Publication Date: February 28, 1997

Related articles: The Doomsday Date and Taking Stock of a Time Bomb: Government and the Year 2000

Protecting Your Company Against Year 2000 Liability

By Sue Mellen

By now, many businesses recognize that computer systems programmed to record the year using two digits rather than four may fail on or before Jan. 1, 2000. But many managers have yet to fully appreciate one aspect of the problem that could prove a major factor in whether or not their companies weather the Year 2000 storm: the legal implications of imperfect "millennium compliance."

As Year 2000 authority Ken Orr of the Ken Orr Institute says, "This is an area of the problem that's going to be bigger than anyone ever expected. In fact, I tell my kids that they should brush up on their COBOL and go to law school at night."

Some law firms that specialize in technology issues are dedicating significant staff and resources to helping clients understand their exposure to Year 2000 liability. One of them is the New York-based firm LeBoeuf, Lamb, Greene & MacRae, L.L.P., where 40 attorneys are at work on various aspects of the issue. Jeff Jinnett, a specialist in computer law, has traded his position as partner of the firm to serve as president of its wholly owned subsidiary, LeBoef Computing Technologies, where he spends his time sorting through the Year 2000 legal morass. The law firm's client base, concentrated in the areas of insurance, utilities, telecommunications and financial services, needs to be most aware of the ticking of the date-change clock, he says. But these are not the only industries that could find themselves on the losing end of expensive and time-consuming legal battles.

"Because these industries are so heavily regulated, with service levels dictated by law, they will be most heavily impacted. But, as I began looking at the Year 2000 issue, I realized that a great many businesses are in bad shape. Think about it. When AOL [America Online] was down for 19 hours and threatened by suits from irate subscribers, its stock went down three points. That's a huge loss for a company of AOL's size. Imagine how stock prices might be impacted if a company is unable to service customers for days or even weeks," Jinnett says.

Jinnett says that corporate areas of risk fall into three basic categories:

• Losses in share prices—A risk for publicly traded companies.
• Lawsuits against directors and officers—A risk for public and private companies.
• Lack of compliance in business partners—A major risk for larger companies whose businesses depend upon several smaller vendors and distributors.

The Best Legal Defense: A Good Plan

The best protection against Year 2000 liability, says Jinnett, "is to start planning right away. This is one issue where we don't have the luxury of time." Jinnett's advice: A company should charge its chief information officer and general counsel to work together in Year 2000 plan development. The chief financial officer should be involved to ensure that sufficient funding is secured and necessary disclosures recorded. The plan should be presented to the board of directors, who should then call in a recognized Year 2000 vendor to assess the route to millennium compliance. As the plan is completed and implementation begins, the board should receive updates every three to six months.

"In this case, the board has full knowledge of the plan as it unfolds. So if the company gets hit with a shareholders' suit, board members can prove due diligence," Jinnett explains.

Vito Peraino, a partner in the Los Angeles office of Hancock Rothert & Bunshoft L.L.P., and head of the firm's Year 2000 working group, says the biggest legal threats to companies are breach of contract suits or charges of mass consumer fraud when computer systems fail. "If a bank can't service its customers or a delivery service can't live up to its advertising, there are massive issues of liability. Obviously, the best defense is to get a good plan in place as soon as possible," he says.

Peraino adds that companies should work closely with all vendors to be sure firms that could impact their operations have Year 2000 plans in place.

"This will be a big issue for manufacturers who depend on vendors for parts. Suppose you are an auto manufacturer with a contract to deliver a fleet of cars by a certain date. If a vendor's system fails and he can't deliver the parts you need, you are at risk for a breach of contract suit," Peraino explains.

Companies should closely examine their outsourcing agreements to determine when vendors are responsible for repairing millennium "bugs." Peraino suggests that firms pay close attention to the "force majeure," or "act of God," clauses in contracts, which could exempt vendors from liability.

Both experts note that the insurance industry has begun to introduce products that provide Year 2000 liability protection. But as Peraino says, the best protection is good planning. "As the issue matures, rights and obligations will clarify, making even clearer the benefits of vigilance and the costs of negligence."

Sue Mellen writes from Tyngsboro, Mass.

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Vito Peraino and Ken Orr are featured speakers at DCI's Year 2000 Issues & Answers Conference. Please see the latest online brochure for program and registration information.

For more on the Year 2000 topic, please see these articles from DCI's Article Archive: Systemic Triage, by Peter de Jager, and The Doomsday Date and Taking Stock of a Time Bomb: Government and the Year 2000, by Sue Mellen. Peter de Jager, a frequent DCI speaker, maintains The Year 2000 Information Center at www.year2000.com.

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