Y2K: The Legal Liability Millennium?

This article appeared in the Washington Times on June 16, 1999.
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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 ofcourt and at least 100 lawsuits have been filed. Several are class actions. One plaintiff alleges everything but the kitchen sink: fraud and deceptivetrade practices, breaches of express and implied warranties, and negligence.

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

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

Were the tort system not continually generating unsupportable verdictsand awarding unjustifiable damages, it would be easy to simply let judges andjuries sort it out. But doing so risks expanding exponentially today's lucrativelegal lottery.

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

This is a particularly bad time for a legal wildfire to race out ofcontrol, 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'ssoftware industry leads the world, yet it could find itself seriously hampered by alegal industry that also leads the world, in its own perverse way. Individualsand businesses around the globe would suffer if U.S. software makers end uphobbled by litigation.

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

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

Restrict "bystander" liability. Where the defendant is not a softwaremaker 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 minimizedamages based on information not only from the defendant, but any knowledge aboutwhich they should have been aware. No compensation would be awarded for expensesthat could reasonably have been avoided.

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

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

Impose attorney disclosure requirements. Plaintiffs' lawyers would haveto provide fees and conditions of representation in writing and revealsettlement offers to their clients, and, in class actions, to the presiding judge.

All of these proposals would help bar the least meritorious suits andlimit judgments to actual damages. None of these restrictions would eliminateeither 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 atrial attorney-motivated filibuster long stalled a similar bill in the Senate.

That legislation has begun to move. Unfortunately, the White Houseremains an obstacle. Attorneys like William Lerach, whose firm, Milberg Weiss BershadHynes & 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 thearrival of the new millennium on Jan. 1. They would provide a real cause forcelebration by passing legislation to staunch the potential Y2K legal deluge.

Doug Bandow

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