Year 2000 Bug Could Bring Flood of Lawsuits
By Rajiv Chandrasekaran
Washington Post Staff Writer
Sunday, May 3, 1998; Page A1 The year 2000 is still 20 months away, but the legal blame game already has begun. At issue: who should pay the costs of the "millennium bug," a glitch that has left computers all over the world unable to recognize dates after Dec. 31, 1999.
Near Detroit, a grocery store is suing a cash register manufacturer whose machines can't accept credit cards that expire in 2000. In Ohio, a firm that makes accounting software is being hauled into court by a Connecticut computer company. And in New York, a well-known law firm is spearheading a class action lawsuit against the developer of popular computer virus-blocking technology.
The suits are the first in what legal specialists predict could be a wave of litigation that eventually could prove more expensive and time-consuming than the worldwide effort to fix the glitch in the first place. The cost of hiring programmers and buying new computers is forecast by industry analysts to be $300 billion to $600 billion. The price tag for lawyers' fees and compensating people for any failures that occur, though no one knows how many there will be, could reach $1 trillion, according to some new estimates.
"We used to think that programmers would be the ones to profit from this," said Lou Marcoccio, a research director at the Gartner Group consulting firm. "Now it's becoming clear that lawyers stand to gain the most here."
Lawyers have started attending seminars on how to bring and defend Year 2000 cases. Law firms eager to get in on the action have set up Internet sites and sent out mass mailings to attract clients.
"There'll be as many, if not more, lawyer-driven cases as there will be customer-driven ones," said Kirk R. Ruthenberg, a partner in the Washington office of Sonnenschein Nath & Rosenthal who teaches a seminar on Year 2000 legal issues.
Corporate executives complain that people already are so afraid of being sued that they can't get a straight answer from their banks, suppliers or vendors on whether their computer systems will be ready to function in the new century. Requests for information about readiness are routed through lawyers not technicians who send out boilerplate language saying the company is working hard and is highly confident its systems will be ready.
At the same time, insurance companies are furiously rewriting policies and seeking legislative changes to protect them from what they expect to be a wave of claims and finger pointing when computer systems fail.
If a date-related computer failure prevents an airline from flying, for example, who will make up the millions of dollars in lost ticket revenue? Should the airline just swallow the cost itself, or are its computer and software suppliers liable? How about individual programmers? Or the insurance companies that cover those parties?
Preliminary estimates for litigation and settlement costs range from $100 billion to $1 trillion, a figure advanced by the Lloyds of London insurance company and the Giga Information Group, a consulting firm in Cambridge, Mass.
That could rival legal fees and settlements associated with such products as breast implants, asbestos or tobacco. Andrew S. Grove, chief executive of computer chip maker Intel Corp., recently predicted that "this country is going to be tied down in a sea of litigation" over the next decade because of the Year 2000 problem. "It's going to put the asbestos litigation to shame," Grove said.
The big explosion of such suits probably won't start until next year, industry specialists said. But Marcoccio, who monitors Year 2000 work at 375 large law firms, said he knows of about 200 disputes that already have been settled out of court. "Most of them were resolved for substantial sums, between $1 [million] and $10 million per settlement," he said.
No Year 2000 case has yet been decided by a court, but legal observers and technology companies are watching closely the first class action suits, all of which have been brought by the high-profile New York law firm of Milberg Weiss Bershad Hynes & Lerach. A win by Milberg, the nation's most prolific filer of class action suits accusing companies and executives of securities fraud, could lead to a quick flood of similar suits, experts said. Even a loss wouldn't necessarily dissuade further legal action, they said only a change in lawyers' litigation strategy.
Milberg's first case was filed in December on behalf of Atlaz International Ltd., a New York computer equipment vendor, which charged Software Business Technologies Inc. of San Rafael, Calif., with breach of warranty, fraud and unfair business practices. Milberg alleges that SBT is improperly forcing customers, including Atlaz, to buy a pricey new version of its accounting software to correct the date glitch instead of providing a free "patch" to fix the problem.
"They knowingly sold them a product that was materially defective and failed to disclose that," said Salvatore J. Graziano, a Milberg lawyer representing Atlaz, which is seeking more than $50 million from SBT. "Our position is that the upgrades should be given for free."
A lawyer representing SBT said that after the suit was filed, the company started offering a free software "patch" to fix the problem in versions of its software used by Atlaz. But he acknowledged that the repair won't work for other, earlier editions of SBT's software. "The engineering task of going back and altering all the old [software] code is substantial," said David M. Furbush, an attorney representing Atlaz.
Milberg's other two class action suits one against Ohio accounting software firm Macola Inc. and the other against anti-virus software maker Symantec Corp. make similar claims for the same reason: The companies are requiring users to pay for new versions of software that are Year 2000-compliant.
Despite the recent lawsuits, software companies don't appear to be backing down from the upgrade charges. In January 1997 only about 1 percent of software vendors were charging for Year 2000 upgrades, Marcoccio said. By this January, 29 percent were, he said. "They see the year 2000 as a way to sell new software, to make money," he said. "It can be a risky strategy."
A spokesman for Symantec, which makes the popular Norton AntiVirus software, said that people who use virus-checking software should be buying updates anyway to get the latest protection. "You need up-to-date products to scan for viruses," said spokesman Richard Saunders, who added that the Milberg suit "is without merit."
In all three of the Milberg cases none of the plaintiffs has yet suffered actual Year 2000-related computing problems.
Produce Palace in Warren, Mich., already knows what that's like. Its cash registers will not accept credit cards that expire in the year "00" or beyond. If a cashier swipes such a card through the magnetic reader on a register, it can cause the store's entire computer system to crash, said Brian P. Parker, the store's lawyer.
"Imagine a Saturday afternoon and the registers go down in all 10 aisles," Parker said. "It's been chaotic for them."
After unsuccessfully trying to fix the problem, the store sued the cash register maker, TEC America Inc., and its distributor, All American Cash Register Inc. Last month Parker said a mediator recommended that the Produce Palace be compensated $250,000. The store has not formally decided whether to accept the settlement; Parker said he expects the case to go to trial. A TEC America spokesman would not comment on details of the suit.
Lawsuits against technology companies may be only the first step in a years-long stream of litigation. Specialists predict that by late 1999, when some businesses start to experience system failures, a second round of chain-reaction lawsuits will ensue among all sorts of companies.
An auto parts maker that fails to get raw material because of a Year 2000 failure at a supplier might sue the supplier. The automaker that relies on the parts maker to stock its assembly line might then sue the parts company, because it has failed to deliver its parts on time and cost the automaker sales.
Investors who see a company's stock price slide because of Year 2000-related expenses and system failures could mount class action suits, claiming that corporate officers failed to adequately inform shareholders of the problem. "Both breach of contract suits between businesses and shareholder suits will be rampant," said Jeff Jinnett, a lawyer with the New York firm of LeBoeuf, Lamb, Greene & MacRae.
Hoping to stem such lawsuits, a coalition of technology firms and other businesses in California have urged the state legislature to pass a bill that would immunize companies from Year 2000 suits if they warn customers of the problem and offer free upgrades. The bill was defeated by a key committee last month after strenuous opposition from the state's trial lawyers.
But state officials across the country are moving quickly to protect themselves against litigation. Bills that would limit state agencies from liability if their computers suffer date-related failures recently have been signed into law in Virginia, New Hampshire and Georgia.
A final wave of litigation, experts said, will begin in 2000 and involve insurance companies, as defendants seek to force their insurers to cover their legal fees and any damages they are ordered to pay. The cost to the insurance industry could reach $65 billion, said Todd A. Muller, an assistant vice president at the Independent Insurance Agents of America, a trade group in Alexandria.
"There's going to be a huge impact on the insurance industry," Muller said. "Because the industry has deep pockets, we expect [trial lawyers] to do everything possible to drag us into these disputes."
Insurance industry executives said they expect businesses to file claims under various types of common corporate policies, including property insurance, general liability insurance, and directors' and officers' liability insurance. Property insurance claims, for example, could result from actual physical damage caused by a Year 2000 malfunction, such as fire sprinklers that accidentally go off, experts said.
The insurance industry is moving quickly to prevent such suits by revising policies to exclude Year 2000-related claims on the grounds the peril wasn't known to exist when the policies were created, and as a result, premiums never were collected for such coverage. The Insurance Services Office Inc., which authors generic policy language used by most large insurers, already has gotten regulators in 40 states to approve such exclusions, said Christopher Guidette, an ISO spokesman.
At the same time, insurers are arguing that the problem was entirely predictable, and therefore isn't coverable, because insurance is only for the unpredictable.
"This is a foreseeable event. People have known for more than 98 years that this was coming. ... We're not going to be the bank of last resort to pay for this," said Steven Goldstein, a spokesman for the Insurance Information Institute, a trade group in New York.
But whatever steps the insurers take, predicts Muller, "when their claims are denied, people are going to go to court."
Lawyers who have gone after companies over asbestos and breast implants already have started preparing litigation strategies for the date glitch.
"Insurance sells itself as a public-service operation," said Eugene R. Anderson of Anderson, Kill & Olick in New York, who has won dozens of cases against insurers. "They are the safe hands, the rock of Gibraltar, the good neighbors. When there's a problem they can't just say, 'Oh well, we don't cover that.' It's contrary to the very idea of insurance."
Unlike in breast implant and asbestos cases, some lawyers said the lack of ordinary human victims in Year 2000 litigation could make it tougher to ask a jury for multimillion-dollar damages. Others caution that the scope of the litigation will rest on the number of systems that actually fail, a figure impossible to determine today.
But there is broad agreement that no matter how severe the glitch eventually proves to be, a cadre of lawyers will find reason to sue. "There's too big of a jackpot here," Marcoccio said.
© Copyright 1998 The Washington Post Company