REP. RIVERS: I have a question about the existing standards of liability and well, essentially my concern is that in some ways this is a back door into tort reform in general because it looks to me as if the Y2K issue becomes sort of an extraordinary vehicle to deal with issues that are currently recognizable as legal claims in our system. We know how to deal with contract issues. We have general standards for liability. And we have juries who make determinations about punitive damages within standards that already exist. And my question is much as Mr. Turner's was is there anything in particular about Y2K that now makes it impossible for use to rely on existing legal standards, makes it now impossible to rely on the efficacy of the jury system. Is there something about this situation that is extraordinary or are we just taking the first step to the same tort reforms that many organizations have been advocating for many years. We'll start over here on that end. I'd like to hear from all of the folks.
MR. ANDREWS: I'm not sure that there is anything so extraordinary about this in terms of the types of issue. I think it's the volume that most of us are concerned about notwithstanding Congressman Turner's question about what that volume is. And I think that this is a legitimate issues and as I said earlier one concern I do have is that I don't think for instance this is something that is appropriate or that there is a public interest or benefit in having punitive damages associated with it. I think people are making a good faith genuine effort to fix it. Whether they can do so in time, whether they will be able to do so completely, whether they will be able to deal with their (operability?), I don't know.
REP. RIVERS: Do you feel the juries could not address the issue appropriately relative to punitive damages in Y2K?
MR. ANDREWS: I think that they quite probably could but I think that if we're trying to do something with this extraordinary problem, that's something that we might want to consider.
MR. NATIONS: I think the law as it exists today, business rules - there's been a lot of thought in addressing a Y2K so far by the businesses that have already literally hundreds of billions of dollars are perfectly adequate for handling Y2K litigation that will follow this because there are not only rules here concerning breach of warranties and breach of contract and duties of due care and business judgment rule that the businesses have to follow but there are also remedies here for those people who have followed the business judgment rule.
If you look at two corporations. One follows the business judgment rule. They meet their duty of due care. They remediate. They do all those things they are supposed to do. And they are out of business anyway or shut down anyway because their vendor did not do so. Now, they look to the UCC. They look to the current law for remedies if they want that breach of warranty action or they want that breach of contract action. And they should have it.
The UCC has been handling our business litigation for 25 to 30 years in the various states. And it's this is exactly the type of thing that our business law is designed to handle and it can handle it fine.
REP. RIVERS: Thank you. Ms. Lundberg?
MS. LUNDBERG: Yes. I agree with Mr. Andrews that inherently there is nothing about the issues that's different. It's the volume. It's the -- just enormity of the problem. And as others have said here today, I believe that potentially there could be a significant hit to the economy from the failures themselves. Forget about the liability and the litigation and their cost in the courts. So I think that's where the concern comes in.
REP. RIVERS: But the hit to the economy would exist irrespective of how the damages are handled --
MS. LUNDBERG: Absolutely, absolutely.
MR. EFFROSS: Congresswoman, I would say that as we stand now legally, at least in my estimation, we are very well equipped to deal with the legal issues arising out of Y2K. That's going to raise a certain number of factual issues, particularly fact sensitive issues with regard to each particular case. But I don't see that we need to establish a whole new brand or breed of law or a whole new type of court. In fact, what I would suggest is rather than perhaps establishing some specialized Y2K court like we now have bankruptcy courts, if it came to it, if a number of cases were that similar, possibly to consider something like the multi-district litigation that is now in the federal system.
But I am not so the volume is the issue. I am not so sure that we need to create a new body of law or new courts or to say this is beyond the scope of ordinary jurors. I think they are reasonably equipped to handle it.
REP. RIVERS: Mr. Donohue?
MR. DONOHUE: Yes. Congresswoman, let me just mention one thing my colleagues reminded me, on the question we engaged on before. It's 30 days before you can go to the court and then it's up to the judge if the other party is being helpful in fixing the problem to grant the other 60 days, otherwise you're only talking about 30 days.
REP. RIVERS: Is there a standard for helpful.
MR. DONOHUE: The judge sets the standard as in most courts for those kinds of judgments.
I would just say about your major question, I think it's a very good one. What makes this different? I think it's everybody is in the same boat at a very, very challenging time and it's choppy water and we ought to look for a way not to upset a very fine balance in our economy and I think that needs your special consideration.
REP. RIVERS: Thank you. Thank you, Madame Chair.
REP. MORELLA: Thank you, Ms. Rivers. It's now a pleasure to call on Ms. Jackson Lee for any questioning.
REP. S. JACKSON LEE (D-TX): Again, REP. MORELLA, let me thank you for your kindness and also the wiseness of this hearing and the continuity and persistence of you and Chairman Horn and our ranking members for continuing the oversight responsibilities that we have. Let me just take a moment of personal privilege and say that I started out earlier today in (the times?) otherwise since, I expect a whole day, -- Y2K informational forum in Houston because of the many inquiries that I have gotten and the enormous interest that I have in this area.
But one of the things that I'd like to see being the theme of our oversight hearings is the fact that the government is concerned. It realizes the challenge ahead of us. Mr. Donohue you have given us a challenge. In fact, I agree with you that we need to recognize the broadness of it and particularly with our business community. We all have business constituents. My focus, of course, is that we send out reasonable signals of even handed information and to stifle as much of the hysteria this is not to suggest any discussion here as such I'm just noting to you that we need to work together to provide real information.
Madame Chairperson, I wanted to take this moment of personal privilege to acknowledge the Texas broadcasters. I have met with them. And, of course, it could be the Maryland broadcasters but at least who have acknowledged their interest in getting CFAs (ph) and other types of information that they would be willing to share not on how to sue, how to litigate, but certainly on issues dealing with Y2K. And I just thought that I'd bring that to our attention because I hope the tone of this hearing will be more on how we can be problem solvers on this very important issue.
With that, let me go to Mr. Andrews and help me walk through. One of the points and the themes that we have hearing is the enormity of the problem and the fact that we are talking about large numbers of people which really characterize this fear of litigation. You have indicated that you counsel businesses and it is my understanding that in doing so the very point that I believe that has been made in terms of the need of litigation really happens anyway which is I don't believe that businesses, from business to business or however, including consumers, run to the courthouse. They really try to work out their situation.
You have talked to me about breach of contract and prime warranty. Would you lead me through, for example, in advising your clients on this issue, or as we look to problems. Wouldn't there be a moment anyhow where the client -- because they really want to get on with their business. I don't think they are looking to spend any extra time in courthouses. Isn't there a point when there is negotiations over problems and concerns in order to try and work them out, under these particular provisions that you have already mentioned?
MR. ANDREWS: Well, I think that you raise a very good point, and that is exactly what we do try to counsel our clients.

Out clients don't want to be in litigation. It is costly, it is time consuming, it is distracting from the regular business. And what we're primarily trying to do is to come up with ways that they can avoid litigation.
Now one of the things that is somewhat unique about the Year 2000 problem is that you don't know from most companies and entities is whether they are going to be a plaintiff or a defendant in any litigation. And so what we are trying to counsel them on is how to structure it, how to set things up in terms of contract negotiations, in terms of warranties and disclaimers and contract review and legal avoidance and liability avoidance, how to set it up so that you won't be either, so you won't be a defendant because you haven't created any liability for yourself, you haven't made any great claims or warranties that you can't live with or meet up with, and that you have also got a contract negotiation with your third party with whom you deal that you have got assurances and certifications from those parties, what have you, so that you are not likely to have to sue them because they are going to comply with what you need. They are going to work that out by negotiation, hopefully now, so that you won't have to incur the costs and disruption later.
REP. JACKSON-LEE: Well, and I appreciate very much that analysis because I think it is important to note that we won't throw to the wind our normal negotiating processes. You are going to refine them, as I hear you saying, in terms of giving guidance to clients, business clients, about how you pre-suppose, if you will, circumstances that would -- that might bring them in the courthouse, but let's find out how otherwise that we can negotiate around already standard legal processes.
And I would like us, again, without coming to any conclusion about what we should do -- and I have already made my leanings known. But I think we should remain open. I think it is important to note that there are present structures that might be able to be utilized, but that we should keenly be aware of monitoring what may ultimately happen.
With that, let me ask Mr. Nations, one of the added points of this hearing is that I am a member of the Judiciary Committee and the liability legislation will make its way through there. I think it is important, if you would define for us punitive damages because it is not an automatic. You don't walk into the courthouse, make allegations, and immediately have standing for punitive damages. And I know it might sound elementary, but I think it is important to distinguish the fact that we are talking about egregious incidences that might even be -- you might consider -- the court or the jury might consider punitive damages.
Would you just share that with me and the likelihood of such?
MR. NATIONS: Be glad to, Representative. I am glad you raised the issue because we hear in each of these hearings all this talk about outrageous billions of dollars in punitive damages. Punitive damages are extremely, extremely difficult to recover. I have been practicing law 33 years. I have had exactly one punitive damage recovery in that 33 years, and it was appealed all the way to the United States Supreme Court. And it is just not something that happens in the absence of egregious conduct.
The definition of gross negligence is a wanton, willful disregard for the rights of others. And in most cases, you don't even think about pursuing punitive damages because punitive damages are not a possibility. In contract cases, in breach of warranty cases, it is extraordinary. You have no provision for punitive damages under the UCC. You have no provision. Where you get punitive damages in this type of situation would be in fraud cases, where you get --
MALE SPEAKER: Tort cases.
MR. NATIONS: Where you get -- exactly. You have to have a tort element to get to punitive damages. And it would take just a minute, but I would be glad to give you an example.
REP. JACKSON-LEE: I will indulge you for a minute. I have a question for Mr. Donohue, but go ahead.
MR. NATIONS: If I may.
REP. JACKSON-LEE: I'll just indulge you for a minute, but my time has run out.
MR. NATIONS: IF we look at the case of Courtney versus Medical Manager, which is one of the 56 lawsuits that has been filed -- as a matter of fact, it is seven of the 56 lawsuits that have been filed to date. It is a class action case. Dr. Courtney is a small town OB/GYN. He spent $13,000 for a medical manager software package that would run his practice for him. It worked fine. It lasted for 12 years. It worked fine until 1997. In 1997, he bought a new package, and they came to him and said this is the latest thing, it will do everything but deliver the babies for you, and it will last you a good 15 years.
He spends $15,000 for it. Almost a year to the day later -- now this is a small town practitioner -- almost a year to the day later, Dr. Courtney gets a letter from Medical Manager, Incorporated, saying we forgot to mention to you that the package we sold you last year for $15,000 is not Y2K compliant, and in order for you to be up and running by January 1, 1999, you have to be -- you have to have a new package, which costs $25,000.
Now Dr. Courtney went to one of those lawyers that we have heard so much about, and that particular lawyer happened to know what he was doing. He brought a class action. It turned out that there were 17,000 people, 17,000 doctors, small town practitioners, who were similarly situated. They were all being hit for $25,000 each by Medical Manager. That is $435 million that Medical Manager was trying to get from -- by selling a Y2K upgrade.
What happened after the lawsuit? And incidentally, they tried for two months to settle the case before the suit was filed. They got nowhere. They filed the suit. Within two months after the suit was filed, they reached the settlement. And guess what the settlement was? It turns out that when confronted with a class action with 17,000 mad small businessmen, Medical Manager came up with a patch, a magical patch that all you have to do is insert it into your old system, and all of a sudden you're Y2K compliant.
Now that is the type of fraud -- that is a type of fraud. That is a type of profiteering which a jury may get mad about, and it may consider punitive damages. However, it is important to note that in that case there was -- it was settled. It was settled for the 17,000 getting their patches, getting their systems up and running. And then they went on down the road. They didn't even pursue punitive damages in that case. But that is the type of fraud you need in order to talk about punitive damages.
REP. JACKSON-LEE: They just wanted to get back to work, and they used the normal litigation structure that exists today.
MR. NELSON: Exactly.
REP. JACKSON-LEE: Let me ask Mr. Donohue quickly, and I know -- what I am concerned about -- you have been very passionate, and these are important issues to all of us. But I am concerned -- and you have noted the work we have to do in the government. I am admonished. We know that. What kind of private sector efforts are going on separate and apart from the seemingly support for liability limitation? But what are we seeing the private sector do to enhance their Y2 capacity, and are they being deterred by looking to litigation limitation from doing what they really have to do to get their business compliant?
MR. DONOHUE: Well, first of all, Congresswoman, we have been -- we, the business community, which is -- you know, what does that really mean? But businesses all over the country have been investing major amounts of money over really over the last three years. There is some that went back before that, to change systems, to upgrade them, to test them. For example, the Air Transport Association, which represents the airlines, is just spending $15 million to test the changes that they have already made in their systems to make sure they work. There was an excellent piece on television this weekend, how a lot of the bond traders and stock traders worked all weekend on the first --
REP. JACKSON-LEE: I saw that.
MR. DONOHUE: -- of a number of things they are doing. Now these things cost lots and lots of money. They have been hiring experts. They have been testing systems. They have been looking for glitches. They are investing significantly in this issue. And we at the Chamber have been working very, very hard to alert small companies and large as to programs that are going on, people they can contact, activities they have to undertake, and fixes they probably have to handle.
In fact, if I can be very personal, I sort of wish I could go sue the guys that we bought 23 years ago, whatever it was, that we bought our system from that we are trying to fix. We have signed a $100 million ten year contract to upgrade the Chamber's system which is -- you want to talk to a nightmares, we can have a little nightmare conversation.
But I think the final thing I want to say, there are some fundamental realities that we need to look at. We don't have to be so naive that we don't understand that certain groups of the trial bar have spent a good amount of money to research how to file these lawsuits. I mean, I don't -- I have not been there where they have done it. But I have heard it from their own parties. I have heard their reports and their discussions amongst themselves. And they are looking for the best way to do this.
We need to be as diligent and figure out a) how to avoid lawsuits by doing smart things, and 2) how to say in this one instance -- I'm not talking about tort reform. That is another battle we'll have on another day. How do we recognize that everybody from our own government to every company in this country could somehow be affected?
I want to give you one thought. In your office, in my office, in every office around this country, we have bright young computer programmers that have been there for years, and they are getting better every day, and they are not satisfied with any system. They are always fixing it a little bit. And you know what? That is where we are going to be in trouble. We are going to be in trouble in every government agency where somebody sort of fixed it. And we just don't have that in the documentation. And this is a very hairy issue.

And I just think we ought to take all of our convictions about tort reform, about the rule of law, about everything we are working on, and for one minute hold them very strongly, but look at this issue and say should we deal with this one time for a limited period of time, and then it goes away, to just keep some order in a very scary situation.
REP. JACKSON-LEE: Even as you speak, however, this issue of lawsuit liability is not impeding businesses, as you represent to me, from looking at this issue.
MR. DONOHUE: I do believe, as was pointed out by Mr. Davis and others, and by some of the people on the panel, I believe it is very, very clear that lawyers are telling people from a legal point of view, don't say anything, don't do anything, don't expose yourself to liability. I think that is good law, good general counseling. I think it is lousy business. I think we need to get out and be very open and risk, risk our own legal position to work with our customers and our suppliers to do everything we can to fix this. That is what I am encouraging.
REP. JACKSON-LEE: The chairwoman has been very indulgent, and I will thank her that if I may just leave one question on the table, as I think a very good point was made about remediation. And as I said, I would like us to be problem solvers, and so I would like people not to be, if you will, held up on the issue that we don't have solutions. And I would like us to be open-minded to the issue of remediating as opposed to putting people in the posture of legal lawsuits at this juncture.
REP. MORELLA: I think that is critically important, and of course that is what we have all been working toward, is we have got to remediate, we have got to correct the problem to be compliant.
I wanted to also mention that most of us have had forums in our districts, and I commend you for doing that, where we have pulled in the Chamber of Commerce, the business community, organizations, as well as state and local government, and the federal government, and vendors, as a matter of fact, on that. And I have been pushing the private sector, and many of them have been doing a great job of coming up with little flyers explaining we're Y2-okay, and explaining to consumers what to expect, what has been done. I just gone one the other day from the Red Cross, for instance. And I think we all have a responsibility to do that and use PSAs and whatever.
I want to ask you a little bit about insurance, and then I have one other issue. I do want to also comment that Republicans have a conference right now, which is why you may be getting some questions sent to you.
For purposes of business interruption insurance, it is likely that many insurance carriers will take the position that the Year 2000 problem is not a fortuitous event designed to be covered under their policy, and that business interruption losses incurred because of the Y2K problem therefore would not be covered under existing business interruption policies.
I am just wondering if you know whether or not all insurance companies are now adopting this position. I think this gap, as I understand it, means that some insurers are offering their own Y2K coverage. And I just wondered if you would like to elaborate on that. You can start any way at all. Mr. Nations, if you would like to comment on it first.
MR. NATIONS: The insurance industry across the board is making it very clear that they have no coverage on Y2K, and they are right now in 1999, as policies are up for renewal, they are including specific Y2K exclusions in policies for business when they come up for renewal. They are claiming under comprehensive general liability, which is an all-risk policy, that the all-risk will not be construed to include Y2K because Y2K is an expected event, as opposed to a fortuitous event. It is an expected event, and expected is the magic word that is in the exclusion under a comprehensive general liability policy.
The only place I have heard where the insurance companies have indicated that there may be coverage simply because they don't have any way to get around it is on directors' and officers' liability coverage, corporate officers malpractice, if you will, which is them acting in a negligent manner. And the way they would circumvent that would be that is was willful, that it was a willful act, it was not corporate directors' negligence. It was a willful act, and therefore willful acts are not covered.
So that brings us back to if lawyers are out there telling their corporate officers don't take any action on Y2K right now, the best lawsuit they may have will be a legal malpractice against their own lawyers.
REP. MORELLA: Would anyone else like to comment? I think that is a frightful concern.

MR. ANDREWS: I think, Congresswoman Morella, that it is a much more complex issue than Mr. Nations suggests. I think that at least the insurance companies with which I work have all said appropriately that the determination of whether there is coverage given a particular claim is going to depend on the facts of that specific claim and the specific terms and conditions of the insurance contract at issue.
For instance, Mr. Nations touched upon several different types of insurance contracts, and there are quite a number. And it is going to make a big difference who is making the claim against what other party, what is being alleged, and what the terms of those contracts are. I will say that I do not believe, based on my research, that a premium was ever charged or collected for Year 2000 exposure. And in fact, the insurance regulators are finding that very reason to be the basis for approving Year 2000 exclusions because they are saying that this was not anticipated coverage, there was not a premium charged for it, so it might be something that should not be covered, depending again upon the facts of the claim and the specific terms and conditions of the policy.
MR. EFFROSS: If I may add, Congresswomen Morella, when you mentioned how, Mr. Andrews, about how this depends on the facts and circumstances of the cases, I recall several years ago one of the moments I was most proud, really proud, of being a lawyer -- and there have been many, but this was one of them -- was when I read a New York Times article about insurance companies refusing to pay for treatment that they deemed experimental.
And someone who had formerly worked with the insurance company but now was no longer with them was asked, well, how do you make those decisions. And this person said to the New York Times, part of it is we look to see whether this person, the plaintiff, would be sympathetic if he or she went to the press, whether or not that person has a good, aggressive lawyer, and whether that lawyer is ready to sue, and we take all that into account.
And I think a number of things we have been hearing here today, negotiation is fine as long as the parties know what the legal backdrop is, if the negotiation fails, what landscape they will be plummeting into, and what the contours of that landscape are. I think in fact some people deserve to be sued, kind of like the police. I mean, there are abuses with the police, as with any authority, but the police keep people in line. And to some degree, the threat of lawsuits is keeping a lot of companies in line. Maybe they are not doing the right thing, but they are at least worried about it.
REP. MORELLA: Dr. Donohue.
MR. DONOHUE: Some people deserve to be sued. I agree. And this bill allows them to still be sued right away.
REP. MORELLA: It is a concern to me that if there is no insurance available, and if you were to get special Y2K insurance, then it means other insurers would be exempted from having it being considered the fortuitous event as some might, as you mentioned, Mr. Nations. Many of them don't. I would think that if there were insurance that one would have to point out to the insurer, prospective insurer, that everything has been taken care of. I don't know. It just seems to me it is a deterrent to corporations and entities to be involved in information sharing beyond the legislation that became law if in fact they don't feel that they have something that they could fall back on that are good faith efforts.
Anybody want to comment on that? Is that something one shouldn't worry about, the whole concept of insurance and business interruption insurance?
MR. ANDREWS: I think again an insurance policy is just a contract. And that contract, just in a Year 2000 context, has to be determined by a court applying the language of the contract. And I am very afraid of hearing people say, well, gee, the insurance carriers are deep pockets, and this is a big problem, and maybe they can pick up some of the pieces, just like some courts who are outcome determinative and outcome minded saw in the environmental era, and there they sort of changed the terms, the meaning of the contracts.
And I don't think that we should do that here if the contract term is provide for coverage, given the facts of the claim, then there should be coverage. And if they don't, then we shouldn't try to change that, either through the courts or through the Congress. And also, I guess I would suggest to Professor Effross that at least I wouldn't necessarily agree, or believe, everything I hear or read in the New York Times.
MR. DONOHUE: Madame Chairwoman, the one point you just made, though, I think is worth repeating. There is great caution in small and large companies about going sort of public with their concerns, with their customers, and with their suppliers, and with their bankers and everybody else if in fact what you are doing is creating a record for liability, and for expensive liability, as opposed to covering actual damages. And I respect the point made by my fellow panelists here about maintaining a common system of law and the fact that there aren't a lot of punitive damage suits, although I would say, if you were to draw a curve, that the number and the amount of money is going up dramatically, if we could infer anything from that.
REP. MORELLA: Probably so. I would like to just comment on the third party bit. Let's say my company or my organization is compliant. But I have to interface with another organization or entity that is not compliant. It infects my system, and then maybe that infection could be spread to another party with which I engage.

Who is liable, or what do we do about a problem like that? Is that -- what I want to say, is there a word like litigatable?
MR. EFFROSS: I think you would be falling back to some degree on general concepts of negligence. Are you negligent in dealing with the party whom you are not satisfied is compliant? Are you negligent in not examining your own systems after that contact has been made and before the data goes to the other party you are dealing with, as well as what are the contracts you have with those parties? Do they require you to take any particular efforts with regard to this, and is there some kind of industry -- even if they don't, is there some kind of industry standard for what people are doing to, you know, diagnose their own systems periodically.
REP. MORELLA: Do you want to comment on that?
MR. NATIONS: I would defend that case in a heartbeat before a jury. I have known a lot of highly intelligent lawyers in my life. I have never met a lawyer or a group of lawyers who had the collective wisdom of 12 citizens off the street that we call the American jury. And the situation like that, we have the American jury system at the bottom line of all this weeding this out for us. And if a claim like that got to the point of being submitted to a jury, and you have done everything you can possibly do, and you are being victimized by someone else, then you are not going to be liable in that circumstance.
If I may address one thing, where there is going to be a problem, and that is on the joint and several liability, if you carry your analogy on out, that the party that caused it initially was a foreign vendor, say -- and this is a real problem, and this is the problem with respect to joint and several liability, or making several liability or partitioning a liability. And that is that if you partition liability, and the foreign vendor is the party that is at fault, many of these products, most of these products, are sold by foreign vendors -- FOB Yokahama, FOB Taipei, wherever.
Those people are not -- those companies are not doing business in the United States. They are not subject to our jurisdiction. To put the end user, a small business, in the position of having to sue a vendor in Taipei who is the actual cause of the problem is just to say that is not going to happen, that that lawsuit will never occur. The reason you keep joint and several liability is the end user goes back against the seller, who goes back up the chain of distribution. And the ultimate person in the United States has a contract with the vendor in Taipei, that they can sue on that contract, then it should provide jurisdiction in the United States.
They are the only ones that have that opportunity. That is why joint and several liability is so important to be maintained, especially in Y2K situations.
REP. MORELLA: I am going to now defer to Mr. Turner for any questioning.
REP. TURNER: I wanted to ask one of you familiar with the bill to help me with the section that was referred to earlier. It is Section 305, which limits the recovery of economic losses. As I understand it, if you make a tort claim, you may recover economic losses only, as it says, upon establishing that any one of the following circumstances exist, one of which is that there was a contract providing that you recover economic losses. The other was that it is a personal injury, and third, that there was some damage to tangible property.
So in essence, any economic loss, I assume a business loss, would not be recoverable unless there was a contract saying you could recover. And I am curious, and maybe Mr. Nations is right. I wanted to ask what kind of tort claim could be made that you would be barred from recovering your economic loss under this section?
MR. NATIONS: I don't know of any type of tort claim that could be -- if you lose your rights under this section, I don't know of any tort claim that could be brought that would remedy your situation. You get into the situation where you have the losses such as Mr. Yawsiki (ph) had in the Produce Palace International, where he lost -- he had huge business losses. He lost his client -- he lost his customer base. He was shut down for 90 days. And when he opened -- he opened a brand new store.
He was shut down, out of business, for the first 90 days after his grand opening. And if you are confined to what you actually -- to recover what you actually paid for the computers that didn't work, then that is going to be an egregious loss for Mr. Yawsiki, and for his Produce Palace International.
And so we have to look very carefully. There is no need in that kind of situation for punitive damages or anything else. But he needs to be able to address the actual losses that he has had, and you need not confine the actual losses that he suffered in his business in that situation, which he said were around $300,000.
REP. TURNER: So you are saying that if this became the law, this Section 305, that he would not be able to recover those business losses? MR. NATIONS: Well, I have not studied Section 305 in that context because we weren't addressing the specific bill today. But unless he is allowed to recover all of his losses other than -- all of his actual losses, other than just the costs of the benefit of the bargain, the cost of what he paid getting back what he paid for the computers that didn't work, he would have a substantial loss, yes.
REP. TURNER: Well, I think I am reading this correctly. It says if you make a tort claim, you may recover economic losses only upon establishing that any one of the following exists. That is, you had a contract --
MR. DONOHUE: And he had a contract. He had a contract.
REP. TURNER: But if his contract didn't say that he could recover his economic losses, which I don't know if it did or didn't -- I mean, in a lot of cases, I can see you buying some software to run your grocery store cash registers, only you don't have anything. You just go and buy it.
MR. DONOHUE: But he did have a contract, and under current law. And the other thing, there was a fourth issue. I think, Congressman, you might help me. I believe there was a fourth issue that said as otherwise covered by current law. So we would still be able to move forward on a host of other conditions. I may be wrong, I just asked my colleague. I think there are four points there, and you mentioned three of them. I think there is a fourth one. Is there?
REP. TURNER: I only see three. One is that the losses must be provided for in the contract. Another is if it involves a personal injury. And the third is if it involves damage to tangible property. So --
MR. DONOHUE: I thought -- and we can all check that. I thought that -- and, yes, if you look on page 23, line 9, it said economic losses shall be recoverable in a Year 2000 action only if an applicable federal law or applicable state law embodied in the statute or a controlling judicial precedent, et cetera, et cetera. And I believe -- and by the way, I am not a lawyer, which gives me a great advantage here. I believe that means that a lot of the prevailing statutes are at hand, and we can discuss that in terms of when the bill is brought up.
But that is my understanding, and I just ran out of everything I know about that.
REP. TURNER: Well, I probably ran out ahead of you. But --
MR. EFFROSS: As I understand it, Congressman, you still would be able, whether or not the contract specifically said so, to recover or at least try to recover economic losses under a contract law claim. So I am not -- REP. TURNER: I think that's right.
MR. EFFROSS: -- too sure what you are losing here by limiting the economic damages you can go under for a tort claim, unless you have such things as a very well drafted contract which says no warranties and this and that to explicitly limit any type of contract claim you could have, although as I have suggested in my statement, may of those limitations of damages clauses in contract law may themselves be seen as unconscionable and may be stricken by a court.
So whatever this says, you may well have still a chance for a home run in contract.
REP. TURNER: Mr. Nations, can you think of a tort claim that would be severely limited by this particular section that we should be concerned about? It just strikes me as an unusual section, to basically say you don't have any recovery for economic damages in tort claims unless one of those three elements are present. And I am really struggling, I guess, to find why that section is in the bill. What is it designed to cover?
MR. NATIONS: No, I actually can't. The fourth provision about economic losses being recoverable in the Year 2000 only if there is federal law is for the purpose of limiting this to make sure it doesn't create any new causes of action. It is saying that unless federal law and state law already exist, that nothing will be -- that this section doesn't add anything. So that is a limiting provision. So it is only the first three provisions that you talked about.
So I don't see -- I really don't see the applicability of this, frankly.
REP. TURNER: There is no section that caught my attention, and I'm not sure I know what it is designed to do here. It is pretty straightforward. It limits the personal liability of any officer or director of a corporation or business to $100,000 or one year of their salary. Why was that important in this legislation? Who was -- you know, why would you particularly single out the corporate officers and protect them to that extent?
MR. EFFROSS: Because I think there are significant fears, Congressman Turner, that a number of these people have been in essence asleep at the switch. And now they are going to be waking up, and shareholders are going to be suing right and left. In my materials, there is a reference to the Web site of Milberg-Weiss (ph), which is well-known for launching a number of shareholder suits. And on their Web site there is even a link to their Year 2000 suits, each of which they describe.

They and numerous other firms must be gearing up for this kind of thing because once the share price falls, whatever contract and tort claims the company itself might have, the shareholders will say you people should have been awake and aware of what was going on, and we can take after you personally. The so-called business judgment rule, which normally protects any decision a director makes, as long as it is not heinously stupid or disloyal to the company, is no longer going to protect you because in this case, you were not fulfilling your duty of care, you weren't informed.
So someone is trying desperately to look out for the interests of directors and officers.
MR. DONOHUE: But, Congressman, you need to understand how some of those suits actually work. And I'm on a number of boards. What the bar would do, the plaintiff's lawyer, once having a client, would sue the directors of the company with the idea of getting at the directors' liability insurance. In a big company, it could be hundreds of millions of dollars. And they sue on behalf of the company. They sue on behalf of the shareholder. An then the idea is that you are getting the directors' liability protection, and you are going to give it to the company, but you are going to keep a third of it.
And the issue here is to limit that in this instance because it provides an extraordinary way for people that were injured not at all or in a very marginal way to file huge lawsuits against all of the companies in this country through their directors that have extended amounts of liability protection to cover other kinds of activities. -- is to limit that in this instance because it provides an extraordinary way for people that were injured not at all or in a very marginal way to file huge lawsuits against all the companies in this country, through their directors, that have extended amounts of liability protection to cover other kinds of activities. And I think it is an area that bears a little more education in terms of the committee.
What we are trying to say here, I think, in this legislation, is that that avenue of shopping a client and then suing on behalf of the shareholder, suing the directors to get at that insurance, which is all there for directors' activities, when in fact there is no insurance for what the company might have done, is a way to get out a lot of money and to collect a lot of legal fees. And I would encourage you, sir, to make yourself familiar with how that has been done of late, and what the impact could be here.
REP. TURNER: Mr. Nations.
MR. NATIONS: If I may address that issue. One of the reasons that you should have unlimited liability, no cap on the directors' and shareholders' actions, is because directors and shareholders are a major part of the problem. As the Senate committee found, the Senate Special Committee on the Year 2000, found, "leadership at the highest level is lacking and misconception pervades corporate boardrooms that Y2K is strictly a technical problem that does not warrant executive attention. Y2K competes poorly against issues such as market share and product development."
So the officers -- many officers and directors of corporations have ignored this problem. They have procrastinated. And I have heard chief information officers come in and say, look, we started asking for money back in 1992 to remediate this problem. We couldn't get it. Well, we'll take it up next year. Well, I need $10 million to solve the problem. What do I get for it? Well, you'll still be in business in January 1, 2000.
Well, they procrastinated. They put it off, they put it off. And what has happened is a lot of corporate officers and directors who now in '98 started addressing the problem and saw that it was getting too late to do anything about it, have taken the money and run. They are resigning, they are retiring, they are taking their profit sharing, they are moving on. And to limit -- and leaving the corporations, where they are going to be in a position where the value of the stocks are going to drop appreciably, and you will have the shareholders holding the bag. And it would be very wrong on behalf of the shareholders' interest to limit that liability to $100,000.
MR. DONOHUE: Mr. Turner, if you are a director a company, and you decide now to retire, or as counsel said, take the money and run -- and there is not very much money in being a director any more. In fact, it is getting more and more difficult to get extraordinary and qualified directors to serve because of these problems. You are still liable for the actions that happened under your tenure, and you are still covered by those liability policies that do exist in most corporations. So you may take the money and run, but there is nowhere to run. You are still -- you still would be responsible for your actions.
I think that the matter here is to say that this is an extraordinary series of circumstances, and anyone, any director in this country could be accused tomorrow of -- even the finest companies and the best directors -- of not doing enough. I mean, at IBM or at AT&T, where I know they have spent a billion dollars on this subject, should they have spent two billion? And would that have been a sound business judgment? Would that be a reasonable man's adjudication of his -- or conduct of his position?
I think that is always something that can be argued. We just think that this is one thing that needs some serious consideration because it is the way to make this a huge cash cow for people who can allege whatever they want. I mean, should we see the Congress as the board of directors for the government of the United States? Have you held back money on this? Have you made sound business judgments? Are you all liable for this kind of activity?
I mean, I think we need some common sense here, and that is what we are asking for. We are not applying this to another issue, another question. It is not a form of tort reform. It is one issue facing the United States. It is here and it is gone in a few years. And then we go back to ground zero and take that matter up on every other issue. And I think that is very important to understand. And we are all concerned about this matter. And I don't know in 1992 there were too many people very, very smart about this issue.
MR. EFFROSS: I think the question, though, is not whether they were very smart, but whether they should have been.
REP. MORELLA: I wanted to point out that really this hearing was not to look specifically at a piece of legislation. Nevertheless, I am certainly delighted to note that each of you has a familiarity with the piece of legislation that will probably be going before Ms. Jackson-Lee's committee, although there may be a number of changes to it. But it was to talk about and discuss the impact of litigation on fixing Y2K. But I think it has been a really good discussion.
I am going to give you the last question, Ms. Jackson. Is that okay?
REP. JACKSON-LEE: I thank you, Madame Chairperson. And I just want to make a statement on some of the free-flowing discussion. And you're right, though I think this committee has certainly taken a leadership role in this, and this is an important discussion, I do want to note that just on the idea of corporate lawsuits, there is a business judgment rule. And so again, I think existing law will find itself reasonably applied that corporate directors are not open to liability recklessly because it will be a question of whether they used prudent business judgment.
I just couldn't help but get that in. The other thing that I wanted to say, and here I am going into the legal analysis, but in any event, one of the things that came to mind, and I am going to give Ms. Lundberg the last word and not me -- one of the things that came to my legal perspective is how do you determine what kicks in as jurisdiction. You have got a new law, and you get all of a sudden the grocery guy or the physician, and he is interrelated with somebody in Taipei that has a product and it wound up there. What you are saying is that you'll have to go to court, whereas you can go under implied warranty, you can go under breach of contract. You have got joint and several liability. Or you have got to go in and say I think I am under the Y2K situation. I mean, you have got sort of the problem of having to put your hat on about am I over here on the Y2K, do I get a better deal under here, breach of contract.
I really think, as our laws have been responsive to technology -- you know, you have got various disciplines, but they fall under the umbrella of breach of contract, but it happens to be a case on a medical design feature or something, and somebody else is dealing with another issue. I just have a nightmare about whether I have got to go in and decide do I want to run over here under the Y2K, or do I want to run over under standard legal action.
Again, we are not in that committee. But, Ms. Lundberg, can you tell me in terms of the industry, who we want to help, who we appreciate, are they tuned in and working steadfastly and working with their clients? And I have said the word remediation. I know that you can be a plaintiff or defendant. You don't know which one you are, so you don't know whether you want remediation because one guy it helps, another guy it may not. But is the industry sensitive to these issues, working diligently, working with various clients of theirs and vice versa? What do we have going on out there now that we should either be aware of or not be aware of, or are not aware of?
MS. LUNDBERG: As I said in my testimony, I do think that there is a fair amount of reticence because a lot of the question letters that are being sent to companies are asking for guarantees. They are asking, you know, tell me everything is okay. And nobody can say that. Even the companies that have remediated all their systems, they have tested them, they are sound today, they cannot guarantee that when January 1 hits, they are not going to have problems.
So what has been suggested by a number of our readers is that, you know, these letters need to change. I think that the Information Sharing Act was a wonderful step in the right direction. Butually lawyers were to get more involved in drafting these letters that are asking for information so that it was focusing not on are you done, but what are you doing and where are you at, and took all the legal issues out of it, that that would be a real positive step.
I know that CIOs and companies want to work together to fix this problem. Everybody wants to fix this problem. And I think that there are things short of changing law that we can do to help that problem.
REP. JACKSON-LEE: There you go. Thank you for your solution. Thank you.
REP. MORELLA: Thank you, Ms. Jackson-Lee. I note that Mr. Horn is here. Did you want to ask a final question? Otherwise, we are going to -- MR. HORN: No. We're fine. The nation is in good hands.
(Laughter)
MR. HORN: We just met on the important things besides this.
REP. MORELLA: You'll have to fill me in then, Mr. Horn. I want to thank you very much. We have stayed longer than we expected to, and you have just been wonderful to come, to give us such excellent testimony. As I mentioned, there will be further questions probably. Any comments beyond that that you want to offer? Dr. Donohue, Professor Effross, Ms. Lundberg, Mr. Nations, Mr. Andrews, thank you all very much, appreciated these. Subcommittees are adjourning.

END

LOAD-DATE: March 12, 1999

Document 66 of 66.


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