The Year 2000 Problem

Year 2000 Team, Thelen, Marrin, Johnson & Bridges L.L.P.

THE YEAR 2000 PROBLEM

What exactly is the Year 2000 problem? Since the early development of computerized business applications, programmers have tended to use a two-digit date scheme to save storage space and reduce the complexity of calculations, yielding better system performance. Many developers failed to anticipate that their systems would still be in service at the Year 2000, and did not account for the millennium change. Yet businesses have tended to protect their technology investments -- particularly those with home-grown applications -- be extending and evolving systems, not replacing the. So there may be hardware components containing system clocks, operating systems containing clocking algorithms, and applications programs that rely on one or both for date-math calculations, that have survived long past the life cycles anticipated by their creators.

Now that Year 2000 is almost upon us, and it is a deadline that cannot be negotiated or avoided. Systems will have to be evaluated, and solutions developed for all inter-related components. Chips programmed for date mate may not have registers available for two additional digits. Operating systems may have to be patched or upgraded. Databases and database managers will have to be modified to accept the additional digits. Applications programs will have to be modified to display four-digit dates and alter their data access methods so they will have two more digits to display. All of this may sound relatively simple, but it is not--programs altered over time may be poorly documented; source codes and compilers may be unavailable; vendors may be gone or unable (or unwilling) to support or upgrade a particular product; and programmers who wrote applications may be unavailable, requiring exhaustive reverse-engineering of their products.

Simply put, each component of an affected system will have to be addressed, and management decisions will have to be made: Where are all the places the problem occurs? Are the resources available to fix it? Do we have access to the people and tools we need to do so? What is the magnitude of the cost? Is it quicker and less expensive to replace or repair? Is there a "black box" solution that will obviate the need to do either? Who is responsible for this and who is going to pay for it? What impact will it have on my business, or on the technology industry as a whole--if the entire industry has to slow down to fix this problem, will advancements be delayed; investments be diluted; revenue streams be interrupted, the general economy impacted? The scope of this problem extends far beyond the confines of the computer room.

The Year 2000 problem is not just a hardware or software problem. It is a serious social problem, which, in this information hungry society could easily be on the same scale as the S&L crisis, the environment and asbestos. Experts currently estimate that the cost of dealing with the problem will be in the range of $600 billion.

A MANAGEMENT PROBLEM

The Year 2000 problem is not just another "technology" issue for the folks in the IT Department to sort out. It requires corporate attention and commitment of the highest levels of executive management. To become "Year 2000 compliant" will require careful planning, hard work, significant resources and, for most businesses, expenditure of ;multi-millions of dollars. A project of this scale--even for small and medium size companies--will require corporate leaders to make success an organizational priority.

Assuring that your own business becomes Year 2000 compliant is not the total solution. Almost all companies are dependent on others for services, materials, utilities and other types of support. Therefore, to avoid potentially crippling Year 2000 problems, each company must assure that every company on which it relies solves its own Year 2000 problems.

LEGAL IMPLICATIONS

Here are just a few of the issues:

Contract Auditing. What are the rights and duties of system users relative to maintenance contractors, software suppliers and licensors, hardware vendors, outsourcers and consultants?

Contract Negotiating and Drafting. What should you do to minimize the risks to your organization under future agreements relating to hardware, software, and IT services? Are your warranties sufficient to protect you form product failures brought on by the Year 2000 failures?

Insurance/Indemnity. Do you have coverage under your existing insurance portfolio to recoup costs necessary to fix the problem and/or deal with the claims arising from Year 2000 snafus? Or have you issued insurance policies or entered into indemnity agreements which may provide such coverage?

Financial Disclosure. Do financial costs associated with Year 2000 problems create SEC compliance and/or other disclosure issues in the preparation of audited financial statements?

Tax. The tax consequences of costs incurred to fix the Year 2000 problem can have a significant impact on your bottom line. Will you be permitted to expense these costs, or will you be required to capitalize them?: If they are capitalized, will you be permitted to amortize them,and if so, over what period?

Officers' and Directors' Liability. As one prominent national publication recently said of the Year 2000 problem, "...nothing motivates management like the treat of liability. Word is spreading that tort lawyers are salivating over the potential for shareholders suites." (The Wall Street Journal,July 26, 1996) What is senior management doing, and what D&O coverage exists?

Mergers and Acquisitions. What due diligence and other measures should you be taking in current and contemplated M&A transactions to protect against inheriting Year 2000 problems and compounding your own?

Protection of Trade Secrets and Intellectual Property. In many instances, Year 2000 compliance will require inter-company access to information that is sensitive and proprietary. How will you protect your intellectual property and obtain access to what you need from others?

Labor & Employment. What liabilities arise from employment actions necessary to correct systems design and implementation? What permissible discipline, including terminations, are appropriate? Will the company need to modify or supplement any personnel policies as a result of Year 2000 changes?

Litigation. Considering the dollars involved, it may be inevitable. How will internal documentation now being generated by your company affect your changes to count in the future? What steps need to be taken to head off litigation and at the same time prepare for it?

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This paper forms part of the information brochure of Year 2000 Team, The Technology Law Group of Thelen, Marrin, Johnson & Bridges, Attorneys at Law, San Francisco. For further information contact Deborah. E. Walsh, Manager of Practice Development: dewalsh@tmjb.com

(c) 1996 Thelen, Marrin, Johnson & Bridges. All Rights Reserved. Published in Com.Links Magazine with permission of the authors.

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