Most clients understand the Year 2000 issue and are working on upgrades of their software and hardware.

This Client Bulletin is not designed to help clients upgrade their systems. It is designed to help clients identify the hidden Year 2000 issues that arise in transactions that do not appear to present the issue and to come up with a legal department plan for identifying Year 2000 issues.

This list of questions proves a simple point: There are Year 2000 issues in many simple legal transactions. Virtually every sale or purchase may involve a Year 2000 issue. Year 2000 issues need to become a priority issue in 1998 for all businesses, for all General Counsel and for all clients.

Because many businesses are not aware of the special Year 2000 issues raised by embedded chips, that issue deserves special attention.

Microchips with embedded program code that perform timing or date-related functions are prevalent in automated devices and processes. It is estimated that in 1995, 3.5 billion chips were sold and in 1996, 7.0 billion chips were sold. See http://www.garynorth.com/y2kresults_cfm/noncompliant-chips

Embedded electronic controls run the U.S. infrastructure including: nuclear power plants; telecommunication satellites and GPS systems; oil and gas pipelines; electric generator plants and transmission lines; telephone and fax systems; telecommunication cable including undersea cables; flowmeters in underground pipes; process control systems in factories, hospitals and elevators; air traffic control systems; radar systems; traffic lights; HVAC systems; ATMs; card key systems; safes; vaults; electronic door locks. They are also contained in many electronic medical devices such as monitors, IV pumps and pacemakers.

Of these 25 billion embedded chips, predictions are that more than 50 million will exhibit Year 2000 date anomalies See http://pnp.individual.com/cgi-bin/NA.GetStory?story=p0924123.700+date=1997 of The Gartner Group.

Business owners must find embedded chips, test them for Year 2000 problems and replace non-compliant chips. Buying a replacement chip can be a challenge.

Because of the special legal issues raised by embedded chips and the fact that many businesses have been late to recognize this problem, any business transaction involving computer chips requires special attention by counsel in 1998.

To date, three lawsuits have been filed which addresses Year 2000 failures. Companies can expect more in 1998, 1999 and 2000.

On December 2, 1997, the first U.S. class action suit was filed by plaintiff’s class action counsel Milberg Weiss relating to a claimed Year 2000 failure. The complaint in Atlaz International Ltd. v. Software Business Technologies, Inc. and SBT Accounting Systems, Inc. (Marin Co., Ca., December 2, 1997) alleges breach of warranty, fraud and unfair business practices in violation of the California Business and Professional Code for licensing of a non-Year 2000 compliant accounting software package. The complaint alleges that the software package licensed to plaintiff at some unspecified time breached an express five year warranty to plaintiff-licensee that the software would operate within specifications. Plaintiff was offered an upgrade but balked at being charged. Plaintiff, a New York company, filed suit in California state court.

On February 19, 1998, the second U.S. class action was filed by plaintiff’s class action counsel Milberg Weiss relating to a claimed Year 2000 failure. The complaint in Capellan v. Symantec (Santa Clara Co. Cal., Feb. 19, 1998) alleges that Symantec violated warranties of merchantability by failing to offer free upgrades for the Norton anti-virus program.

On January 29, 1998, following the tobacco litigation model, the North Carolina Attorney General issued a press release proposing that a class action be filed by states against computer companies who supplied non-compliant systems, software and hardware for the cost of Year 2000 remediation.

One prior lawsuit was filed because a cash register system could not process credit cards that expired past the millennium. In Produce Palace Intl. v. TEC America, (Macomb Co., Mi., August 13, 1997), the complaint alleges that a non-compliant cash register system installed in 1995 caused business losses because of its inability to process credit cards expiring past January 1, 2000.

Potential causes of action include contract, UCC actions, tort and fraud claims as well as claimed violations of statutes, shareholder’s suits, insurance coverage suits, class actions, suits by the United States government and its agencies and many more.

Checklist of issues for your business to consider in dealing with the Year 2000 issue.

1. Have you asked for assurances from your software vendors, hardware vendors, suppliers, lenders, borrowers, business partners, landlord’s (elevators, HVAC, fire protection) and others that they are "Year 2000 compliant?" You must test your systems and their interfaces with other systems in 1999. You need to ask now when your suppliers plan to be compliant.
2. Have you responded to requests from your business partners, customers, borrowers, regulators and others as to your own Year 2000 compliance status? How you respond depends on what rights the partner has to demand a response. Expect a flurry of letters in 1998 and be careful in drafting responses.
3. What good is a Year 2000 assurance that is not available until January 1, 2000? You must protect yourself if it looks like your partners are in trouble on January 1, 1999.
4. Beware of the Year 2000 warranty that is undercut by a limitation of liability

5. You are not saving your company heartache by refusing to talk about your Year 2000 status with customers. Companies that do not become compliant by 1999 will lose business. When you talk to your customers, do not over-promise. Any over-promise may leave you open to punitive damages.
6. You are not saving your company heartache by refusing to talk about your Year 2000 status with customers. Companies that do not become compliant by 1999 will lose business. When you talk to your customers, do not over-promise. Any over-promise may leave you open to punitive damages.


Litigation Decisions That Must Be Made Now

7. If you think you should sue, when will your cause of action be time barred?
8. The UCC has a four year limitation period that runs from delivery, not injury.
9. For off-the-shelf software, a court is likely to find a "sale" and to apply the UCC’s 2-725 four year limitation period.
10. For off-the-shelf software, a court is likely to find a "sale" and to apply the UCC’s 2-725 four year limitation period.
11. For customized software, a court is likely to find a "service" and to apply a six year breach of contract or other contract limitation period.
12. Try to reach tolling agreements if you are not yet ready to sue now.
13. What warranty and product liability issues are raised by products that contain non-compliant computer chips (recalls, customer letters, notification, post-sale duty to warn). (Are there CPSC or FDA customer notification issues or guidelines?)


Government Regulations

14. Know what regulations apply to your industry.
15. For publicly traded companies, the SEC has issued guidances on public disclosure of Year 2000 plans and costs in 10Q and 10K filings.
16. For banks, there are many different sets of regulatory guidances.
17. For Medicare contractors, Year 2000 certifications may be mandated.
18. Other agencies at the federal, state and local level are issuing "guidances" on Year 2000. Make sure you know about regulations that apply to your industry or to your company.


Due Diligence

19. Do not merge or acquire without assessing the Year 2000 status of the acquired company.
20. After March of 1998, it may be too late to acquire a new company and become Year 2000 compliant. This is especially true for banks, insurance companies and other companies with large Year 2000 problems. Query whether companies with embedded chip problems should be acquired?
21. Before you buy or sell anything, consider whether there is a hidden Year 2000 issue (e.g., in real estate transactions, HVAC systems, elevators, phone equipment, fire protection systems, sewage control equipment, etc., may contain non-compliant embedded chips).
22. Banks must now consider Year 2000 compliance in lending decisions. Expect inquiries when you borrow.
23. Your company’s board must assess the Year 2000 plans of the company and exercise its independent judgment on the plans or face shareholder and D&O litigation.
24. Auditors are assessing Year 2000 compliance. Expect inquiries from your auditors.


Insurance Issues

25. Do you have Year 2000 insurance coverage? Every loss is different. You need to carefully analyze your D&O, CGL, E&O and Business Interruption policies.
26. Can you buy Year 2000 insurance coverage?
27. Must you notify any carriers now of "losses" under any CGL, Business Interruption or D&O policies?
28. Has your carrier recently made Year 2000 failures an exception to coverage?


Tax and Accounting Treatment

29. Must your remediation costs be expensed?
30. Can you capitalize any of your remediation costs?
31. What legal issues are raised by reduced corporate earnings that will be caused by Year 2000 expenses?


Internal Issues

32. You should maintain central Year 2000 files. Include all software agreements, correspondence to and from vendors and any other relevant documents.
33. Examine your record retention policy and how it may impact necessary Year 2000 files. Instruct your company not to destroy files you may need in litigation.
34. Consider options to retain your MIS employees, especially those responsible for Year 2000 compliance. You are at risk of losing them to headhunters who are recruiting for other companies.
35. Consider confidentiality agreements for your Year 2000 program and employees (if you do not already have them).
36. Make sure you understand whistleblower regulations that apply to your industry and be aware that certain Websites are asking employees to report employer’s Year 2000 progress, or lack thereof, anonymously. See Project Damocles http://www.year2000.com/archive/damocles.html.


IP Issues

37. Know your contract rights against software vendors

38. Do you have an escrow agreement for necessary source code?
39. What are potential copyright and trade secret issues raised by your modifications to licensed software?


Contingency Planning

40. What issues are raised for General Counsel if unexpected Year 2000 failures occur: layoffs, WARN Act, unemployment compensation, etc.

Year 2000 compliance should be your company’s number one priority in 1998. Year 2000 issues are not just a technical issue to be solved by the MIS department. They demand the attention of the company’s General Counsel, and of its officers and board. The marketplace will punish companies that are not Year 2000 compliant by January 1, 1999. Customers will flee. Businesses will lose money. Litigation will result. Companies that are not compliant may not survive into the 21st century.