Year 2000 Lawsuits Begin

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Year 2000 Lawsuits Begin

By David M. Nadler and Kendrick C. Fong
Contributing Writers

As the year 2000 approaches, industry analysts and experts predict that beleaguered businesses and disgruntled shareholders will bombard the courts with lawsuits concerning the year 2000 date change problem and whether products and internal systems are year 2000 compliant. Indeed, these analysts predict that total year 2000 litigation costs could exceed $1 trillion. The vanguard year 2000 case is Produce Palace International vs. TEC-America Cash Register Inc. and All American Cash Register Inc., which was filed recently in Michigan state court.

The year 2000 date change problem is a design defect in the COBOL programming language, which was developed 30 years ago. To save limited and costly memory space, COBOL developers decided to use only two digits to identify calendar years. Accordingly, 1997 was identified as "97" within COBOL programs, and 2000 was designated as "00," which could also be read as 1900.

Because many computer functions - hardware, software, embedded microchips - are time-sensitive, the computers may simply shut down or process incorrect data on Jan. 1, 2000. Affected systems may include computerized cash registers, mainframes, communications systems, elevators, heating and ventilation systems, vaults and security systems, to name just a few.

In Produce Palace International, a Michigan produce store filed what is believed to be the first year 2000-related lawsuit against its computerized cash register vendor and manufacturer, alleging breach of contract, breach of warranty, negligent repair and misrepresentation, as well as violation of various consumer protection laws. Shortly after this lawsuit was filed, the cash register vendor filed suit against the manufacturer for indemnification of any liability for the products sold.

In the Michigan suit, the owners of the grocery store complained that their computerized cash registers have crashed over 100 times between April 1996 and May 1997 because they are not year 2000 compliant. Specifically, the owners of the grocery store alleged that the computerized registers would not accept credit cards with expiration dates beyond 1999. If a customer tried to use a credit card with an expiration year after 1999, the computer screen would read "Improper Transaction" and, almost immediately, the entire cash register network (10 registers) would crash for hours.

In the 500 days the register network has been installed, it has been inoperative for 100 days due to the year 2000 problem. Because the cash register vendor and manufacturer have been unable to correct the problem, the store owners claimed to have lost business and now must process all credit cards with expiration dates after 1999 by hand.

Many legal authorities predict that the Michigan lawsuit is just the tip of the iceberg. As more banks and credit card companies issue cards with year 2000 expiration dates, similar problems may arise in other contexts, such as computerized transactions at retail stores, automated teller machines and mail order systems.

Many angry consumers have canceled their credit cards after their cards were rejected for having an expiration date in the new millennium. As a result, Visa USA Inc. has stopped producing cards with year 2000 expiration dates. MasterCard International Inc. has warned member banks not to release any year 2000 credit cards, but analysts say that many have slipped through the cracks.

As shown by the Michigan action, the year 2000 presents a potentially enormous problem for the many companies relying on computerized systems. The most pressing questions are those regarding who will pay for corrective action and who is responsible for failure to achieve year 2000 compliance after the turn of the century. In answering these questions, many thorny issues will arise concerning rights and liabilities under contracts, adequacy of insurance coverage, and intellectual property violations. Other anticipated issues are those involving corporate fiduciary duties to ensure year 2000 compliance, and whether publicly traded companies must disclose their compliance efforts under Securities and Exchange Commission rules and regulations or generally accepted accounting principles.

Analysts predict that many more lawsuits are looming on the horizon, both from businesses that claim the products they purchased are defective, and from shareholders who sue company executive boards because they did not solve year 2000 compliance problems in a timely fashion. Indeed, the Michigan suit should be a wake-up call to corporate America.

David M. Nadler is a partner in the Washington law firm of Dickstein Shapiro Morin & Oshinsky LLP where he is co-chairman of the firm's Year 2000 Legal Strategies Team. He can be reached via e-mail at NadlerD@dsmo.com. Kendrick C. Fong is an associate with the firm.