Clinton's Y2K Proposal a Safety Net With Some Gaps

Infotech and the Law David Nadler

Clinton's Y2K Proposal a Safety Net With Some Gaps

President Clinton's good Samaritan legislative proposal, officially known as the Year 2000 Information Disclosure Act, will promote the exchange of year 2000 information among companies, their customers and vendors by significantly reducing the risk of lawsuits arising from such disclosure.

The legislation, submitted to Congress July 27, provides a safe harbor for information disclosures. However, it will not reduce the liability that may arise from year 2000-related failures of software, hardware and systems.

In addition, the legislation will not alter existing contracts and warranties nor reduce liability for violation of disclosure requirements imposed by state and federal securities laws.

The year 2000 problem can be traced to the early days of computing, when memory and data storage were expensive. To conserve these limited resources, computer programmers used just two digits in date fields to identify calendar years. In 2000, many computer programs will recognize "00" as 1900 rather than 2000. This error may cause systems to process incorrect data or simply to shut down.

Companies in the financial, manufacturing, energy and other sectors of the economy are precariously interdependent. Manufacturers, for example, have improved steadily plant operation efficiency by adopting just-in-time inventory, automating the factory floor and communicating with vendors using electronic data interchange.

These practices concomitantly have increased the interdependence among suppliers, manufacturers and customers. Indeed, a year 2000 failure in one company could have a domino effect and impede operations throughout the entire supply and distribution chain.

Similarly, the inability of a few financial firms to execute trades, transfer funds or document transactions could undermine public confidence in the entire financial system. As a result, there is a pressing need for companies to exchange year 2000 information regarding products, services, solutions and management practices. This exchange will allow companies to assess their readiness, as well as that of their partners, and efficiently renovate systems.

The Clinton proposal provides safety for exchange of information by establishing a uniform national standard for actions involving year 2000 disclosures.

Under the proposal, there can be no liability for disclosure of year 2000 information unless the statement was material and was "made with knowledge that the statement was false, inaccurate or misleading; made with intent to mislead or deceive; or made with a grossly negligent failure to determine or verify that the statement was accurate." The proposal promotes information exchanges between companies by precluding actions based upon inadvertent inaccuracies or omissions.

The Clinton proposal also encourages trade groups and others to compile and disseminate year 2000 information provided by third parties.

Specifically, the proposal provides that republishing a statement of a third party cannot lead to liability for trade disparagement and other causes, absent "knowledge that the statement was false, inaccurate or misleading," provided the republisher discloses that the repeated statement is based on third-party information and has not been independently verified.

The proposal excludes from protection year 2000 statements "made directly to a consumer in connection with the sale of a consumer product by the seller or manufacturer."

A consumer product is defined as personal property or services normally used by an individual for personal, family or household purposes.

The exclusion creates legal uncertainty because it excludes statements such as mass media advertisements made directly to consumers, but purports to protect statements made in trade publications or on Web sites directed to business users. This distinction will prove difficult to administer.

Corporations also have hesitated to exchange year 2000 information because of antitrust concerns. The Department of Justice sought to allay these fears July 1 by issuing a business review letter to the Securities Industry Association. The letter has general applicability and is intended to reassure corporations that merely sharing year 2000 information does not constitute a violation of antitrust laws.

If enacted, Clinton's proposal, combined with the Justice Department's reassuring letter regarding antitrust laws, should encourage corporations and trade groups to disclose accurate information concerning test results, remediation plans and the year 2000 compliance of products and services. The disclosure of such information will help companies in solving year 2000 problems before time runs out.

David Nadler is a partner in the Washington law firm of Dickstein Shapiro Morin & Oshinsky LLP. He may be contacted at Edward Kirsch, an associate with the firm, contributed to this article.

Copyright 1998 Post-Newsweek Business Information, Inc. All rights reserved

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