October 1999

The Y2K Act: Notification Tricks and Traps

On July 1, 1999, the United States House of Representatives and Senate approved an amended version of HR 775 (the Y2K Act), which will affect lawsuits arising from Year 2000 (Y2K) problems.1 President Clinton has signed the Y2K Act into law. The Act is intended to provide uniform legal liability standards and encourage remediation and nonlitigious solutions to Y2K problems.

The Y2K Act, as enacted, differs from the prior versions of the bill, passed first by the House of Representatives on May 12, 1999, and in amended form by the Senate on June 15, 1999. A significant feature of the Y2K Act, both as originally proposed and as finally enacted, concerns the establishment of a notification system which would require a prospective plaintiff to notify a potential defendant before filing suit.2 A similar provision was recently signed into law in Texas.3 This article briefly examines the notification system outlined in the Y2K Act, noting differences between the Act as originally proposed and as finally enacted. The article further suggests potential difficulties that both plaintiffs and defendants may encounter in dealing with these notification requirements.

The Y2K Act requires that a prospective plaintiff who wishes to file a Y2K action (except an action that seeks only injunctive relief) must first provide notice to each prospective defendant. The notice must include a description of the material defect that has caused the claimed harm, information concerning the harm or loss suffered, the basis for any claim against the defendant, a request for a remedy from the defendant, and identification of a person with authority to negotiate a settlement on behalf of the plaintiff.

Within 30 days after receipt of such a notice, a defendant must respond, in writing, with an acknowledgement of receipt of the notice and a description of the actions it has taken or will take to address the problem identified by the prospective plaintiff. If the defendant does not respond to the notice, or if it does not describe the action taken (or to be taken) in response to the alleged problem, the plaintiff may immediately file suit. If the defendant properly responds, the plaintiff must wait an additional 60 days before filing suit. If a plaintiff initiates a Y2K action without following the notice process, a defendant may treat the plaintiff's complaint as a Y2K notice, and the court will stay all discovery and time for filing answers or other pleadings in response to the complaint.

The Y2K Act, as finally enacted, differs in several regards from the versions of the Act that were originally proposed. The House version of the bill contained a broad definition of the term "Y2K failure." That basic definition included any failure of a device or system to process, calculate, compare, sequence, display, store, transmit or receive Y2K date-related data. The definition in the final enacted version was even broader and included any failures as a result of 2000's status as a leap year, and other failures that may result in 1999, 2000 or 2001. The final version of the Act also included a sunset provision: the Act will apply only to problems that occur before January 1, 2003. The protections in the original House version of the bill were not limited in time. The final version of the Act, moreover, reconciled a number of other differences on such issues as proportionate liability, punitive damages and liability caps.4 

The notification provisions of the Act, in particular, differ on several points from the earlier bills. First, the final version of the Act specifies that the response to a pre-litigation notice must state whether the defendant is willing to engage in alternative dispute resolution (ADR). If the defendant indicates willingness to engage in ADR, then the stay of litigation will continue for an additional 60 days from the end of the 30-day notice period. The House bill merely provided that either party could request that the other side agree to an ADR process, and that the parties could also agree to an extension of the 90-day pre-litigation period for that purpose.

Second, the final version of the Act permits a defendant, if presented with more than one notice of alleged Y2K failures, to give priority to notices that involve health- or safety-related failures. The original House bill contained no equivalent provision.

Third, the original House bill would have provided for Rule 11 sanctions for invocation of the pre-litigation notice and stay provisions of the Act if the defendant's invocation of the Act was frivolous and made for the purpose of causing unnecessary delay. The final Act contains no such provision.

Lastly, the final version of the Act contains several procedural provisions that were not contained in the bill as originally passed by the House. For example, the Act provides for tolling of statutes of limitations during the notice and reme-diation period. It also provides that the federal Act will not preempt state laws or rules of civil procedure regarding ADR.

The initial problem for the plaintiff will be to determine whether its prospective litigation is a "Y2K action" within the meaning of the Y2K Act. The Act provides that the term applies both to state and federal lawsuits where "the plaintiff's alleged harm or injury resulted from a Y2K failure." As noted above, the term "Y2K failure" is broadly defined (indeed, the definition was intentionally broadened in the final version). The Act applies, in particular, where "a claim or defense arises from or is related to an actual or potential Y2K failure." It is relatively easy to conceive of problems that appear to be within the core concept of a "Y2K failure." Where, for example, a business has purchased a computer system and discovers, shortly after January 1, 2000, that it no longer functions properly (apparently as a result of a Y2K problem), the Y2K Act probably would apply.

But other forms of losses may be more difficult to characterize as Y2K failures. For example, if the plaintiff is a customer with a long-term supply contract for raw materials, and shortly after January 1, 2000 learns that its supplier can no longer deliver (allegedly as a result of some Y2K-related system failure), it is unclear whether the Y2K Act would apply. Presumably, the defendant would claim that the suit is a Y2K action because its defense arises from a Y2K failure.

Even within the core definition of a Y2K failure, moreover, technical problems may arise. In the first scenario outlined above, for example, the mere fact that a computer system failed shortly after January 1, 2000 will not necessarily establish that the failure was "caused" by a Y2K problem. It could be caused by a host of other problems (human error, format incompatibilities or bad date inputs, to name just a few).

Because of the significant benefits of characterizing a lawsuit as a Y2K action, defendants will have great incentives to invoke the protections of the Y2K Act even if the plaintiff does not, in the first instance, provide the required pre-litigation notice. The Act provides that if the defendant elects to treat a complaint in that fashion, the court "shall stay all discovery," and the time for responding to the complaint "shall be tolled" during the 60-day period for remediation. In the event that the plaintiff considers the defendant's invocation of the Act to be improper, the plaintiff could presumably file an appropriate motion for relief from the Act's stay of litigation. But bringing such a motion would raise its own problems.

The best that the plaintiff could reasonably hope to achieve is the opportunity to proceed immediately with the lawsuit, instead of waiting 60 days. The plaintiff might, however, have to invest substantial resources to accomplish that modest goal. At a minimum, the motion would require some basic effort to summarize the facts and law applicable to the case. If the defendant resists the motion, those efforts could be increased. Indeed, the court might well determine that conflicting factual assertions on such a motion would require discovery, and perhaps even a mini-trial, all of which would concern a collateral proceeding. The prospective plaintiff might well conclude that it is not worth fighting on this issue, so long as the stakes are only a brief delay in litigation.

Invocation of the Act would, however, also have a vast array of other consequences. A defendant in a lawsuit characterized as a Y2K action would generally enjoy punitive damages limitations, proportionate liability protections, a statutory duty-to-mitigate defense and other benefits. Thus, even though the plaintiff might conclude that a 60-day delay is not particularly onerous, and even though the plaintiff may be uncertain whether its action does or does not come within the terms of the Act, the plaintiff may be forced to litigate the question of the applicability of the Act, simply because the stakes are so high.

If the plaintiff concludes that the Y2K Act applies to its prospective lawsuit, then the pre-litigation notice requirements must be addressed. The Act requires "particularity" or "specific and detailed information" about any "material defect" that has allegedly caused harm or loss, the nature of the harm or loss, the remedy the plaintiff seeks, and the basis upon which the plaintiff seeks its remedy. Although the original House version of the bill would have provided that the plaintiff need not provide "technical" details about the alleged failure, that provision was eliminated from the final Act. If the problem involves multiple computer systems, programs and operators, for example, it may be extremely difficult to provide such a summary, absent a comprehensive investigation (including, perhaps, discovery) to sort out the various potential causes.

Defendants may also conclude that they can gain a tactical advantage by emphasizing the particularity requirement. Although the Act does not expressly provide for court intervention to assess the quality of a pre-litigation notice, a defendant might make use of the particularity requirement in various ways. A defendant could, for example, respond to a pre-litigation notice by claiming that it has not been given enough information to respond to the plaintiff's notice. If the plaintiff then seeks to file its lawsuit, claiming that the defendant has not properly described the actions it has taken or will take in response to the problem, the defendant might ask the court to rule on whether its response was proper. If the court agrees with the defendant, then arguably the stay of discovery and litigation should continue until the defendant has had an opportunity to respond.

A less risky gambit for the defendant might be to insist that whatever particularized summary the plaintiff provides in its pre-litigation notice be duplicated in the actual complaint filed. The Act requires the plaintiff to plead specific information about the defect, and the nature and amount of the alleged damages. Whatever specific information is provided in the pre-litigation notice should arguably also be plead in the complaint. Additionally, the defendant might use the pre-litigation notice as evidence in connection with the lawsuit. Although the Act provides that a defendant's response to a pre-litigation notice will not be admissible in evidence,5 the Act would apparently not provide the same protection for the plaintiff's pre-litigation notice. Even if the plaintiff did not duplicate the pre-litigation summary of facts in the complaint, the defendant might make use of the statement, either on a motion to dismiss the complaint or at later stages in the proceedings.

The plaintiff could be whipsawed by these potential defense strategies. If the plaintiff does not provide enough detail in its pre-litigation notice, it may be forced to wait even longer to pursue its claim. If the plaintiff provides such detail, it may be forced to litigate its case based on a premature understanding of the facts.

The defense under the Y2K Act notification regime may also encounter a number of uncertainties. Suppose, for example, that the plaintiff has not sent a pre-litigation notice before commencing a lawsuit. If the defendant considers the suit to be a "Y2K action," it may so inform the court, and the Act provides that the court "shall" stay discovery and "shall" toll the time for filing pleadings. But what if the court does not respond to the defendant's notice? Can the defendant simply assume that the litigation and discovery are stayed unless the court otherwise rules? What if the plaintiff serves discovery requests? Can the defendant simply ignore them? Under the Federal Rules of Civil Procedure, failure to at least object to such discovery might be considered a waiver. Failure to respond to the plaintiff's complaint, moreover, might constitute an admission of facts in the complaint, or waiver of defenses to the complaint. Thus, even though the purpose of the Act is to reduce unnecessary litigation, a defendant may be forced to take steps (such as a motion to dismiss and for stay of discovery) to preserve its position in litigation, despite the apparent protections of the Act.

What happens, moreover, if the defendant guesses wrong in its invocation of the Y2K Act? Under the original House version of the bill, if the court subsequently found that the defendant's invocation of the Act was "frivolous and made for the purposes of causing unnecessary delay," the court would be expressly authorized to award sanctions, in accordance with Rule 11 of the Federal Rules of Civil Procedure. That provision was removed from the final version of the Act. Arguably, the same kind of sanctions could be applied even without that express provision. Although Rule 11 sanctions are relatively rare at present, widespread, indiscriminate invocation of the Act by defendants might cause some courts in the post-millennium environment to issue Rule 11 sanctions with less restraint. At the very least, defendants who wish to invoke the Act will be well-advised to monitor the developing caselaw interpreting the Act's definition of a "Y2K failure" and develop a solid factual basis for their invocation of the Act.

The defendant's response to a pre-litigation notice and demand for remedy will also present a number of challenging strategic decisions. Under the terms of the Act, failure to respond within 30 days allows the plaintiff to commence its litigation. Defendants thus have a powerful incentive to say something in response to a plaintiff's pre-litigation notice. But what? If the defendant responds and proposes specific remedial action, that proposal arguably constitutes a binding settlement offer. Even though such an offer might be directed solely at the plaintiff's circumstances, if the defendant engages in mass marketing there may be many more potential plaintiffs who will be keenly interested in such an offer. The Act does not provide any confidentiality protection for such an offer. Thus, even though such an offer may not be used to prove liability in a pending case or subsequently filed cases, the defendant must consider the practical business effects of publicly offering to compromise a claim.

One option available to the defendant in response to a prospective plaintiff's pre-litigation notice is to offer to engage in ADR. That term is broadly defined in the Act to include early neutral evaluation, mediation, mini-trial and arbitration. Rather than propose a specific form of remedy for the Y2K failure, a defendant might well propose its preferred form of ADR, perhaps before a favored forum. Like arbitration, however, binding ADR processes can have negative consequences. A safe alternative aimed at invoking the protections of the Y2K Act with a minimum of commitment might be to offer a non-binding alternative, such as mediation.6 

The Y2K Act will pose significant challenges for litigants and, ultimately, for the courts. Counsel in Y2K actions will be well advised to think through the implications of the Act with an eye toward offering practical interpretations and solutions. If a tidal wave of Y2K litigation hits (as many experts predict), courts will be searching for the fair, efficient, non-litigious solutions to Y2K disputes which the framers of the Act intended.

NOTES

1 The full text of the Act is available at www.senate.gov/.

2 A White House-supported alternate bill, sponsored by Senator Kerry, contained a pre-litigation notice provision, but omitted various other features, such as punitive damages caps. Consideration of that bill was tabled before the entire Senate could consider it. See Senate Begins Debate on Y2K Measure, (BNA) Daily Report for Executives, A-45 (June 10, 1999); Senate Readies Anticipated Vote on Y2K Bill,  (June 8, 1999); White House Statement Brightens Outlook for Y2K Tort Limit Action, Nat'l L.J., May 24, 1999 at A7.

3 See Gov. Bush Signs Bill to Protect Texas Businesses from Y2K Litigation, (BNA) Daily Report for Executives A-3 (May 20, 1999) (law requires claimants to notify defendants 60 days prior to bringing suit).

4 For summaries of important provisions of the Act, see, e.g., Deal Reached on Bill to Limit Y2K Liability, Wash. Post, June 30, 1999, at A-1; White House, Congress Reach Accord on the Details of

Year 2000 Legislation, Wall S.J., June 30, 1999, at B-2; Vexing Party, Clinton Backs Year 2000 Law, N. Y. Times, June 30, 1999, at A-1.

5 Both versions of the bill refer to Rule 408 of the Federal Rules of Evidence, or any analogous state rules of evidence.

6 See Steven C. Bennett, Millennium Mediation: A Practitioner's Perspective, forthcoming in the Y2K Advisor.

The State of Washington is now offering an exhaustive toolbox for diagnosing and fixing potential Y2K problems.  Topics include business checklists, contingency planning tips, insurance resources, legal-issue discussions, readiness updates by local governmental entities, and an extensive list of related links.

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