Brad Sprayberry

Monday, 22 July 2002 10:00

Avoiding Year 2000 lawsuits

You think you're ready for the Year 2000. You've tested your software. You've checked your phones, your fax, your computers. You've even talked to your vendors about Year 2000 compliance. So what do you do if one or more of them has not addressed your Y2K concerns? What legal liability might you face due to unexpected Year 2000 failures?

Some experts predict Year 2000 lawsuits will ultimately cost $1 trillion. In fact, some matters pertaining to Y2K issues are currently before U.S. courts or being considered by lawyers. Although this column is no substitute for legal advice-your attorney should determine the appropriate course of action in any particular situation-looking at some of these "what-if" scenarios may help you steer clear of Y2K litigation.

Assume, for example, your vendor says it won't "fix" the software or hardware it has sold to you, but is selling a "newer version" you can purchase. Here, the vendor may be liable for misrepresentation if its advertising or sales pitch implied its product would be Year 2000 compliant and the vendor is trying to force the purchase of an upgrade rather than invest time and resources to "fix" the original software. Your claim could be even stronger if you are locked into long-term maintenance or outsourcing agreements. You may also be able to claim the vendor is liable and must take corrective action if it did not exercise "good faith and fair dealing" by failing to disclose a Year 2000 glitch at the time you were considering the purchase.

Your IT staff may be capable of reviewing and modifying the noncompliant software's source code. However, if the party who owns the intellectual property rights to that code refuses to grant you the right to "fix" it yourself, a court may grant injunctive relief and issue an order allowing you to make the necessary modification. On the other hand, making the modification without permission or court approval will likely be an infringement of the owner's rights, subjecting you to liability.

If, on Jan. 1, 2000, you find your company is a victim of a Y2K failure, your vendor or provider may be liable for breach of an express warranty if it told you the malfunctioning equipment or program was Year 2000 compliant or that it contained no viruses. Additionally, some states have specific laws dealing with deceptive trade practices which may help you recover damages in these situations.

If your business suffers damages due to malfunctioning building security systems, HVAC systems, elevators and the like, you may be able to assert a product liability claim against the manufacturer. If you lease office space, your landlord may be liable for breaching the covenant of "quiet enjoyment."

Your business may also have recourse against banks, brokerage firms and other financial institutions if they "lose" your money due to a failure to record deposits, issue payments or affect stock trades. Banking failures can also occur where records of deposits are unavailable or incorrectly calculated and the bank refuses to honor checks.

In cases in which an entity does not or cannot fulfill contractual obligations due to its or its suppliers's Y2K problems, a breach of contract may exist. Directors and top managers at public companies may be liable for breaching their duty of care and loyalty if they fail to correct Y2K problems or take appropriate action early enough.

Since the business world is a domino system of interconnectedness, someone else's failure may have a direct impact on your ability to fulfill your commitments. Total immunization for any business is unlikely. However, failure to give sufficient attention to Year 2000 business and legal issues will almost assuredly result in delays and losses which could jeopardize the success of your company. SBN

Brad A. Sprayberry is an attorney with Kegler, Brown, Hill & Ritter in Columbus.