Y2K Litigation

As has been reported in numerous journals and articles, the Year 2000 (Y2K) problem will result in significant litigation. The types of litigation are varied and will potentially impact both business across the whole spectrum of the economy and the individuals who rely upon those businesses and their products. In preparing for potential impact of the Y2K problem, businesses need to consider not only their own goods and services but also those of every other business with which they deal including contractors, suppliers, transporters and customers. If any one of these businesses experience difficulties as a result of the Y2K problem, it may impact the company’s ability to deliver or produce goods or services.

There will be several general categories of Y2K lawsuits including: (i) lawsuits against businesses which breach contracts or fail to provide appropriate services or products as a result of the Y2K problems; (ii) lawsuits against software and hardware suppliers for products that fail to perform; (iii) lawsuits by shareholders against corporate officers and directors if stock prices decline as a result of the company’s failure to have adequately prepared for the Y2K problems; (iv) lawsuits for personal injury and property damage resulting from computer malfunction; and (v) lawsuits relating to mergers and acquisitions.

In order to seek reimbursement for lawsuits associated with the Y2K problem, companies and individuals who have suffered a loss or have been sued may look to their insurance companies for coverage. Therefore, there will be significant litigation brought by insureds against their insurance companies who have denied coverage for claims.

BREACH OF CONTRACT

There are two potential types of breach of contract actions. First, the Y2K problem will interfere with the normal flow of commerce. Businesses will likely be unable to honor contracts for goods and services which they have made. Second, there will be lawsuits filed by businesses against suppliers and vendors of hardware and software for failure to properly remediate and address the Y2K problem as contracted. These breach of contract actions will involve claims under the Uniform Commercial Code for breach of implied warranty of merchantability and implied warranty of fitness for a particular purpose.


MISREPRESENTATION

Businesses will assert their vendors either fraudulently or negligently misrepresented that the software purchased by the business would be Y2K compliant or that the remediation service performed by the vendor would address Y2K problems, when in fact, it turns out that they did not. Individuals who purchase computer products for use at home may assert claims against vendors under state unfair trade practices and consumer protection laws, many of which provide for recover of treble damages and attorneys fees.

ACTIONS AGAINST CORPORATIONS

Shareholders of corporations whose stock values decline as a result of computer malfunctions due to the Y2K problem will bring claims against the corporation for waste of corporate assets, violation of federal securities laws and claims against the officers and directors for breach of fiduciary duty for failing to recognize and/or remediate Y2K issues prior to the millennium.

PERSONAL INJURY AND PROPERTY DAMAGE ACTIONS

Individuals who are injured as a result of computer malfunctions or where property is damaged as a result of such malfunctions will certainly bring actions for those damages. Whether insurance companies will provide coverage for such personal injury and property damage will be the subject of intense litigation.

MERGERS AND ACQUISITIONS ACTIONS

If a recently acquired company incurs losses as a result of the Y2K problem, claims will be asserted that the company, as the seller, violated their representations and warranties in the sale documents. These lawsuits will include claims that the professionals who performed the due diligence with respect to such transactions failed to perform their task properly.

INSURANCE COVERAGE

With all of the lawsuits involving Y2K damages, companies and individuals will be looking to their insurance companies for coverage. These cases will involve companies seeking recovery from their insurance companies directly for losses which the company incurs as well as looking to the insurance company to defend and cover claims which may be asserted against them by other parties. While insurance companies are presently seeking to add exclusions to policies excluding Y2K coverage, many current policies may provide some protection to businesses. Such policies include business interruption insurance, director and officer insurance, errors and omission insurance, comprehensive general liability insurance, product liability insurance and professional liability insurance. Coverage may depend upon whether it is a “claims made” policy (where coverage is provided if the policy is in effect when the claim is made) or if it is an “occurrence” policy (where coverage is provided if the policy was in place at the time the computer malfunction occurs).

In addition to placing exclusions in policies, insurance companies may set forth various defenses to Y2K claims including: the Y2K problem was foreseeable and, therefore, is not an insurance event; the Y2K problems are not sudden or accidental and, therefore, are excluded from many policies; the failure of businesses to provide appropriate notice to the insurance company or when the business knew or should have known of such claims; failure of the business to provide adequate disclosure of its Y2K exposure in the insurance application or questionnaire; and the failure of the business to properly mitigate its damages.

LITIGATION ISSUES

Y2K litigation will involve questions of whether a company knew of its Y2K exposure, when it knew it and what it did to address it. As with most lawsuits, these types of questions will heavily be dependent on the documents and business structures of the company, including e-mail. In anticipation of such lawsuits, companies should take steps to address their record retention policies to assure that the documents and records being created within the company are consistent with the actions which it is taking to address its Y2K problems.

CONCLUSION

By taking prudent steps to address the Y2K compliance of its own computer systems and, to the extent possible, those upon which it relies, a business can reduce its Y2K exposure.


Provided as an educational service by John Raymond Dunham, III, Esq..

This publication is intended to serve you. If you would like certain topics covered, or have any questions or comments, you are invited to contact Mr. Dunham at: 941.951.1800, Ext. 250, Facsimile: 941.366.1603, E-Mail: jrd@jrdlaw.com, Web site: www.jrdlaw.com or write him at LUTZ, BOBO, TELFAIR, DUNHAM & GABEL, Two North Tamiami Trail, SARASOTA, FLORIDA 34236.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered and report on issues and developments in the law. It is not intended as legal advice, and should not be relied upon without consulting an attorney.