Y2K Liability Reform Bill Filed in Congress

(July 21, 1998)  Rep. David Dreier and Rep. Chris Cox  filed a bill in the House that would limit liability for Y2K failures.  The bill protects some "designers, developers and manufacturers" and other persons, such as users of noncompliant software or equipment.  The purpose of the bill is "to have companies focussed on fixing Y2K problems rather than being frozen by the fear of lawsuits," said Dreier.  The bill's strong protections are in sharp contrast to the weak bill proposed by President Clinton last Tuesday.

The bill, HR 4240 IH, is titled the "Y2K Liability and Antitrust Reform Act."  It is sponsored by Rep. David Dreier (R-CA), who is a senior member of the key House Rules Committee, and Rep. Chris Cox (R-CA).  HR 4240 would limit the financial liability for Year 2000 failures of businesses who first meet certain criteria. The key phrases of the bill state that all such suits will "be deemed to be based in contract".  Then, financial recovery would be limited to "consequential business loss and costs of repairs or replacement resulting from the failure."  The bill appears to be an attempt to preclude larger pain and suffering and punitive damage awards.

The bill would also provide a temporary exemption to federal and state antitrust laws for businesses working together to fix problems.

President Clinton gave a speech in Washington on Tuesday, July 14, in which he said:

"I will propose good Samaritan legislation to guarantee that businesses which share information about their readiness with the public or with each other, and do it honestly and carefully, cannot be held liable for the exchange of that information if it turns out to be inaccurate."

While Clinton's one phase was vague, the bill it describes would not provide much protection.  Clinton has long been supported by trial lawyers' groups, which stand to profit tremendously from Y2K litigation.  No bill supported by Clinton has yet been introduced.  The Dreier bill would provide much more significant protection.

"With the press reporting that some unscrupulous lawyers are already planning multi-billion dollar lawsuits to reap monetary rewards from America's pain, it's in the national interest to have companies focussed on fixing Y2K problems rather than being frozen by the fear of lawsuits," Rep. David Dreier  said in a press release. "Although the trial lawyer-dependent Clinton Administration offers a pop-gun response to this potentially immense problem, the legislation I introduced today is a rifle-shot that can work."

The bill provides that in certain circumstances:

"An action which is brought in a Federal or State court against a person because of a computer date failure shall be deemed to be based solely in contract and shall only allow recovery for consequential business loss and costs of repairs or replacement resulting from the failure ..."

This protection would be offered to two categories.  First, it would cover "designers, developers and manufacturers."  This would apply to businesses that supply or have supplied software or equipment that experiences failure with the new millenium.  Second, it would cover others, such as the businesses whose equipment, operations, or services fail.

Designers, developers and manufacturers would receive the "contract remedy" protection, if they meet the following conditions:

• The case does not involve a personal injury (other than emotional).
• The business gives written notice to all of its known customers, and publishes notice in its website.  This notice must warn of the Y2K problems of its products, and explain how to remedy the problems.
• The business offers a repair or replacement to the problem software or equipment (for free if it was first offered for sale after December 31, 1994).

Other businesses would receive the "contract remedy" protection, provided:

• The case does not involve a personal injury (other than emotional).
• It made reasonable efforts to correct any problems.
• It tested it systems before July 1, 1999.
• It gave notice of its efforts to customers and the President's Y2K council.

The antitrust litigation protection section of the bill provides that except for actions based on boycotts, "the antitrust laws shall not apply to conduct engaged in, including making and implementing an agreement, solely for the purpose of establishing responses designed to mitigate the impact of computer date failure in a computer system, in a component of a computer system, or in a computer program or software ..."   This protection would not apply to agreements made after December 31, 2001.

The bill was filed on July 16, and was referred to the House Judiciary Committee.  Since there are few business days left in the 105th Congress, it is unlikely that this bill would be passed in 1998.

The Dreier-Cox bill has some similarities to the securities litigation reform bills, such as the PSLRA which was enacted in 1996, and the Securities Litigation Uniform Standards Act (SLUSA) which has been passed by the Senate, and is about to be passed by the House.  All of these bills have broad application, but primarily benefit computer industry companies; all are being backed by California congressmen (Rep. Anna Eshoo (D-CA), who is sponsoring the SLUSA, represents Silicon Valley); and, all are designed in large part to limit tort liability in California state courts, which are notorious for awarding huge judgments in flimsy cases.