Enterprise Systems: Round Table: Year 2000 Litigation -
[Cached Version]
Published on: 3/11/2001
Last Visited: 3/11/2001
* Vito C. Peraino , Partner at Hancock Rothert and Bunshoft LLP , where he serves as chairman of the firm's Year 2000 Working Group.Mr. Peraino has testified before the U.S. Congress on legal issues associated with Y2K.
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VITO : My background is disaster litigation and I've found Capers' numbers a little overstated.But people shouldn't come away thinking this won't be a large litigation.Our best estimation is that this is going to be problem on par with , say the pollution litigation , or on par with the asbestos litigation.So I'm thinking somewhere in the range of $ 250 billion dollars for litigation is not unreasonable -- as an estimate.It's an unreasonable number.
THOMAS : I agree with Vito.
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VITO : More accurately , what's happening is 48 states have approved a form of Year 2000 exclusion.That doesn't necessarily mean that the insurers will use the exclusion.Another thing to keep in mind is that it's a very soft insurance market.So the next three months will be the critical time frame to see where the insurance industry will go with Year 2000 exclusions.I do think it's fair to say that the insurance industry is likely to be very vigorous in denying their Year 2000 claims for a host of technical insurance policy reasons that I won't bore you with.But I think there's going to be a lot of litigation and a lot of action against insurers over this.
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JAMES : Vito , what do you see as the trigger which will get past the exclusion.
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VITO : Again , it's the environmental and asbestos paradigm that works here.The issue is that if you bought insurance over a period of time , can you take advantage over all the policies that cover you over the period of time.And that's going to be one of the big battles ; do you get the limit in just the year where the failure occurs or whether you get a broader span of coverage.I expect the insurers will again vigorously resist having the broad span.
ESJ : I understand that the insurers will not be obligated to pre-release their Y2K intentions to their customers.
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VITO : That's probably right.Until a claim is filed , the insurer is not obligated to tell its policy holder how it will interpret the policy.So in all likelihood , people won't know until they actually file a claim.But the insurers are being public about their view that this is not a covered lost , so it shouldn't come as a surprise to anyone.
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VITO : Yeah , no doubt.That's exactly right.Famous last words.
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VITO : We've put together an alliance of firms internationally that are Year 2000 savvy to create what we're calling a virtual Year 2000 law firm , to position ourselves so that when these global litigations start , we'll have a network of people who can step in and assist in countries we think will be active.
ESJ : Will it be enough for corporate officers and CIOs to simply say , We trusted our third-party provider or consultant to fix the problem and they didn't?.
VITO : Generally speaking from a management liability perspective , management does have the option to rely on an outside expert.As long as they undertake an effort to understand what is happening with the Year 2000 , they've discharged their duty.But that doesn't mean that the company might not still be liable if there's a failure.If I can't fulfill my contracts it doesn't matter how I got there.
From the providers perspective , they generally have strong contractual limitations that are going to provide a real barrier to their liability.So it's all going to fall back into the lap of the corporation.
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VITO : I think the letter was a very savvy move on IBM's part.It wouldn't surprise me to learn that there was a team of lawyers who took a real hard look at that letter , if not every word of every draft of that letter.
I think what IBM was attempting to accomplish was to put their customer base on notice of a potential problem so that in the event of a failure business losses should not be recovered against them.I think they will argue that in certain situations it began the statute of limitations to run.And they will argue that they placed the duty on the client to act.Whether this holds up will be up to the courts , but in terms of a savvy legal move I tip my hat to them.
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VITO : In the massive litigation , it can take 10 or 15 years of trial , which just doesn't work..But the statute of limitations is one of the areas that is being misanalyzed across the board.A lot of statutes are being blown without people paying attention to them and people aren't doing a good job of analyzing their rights and what they should do to begin a dialogue with their partners to secure those rights.
It's why we developed what we call Legal Audit , to help people begin to think through from a legal perspective where they stand : where their liabilities are , where their rights are , where they should begin negotiating to try to avoid going to court ; because once you're in court , that's where the hemorrhage of money really starts happening and that's not in the best interest of the business world.
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VITO : Just so we're not bashing litigation too much.. . . [ As all laugh ].
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VITO : All the comments are fair , but let's not lose sight of the fact that the courts are there to resolve disputes and there are going to be serious disputes arising over the Year 2000.
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DENNIS : I agree with all that , I would amplify that with that , as Vito said , there are people out there perpetrating fraud.
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VITO : The first phase of litigation is already being seen.The computer purchaser who is suing the vendor who fails to give a free upgrade.This will expand to beyond the consumer to the business purchaser.That may take everyone from the reseller back to the manufacturer.
The second phase will be the shareholders suing a company that hasn't revealed it's true Year 2000 compliance.And as a result there is a stock performance impact.
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VITO : One thing that amazes me is , this is the first time where the legal industry and the IT industry has intersected.It's amazing that an organization will spend $ 25 million on a software application and not have a lot of legal involvement in the purchase.If it were a real estate purchase for that much , lawyers would be crawling all over the contracts.The IT industry is a litigation virgin.It doesn't understand the time to move is yesterday.And people not watching the legal ball are going to get crushed.
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VITO : That's an excellent point.No one will come to the table with their hands completely clean.
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VITO : Jim makes a great point.
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VITO : Absolutely.This problem unlike other technical problems tends to force people to feel compelled to cover their rears , because they don't feel they are getting support within the organization.So the e-mails to the CIO saying , Oh this is terrible , you didn't approve my budget , there's no way we're going to make it , are out there.And these e-mails are the smoking guns.
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VITO : When I first spoke at a technical conference the two big questions I was asked when people learned I was a lawyer were : Can I be held personally liable when my corporation doesn't give me the support I need? And the second was What are the tax consequences if I take all my money out of 401K.Can I liquidate my mutual fund , because I don't think my retirement money will be in place..
This drove home to me that people are personalizing this issue.
ESJ : Will anyone go to jail over this.
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VITO : It's certainly possible.But the more likely places you'll see criminal litigation will be the SEC , stock fraud enforcement angle - where people are not stepping up.
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VITO : End of third quarter this year [ in fact it has passed , September 30 , 1998 , was the date ] .The most amazing aspect of this disclosure is that companies have to layout their most reasonable likely worst-case scenario. This is a huge and unprecedentally dangerous requirement from the SEC.
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VITO : I drafted one out of the box for a company that volunteered disclosure back in August and it went form one to four-and-a-half pages.
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VITO : We spent a full week debating that ….
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VITO : It's difficult.I agree costs and where you are , clearly ought to be out there ; but your worst case scenario has the potential of being a game plan for the plaintiffs and it gives your competition extremely sensitive information and it can precipitate litigation.Because companies will be conservative with their predictions , and when the failure is worse than their predictions -- well , that's when you light the match and put it in the gasoline can.The litigation is just going to explode.The SEC is doing a disservice by letting the pendulum swing just a little too far.
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VITO : Barbara's points are important because dialogue about how the liabilities will play through is an issue that hasn't been forced to the table around the country and frankly nor has it been forced to the table with Congress.
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VITO : Although the SEC action may have gone too far , it is a defining moment.The SEC is making clear as to what you must say.In fact , the typical disclosure we've been s
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