Commentary

Y2K: The Legal Liability Millennium?

This article appeared in the Washington Times on June 16, 1999.
The coming new millennium means different things to different people. Some fatalists believe it presages the end of the world. Some religious people believe it portends the return of Christ. Some lawyers believe it promises yet another financial cornucopia.

Hundreds of disputes over the Y2K bug have already been settled out of court and at least 100 lawsuits have been filed. Several are class actions. One plaintiff alleges everything but the kitchen sink: fraud and deceptive trade practices, breaches of express and implied warranties, and negligence.

Moreover, a number of cases in states like California and New York have been dismissed without prejudice, meaning they can be refiled, since no injury has yet occurred. Come Jan. 1 they are likely to reappear, along with a flood of new actions.

Presumably at least some software makers should be liable for at least some of the expense of fixing the Y2K bug. Yet the issue is complex. Given the cost of memory and perceived half-life of software at the time, designers could be seen as having acted reasonably.

Were the tort system not continually generating unsupportable verdicts and awarding unjustifiable damages, it would be easy to simply let judges and juries sort it out. But doing so risks expanding exponentially today’s lucrative legal lottery.

The problem is not just hitting defendants for unforeseeable damages. It is also the potential misuse of punitive damages - like the recent $581 million for a $1200 overcharge on a satellite dish sale - to punish companies for what turns out to have been an almost universal mistake.

This is a particularly bad time for a legal wildfire to race out of control, since software designers should be focusing on fixing the Y2K problem. One Seattle law firm is already giving litigation tips to software companies. Guesstimates on the likely collective legal bill range up to $1 trillion, with $ 2 or $3 being spent in court for every $1 spent at the computer on Y2K compliance.

Moreover, abusive Y2K litigation poses a broader threat. America’s software industry leads the world, yet it could find itself seriously hampered by a legal industry that also leads the world, in its own perverse way. Individuals and businesses around the globe would suffer if U.S. software makers end up hobbled by litigation.

No one is demanding immunity from liability. But Congress could help limit abusive verdicts in several ways.

Ensure proportional liability. Make liability several but not joint, thereby limiting a defendant’s payment to his proportionate share of responsibility for the damages.

Restrict “bystander” liability. Where the defendant is not a software maker or distributor, and there is no substantial “privity,” or relationship, with the plaintiff, liability would require clear and convincing evidence that the defendant was aware of or recklessly disregarded a known risk.

Make reasonableness a defense. A good faith effort to address the Y2K problem, either by preventing program failure or forestalling any damage, would eliminate or limit liability.

Establish a duty to mitigate. Plaintiffs would be obliged to minimize damages based on information not only from the defendant, but any knowledge about which they should have been aware. No compensation would be awarded for expenses that could reasonably have been avoided.

Limit punitive damages. Punitives would be restricted to a multiple of actual damages, and could only be awarded based on clear and convincing evidence that the defendant was flagrantly irresponsible.

Set a cooling-off period. Parties would be required to attempt to resolve their dispute before fighting in court. Notice of the claim would have to be sent 90 days before a suit was filed.

Impose attorney disclosure requirements. Plaintiffs’ lawyers would have to provide fees and conditions of representation in writing and reveal settlement offers to their clients, and, in class actions, to the presiding judge.

All of these proposals would help bar the least meritorious suits and limit judgments to actual damages. None of these restrictions would eliminate either the ability of those injured by the negligence of others to recover or the incentive of software designers to ameliorate Y2K problems.

Legislation embodying the above provisions has passed the House. But a trial attorney-motivated filibuster long stalled a similar bill in the Senate.

That legislation has begun to move. Unfortunately, the White House remains an obstacle. Attorneys like William Lerach, whose firm, Milberg Weiss Bershad Hynes & Lerach filed the first Y2K class action, is a major Democratic donor. Yet even Senate Minority Leader Tom Daschle (D-S.D.) now backs some litigation restraints.

Like most Americans, members of Congress are likely to celebrate the arrival of the new millennium on Jan. 1. They would provide a real cause for celebration by passing legislation to staunch the potential Y2K legal deluge.

Doug Bandow is a senior fellow at the Cato Institute and former special assistant to President Reagan.