Negotiating the End of the Millennium

by William S. Galkin, Esq.

Irony -

Billions of dollars, and the world's best and brightest, have been devoted to the development of information technologies. And, now, with the meteoric rise in use of the Internet, we seem finally to be at the dawn of a new era where information resources will truly permeate our lives - dramatically altering the landscape of mankind in a manner many compare to the industrial revolution.

And yet, someone discovered a flaw, a fault line that runs through much of the system. A simple programming error, that when viewed with hindsight one wonders "How could anyone have made such an obvious mistake?"

This article focuses on the legal issues involved in successfully negotiating a solution to what is often referred to as the "Year 2000 Problem".

Mistake -

Date calculations play an essential role in most applications. Almost all applications record information regarding the year with two digits (i.e., 96 for 1996). The basic functions involving dates include calculating, comparing and sequencing. Therefore, when a program wants to calculate a person's current age, it will perform a calculation by subtracting the person's date of birth from the current year. In my case, subtract 57 (1957) from 96 (1996) and the result is 39. However, when the new millennium arrives, the year information contained in most applications will be "00". The calculation of my age (i.e., 00 minus 57) produces an erroneous result of negative 57!

Magnitude -

All hardware and software systems are potentially affected by the Year 2000 problem, even applications that are resident with service bureaus. It is important to note, however, that this problem does not for the most part affect Macintosh computers until the year 2040. Major corporations are expected to have to pay at least $40 million to rectify the problem. The worldwide cost could reach $400 billion. Federal Express was reported as having paid 5 cents per line of code to correct the problem, which resulted in a $500 million total cost. Chubb Insurance has paid $180 million and the state of Nebraska has paid $32 million.

The problem is estimated to affect 95% of all U.S. companies. To date, only one third of affected companies are undergoing conversion. Some estimate that either the cost to repair or the failure to repair could result in a bankruptcy rate of 1 to 5%.

The repair process is complex and involves either a data solution or a procedural solution. The data solution involves the modification of each occurrence of a date. This requires a methodical line-by-line analysis of code. With each change, the affected logic must be revisited and the modification must then be tested. Mid-sized companies will often have millions of lines of code. As many as one in every 50 lines could have a date reference. Data entry screens and output formats will have to be modified as well. A procedural solution involves changing the processing methodology so that an application will know that "18" means "2018" instead of "1918". This approach is difficult to implement as well.

First steps -

Every affected company needs to design its own approach to the Year 2000 problem. Usually a team will be set up to oversee the process. The team will include the appropriate internal technical personnel as well as management and outside consultants. Financial and legal advisors may also need to be included.

The first step is to take a thorough inventory of all affected applications and gather all of the software license and support agreements that govern such applications to determine each party's rights and liabilities. There are a variety of provisions that might be found in these agreements, especially for custom software or where agreements went through a negotiation process.

Some provisions might obligate the vendor to assist with the repairs or impose liability for damages that occur due to the Year 2000 problem. Additionally, a licensee will need to identify all confidentiality restrictions that might be found in the license agreements in order that when the repair work begins, it can proceed efficiently without violating these provisions. Many modifications will require access to the source code. Therefore, it is important to determine whether a source code escrow agreement requires delivery to rectify such a problem.

Negotiating the cure -

Rectifying the Year 2000 problem is complex because of both the variable times when problems might arise and because of the variety of forms the problems might take. Accordingly, when hiring outside consultants to repair the problem, a careful agreement needs to be drafted to specify what the problem is, how and when it is going to be fixed, and what happens if it is not adequately fixed. Following is a discussion of some of the important issues that need to be considered:

DEFINITION OF PROBLEM: A survey of the problem is the first step. This can be performed in house, by a third party consultant or by the vendor hired to correct the problem. The results of this analysis will become an essential component of the agreement. The survey should include a catalogue of all applications reviewed and specifications as to what kind of corrections are needed for each application. There are a variety of correction methods that can be implemented - some will be appropriate for some applications, and not for others. The ideal goal is for the vendor to represent that all Year 2000 problems will be corrected, even those not listed in the survey results. However, most vendors will not agree to such a global representation.

CONFIDENTIALITY: The vendor will be having intimate contact with a large portion of the information about the company. Additionally, the company itself will be under confidentiality restrictions that may prohibit the company granting access to certain applications. Accordingly, the confidentiality issues need to be settled in advance.

IMPLEMENTATION SCHEDULE: It cannot be over stressed, that with Year 2000 repairs, time is of the essence. A detailed implementation schedule needs to be prepared and specific remedies and options need to be available if the schedule becomes delayed due to the actions of the consultant or the company.

EVALUATING PROGRESS: Having the work completed by a certain date, well in advance of December 31, 1999, if possible, may be crucial in accomplishing an effective transition. Accordingly, the vendor should be required to keep the company regularly informed of progress and of any delays.

CHANGE ORDERS: As the work begins to be performed, it is inevitable that additional tasks will be identified as needing to be performed. The agreement needs to be flexible enough to adjust for these changes in scope.

TIME OF WORK AND DISRUPTION: Much of the Year 2000 repair work will have to be performed when the system or certain applications are down. This means that companies will want this work performed at night or over the weekends. Accordingly, it is important that the agreement set forth when the system will be done, and who determines the down schedule.

TESTING PROCEDURES: Given the complexity of the repair methods, testing must be an essential component of the repair services. The vendor and the customer must develop and agree upon test criteria, how the tests will be performed, and when the system is considered to have passed the test. Additionally, it is important that a significant period of live use be a part of the test period. In order for this to be effectively available, the repair work must be completed well before December 31, 1999.

FOLLOW-UP REPAIRS: It is likely that the testing procedures will turn up problems and errors. These errors may or may not fall within the scope of the repair services. Accordingly, the vendor should agree to be available (i.e., have personnel available) to rectify whatever problems arise. This is an important provision. As the year 2000 approaches, vendors will be stretching themselves thinner and thinner to complete the work by the deadline. Without prior assurances, there may not be personnel available to perform these follow up services.

COST INCREASES; EMERGENCY SERVICES: Many service agreements are done on a time and materials basis and the vendor can increase the hourly rate after giving proper notice (e.g., 60 days' prior written notice). These provisions are workable when other vendors are available to substitute for a vendor that raises its price too much. As time goes on, it will be prohibitively expensive to find a substitute vendor, if one can be found at all.

LENGTH OF WARRANTY: Not all Year 2000 glitches will be apparent at the turn of the century. It may take months or even years for some to surface. The warranty provision needs to take this issue into account.

Other issues -

Obviously, all new license agreements should include Year 2000 compliance requirements. This is a complex provision and should be carefully drafted. However, a discussion of this provision is beyond the scope of this article.

Given the cost to repair and the potential for damage resulting from lack of compliance, due diligence for any corporate acquisition or significant loan or investment, must include a thorough evaluation of this issue.

Many boards of directors have been postponing dealing with the problem because of the large expense that will appear on their financial statements. To make matters worse, the Financial Accounting Standards Board emerging issues committee has determined that money spent on the Year 2000 Problem must be charged against the current year's earnings, and cannot be amortized.

However, a corporation that does not develop, in a timely manner, a complete compliance plan, will be a good target for shareholder suits against the officers and directors if failure in this regard results in a decrease in the value of the stock or company.

Conclusion -

Some companies are waiting for a "silver bullet" that will be developed which will simply and efficiently rectify the problem. However, the most optimistic predictions foresee the best technological developments providing at most a 30% savings in repair time and costs.

The process of making systems Year 2000 compliant can be complex and fraught with unknown variables. A good agreement is necessary to successfully deal with the many issues involved. However, given that the end of the millennium is approaching fast, a prudent company will construct alternate plans if compliance is not achieved on time.

William S. Galkin concentrates his practice in the areas of technology law, intellectual property law and commercial law. He represents a wide variety of software, hardware and online ventures and developers, and purchasers of complex computer systems and technology services. He provides a full range of services for both mature and start-up technology companies across the U.S. and internationally. His office is located at 10451 Mill Run Circle, Suite 400, Owings Mills, Maryland 21117 and he can be reached at (410)356-8853 or via e-mail at wgalkin@lawcircle.com

This article first appeared in the Computer Law Observer.

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