By: Vito C. Peraino

 On March 9 and 10 in New York, Lexis/Nexis co-sponsored Fulcrum's seminar "Year 2000 Computer Crisis: The Litigation Summit" which brings together voices from all perspectives on the legal impact of the problem. As co-chair of the conference, we found the comments of Mr. Michael Spencer of Milberg Weiss Bershad Hynes & Lerach to provide a valuable insight into the first wave of litigation that has been and will continue to be filed over this problem and where the litigation wave might move. We believe these comments to be significant because the Milberg Weiss firm has filed the first two class actions on the Year 2000 crisis: The Atlaz International Ltd. v. SBT Technologies, Inc. (Case No. 172539) suit in Marin County, California and the Cappellan v. Symantec Corporation (Case No. CV772147) suit in Santa Clara County, California. (For copies of the cases see www.2000law.com).

I. Derivative Actions

 Mr. Spencer admitted that at present, his firm had no hands on experience with Year 2000 derivative actions because they had not yet identified circumstances which would compel initiation of an action. That is, they are not yet aware of any material decline in stock prices due to Year 2000 problems. While he stated his belief that directors and officers are "behind the curve" in addressing the problem, the conduct they have seen is not yet compelling or obvious enough to compel action.

Should stock price impact due to disclosure become a reality, we would expect to see the plaintiffs' securities bar become more interested in such actions. We note that the January 12 amendments to Staff Legal Bulletin No. 5 (reported in Vol. 1, Issue 1, February 1998) have increased the likelihood that companies will be disclosing their Year 2000 impacts during the first round of filings this month. We also note that the FASB statement that Year 2000 costs must be recognized in the year incurred, rather than capitalized, will exacerbate the bottom line impact and increase the likelihood of some downward stock price movement for many companies.

II. Breach of Warranty Actions

 More significantly, Mr. Spencer articulated the Milberg Weiss view regarding breach of warranty actions. He indicated that his firm is taking a hard look at bringing such actions against software and hardware manufacturers and against computer consultants. He identified the "easiest" area as actions against computer software manufacturers.

Mr. Spencer stated his view that the release of non-compliant software will subject a company to liability if the company fails to offer a free of charge fix to all purchasers of the software. This position is taken with respect to both current and prior releases of software. Noting that many companies are supporting their prior releases by offering a free of charge Year 2000 upgrade, he singled such companies out as acting "responsibly."

These companies were contrasted with companies that are making the Year 2000 problem "a marketing opportunity." He perceived that these companies view a year 2000 fix as an upgrade instead of a fix to be provided free of charge.

Noting that the way a software company executive thinks about this problem is different than the way that a plaintiff's lawyer thinks about this problem, he identified a software industry view that customers should always have the most recent version of a company's software and be willing to pay for it. He characterized owners of older versions of software as customers the software industry executives "treat with disdain." He noted that where his firm "sees situations where widely disseminated software (is sold) to consumers with no free fix, chances are very good we will take that case."

The legal theories that will support these claims rest on breach of warranty. To prepare such an action, all literature relating to the product will be collected and reviewed. Where warranties are stated specifically, Mr. Spencer sees a relatively clear case.

Mr. Spencer conceded that cases based on a theory of breach of implied warranty, while factually similar, are legal more difficult because the implied warranties are typically disclaimed. However, he noted that in the consumer context, certain statutes limit disclaimers of implied warranties. He cited the federal Magnusson-Moss Consumer Product Warranty Act, 15 USC §2301 and California's Song-Beverly Consumer Warranty Act, California Civil Code §1790, et seq., as examples of statutes that limit disclaimers of implied warranties in consumer contracts.

Mr. Spencer noted that the class action device provides the most likely procedural vehicle for such actions. The only wrinkle he conceded was that some purchasers of software will have already suffered substantial consequential damages and that some of these individuals may have suffered damages that are peculiar to that individual, making class certification more difficult.

While acknowledging that difficulty, Mr. Spencer took comfort from the case of Microsoft Corporation v. Manning, 914 S.W.2d 602 (Tex. App. 1995) LEXIS 2794 where the Texas Court of Appeals affirmed class certification of a consumer class of purchasers of DOS 6.0. Though only costing $10 to fix, Microsoft was unwilling to provide a free fix in that case. The court rejected Microsoft's argument that class certification was not appropriate where the class excluded individuals that had suffered unique consequential damages. The court went on to hold that the ruling would not stand as either issue preclusion or claims preclusion in a subsequent action by individuals that suffered consequential damages.

By stating a theory that applies to current and prior releases of software, the implication of the theory stated in the Symantec and Atlaz suits is that, at least for some period of time, a seller of software to consumers is required to provide free fixes. Should this theory prevail, the impact on the software industry would be very significant, indeed.

Conclusion

 We continue to believe that the Year 2000 problem will become a fireball of litigation. Prudent companies and institutions are taking steps now to proactively manage a coming litigation problem. Mr. Spencer's comments underscore that more litigation on this issue is likely, and that this initial wave will spread as the Year 2000 problem becomes more significant.

Second Year 2000 Lawsuit Filed Against Symantec

 Symantec has been hit with another lawsuit in connection with their Norton AntiVirus Software. The complaint filed in the Superior Court of the State of California in Santa Clara County.

The complaint alleges that the Norton AntiVirus Software is defective prior to Version 4.0 and does not have the ability to recognize or process dates starting in the year 2000. A copy is available for download at www.2000law.com.

Year 2000 Class Action Filed Against Macola Inc.

 Another Year 2000 class action lawsuit has been filed. The complaint was filed in the Court of Common Pleas in Marion County, Ohio on April 1, 1998. The suit has been filed on behalf of all persons who purchased Macola Progression Series Software, Version 6.0.

The complaint alleges breach of warranty and fraud in connection with Macola's accounting computer software. According to the complaint, the software is defective in that it does not recognize and process dates starting in the Year 2000. Additionally, Macola is allegedly requiring its customers to pay substantial fees in order to purchase upgrades that would remedy the date recognition problem. A copy will be available soon at Click Contact Link

The Health Care Financing Administration Reports Potential Cost Reimbursement Problems Due To Year 2000 Problem

 The Senate Government Affairs Committee chaired by Senator Fred Thompson (R-TN) held hearings on April 1 relating to the Year 2000 problem. It received testimony from Mr. Devin Thurm, Deputy Secretary, Health and Human Services regarding the lack of readiness of The Health Care Financing Administration -- the organization charged with assuring that Medicare and Medicaid payments are made. Mr. Thurm's testimony provides yet another example of a dire threat to the healthcare industry due to Year 2000 failures.

[T]he Health Care Financing Administration has made progress with its external contractors, the department's most critical year 2000 issue, but we need Congress's help to provide us with greater leverage to expedite the year 2000 compliance in this area.

In HHS, our year 2000 costs have increased moderately, from about $140 million as of last fall to $165 million. Although some of our agencies still need to accelerate the pace of their remediation efforts, our budgetary needs appear manageable except in the case of HCFA's external Medicare contractors. The most critical set of year 2000 issues requiring the department's attention and assistance and also that of Congress are the issues surrounding HCFA's external Medicare contractors. HCFA's decentralized Medicare program is run by over 70 external contractors which annually process nearly one billion claims for over one million health care providers. HCFA has been proactive in exerting pressure on [the] Medicare contractor community to become millennium compliant through meetings, proposed amendments to Medicare contracts requiring compliance and guidance that would provide more restrictive definitions of compliance and testing requirements.

But our leverage is limited because Medicare contracts are unique and differ in several important respects from more typical federal contracts awarded under the federal acquisition regulations. Medicare statutes require HCFA to contract for services with insurance companies only, and only on a cost-reimbursement basis. Moreover, intermediary and carrier contracts provide for automatic renewal with no fixed term. Most importantly, HCFA is required to reimburse its Medicare contractors for allowable costs, thus limiting the ability of HCFA to exert financial control over the year 2000 efforts of its contractors. Our Medicare contractor reform proposal which was sent to Congress in February would amend the Medicare statute with regard to HCFA to exert financial control and pressure over the year 2000 efforts of its contractors. Our Medicare contractor reform proposal which was sent to Congress in February would amend the Medicare statute with regard to HCFA contractor relations. Our proposal would provide the secretary with greater flexibility for managing the Medicare program by allowing the secretary to contract competitively with any qualified entity, including insurance companies. This change would promote competition, an essential tool to ensuring that Medicare computer systems are modified to continue processing claims in the Year 2000.

In addition, the proposal would allow the secretary to contract for Medicare functions on any basis permitted by the federal acquisition regulations. Swift passage of this legislation would provide HCFA with greater leverage to proactively manage Medicare contractors. We respectfully seek your assistance in securing enactment of this important proposal. We also recognize that HCFA will continue to face a daunting and exhausting effort that contractor reform alone cannot address. This may well require the identification of additional resources to be used for contractor year 2000 remediation. We are currently assessing this budgetary questions and we are especially dependent on our independent verification and validation contractor, who will review both internal and contractor remediation efforts. And in addition, HCFA's testing contractor will provide independent assurance that their renovated systems will operate properly in the next millennium. . . .

Finally, HHS has taken the lead in obtaining reliable information on the year 2000 compliance status of biomedical equipment. In January, we sent a letter to over 16,000 biomedical equipment manufacturers strongly urging them to identify non-compliant products and the actions they are taking to ensure compliance by responding to a survey developed by the department's chief information officer and the Food and Drug Administration.

The FDA has agreed to operate and maintain a public Web site listing all biomedical equipment information received from the manufacturers. The Web site is operational and the FDA is currently posting the manufacturers' responses. To increase awareness of the survey and our Web site, we have enlisted professional associations and the trade press, and we are planning additional outreach activities beyond the biomedical equipment issue.

The red flags are being waved and prudent organizations will take note of Mr. Thurm's comments. We will continue to report on the efforts made by HHS in addressing the Year 2000 problem.

Vito C. Peraino, Esq. of Hancock Rothert & Bunshoft LLP in Los Angeles, California chairs the firm's Year 2000 Working Group and specializes in 4, Year 2000 legal issues. Reach him at Click Contact Link

Visit the Year 2000 website at Click Contact Link

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