McCain Y2K Litigation Bill Is a Work in Progress

(February 15, 1999) Sen. John McCain's Y2K Act, which would reform the rules governing lawsuits over Year 2000 problems, had its first hearing on February 9. It faces opposition from within the Senate, and from plaintiffs' trial lawyers. Business leaders, and the Republican and Democratic leaders of the Senate's Y2K Committee, testified in favor of Y2K litigation reform.

Sen. John McCain (R-AZ), who is Chairman of the Senate Commerce Committee, and the lead sponsor of S 96, "The Y2K Act," blasted the trial lawyers:

"Opportunistic lawyers are already filing suits to reap the benefits of this issue, and the calendar still reads February, 1999. These lawsuits are shear craziness and represent ambulance chasing at its worst. They are clear and convincing evidence that we will face a rash of Y2K lawsuits in the coming year. They are absolute confirmation that Y2K litigation is not about consumers, but about making wealthy lawyers even wealthier."

Sen. McCain said that "the bill itself is still a 'work-in-progress'." He added that, "I put S.96 on the table to begin a discussion of the issues. We have had discussions with various stakeholders, and will be amending the bill to reflect additional ideas and suggestions."

Sen. Bob Bennett (R-UT) and Sen. Chris Dodd (D-CT), the Chairman and Ranking Minority Member of the Senate Special Committee on the Year 2000 Technology Problem, testified together at the hearing, making a bipartisan show of support for S 96.

However, the chances that a bill with meaningful reform will actually be passed in time are limited because of the strong opposition of Sen. Ernest Hollings (D-SC), who is the ranking minority member of the Commerce Committee. Winning his support might be necessary to win quick passage of S 96.

Sen. Bennett and Sen.Dodd are not members of the Commerce Committee. So, they testified as witnesses. Sen. Bennett stated that:

"The fear of litigation is so great that it threatens to eclipse the goal of remediation. While we believe that remediation and contingency planning are of paramount importance, our findings suggest that the fear of litigation is real and justified."

Sen. Bennett made three points about Y2K litigation legislation. First, he said, "Punish those who are negligent. Since the best deterrent to Y2K litigation is Y2K remediation, we cannot consider any measure that could be interpreted by businesses as an excuse to stop the remediation projects they've already begun."

Second, said Sen. Bennett, "companies that take reasonable efforts to remediate their Y2K problems ought to get credit for having done so." He elaborated several ways this could be done.

He said one way would be to disallow punitive damages. "One way of doing that is to limit their liability if, despite all their efforts, they have a Y2K-related failure that causes economic injury to another party. It is counter-productive to punish a company that has acted responsibly -- and still experiences a failure -- with punitive damages." He also stated that "punitive damages are meant to discourage similar bad behavior in the fixture. With Y2K, as a one time event, punitive damages are not appropriate."

He said that joint and several liability should not be allowed. "Make them liable only for the portion of economic damages for which they are responsible."

Sen. Bennett's third point was that legislation ought to encourage companies "to take proactive measures to prevent litigation. Anything we can do to encourage business partners to solve their mutual problems now, will help. As you examine this issue, consider providing additional incentives or protections to companies to disclose information to each other, Also, look at providing incentives for people to engage in some type of alternative dispute resolution that avoids litigation."

Sen. Dodd, who joined Sen. Bennett at the witness table, likewise said that Y2K litigation reform is necessary. He stated:

"We must be careful that an avalanche of lawsuits does not smother American corporations and bury their competitive edge. A maelstrom of class action lawsuits could have long-term consequences on the American economy and the American people. The rush to file lawsuits might curb the future economic development in a number of different sectors. Therefore Mr. Chairman, I believe that there is a need for Y2K litigation reform legislation, but not just any legislation. Clearly, we need a bipartisan bill. We need a narrowly crafted, well-structured and easily understandable bill."

Sen. Bennett complimented Sen. Dodd, and said, "we are very much a team on this matter."

Sen. Jay Rockefeller (D-WV) and Sen. Ron Wyden (D-OR) also participated in the hearing. "I intend to keep an open mind," said Sen. Wyden. "I think that there is a real potential for this issue to make the tobacco settlement look like small potatoes." Sen. Rockefeller questioned: "Do we have a crisis that we are so sure of that we are willing to pass legislation."

Sen. Dodd represents Connecticut, a state with major computer and software companies, as well as insurers. Sen. Bennett represents Utah, which is also the home to major computer and software companies. Sen. Hollings, in contrast, represents a state which only has businesses which use products which which may be affected by the Year 2000 technology problem.

Thomas Donohue, the President and CEO of the U.S. Chamber of Commerce, testified in support of Y2K litigation reform. "Unless steps are taken soon, we could experience an explosion in litigation," he warned. "The amount of legal costs associated with Y2K could exceed all the money spent on asbestos, breast implants, tobacco, and Superfund litigation combined."

Donohue continued with his dire prediction of the potential consequences of Y2K litigation.

"America has a choice. It can adopt a legal environment that encourages the sharing of information, the fixing of the problem, ... or it can allow a potential litigation explosion that could be very costly to American consumers. ... Can we run the risk of quashing those historic years of economic expansion with the lowest unemployment rate in three decades?"

Donohue said that Congress should pass a bill that contains a number a features, including the following:

• No Joint and Several Liability. Make Defendants liable only for their proportion of fault. "In tort actions, each defendant will only be liable for the amount of the damage in direct proportion tot the defendant's responsibility."
• Avoidance. Do not allow Plaintiffs to recover "for damages that they could reasonably have avoided."
• Plaintiff's Attorneys Fees. Limit attorneys fees to $1,000 per hour. "an attorney in a Year 2000 action cannot earn a contingency fee greater than the lesser of the attorney's hourly billings (not to exceed $1,000 per hour) or an agreed upon percentage of the total recovery."
• Remediation. "Before suing, potential plaintiffs will be required to give potential defendants an opportunity to fix the Y2K problem by giving written notice outlining their Y2K problem."
• Punitive Damages Limit. Limit punitive damage awards to "the greater of three time actual damages, or $250,000."

He also said to Sen. McCain, "your bill moves us in the right direction."

Two other business witnesses testified: Marshall Carter, CEO of State Street Corporation, and Don Gilbert, SVP for Information Technology of the National Retail Federation. Carter called S 96 a "step in the right direction," and emphasized that "American industry needs protection from both punitive and consequential damages." Gilbert, who said that his group represents both prospective plaintiffs and defendants in Y2K suits,

The committee also heard from three witnesses who opposed changing the laws, two small businessmen who had experienced Y2K problems, Robert Yarsike and Robert Courtney, and a trial lawyer, Howard Nations. Yarsike and Courtney related the problems which they had experienced. Yarsike's cash registers crashed when credit cards with "00" expiration dates were used. Courtney faced year 2000 problems with his medical office management software. Both had brought and settled lawsuits.  Both asserted that if the McCain bill had been law they would not have been able to obtain settlements. Sen. McCain rebutted these claims. Anthony Pierce did so also. In addition, Sen. McCain brought forward his staff assistant who authored the bill, Allbright, to do the same.

Howard Nations also testified against the McCain bill:

"... there is another group of business leaders in this country who procrastinated against the inevitable arrival of January 1, 2000; who acted irresponsibly by failing and refusing to address the Y2K problems of their companies, and who failed to follow the business judgment rule and to exercise due care ... Instead of accepting the consequences of their own irresponsible actions, these business leaders now ask this distinguished body for what amounts to "corporate welfare." The cry of those who ignored the long-established rules of business is: "Don't impose rules upon us, don't hold us accountable, simply change the law and grant us immunity from our own irresponsibility." The bill before this Honorable Senate, unfortunately, responds to the latter group of business leaders -- the procrastinators, the irresponsible, and those who seek to avoid accountability for their irresponsible actions. ... S 96, as drafted, should be rejected."

The Committee also heard from Anthony Pierce, a partner in the Dallas based mega-firm, Akin Gump:

"The Y2K Act encourages businesses to address their year 2000 readiness and to develop strategies to become year 2000 compliant ... I will suggest today that this Committee consider two additional provision: (1) recognizing a self-evaluative privilege prohibiting the use against a defendant of documents evidencing the defendant's evaluation of its year 2000 readiness and compliance status; and (2) prohibiting multiple punitive damage awards."

Several others also testified regarding punitive damages. Some argued that they were inappropriate in any Y2K actions. Others, like Pierce, merely argued that punitive damages should only be awarded once for a single course of conduct. Nations rebutted Pierce's argument that multiple punitive damages awards should be prohibited. He claimed that defendants would find friendly plaintiffs, settle for minimal punitive damages, and thereby cut off other punitive damages claims.

Several other groups submitted written testimony, but did not testify at the hearing, including the National Association of Manufacturers, the National League of Cities, the Business Software Alliance, the Semiconductor Industry Association, and the National Association of Computer Consultant Businesses.

Jerry Jasinowski, President of the National Association of Manufacturers, wrote that "we do not believe that this should be the time for entrepreneurial lawsuits, particularly class action law suits. We believe that the first order of business is to keep business going. The focus should be in maintaining business relationships, not severing them." He commended the Committee for focusing on the Year 2000 liability problem, but did not endorse S 96, or offer any recommendations regarding the content of the bill.

Robert Holleyman, President and CEO of the Business Software Alliance, wrote a very detailed explanation of the problem, and set of proposals. His statement suggested the following:

• "Contracts should be the Starting Point. The contracts which govern the use of software almost always spell out how a product is supposed to work, and which rights and remedies apply when the product does not function as intended by the parties. Thus, in any dispute regarding the performance of a product or fulfillment of a service obligation, public policy should insist that the language and commitments of the contract will be the first point of reference to define the parties' rights and obligations."
• "Suits alleging date-related failures should be permitted only when the alleged defect is "material," in the sense that the defect prevents the overall program from operating as designed and intended."
• "A vendor must have the opportunity to effect a cure of the Y2K date-related problem before legal action can be instituted."
• "Companies that develop and make available solutions to Y2K associated failures should have their "good and responsible" actions considered in their favor in any subsequent litigation. Thus, parties should have a right to plead and prove, by way of defense to the action, that it used reasonable efforts in the circumstances to achieve Year 2000 readiness."
• "Recovery in suits regarding Y2K date-related material defects should be limited to actual direct damages. The goal of legislation should be to prevent abusive and potentially frivolous class action suits. As a general rule, the goal of litigation should be to fix the problem, and not to punish, except in certain egregious cases of physical injury, or fraud."

Sen. McCain stated to Sen. Dodd and Sen. Bennett, "I will seek compromise and dialogue." At the conclusion of the hearing, he stated to Howard Nations, the trial lawyer, "we may be in disagreement, but I would like to work together."