HOW LAWYERS CAN HELP MEET THE YEAR 2000 CHALLENGE

(Other than staying out of the way while the programmers do the real work ...)

Steven H. Goldberg

Although much has been written about Year 2000 (Y2K) legal issues,(1) little has been said about the specific assistance that legal professionals can provide to manufacturers, health care facilities, banks, insurers, retailers, technology vendors, and other businesses and institutions as they struggle to prepare for the millennium computer problem. This short paper offers some guidance on the kinds of legal services that enterprises might need to effectively address the full range of Year 2000 problems.

Generally speaking, there are three broad and overlapping business objectives of Year 2000 legal work: (1) maintaining operations, (2) protecting business transactions and (3) preparing for litigation by and against the company. The tasks described below might not be required in every situation, nor will they necessarily be performed in the sequence listed. Because these legal needs are so diverse, it is unlikely that one lawyer will have the skills or resources to provide all the Y2K-related services that may be required for any but the smallest enterprise. Several options are presented below for making cost-effective use of legal counsel.

Maintaining Operations

The most important objective for counsel is to help clients avoid or minimize Y2K-related disruptions. As such, lawyers are part of the risk management effort to anticipate and control identifiable bumps in the road to 2000 and beyond. Key tasks include the following:

  • participating in business risk assessments to identify the extent to which IT systems, embedded chip systems and third-party dependencies might be vulnerable to Year 2000 failures;
  • conducting a legal audit of existing contractual, regulatory, insurance, and other legal rights, obligations and remedies in order to, first, determine whether third parties might be responsible for correcting the company's own Year 2000 computer problems or bearing some or all of the cost and, second, identify where the organization might face liability exposure;
  • helping track Y2K compliance efforts by third parties upon which the company relies, including vendors, service providers, trading partners, data providers, and suppliers of equipment containing date-sensitive embedded chips;
  • developing and implementing Year 2000-compliant contracting and purchasing policies, procedures and documents;
  • negotiating and drafting contracts with Y2K solutions vendors;
  • developing and drafting employment incentives for in-house Y2K project team members; and
  • helping to prepare contingency plans and disaster recovery plans.

Preserving Transactional Opportunities

A company's ability to demonstrate its Year 2000-readiness will become an essential prerequisite for many business transactions. Just as environmental due diligence is now routinely required for most commercial real estate transactions, Year 2000 due diligence is likely to be seen as a basic requirement for financings, mergers and acquisitions, public offerings, asset and stock purchases, and other business deals that are the lifeblood of growing companies.

Banking and securities regulators are increasingly aware of the potential adverse impacts of Year 2000 computer failures on financial transactions. On September 21, 1997, the president of the Federal Reserve Bank of New York urged that "underwriting standards should specially consider how customers are addressing the [Y2K] issue, and credit officers should monitor the progress of customers who rely on technology on a regular basis."(2) On May 12, 1997, the Securities and Exchange Commission advised that "[c]ompanies should review on an ongoing basis the need for disclosures concerning projected expenditures and uncertainties associated with Year 2000 consequences" in connection with reports, registration statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" on Forms 10-K and 10-Q filed with the SEC.(3)

Corporate due diligence requires specialized expertise by skilled legal counsel and is typically performed for the purpose of rendering carefully crafted legal opinions about the enforceability of the parties' respective rights and obligations in specific transactions. It may well be the case, however, that capable corporate attorneys reviewing a proposed transaction know little or nothing about Year 2000 business and legal risks. Moreover, counsel structuring a business transaction are usually not engaged for the purpose of preventing or ameliorating Y2K risks. Accordingly, many companies should consider whether they need to engage counsel on an ongoing basis to address the legal dimensions of Year 2000 problems in order to lay the groundwork for anticipated business deals and provide the attorneys handling the transaction with information about the organization's efforts to achieve compliance. In that way, the lawyers handling the deal can make informed, independent determinations about the company's ability to carry out its responsibilities through 2000 and beyond. Without such preparation, businesses might not be ready when the time arrives for close scrutiny by the due diligence team.

Preparing for Litigation

Much of the work described above will provide business with its best protection against litigation exposure. For example, if a risk assessment and legal audit enable a manufacturer to avoid doing business with parts suppliers who appear to be particularly vulnerable to Y2K disruptions, the manufacturer will be less likely to breach its contracts with its customers. Likewise, if a corporate transaction is grounded in thorough Year 2000 preparation, the company will be well-positioned to defend against stockholders suits filed against the enterprise and its directors and officers in the event that Y2K failures occur despite the best efforts to avoid them.

Companies might also have responsibilities to investors, shareholders and others to bring suits against parties who are responsible for Year 2000-related losses. It must be emphasized that it is far better to make every effort to avoid such monetary damages in the first place, for example, by working collaboratively with vendors now and treating Y2K as a shared problem. But a company that spent hundreds of thousands or millions of dollars last year for a major computer system upgrade that cannot perform as warranted just a few years later can hardly be expected to walk away from its loss.

Accordingly, the following litigation-related measures should be taken in addition to those that have already been presented:

  • provide periodic management briefings on Y2K risks and liability exposures;
  • help develop procedures for documenting Year 2000 compliance efforts;
  • preserve privileged communications;
  • avoid copyright infringement and warranty invalidation under IT licensing agreements in the course of renovating non-compliant code;
  • advise clients on regulatory compliance issues, including securities, tax and industry-specific requirements;
  • assist in evaluating and making required disclosures of Y2K-related expenditures and contingencies; and
  • notify responsible vendors and insurers of potential claims.

Options for Obtaining Legal Services

Contrary to popular (or unpopular) belief, lawyers are not fungible. Litigators might not be skilled at drafting contracts. Securities lawyers probably can't help with software licensing issues. In-house attorneys have superior knowledge of your organization, operations and personnel and they might cost less than outside counsel (at least on an hourly basis). However, because they often must function as generalists, in-house counsel might not have the time to develop expertise in Year 2000 law. At the other end of the spectrum, a few firms have developed "Year 2000 teams" of ten or more lawyers who can provide comprehensive Y2K legal services on even the most complex issues, including intellectual property, tax and securities law. If such full service law firms are more expensive than other options, it might also be true that you get what you pay for. In between, individual outside attorneys (who may be employed in small, medium or large firms) are developing Year 2000 legal skills to serve the burgeoning needs of businesses at all levels.

The best choice in any given situation will depend on many factors, not unlike the matrix of factors that affect the decisions businesses make about hiring Y2K consultants and choosing among the many available assessment, conversion and testing tools. A large corporation with a broad-based, in-house legal team might only need to engage a single skilled Year 2000 lawyer to help spot issues, conduct specialized research, locate hard-to-find resources, and provide an independent point of view. Another corporation of similar size that uses one or more outside law firms (on either a continuing or as-needed basis) might look for Y2K lawyers who can work with its regular attorneys, since they already know the business and may have provided advice on prior transactions that need further attention in light of anticipated IT problems.

Engagements can range from limited consulting agreements in which an outside Y2K specialist works with in-house counsel to develop a legal game plan and makes herself available as questions arise, to full "turnkey" legal support. Cost savings can be achieved by using paralegals and non-legal personnel to perform many of the labor-intensive administrative tasks, such as contacting vendors, performing Internet searches, maintaining documentation files, and compiling contracts, license agreements and insurance policies.

The New York Federal Reserve Bank president believes that "Year 2000 issues pervade every business area of all financial and non-financial institutions."(4) Estimates of worldwide Y2K litigation expenses and damage awards range from $300 billion(5) to $1 trillion.(6) Timely legal advice can help companies prepare for the turbulent times that lie ahead.

September, 1997

Steven H. Goldberg
Cosgrove, Eisenberg & Kiley, P.C.
One International Place, Suite 1820
Boston, MA 02110
617.439.7775 • Fax 617.330.8774

E-mail shg@tiac.net

This publication is provided for educational and informational purposes and is not intended as legal advice. Readers should not act upon this information without professional legal counseling based on specific facts. This publication may be considered advertising under the rules of the Massachusetts Supreme Judicial Court.


© 1997 Steven H. Goldberg. All rights reserved.

1. An extensive collection of legal articles is available on the Internet at http://www.comlinks.com, including two by the author entitled, "Year 2000 Computer Failures: Managing the Business and Legal Risks" and "Managing 'Year 2000' Business and Legal Risks for Hospitals and Health Care Systems." Comlinks.com is also useful for finding attorneys who are familiar with Y2K legal issues. Caveat emptor, of course.

2. "The Year 2000 Challenges," Remarks by William J. McDonough, President, Federal Reserve Bank of New York, before the Annual Membership Meeting of the Institute of International Finance, Hong Kong, Sept. 21, 1997, available on the Internet at http://www.ny.frb.org/pihome/news/speeches/sp970921.html.

3. "SEC Posts Y2K Disclosure Statement," Update for IT Executives, The Information Technology Association of America, June 13, 1997, Vol. 2, No. 22, available on the Internet at http://www.itaa.org/script/ newslett.cfm?/IssueID=86.

4. Remarks by William J. McDonough, ibid.

5. Capers Jones, Software Productivity Research, Inc., The Global Economic Impact of the Year 2000 Problem, p. 58 (1997), available on the Internet at http://www.spr.com.

6. "The Unspeakably High Cost of Noncompliance," Information Week, June 30, 1997, available on the Internet at http://www.techweb.com/se/directlink.cgi?IWK199706030S0015.

 

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