Law of the Millennium

By David M. Nadler and

Kendrick C. Fong

Dickstein Shapiro Morin & Oshinsky LLP

Businesses and government entities will spend billions of dollars in the next few years defending themselves against the "Year 2000 Problem," or "Millennium Bug," the name given to the problem some computer systems have switching from the year 1999 to 2000. This date-switching problem can cause massive computer errors for businesses and the government alike, resulting in loss of business and corrupted data.

Unless the Millennium Bug is corrected before January 1, 2000, many companies will be unable to print or deposit checks, calculate interest and payment periods, sell or buy stock, apply employee benefits, place or take orders, etc. that is, process any action that ultimately relies on a computer-coded date.

Roots of the Problem

This problem can be traced to the early days of computing, when memory and data storage were very expensive. To conserve these limited resources, computer programmers decided to use just two digits to identify calendar years. Accordingly, 1999 is identified as "99" and the year 2000 as "00." Clearly, calculations based on these two digits will assume that "00" is less than "99," not greater. Because many computer functions are time-sensitive, systems may process incorrect data or simply shut down if they do not recognize the date.

Experts estimate that the Year 2000 Problem could cost the public and private sectors more than $300 billion to correct. Some estimates place the worldwide cost at approximately $600 billion. How do they come up with such figures? Consider this: Researchers figure that the typical mid-sized company has 8000 computer programs with 12 million lines of code. One of every 50 lines has a date reference. Thus, 240,000 lines of code must be modified at costs of up to several million dollars.

<Whenever that much money is at stake, a dispute over blame and financial responsibility is sure to follow. However, this matter is fraught with legal and factual uncertainty as to liability and damages. Businesses may attempt, for example, to seek legal redress from software developers. However, even if a customer can establish that the software developer is liable for selling a defective product (one that is not Year 2000 compatible), the extent of that responsibility may still be at issue. Software products are often accompanied by some form of warranty, which typically limits the scope of potential claims. Litigation may not be worth the risk and expense if the potential recovery is likely to be limited to a refund of the software purchase price rather than the full cost of repairing damage caused by the bug and consequential damages, such as lost profits.

Are You Insured?

Insurance policies are another possible source of redress. A typical "all-risk" policy covers all risks resulting from physical loss or damage. One of the "perils" included in some "all-risk" policies may be physical loss or damage from any cause to data processing systems, computer systems or other electronic control equipment. At least some policies specifically state that physical loss includes the "accidental, intentional or malicious distortion, corruption, manipulation, erasure or loss of data or software." The issue that will be litigated with regard to coverage is whether the Year 2000 Problem falls into any of the above categories.

Another noteworthy insurance policy is the "business interruption" insurance. Under this type of policy, the insurer typically agrees to indemnify the insured for any loss sustained from the inability to use specified premises. Courts have allowed recovery under such policies for entire suspensions of operations. On the other hand, courts have not provided relief where computer malfunctions simply cause slowdowns or reduction in business. At this time, it is unclear what impact the Year 2000 Problem may have on the operations of affected businesses.

Full Disclosure

Another thorny issue is the extent to which a company must disclose to the public the potential impact of the Year 2000 Problem on the company. A recent Wall Street Journal article reported that many companies with significant Year 2000 problems were reluctant to talk about the magnitude of the corrective work, for fear of providing damaging information to future plaintiffs in case the problems were not corrected in time. However, generally accepted accounting principles may mandate such disclosures, depending on the likelihood of problems occurring.

Similarly, public companies must file an annual report with the SEC that includes the "Management’s Discussion and Analysis of Financial Condition and Results of Operations." It is likely that the SEC would take the position that any public company that knew that it was reasonably likely that it would not become Year 2000 compliant in time, with a resulting material effect on business, is required to disclose this event in the management discussion.

The Year 2000 Problem is an enormous bug that’s quickly catching up with corporate America. There are a number of novel legal issues that will be decided in the next few years concerning the responsibility for correcting the bug. Because of the cost implications and the highly time-sensitive nature of this problem, it seems that the resolution of the associated legal issues will be a priority concern.

David M. Nadler is a partner at the law firm of Dickstein Shapiro Morin & Oshinsky LLP. He can be reached at NadlerD@dsmo.com.

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