[Senate Hearing 106-171]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 106-171


 
                             THE Y2K BILL:
                          THE NEXT GENERATION

=======================================================================

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                                   on

                                 S. 461

  A BILL TO ASSURE THAT INNOCENT USERS AND BUSINESSES GAIN ACCESS TO 
 SOLUTIONS TO THE YEAR 2000 PROBLEM-RELATED FAILURES THROUGH FOSTERING 
AN INCENTIVE TO SETTLE YEAR 2000 LAWSUITS THAT MAY DISRUPT SIGNIFICANT 
                    SECTORS OF THE AMERICAN ECONOMY

                               __________

                             MARCH 1, 1999

                               __________

                           Serial No. J-106-4

                               __________

         Printed for the use of the Committee on the Judiciary


                                


                      U.S. GOVERNMENT PRINTING OFFICE
 59-523 CC                   WASHINGTON : 1999
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                       COMMITTEE ON THE JUDICIARY

                     ORRIN G. HATCH, Utah, Chairman

STROM THURMOND, South Carolina       PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania          JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona                     HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio                    DIANNE FEINSTEIN, California
JOHN ASHCROFT, Missouri              RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan            ROBERT G. TORRICELLI, New Jersey
JEFF SESSIONS, Alabama               CHARLES E. SCHUMER, New York
BOB SMITH, New Hampshire

             Manus Cooney, Chief Counsel and Staff Director
                 Bruce A. Cohen, Minority Chief Counsel

                                  (ii)



                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Hatch, Hon. Orrin G., U.S. Senator from the State of Utah........     1
Leahy, Hon. Patrick J., U.S. Senator from the State of Vermont...     3
Sessions, Hon. Jeff, U.S. Senator from the State of Alabama......    22
Feinstein, Hon. Dianne, U.S. Senator from the State of California    24

                    CHRONOLOGICAL LIST OF WITNESSES

Statement of Eleanor D. Acheson, Assistant Attorney General, 
  Office of Policy Development, U.S. Department of Justice, 
  Washington, DC.................................................     7
Panel consisting of Harris N. Miller, president, Information 
  Technology Association of America, Arlington, VA; Laurene West, 
  year 2000 healthcare consultant, Midvale, UT; Mark Yarsike, co-
  owner, Produce Palace International, Warren, MI; B.R. McConnon, 
  president, Democracy Data and Communications, Alexandria, VA, 
  on behalf of the National Federation of Independent Business; 
  Harris Pogust, Sherman, Silverstein, Kohl, Rose and Podolsky, 
  Pennsauken, NJ; and Stirling Adams, corporate counsel, Novell, 
  Incorporated, Orem, UT.........................................    28
Statement of Hon. Robert F. Bennett, a U.S. Senator from the 
  State of Utah..................................................    38

               ALPHABETICAL LIST AND MATERIALS SUBMITTED

Acheson, Eleanor D.:
    Testimony....................................................     7
    Prepared statement...........................................    11
Adams, Stirling:
    Testimony....................................................    60
    Prepared statement...........................................    62
Bennett, Hon. Robert F.:
    Testimony....................................................    38
    Prepared statement...........................................    42
Leahy, Hon. Patrick J.: Submitted the prepared statement of John 
  A. Koskinen, President's Council on Year 2000 Conversion.......     5
McConnon B.R.:
    Testimony....................................................    50
    Prepared statement...........................................    53
Miller, Harris N.:
    Testimony....................................................    28
    Prepared statement...........................................    30
Pogust, Harris:
    Testimony....................................................    54
    Prepared statement...........................................    58
West, Laurene:
    Testimony....................................................    34
    Prepared statement...........................................    36
Yarsike, Mark:
    Testimony....................................................    44
    Prepared statement...........................................    48

                                APPENDIX
                         Questions and Answers

Responses of Eleanor Acheson to Questions from Senator Hatch.....    73
Responses of Mark Yarsike to Questions from Senators:
    Hatch........................................................    74
    Leahy........................................................    75
Responses of B.R. McConnon to Questions from Senator Hatch.......    78
Responses of Harris L. Pogust to Questions from Senators:
    Hatch........................................................    78
    Leahy........................................................   114
    Torricelli...................................................   118
Responses of Stirling Adams to Questions from:
    The Senate Committee on the Judiciary........................   120
    Senator Leahy................................................   121

                 Additional Submissions for the Record

Prepared statement of Hon. John Ashcroft, a U.S. Senator from the 
  State of Missouri..............................................   149
Prepared statement of Thomas J. Donohue, for the U.S. Chamber of 
  Commerce, and U.S. Chamber Institute for Legal Reform..........   150
Prepared statement of David C. Crane on behalf of the 
  Semiconductor Industry Association.............................   154
Prepared statement of Melissa W. Shelk on Behalf of the American 
  Insurance Association..........................................   156



                   THE Y2K BILL: THE NEXT GENERATION

                              ----------                              


                         MONDAY, MARCH 1, 1999

                                       U.S. Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:04 a.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Orrin G. 
Hatch (chairman of the committee) presiding.
    Also present: Senators Ashcroft, Abraham, Sessions, Leahy, 
and Feinstein.

 OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 
                       THE STATE OF UTAH

    The Chairman. Well, we will begin today's hearing. Today's 
hearing is entitled ``The Y2K Bill: The Next Generation.'' It 
is a hearing on S. 461, the Year 2000 Fairness and 
Responsibility Act, that Senators Feinstein, McConnell and I 
introduced last week. The bill is the next generation or 
follow-up legislation to the Senate Judiciary Committee-
reported safe harbor bill that passed the Congress last year. 
Passage of this measure is important for consumers, businesses, 
and the economy, especially in my home State of Utah, and I 
think elsewhere. In Utah, we have quickly become one of the 
Nation's leading high-tech States, and we are concerned about 
this.
    In working together to develop this legislation, Senator 
Feinstein and I have sought to produce a bill that encourages 
Y2K problem-solving rather than encouraging a rush to the 
courthouse. It is not our goal to prevent any and all Y2K 
litigation, and it is to simply make Y2K problem-solving a more 
attractive alternative to litigation. If we are to enact 
worthwhile Y2K problem-solving legislation this year, we must 
work together in a bipartisan manner on a fair and narrowly 
tailored bill. S. 461, it seems to me, gives us that 
opportunity.
    Now, first of all, while our bill encourages problem-
solving, nothing in it prevents injured parties from eventually 
bringing legitimate Y2K actions. The bill merely creates an 
opportunity for companies to correct problems and an additional 
incentive to settle cases. This will spur technology providers 
to spend resources in the repair room instead of diverting 
needed capital to the courtroom.
    Now, with regard to the 90-day problem-solving period, this 
is a main feature of our bipartisan bill; in other words, its 
requirement that there be a 90-day delay before any Y2K-related 
litigation may begin. More specifically, this mandatory 
cooling-off or problem-solving period is designed to allow a 
consumer to notify in a simple communication the technology 
provider, the supposed source of the Y2K problem, about the 
exact nature of the problem, how the consumer has been injured 
as a result, and what remedy is sought. The technology provider 
then has the chance to fix the problem. If no agreement is 
forthcoming, the consumer has the full right to sue.
    With regard to proportionate liability, our bill provides 
that the liability of a defendant would be limited to the 
percentage of the company's fault in causing the harm. This 
will discourage the targeting of so-called deep-pocketed 
defendants.
    On alternative dispute resolution, the bill specifically 
encourages the parties to a dispute to request alternative 
dispute resolution, or ADR, during the 90-day problem-solving 
period. In the event that the parties do engage in ADR, the 
bill requires the defendant to promptly pay any settlement. By 
ensuring expeditious payment of settlements, the bill makes 
out-of-court resolution a little more attractive for any and 
all parties.
    On contract preservation, the bill ensures that if a 
contract does not limit liability for Y2K actions, or if there 
was not a true meeting of the minds in a contract which limits 
liability, recovery is available. Where, however, the contract 
specifically limits liability for actions that include Y2K 
claims, the bill justly limits recovery.
    Now, this bill prevents careless Y2K class action lawsuits 
by requiring courts to determine whether an alleged Y2K defect 
was material as to a majority of class action members and 
whether members of the class are seriously engaged in the 
litigation, the bill guards against plaintiffs lawyers 
gathering large numbers of plaintiffs that have not really been 
harmed by a given Y2K defect or have only a passing interest in 
the case. The bill also limits punitive damages and ensures 
that our Federal courts have jurisdiction over what has become 
a major national problem.
    In summary, it is clear that consumers and businesses have 
been and will be harmed by Y2K defects. And it is true that the 
Y2K problem could very well disrupt distribution systems and 
certain key sectors of our economy. It is also true, however, 
that the Y2K problem could spawn a rash of litigation that will 
inevitably shift scarce resources from fixing the Y2K problem 
to defending lawsuits, many of which will be frivolous. Indeed, 
one expert estimated that the worldwide cost of Y2K litigation 
could well be more than $1 trillion. We will hear much more 
about this from our witnesses today.
    Now, our bill will give companies an incentive to fix Y2K 
problems right away, knowing that if they don't make a good-
faith effort to do so, they will shortly face costly 
litigation. The natural economic incentive of industry is to 
satisfy their customers and thus prosper in the competitive 
environment of the free market. This will act as a strong 
motivation, for industry to fix a Y2K problem before any 
dispute becomes a legal one. This will be true, however, only 
as long as businesses are given an opportunity to do so and are 
not forced at the outset to divert precious resources from the 
urgent task of the repair shop to the often unnecessary 
distractions of the courtroom.
    In the end, a business and legal environment which 
encourages problem-solving while preserving the eventual 
opportunity to litigate may best ensure that consumers and 
other innocent users of Y2K defective products are protected.
    Finally, I want to stress that we hope to proceed on a 
bipartisan basis, one that is modeled on the cooperation we 
achieved last year in passing the Year 2000 Information and 
Readiness Disclosure Act. That kind of bipartisan cooperation 
will be indispensable if we are to pass legislation in time for 
it to be of any use to consumers and businesses.
    Now, I want to welcome our esteemed witnesses. I believe 
the witnesses today will shed new light on the Y2K problem and 
how our bill helps to resolve that predicament. And we will 
keep the record open for a week if additional testimony needs 
to be submitted.
    Let me turn to the ranking member at this time, and we will 
move on from there.

  STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE 
                        STATE OF VERMONT

    Senator Leahy. Thank you, Mr. Chairman. I do hope that the 
Judiciary Committee is going to carefully review all the recent 
proposals, including those that would restrict the rights of 
American consumers and small businesses to seek redress for 
harms caused by year 2000 computer problems.
    I think we should have just one simple, direct principle. 
Our goal should be to encourage Y2K compliance. Every single 
statement I have heard from everybody, no matter which piece of 
legislation they support, say they want Y2K compliance, and 
that should be our driving purpose. That is what we were 
looking for when we worked cooperatively last year with the 
President, the Vice President and the administration on the 
Year 2000 Information and Readiness Disclosure Act, which you 
have referred to, Mr. Chairman.
    That is why I am cosponsoring and looking forward to Senate 
passage tomorrow of the Small Business Year 2000 Readiness Act, 
S. 314, to offer help to small businesses that are working to 
remedy their computer systems before the millennium bug hits.
    I am concerned that sweeping liability protection has the 
potential to do great harm. Such legislation may restrict the 
rights of consumers and small businesses and family farmers and 
State and local governments, and even the Federal Government, 
from seeking redress for the harm caused by Y2K computer 
failures.
    What worries me is that it tells all 50 of our State 
legislatures that they are irrelevant and we are going to 
rewrite every State law through Federal preemption. And I think 
it runs the risk of discouraging businesses from taking 
responsible steps to cure their Y2K problem before it is too 
late.
    By focusing attention on liability-limiting proposals, no 
matter how much some special interests might want them, instead 
of on the remedial steps that need to be taken now, Congress 
could be contributing to distraction and delay from what should 
be our principal focus--encouraging Y2K compliance. Remedial 
efforts are necessary now.
    Now, these recent legislative proposals by Senator Hatch 
and Senator McCain raise many questions that need to be 
answered before we move forward. If we do not proceed 
carefully, then broad liability limitation legislation could 
reward the irresponsible, at the expense of the responsible and 
the innocent, and that would not be fair or responsible.
    Removing accountability from the law removes one of the 
principal incentives to find solutions before the problems 
develop. In fact, why would congressional consideration or 
passage of special interest immunity legislation make anyone 
more likely to expend the resources needed to fix computer 
systems to be ready for the millennium? In fact, some would ask 
would it not likely have just the opposite effect.
    Why should individuals, businesses and governments act 
comprehensively now if the law is changed to allow you to wait, 
see what problems develop, and then use a 90-day cooling off 
period after receiving detailed written notice of the problem 
to think about coming into compliance? Why not wait and see 
what solutions are developed by others instead of working to 
develop your own, draw from them later in the 3-month grace 
period after the harm has been done, and then only if somebody 
complains?
    I would rather continue the incentives our civil justice 
system allows to encourage compliance and remediation now, in 
advance of the harm. I am not looking at what we do after 
somebody has been harmed. I would like to make sure the harm 
doesn't occur in the first place. And I would rather reward 
responsible business owners who are already making the 
investments necessary to have their computer systems fixed for 
Y2K than to reward special interests with immunity for the 
irresponsible.
    I sense that some may be seeking to use fear of the Y2K 
millennium bug to revive failed liability limitation 
legislation in the past. These controversial proposals may be 
good politics in some circles, but they don't solve Y2K. 
Instead, we should be looking to the future, creating 
incentives to accelerate the efforts to cure the Y2K bug.
    The international aspect is one of the most important. We 
encounter a world as we are working to bring our systems into 
compliance that a lot of foreign suppliers to U.S. companies 
pose significant risks for all of us. And so we should consider 
whether creating a liability limitation model is going to help 
us in the international arena.
    Under the bipartisan leadership of Senator Bennett and 
Senator Dodd, the Special Committee on the Year 2000 Technology 
Problem has done an outstanding job of raising awareness of the 
consequences that could result from ignoring the bug. I look 
forward to reviewing the findings and report of the Special 
Committee.
    The administration is working hard to bring the Federal 
Government into compliance. The President decided to have the 
Social Security Administration's computers overhauled first and 
then tested and retooled and retested again. He was able to 
announce that Social Security checks will be printed without 
glitches in January 2000. Now, that is success.
    Last month, I hosted a Y2K conference in Vermont to help 
small businesses prepare for 2000. Hundreds of small business 
owners from across Vermont attended the conference. Vermonters 
are working hard to identify their Y2K vulnerabilities and 
preparing action to resolve them. This is the right approach. 
We should not be waiting to sit back, let the problems occur, 
and then say, well, you got hurt, but, you know, we have got 
liability protection and now we will see what we can do about 
it. We should fix the problems first.
    During the last Congress, I joined with Senator Hatch to 
introduce and pass into law the consensus bill known as the 
Year 2000 Information and Readiness Disclosure Act. We worked 
on a bipartisan basis with Senator Bennett and Senator Dodd, 
the administration, industry representatives, and others to 
reach agreement on a bill to facilitate information-sharing to 
encourage Y2K compliance. And, Mr. Chairman, that was a good 
bill. It has helped. It is working to encourage companies to 
work together and share solutions and test results. It promotes 
company-to-company information-sharing.
    The North American Electric Reliability Council got a great 
response from its efforts to obtain detailed Y2K information 
from various industries. Large telephone companies are sharing 
technical information over Web sites designed to help each 
other in solving year 2000 problems. I understand that Novell, 
which sent a witness to today's hearing, uses a Web site 
pursuant to our Act, to the Hatch-Leahy Act, to educate its 
customers about year 2000 software problems. Under a provision 
I included, that law also established a national Y2K 
information clearinghouse and Web site at GSA--again, a great 
place to go if you are a small business.
    Now, I understand your bill, Mr. Chairman, was introduced 
just last Wednesday. It is very complex. A number of us are 
beginning our analysis. Some of the witnesses may not even be 
familiar with it yet and it will take some time to examine it. 
I would hope that you will also join me in taking a hard look 
at S. 96, the Y2K Act which was introduced 3 months ago by 
Senator McCain, in January. I understand that on Wednesday, he 
released a revised working draft of that bill. I hope that you 
will join with me and ask to have sequential referral of S. 96 
to us. I mean, this is going to override many of our State laws 
and I think that we should be looking at it because of that.
    We have a number of witnesses who have appeared on short 
notice, including Eleanor Acheson from the Justice Department, 
Mark Yarsike and Harris Pogust. I thank them for coming on such 
short notice.
    Could I conclude by entering into the record a statement 
from John Koskinen? He chairs the President's Council on the 
Year 2000 Conversion. He is attending the global conference on 
Y2K compliance in Manila and thus could not be here. So if we 
could put his statement in the record?
    The Chairman. We certainly will.
    [The prepared statement of Mr. Koskinen follows:]

    Prepared Statement of John A. Koskinen, President's Council on 
                          Year 2000 Conversion

    I am in the Philippines today to meet with the National Year 2000 
Coordinators from over 25 Asian-Pacific countries who are holding a 
series of meetings to discuss individual country and regional efforts 
to address the Year 2000 (Y2K) computer problem. However, I am pleased 
to have the opportunity to present to the Committee my views on the 
subject of Y2K liability limitations and efforts to prepare computers 
for the date rollover.
    The Council is focused on efforts to ensure that as many 
information technology systems as possible function effectively through 
the transition to the next century. In addition to its work to prepare 
Federal Government systems for the Year 2000, the Council's more than 
25 working groups have been reaching out to promote action on the 
problem in the private sector, among State and local governments, and 
internationally.
    Last year, the Council worked with Congress to enact the bipartisan 
``Year 2000 Information and Readiness Disclosure Act,'' because there 
was strong evidence that concerns about liability for inaccuracies in 
voluntary statements were interfering with the sharing of information 
about technical solutions and the Y2K preparedness of businesses and 
governments throughout the country. During this process, we carefully 
distinguished between the need to increase the sharing of information--
which would result in more systems being remediated--and dealing with 
the underlying question of whom should be held liable for actual Year 
2000 failures or the cost of remediation efforts.
    The bills before the Judiciary and Commerce Committees focus on 
liability litigation, which is not a Year 2000 readiness issue. In 
fact, I have serious doubts that these bills will do anything to 
enhance readiness and increase the number of systems able to 
effectively make the century transition. In addition, we need to ensure 
that discussion speculating about the possibility of voluminous 
litigation does not inadvertently increase the possibility of 
unnecessary overreaction by the public as a result of a misperception 
about the magnitude of the number of systems that will fail.
    From my perspective, we need organizations to do everything they 
can between now and the end of this year to ensure that their systems 
and those of their customers and suppliers are made Year 2000 
compliant. My principal concern about any liability legislation is that 
we do nothing to interfere with that goal. For example, I believe it 
would be counterproductive to establish a minimum standard of 
performance that triggers legal protections. I want to encourage 
leaders of every organization in the United States to keep asking if 
there is anything more they can do to get more systems fixed rather 
than seeking advice from their lawyers about when they have done what 
is necessary and can move on to other issues.
    Ultimately, the best way to limit liability is to make sure that 
systems work, and we need everyone concentrating throughout the rest of 
this year on meeting that challenge. Significant progress is being made 
on the Year 2000 problem in the Federal Government and in critical 
sectors of the economy such as banking, electric power, oil and gas, 
and telecommunications. But much work remains. Our top priority must be 
continuing efforts with State and local government, the private sector, 
and the international community to maximize the number of compliant 
systems and thereby minimize potential disruptions related to the 
century date change. The Department of Justice has extensive expertise 
in analyzing efforts to limit liability or revise litigation procedures 
and is well positioned to speak to those issues.
    I appreciate having the opportunity to share my views on this 
matter with the Committee.

    Senator Leahy. I thank you for holding this hearing, Mr. 
Chairman, but I do feel that the one before the Commerce 
Committee affects so many parts of our jurisdiction that when 
that comes out of committee, we should ask for sequential 
referral.
    The Chairman. Thank you, Senator. We will sure look at 
that.
    Our sole first witness on our first panel is the Honorable 
Eleanor D. Acheson. Ms. Acheson is currently the Assistant 
Attorney General for Policy Development in the U.S. Department 
of Justice. She has been with the Department since 1993 and is 
responsible for a broad range of policy initiatives. I want to 
welcome you and thank you for coming this morning.
    Senator Bennett--we will try to fit him in as soon as he 
gets here. He is head of our committee on Capitol Hill and we 
are naturally very interested in what he has to say. But we 
will proceed with Ms. Acheson at this time.

 STATEMENT OF ELEANOR D. ACHESON, ASSISTANT ATTORNEY GENERAL, 
   OFFICE OF POLICY DEVELOPMENT, U.S. DEPARTMENT OF JUSTICE, 
                         WASHINGTON, DC

    Ms. Acheson. Thank you, Mr. Chairman. Good morning. I 
appreciate the opportunity to appear before this committee to 
express the Justice Department's preliminary views regarding 
the proposed Year 2000 Fairness and Responsibility Act.
    This Act was introduced last Wednesday. The Department is 
still in the process of reviewing it and my submitted 
testimony, as well as this summary, presents only the 
Department's initial reactions to its more significant 
provisions. The Department fully supports the objective of the 
sponsors of this Act insofar as they seek to curtail frivolous 
Y2K actions and to encourage companies and individuals to focus 
their efforts on fixing Y2K problems before they occur.
    At the same time, however, we are mindful that 
congressional amendment of State substantive law, as well as 
State procedures, should not be undertaken without real and 
compelling reasons, and must be done in ways consistent with 
the Constitution and important policy considerations, such as 
federalism.
    This legislation presents a number of questions. First, 
does the legislation support or does it undercut the incentives 
that encourage companies to fix Y2K problems now? Second, has 
the factual predicate been established for the unprecedented 
changes that would be wrought by this bill, including the 
wholesale rewriting of State law?
    Prior litigation reform measures have been based upon 
detailed study by both Houses of Congress and have been 
justified by demonstrated abuses. There has been no such 
examination in this context. Yet, the bill deals broadly with 
an entire universe of tort, contract and statutory claims.
    Moreover, while Y2K failures will likely generate 
litigation----
    [Technical interruption.]
    Senator Leahy. I told you to fix that computer, Mr. 
Chairman. [Laughter.]
    The Chairman. I thought it was just the administration's 
appearance here today. [Laughter.]
    We will try to prevent those types of glitches. We hope 
they are not starting before the year 2000.
    Please continue, Ms. Acheson.
    Ms. Acheson. Thank you.
    Moreover, while Y2K failures will likely generate 
litigation, it is difficult to predict at this time who will 
experience those problems, whether those persons will resort to 
litigation to resolve them, and what impact on which sectors of 
the economy that litigation will have. Thus, the Department 
will be looking to see whether the legislation addresses only 
those problems that are likely to arise.
    Third, does the legislation comport with the Constitution, 
and in a way as to foreclose reasonable challenges to its 
constitutionality? Finally, does the legislation create more 
public policy and practical implementation problems than it may 
solve?
    To the extent we have identified concerns about the current 
bill in the context of our continuing analysis, the Department 
is committed to working with the committee to craft 
appropriately tailored legislation that responds to genuine Y2K 
liability or litigation-related problems likely to disrupt the 
American economy.
    Title II of the Act amends Federal and State contract law 
as it applies to year 2000 claims, and in so doing effectively 
modifies the terms of already negotiated contracts and existing 
contractual relations. Section 202 of the Act, for example, 
creates a ``reasonable efforts'' defense in Y2K contract 
actions that would allow a defendant who had otherwise breached 
the express terms of the contract to show that the efforts it 
took to implement the contract were reasonable in order to 
limit or eliminate its liability.
    In general, a party to a contract is obligated to fulfill 
its promises and is liable to the other party for damages to 
the latter resulting from the former's breach of contract. It 
does not matter whether the party breaching the contract made 
reasonable efforts to avoid doing so. Creating a post hoc 
``reasonable efforts'' defense that absolves parties to Y2K-
related contracts seems to be unfair to the contracting 
plaintiffs who bargained and paid for contract compliance by 
the other party. Moreover, this defense appears to undercut 
incentives for Y2K contractees to discharge their obligations. 
Instead of being required to fulfill their contracts, potential 
defendants need only make reasonable efforts to do so, with the 
risk of failure being transferred to the other party.
    In a similar fashion, section 201 of the Act requires a 
court to enforce all written terms of a contract even if those 
terms, in violation of State law, disclaim certain kinds of 
warranties or are unconscionable. As a result, the Act would 
appear to validate contract terms that were ineffective or 
illegal at the time they were made.
    Title II may also implicate Fifth Amendment property 
interests under the Takings Clause of the Constitution. A 
business that paid for maintenance and a promise by a vendor to 
remedy defects in software that suffers a catastrophic Y2K 
failure could have a claim for compensation from the Government 
if that interest were invalidated by Federal legislation.
    Title III of the Act modifies Federal and State substantive 
tort law as applied to year 2000 actions for money damages and 
not involving personal injury. Sections 302 and 303 
significantly alter the rules of tort liability for Y2K actions 
involving money damages. Section 302, for example, appears to 
foreclose some Y2K actions premised on a theory of negligence.
    Even if section 302 does not always foreclose a negligence 
claim, a question over which reasonable minds might differ, 
section 302 does clearly require plaintiffs to satisfy a 
greater burden of proof in their tort actions. Y2K tort 
plaintiffs would be required to establish the critical elements 
of their tort actions, the defendant's knowledge and 
foreseeability, by clear and convincing evidence, even though 
this standard is usually reserved for use in quasi-criminal 
proceedings.
    Section 303 erects a ``reasonable efforts'' defense similar 
to that contained in title II. This section provides a complete 
defense to liability, no matter how much the defendant was at 
fault. For example, the defendant could have recklessly 
disregarded a known risk of Y2K failure. Such a defendant has 
no responsibility for the damages suffered by the plaintiff as 
long as the defendant makes reasonable, albeit unsuccessful, 
efforts to fix the defect.
    Section 104(a), while titled ``Duty to Mitigate,'' imposes 
what appears to be a second complete defense to liability that 
bears little resemblance to the common law duty to mitigate. 
Again, these defenses would appear to be available even when 
the defendant is clearly at fault.
    Other sections of title III curtail damages. Most 
dramatically, section 305 would appear to foreclose in tort 
cases the recovery of economic losses; that is, financial 
damages that flow from the defendant's tortious activity, 
unless they are incidental to personal injury or property 
damage claims. This provision appears to have the effect of 
granting defendants full immunity from tort suits involving 
fraud and misrepresentation, including securities fraud, where 
financial loss is unlikely to be unaccompanied by a personal 
injury or property claim or damage. Indeed, this section 
appears to preclude recovery in any tort case that does not 
involve personal injury or damage to tangible property.
    Section 304 caps the punitive damages that may be awarded 
on Y2K claims, and section 306 caps the potential liability of 
directors and officers. This latter may turn out to be a 
windfall to insurance companies who have already been paid for 
unlimited coverage but will have only to pay out under the 
caps.
    Section 301 abolishes joint and several liability entirely, 
substituting strict proportionate liability, even though most 
States have retained some form of joint and several liability 
to avoid placing all the risks on plaintiffs.
    We have several concerns about these provisions. First, we 
do not understand, at least as yet, that State law is somehow 
defective in these areas. Second, a number of these provisions 
appear to provide disincentives to achieve Y2K readiness. 
Third, portions of title III may have undesirable collateral 
consequences. For example, the bill as currently drafted covers 
tort actions brought by governments and could curtail the 
ability of the SEC or other Federal and State agencies bringing 
regulatory or enforcement actions. Title III also overlaps in 
unpredictable ways with recent Federal legislation governing 
securities litigation.
    Title IV essentially federalizes class action standards in 
class actions involving Y2K claims, even when the Y2K claim is 
only a small part of the overall action. Title IV would permit 
removal of State class actions to Federal court when any class 
plaintiff is diverse from any defendant, and further provides 
that cases so removed but not certified under Federal class 
action standards be remanded to State court, stripped of their 
class allegations.
    This mechanism effectively prevents States from setting 
their own policies concerning class actions involving Y2K 
claims, and in cases where individual claims are too small to 
justify litigation, may well leave large numbers of plaintiffs 
without redress. Title IV also imposes onerous opt-in 
requirements that may have the practical effect of making many 
class actions impossible.
    The material changes to contract and tort law to State 
procedure and practices and to class action law and procedure 
that the Act would effect raise many unknowns about Y2K 
litigation under such a regime. Chief among those questions has 
to be will small business and consumers injured by wrongful 
conduct still be able to obtain compensation for the harm that 
they suffer. The changes to current law appear to make it much 
more difficult, if not impossible, for small businesses and 
consumers to invoke traditional contract remedies, and 
significantly limit claims under statutory and tort law even in 
the face of reckless or intentional wrongdoing.
    Finally, some concerns about the scope of the Act. The Act 
appears to cover Y2K lawsuits initiated by Federal and State 
governments and their agencies which are explicitly included 
within the Act's definition of ``person.'' Title II's 
modifications to State and Federal contract law seem likely, 
for instance, to alter Government contracts law significantly, 
and more specifically the provisions of the Contracts Dispute 
Act which controls contract disputes involving the Federal 
Government.
    Title III's modifications to tort law may have a similar 
effect on Government-initiated actions under consumer 
protection statutes. The limitations on the financial liability 
of corporate officers and directors contained in section 306 
may, as discussed above, curtail the SEC's enforcement powers.
    There is likely to be considerable dispute over whether or 
not lawsuits are subject to the Act. Plaintiffs will want 
likely to avoid styling their claims as year 2000 claims, and 
defendants will probably assert Y2K-related defenses in order 
to bring the claims under the terms of the Act. State and 
Federal courts will then be forced to determine whether the Act 
or normal State tort and contract law controls.
    In light of the fact that the Act works great changes in 
State law which may have a great impact on the outcome of any 
given Y2K lawsuit, substantial disputes about the Act's 
coverage are likely to be common and will occupy much judicial 
time, complicating what would otherwise be rather 
straightforward contract or tort litigation.
    These are some of the concerns of the Justice Department 
with respect to the Year 2000 Fairness and Responsibility Act. 
On the other hand, there are ideas in the Act--for example, 
alternative dispute resolution and provisions for pre-filing 
notice with the opportunity to cure--that we believe provide 
common ground for us to work with the committee.
    We are sympathetic to the concerns about Y2K liability and 
the need to act responsibly and expeditiously. We feel we need 
to know more of the nature and scope of any litigation-related 
problems that develop and are or may be beyond the ability of 
current law, procedure and practice to deal with. Above all, we 
must not do anything that would result, however 
unintentionally, in undermining Y2K readiness.
    Accordingly, the Department would urge the committee not to 
act hastily, but instead to reflect carefully before enacting 
legislative provisions like the bill before you today that 
greatly alter the substantive and procedural tort and contract 
law of the States with regard to Y2K lawsuits. We are committed 
to working with the committee to create a responsible and 
balanced approach to any necessary Y2K litigation reform.
    Thank you for the opportunity to address the committee 
today.
    [The prepared statement of Ms. Acheson follows:]

                Prepared Statement of Eleanor D. Acheson

    Good morning. I appreciate the opportunity to appear before the 
Committee on the Judiciary to express the Justice Department's very 
preliminary views regarding the proposed Year 2000 Fairness and 
Responsibility Act.
                              introduction
    The Year 2000 Fairness and Responsibility Act (``the Act'') was 
introduced last Wednesday. As many components of the Department are 
still in the process of considering its provisions, my testimony today 
will outline only the Department's initial reactions to some of the 
Act's more significant provisions.
    The Administration has no quarrel with the objectives of this 
legislation insofar as it seeks to curtail frivolous Y2K actions and to 
encourage companies and individuals to focus their efforts on fixing 
Y2K problems before they occur. In crafting legislation to serve these 
objectives, however, we must be careful not to bar small businesses and 
consumers who have legitimate Y2K claims from the courts and not to 
create disincentives to Y2K readiness. We must also be mindful that 
Congressional amendment of state substantive laws, as well as state 
procedures and practices, is not a step to be taken without real and 
compelling reasons. And, even in such circumstances, there may be 
constitutional and significant federalism policy reasons to avoid those 
extraordinary means.
    With these principles in mind, this proposed legislation raises a 
number of questions for us to consider. First, does the legislation 
support--or does it undercut--the incentives that encourage companies 
to fix Y2K problems now (thereby avoiding costly malfunctions before 
they occur)? Second, has the factual predicate been established for the 
unprecedented changes that would be wrought by this bill, including the 
wholesale rewriting of state law? Prior litigation reform measures have 
been based upon detailed study by both Houses of Congress and have been 
justified by demonstrated abuses. Before acting with respect to Y2K 
litigation, we should be comfortable in our estimation of what type of 
litigation is likely to arise, who the parties are likely to be, and 
which sectors of the economy are likely to be affected. If, for 
example, Y2K failures involving large businesses may be resolved more 
by negotiation than litigation, a bill directed primarily at Y2K 
litigation between such businesses might well be unnecessary. The need 
for justification is even more pressing when the legislation imposes 
dramatically different rules upon a relatively discrete subset of cases 
that are in many respects similar to those cases not affected by the 
legislation. Third, is the legislation targeted at frivolous lawsuits 
or will it prevent businesses and consumers with legitimate claims from 
vindicating their rights? Fourth, does the legislation comport with the 
Constitution and do so in a way that forecloses reasonable challenges 
to its constitutionality? Finally, would the legislation create more 
public policy and practical implementation problems than it would 
solve? While we share with the desire to act responsibly and 
expeditiously in this context, we feel it is important to answer these 
questions thoughtfully before enacting any legislation.
    We have yet to answer any of these questions fully with respect to 
the bill before the Committee. But our preliminary analysis indicates 
that this bill would be by far the most sweeping litigation reform 
measure ever enacted if it were approved in its current form. The bill 
makes extraordinarily dramatic changes in both federal procedural and 
substantive law and in state procedural and substantive law. For all of 
the issues we have identified with the current bill, the Department is 
absolutely committed to working with the Committee to craft an 
appropriately tailored bill that responds to genuine Y2K-related 
litigation problems.
    I will now outline the Department's initial thoughts on the current 
bill, and will begin with the provisions that alter substantive law 
affecting Y2K claims.
               modification of pre-existing y2k contracts
    Title II of the Act amends federal and state contract law as it 
applies to ``year 2000 claims'' and, in so doing, effectively modifies 
the terms of already-negotiated contracts and existing contractual 
relationships. Most of these provisions appear to narrow, and in some 
cases eliminate entirely, the grounds and extent of relief available in 
breach-of-contract actions.
    Section 202 of the Act, for example, appears--either intentionally 
or unintentionally--to create a ``reasonable efforts'' defense in Y2K 
contract actions that would allow a defendant who had otherwise 
breached the terms of a contract to show that the efforts it took to 
implement the contract were ``reasonable'' so that it could ``limit[]'' 
or ``eliminat[e]'' its liability. As far as we are aware, this would be 
a novel defense in contract law. As a general matter, a party to a 
contract is obligated to fulfill its promises and is liable to the 
other party for damages to the latter resulting from the former's 
breach of the contract absent force majeure or other extremely rare 
circumstances. It does not matter whether the party breaching the 
contract made reasonable efforts to avoid a breach. This widespread 
rule of basic contract law has been in existence for hundreds of years 
in the common law, is currently reflected in our contract statutory 
schemes (e.g., the Uniform Commercial Code), and is essential to 
commerce.
    In a similar fashion, Sec. 201 of the Act would require a court, 
unless there is some defect in the formation of the contract, to 
enforce all written terms of a contract, even if those terms disclaim 
certain kinds of warranties, are unconscionable, or render the contract 
an unenforceable ``adhesion contract.'' Most state legislatures, 
however, have adopted some version of the Uniform Commercial Code 
(``UCC'' or ``the Code''), which renders unenforceable in commercial 
contracts certain warranty disclaimers, as well as unconscionable 
contract terms and ``adhesion contracts.'' These sections of the Code 
are designed to protect both individual and business consumers from 
particularly egregious contract terms imposed upon them by contracting 
parties with far greater economic power. The Act would appear to 
validate such terms, even though they were ineffective or illegal at 
the time they were made. Following in much the same pattern, Title II 
``freezes'' the state law regarding the defenses of impossibility and 
commercial impracticability--and, in some cases, damages--to what it 
was on a specific date in the past: January 1, 1999 (for the defenses) 
or the time of contract formation (for damages).
    Some of the provisions of Title II may be unfair both to American 
business and to American consumers. Creating a post hoc ``reasonable 
efforts'' defense that absolves parties to Y2K-related contracts of 
their contractual obligations seems to be unfair to the contracting 
plaintiffs who bargained--and paid--for contract compliance by the 
other party. That a breach resulted from a Y2K malfunction does not 
change the fact that the proposed reasonable efforts defense deprives 
parties to a contract of their paid-for bargain. Similarly, mandatory 
enforcement of only the written terms of a contract will upset the 
expectations of those businesses and consumers who relied upon the UCC 
for protection against unconscionable terms and illegal disclaimers. 
Together, these provisions seem extremely unfair and may, in many 
cases, leave without any remedy legitimately aggrieved plaintiffs who 
prudently bargained for protection against Y2K failures.
    The reasonable efforts defense, in particular, appears also to 
undercut the incentives for potential contract defendants to discharge 
their contractual duties to prepare for--and prevent--potential Y2K 
errors. Presumably, under most bargained-for contracts, these 
defendants would be fully liable for a breach of contract if Y2K 
malfunctions occur; as modified by the Act, these defendants would be 
able to reduce or avoid liability, even if Y2K errors occur, as long as 
they made ``reasonable efforts'' to implement the contract. By 
curtailing the extent of their contractual liability, the Act may also 
curtail their incentives to meet the terms of the contract. Thus, the 
Act may actually fail to serve its own avowed purpose--``giv[ing] all 
businesses and users of technology products reasonable incentives to 
solve year 2000 computer date-change problems before they develop.''\1\ 
John Koskinen, the Chairman of the President's Y2K Council, expressed 
these same concerns about the bill as currently written in his letter 
to this Committee.
---------------------------------------------------------------------------
    \1\ See Sec. 2(b)(1).
---------------------------------------------------------------------------
    We also preliminarily note that Title II may implicate 
constitutional interests and issues. There may be contracts for which a 
legislatively imposed post hoc reasonable efforts defense would raise 
issues under the Takings Clause of the Fifth Amendment. Contracts for 
computer services or software often contain explicit allocations of 
responsibility for remedying defects. Businesses that paid for 
maintenance and for commitments by vendors to remedy software defects, 
including defects that might cause Y2K failures, could file claims for 
compensation from the government if federal legislation invalidated 
those commitments. Title II's requirement that state courts in some 
circumstances apply substantive state law as that law existed on a 
particular date in the past may also raise some constitutional concern. 
These provisions effectively deny to state legislatures (and apparently 
state common law courts) the power to modify their own substantive law 
as they see fit to respond to changing circumstances.
    Finally, Title II raises some fundamental policy and practice 
implementation problems that bear greater consideration. Initially, it 
is not clear how modifying the rules of liability that apply to 
meritorious contract actions will necessarily deter frivolous Y2K 
claims, which by definition will be filed regardless of the rules of 
liability. Moreover, the provisions requiring enforcement of all 
written contract terms would seem to displace the judgment of nearly 
all state legislatures that certain types of contract terms in 
commercial contracts are against public policy. We strongly question 
whether sufficient study has been made to justify hastily discarding a 
principle of contract law that has become a cornerstone of consumer 
protection in so many states for very good reasons. In the same vein, 
requiring courts to apply state law as it existed at some date in the 
past withdraws from states their authority to respond reasonably to 
changing circumstances. The Act may also require courts to apply state 
law to various parts of a contract from three different time periods--
the current law, the law as of January 1, 1999, and the law at the time 
of contract formation. This would, at a minimum, complicate what might 
otherwise be a relatively straightforward application of state contract 
law.
          modification of substantive tort and other civil law
    Title III of the Act modifies federal and state substantive tort 
law (and other civil law) as applied to ``year 2000 actions'' for money 
damages not involving personal injury. The various sections place a 
greater burden of proof upon Y2K plaintiffs in these lawsuits, create 
new defenses, and significantly limit the damages that may be 
recovered. Several sections appear to preclude liability or recovery 
even when a defendant is clearly at fault. Is it sound policy for 
Congress to displace state law in such a dramatic way?
    Sections 302 and 303 significantly alter the rules of liability for 
Y2K actions involving money damages. Section 302, for example, appears 
to foreclose some Y2K actions premised on a theory of negligence. Under 
ordinary principles of tort law, some Y2K negligence claims are likely 
to require proof that the defendant ``should have been aware'' of the 
potential Y2K failure and/or its likelihood to injure the plaintiff. 
Section 302(a), however, requires the plaintiff in any cause of action 
requiring proof of the defendant's actual or constructive awareness to 
prove that the defendant was ``actually aware'' or ``recklessly 
disregarded a known and substantial risk.'' This ``recklessness plus'' 
standard would seem to preclude any such claim premised on culpability 
short of recklessness--that is, the standard appears to exclude 
negligence.
    Section 302 clearly would require plaintiffs to satisfy a greater 
burden of proof in their civil actions. Instead of prevailing upon 
proof of their claims by a ``preponderance of the evidence,'' Y2K 
plaintiffs would have to establish the critical elements of their 
actions--the defendant's knowledge and foreseeability--by ``clear and 
convincing evidence.''
    Similarly, Sec. 303 erects a ``reasonable efforts'' defense similar 
to that contained in Title II. This section provides a complete defense 
to liability--no matter how much the defendant was at fault (for 
example, the defendant could have recklessly disregarded a known risk 
of Y2K failure). Such a defendant would have no responsibility for the 
damages suffered by the plaintiff as long as the defendant made 
reasonable, albeit unsuccessful, efforts to fix the defect.
    Section 104, while titled ``Duty to Mitigate,'' appears to create 
two more new defenses--one complete and one partial--neither of which 
bears much resemblance to the common-law duty to mitigate. At common 
law, plaintiffs are not usually permitted to recover from defendants 
any damages they could reasonably have avoided after they are injured. 
By contrast, Sec. 104(a) seems to bar recovery of any damages if a 
defendant can show that the plaintiff should have known of information 
that ``could reasonably'' have aided the plaintiff in avoiding the 
injury upon which his Y2K claim is based. Even when Sec. 104(a) does 
not act as a complete bar, Sec. 104(b) seems to preclude recovery for 
those damages that could have been avoided by consulting this Y2K 
information. By imposing an affirmative duty on Y2K plaintiffs to seek 
out publicly disseminated information or else lose their right to 
maintain an action at all, Sec. 104 sweeps far beyond the fairness 
concerns that animate the common law duty to mitigate. Again, these 
defenses would appear to be available even when the defendant was 
clearly at fault.
    Other portions of Title III significantly curtail the types and 
amount of damages a Y2K plaintiff may collect should he prevail in 
establishing liability. Most dramatically, Sec. 305 would appear to 
foreclose the recovery of ``economic losses''--that is, financial 
damages that flow from the defendant's tortious activity--unless they 
are incidental to personal injury or property damage claims. This 
provision apparently grants defendants full immunity from civil suits 
involving fraud and misrepresentation (including securities fraud), 
where financial loss is unlikely to be unaccompanied by any personal 
injury or property damage. Indeed, this section appears to preclude 
recovery in any case that does not involve personal injury or damage to 
tangible property.
    Additionally, Sec. 304 caps the punitive damages that may be 
awarded on Y2K claims, limiting damages against most defendants at the 
greater of $250,000 or three times the plaintiffs' actual damages, and 
limiting damages for individuals and small-business defendants at the 
lesser of $250,000 or three times the plaintiffs' actual damages. 
Section 306 would apply in suits against corporate directors and 
officers and would cap their personal liability in Y2K actions at the 
greater of $100,000 or their past 12-months' compensation, as long as 
they did not intentionally make misleading statements or withhold 
material information with the specific intent to harm the plaintiff. 
This latter standard likely would not often, if ever, be met, so the 
cap on liability would apply in almost every case, even those in which 
fraud were proved.
    Title III may also significantly impact whether a prevailing Y2K 
plaintiff will actually be able to recover his damages. Section 301 
provides that a Y2K plaintiff may recover from each defendant only the 
amount of damages that defendant was responsible for causing. This 
would abolish all species of ``joint and several liability,'' which in 
varying forms permits tort plaintiffs to hold any one defendant 
responsible for more than its share of damages. Because Y2K 
malfunctions may be caused by the complex interaction of software 
programs and computer hardware from several defendants, Sec. 301's rule 
of absolute proportionate liability will, at the very least, place a 
greater burden on plaintiffs who will be forced to track down all 
potential defendants in order to receive a full recovery. Moreover, 
because many of these software and hardware companies are mid- to 
small-sized companies that are created and dissolved with some 
regularity, it is more likely that the rule of ``proportionate 
liability'' will create ``orphan'' liability that cannot be assigned to 
any still-existing defendant. As a result, a small business forced to 
shut down temporarily because of Y2K malfunctions may not be able to 
recoup its losses, which may be essential if it is to remain in 
business. Small business owner Mark Yarsike, for example, testified to 
the Commerce Committee earlier this month that his fledgling grocery 
store would have failed had he not been permitted to recover the losses 
he incurred when he was unable to process credit cards expiring after 
1999.
    In examining these changes to substantive state law, the Department 
has a number of concerns. First, we are troubled that the need for some 
of these provisions has yet to be demonstrated. With regard to 
Sec. 301's rule of ``proportionate liability,'' for example, the 
Department understands why a pure ``joint and severable liability'' 
rule may, on occasion, be deemed unfair to defendants, but only a 
handful of states currently follow such a pure rule. Instead, many 
limit a defendant's ``joint and several'' exposure to certain 
defendants (for example, those who are at least X percent responsible 
for the plaintiff's injury) or to certain percentages (for example, X 
times the defendant's proportional liability). As a result, we would 
urge the Committee to further investigate the need to foreclose modest 
forms of ``joint and several liability'' before resorting to an 
absolute ``proportional liability'' rule--which lies at the extreme end 
of the spectrum of potential options. We would also ask the Committee 
to consider further whether the case has been made for overhauling 
state law by abolishing recovery for most ``economic loss.'' Also, we 
are not yet convinced that it is necessary to cap the liability of 
corporate directors and officers, who are already protected in most 
states by the ``business judgment rule'' that insulates them--and the 
insurance companies who insure them--from liability as long as they act 
reasonably in governing the affairs of the corporation. Indeed, the 
practical effect of this provision might well constitute a windfall to 
insurance companies, who have been paid for unlimited coverage but will 
have to pay only up to the cap.
    Second, it appears that a number of Title III's provisions might 
provide disincentives to achieve Y2K readiness. Again, John Koskinen 
shares these concerns. Limiting a defendant's liability by 
circumscribing his duty of care with a ``reasonable efforts'' defense 
may in fact undercut the incentives to take all necessary steps to make 
computer systems and other machinery Y2K-compliant. Although some of 
the proponents of the Act argue that limiting liability in advance 
gives potential defendants more incentive to fix Y2K problems now 
because they will get some ``credit'' for their ``reasonable efforts,'' 
this argument is unpersuasive to us at this stage. Given that the goal 
today is to get ready for Y2K problems before they happen, rewarding a 
person for only making ``reasonable efforts''--instead of fixing the 
problems completely--seems counterintuitive. By the same token, capping 
punitive damages for Y2K defendants would reduce the deterrent effect 
of those damages, and accordingly leave such prospective defendants 
with less reason to take action now to avoid Y2K problems before they 
occur. We share the sponsors' worry about the potential effect of 
punitive damage awards on small business, but are concerned that an 
across-the-board cap may create the wrong incentives.
    Third, we fear that some portions of Title III may, as a practical 
matter, have undesirable (and perhaps unintended) collateral 
consequences. As currently drafted, the bill covers civil actions 
initiated by government entities, including regulatory agencies. The 
SEC, for example, currently has responsibility for safeguarding the 
integrity of the securities markets, and towards that end has been 
active in bringing cases designed to promote timely Y2K compliance by 
market intermediaries.\2\ Title III, and Sec. 306 in particular, would 
likely interfere with these SEC actions. The Act is also likely to 
engender confusion in private securities fraud actions, which are 
already covered by specialized provisions in the federal securities 
laws that contain liability protections, such as the 1998 Securities 
Litigation Uniform Standards Act and the 1995 Private Securities 
Litigation Reform Act. Overlaying an additional layer of liability 
protection on top of these existing protections threatens to create a 
confusing and possibly conflicting set of legal standards that would 
lead to more complex, prolonged litigation over which set of liability 
protection provisions applies. Title III's comprehensive reform 
provisions may have a second, unintended effect--creating federal court 
jurisdiction over Y2K-related civil actions. Because it would amend 
rules to govern liability, and require courts to apply a federally 
prescribed rule that differs from the rule prescribed by current state 
law, the Act might be construed to create a federal question over which 
federal courts would have jurisdiction.
---------------------------------------------------------------------------
    \2\ See, e.g., ``Disclosure of Year 2000 Issues and Consequences by 
Public Companies, Investment Advisers, Investment Companies, and 
Municipal Securities Issuers,'' Release Nos. 33-7558, 34-40277, IA-
1738, IC-23366 (Aug. 4, 1998), reprinted at .
---------------------------------------------------------------------------
    I have flagged some of the Department's chief initial concerns 
regarding the provisions of the bill that amend the substantive law 
applying to Y2K-related claims. Indeed, the Act's extensive amendments 
to state substantive law raises many unknowns about how Y2K litigation 
would operate under such a regime. For example, will small businesses 
and consumers injured by wrongful conduct still be able to obtain 
compensation for the harm that they suffer? The changes to current law 
appear to make it much more difficult, if not impossible, for small 
businesses and consumers to invoke traditional contract remedies, and 
significantly limit claims under statutory and tort law even in the 
face of reckless or intentional wrongdoing.
    The Act amends state procedural requirements attendant to Y2K 
litigation as well, and it is to those provisions I will now turn.
                       pre-litigation procedures
    Title I of the Act would impose some pre-litigation obligations 
upon plaintiffs seeking to bring civil claims premised on Y2K 
malfunctions. Section 101 requires plaintiffs to notify potential 
defendants of their intention to file a lawsuit 90 days in advance, and 
requires defendants to respond by explaining what actions they have 
taken, or will take, to ``cure'' the Y2K defect that forms the basis 
for the plaintiff's lawsuit. Section 102 encourages parties to use 
alternative dispute resolution mechanisms for resolving their Y2K 
claims. Section 103 imposes heightened pleading requirements on 
plaintiffs' Y2K-related claims by mandating that they plead with 
particularity the facts supporting their allegations of material 
defects, their prayer for damages, and their proof of the defendant's 
state of mind. Section 103 also stays discovery while any motion to 
dismiss based on failure to comply with these pleading requirements is 
pending.
    The Department supports mechanisms that encourage parties to settle 
their disputes without litigation, and looks forward to working with 
the Committee in securing passage of appropriate provisions. We are not 
at this time convinced, however, that the need for heightened pleading 
requirements--or the need for stays of discovery pending a pleading-
based motion to dismiss--has been established. We would welcome the 
opportunity to work with the Committee in exploring the need for these 
requirements and in fashioning a provision that avoids the 
constitutional concerns that arise from imposing procedural 
requirements upon state courts.
                     federalizing y2k class actions
    The provisions of Title IV would grant the federal district courts 
jurisdiction (either original or by removal) over any Y2K-related class 
action as long as at least one of the defendants and one of the class 
plaintiffs are from different states. While the Act requires district 
courts to decline jurisdiction over certain Y2K class actions involving 
securities and grants them discretion to decline jurisdiction over 
class actions that involve primarily in-state parties and issues or 
that involve few plaintiffs or little money, it is unlikely that either 
of these discretionary grounds will be invoked very often. We note that 
these provisions are markedly similar to those contained in legislation 
proposed in the last Congress and to which the Department had 
significant objections. Title IV also imposes new and possibly onerous 
notification requirements on the class plaintiffs.
    The Department is concerned about the practical effect of 
federalizing every class action that involves a Y2K claim. Granting 
defendants the power to remove all Y2K class actions to federal court 
may result in the dismissal of a number of meritorious class actions 
that would have otherwise proceeded to resolution in the state courts. 
It is possible that some Y2K class actions will be brought by primarily 
in-state plaintiffs who wish to apply their state's law against 
defendants from the same state. While a district court might have 
discretion to deny this removal, it may not do so when defendants face 
a number of similar, single-state class actions. Instead, the court is 
likely to grant removal and consolidate the cases into a single class 
action under Sec. 1407 of Title 28. In that case, the federal court 
hearing the now-consolidated class action will be required to apply the 
substantive law of several different states. While the differences in 
law may be ameliorated to some extent by the Act's amendment of state 
substantive law, there will still be differences in the various states' 
laws. The court would at the very least be obligated to spend time 
canvassing the substantive law of many states to determine whether a 
class action applying those laws presented any common legal issues. If, 
as is often the case, the states' laws were sufficiently dissimilar, 
the court would find few common legal issues and would accordingly be 
unable to certify the class.\3\ Under this latter scenario, the Act 
requires that the class actions be remanded to their respective state 
courts, but stripped of their class allegations. For those plaintiffs 
whose individual claims are so small as to make an individual action 
impractical, relief would be unlikely (because any attempts to 
reconstitute the class in state court will again prompt removal, 
consolidation, and remand stripped of class allegations). Thus, 
granting defendants the power of removal effectively grants them the 
power to terminate meritorious state-based Y2K class actions and to 
leave large numbers of plaintiffs without redress for their legitimate 
Y2K-related damage claims.
---------------------------------------------------------------------------
    \3\ See Fed. R. Civ. P. 23(a)(2) (one prerequisite to class 
certification is the existence of ``questions of law or fact common to 
the class'').
---------------------------------------------------------------------------
    Moreover, the Department is not yet convinced that the benefit to 
be gained by federalizing Y2K class actions outweighs the cost. Unlike 
Titles II and III that alter substantive state law, Title IV--by 
permitting removal and then remand stripped of class allegations--does 
little more than effectively impose federal procedural law on Y2K class 
actions. We do not believe that it is appropriate--or desirable--to 
supplant the state courts' class action procedures. Because, in our 
federal system, states are encouraged to experiment and take different 
approaches to judicial administration and substantive law, the Act's 
imposition of federal standards on state class actions may be perceived 
to be an attack on federalism itself and the Constitution's allocation 
of authority between the state and federal governments.
    Section 402 would impose a heightened notice requirement on Y2K 
class actions. Instead of the constructive notice now permitted in 
``opt-out'' class actions under the Federal Rules of Civil Procedure, 
Sec. 402 requires plaintiffs to send direct notice to every class 
member via first-class mail with a return receipt requested. If the 
plaintiffs cannot verify individual class members' actual receipt of 
the notice, those members are excluded from the class unless they 
affirmatively ``opt in'' to the class action. This may severely cripple 
the ability of private parties to bring some legitimate class actions. 
For example, these notice requirements might preclude a securities 
class action premised on a fraud on the market theory because it is 
often impossible to identify (and hence notify) the victims of such 
schemes in advance. At a minimum, this new notice requirement imposes 
significant costs on the Y2K class action plaintiffs that no other 
class action plaintiff must bear, and is not guaranteed to provide any 
benefits.
                                coverage
    As a final matter, the Department has a number of concerns 
regarding the scope of the Act. For example, we are very concerned that 
the Act appears to cover Y2K lawsuits initiated by federal and state 
governments and their agencies, which are explicitly included within 
the Act's definition of ``person.''\4\ Applying the Act's substantive 
and procedural limitations to these sovereigns may interfere with their 
ability to enforce their own laws. Title II's modifications to state 
and federal contract law seem likely, for instance, to alter government 
contracts law significantly and, more specifically, the provisions of 
the Contract Disputes Act, which controls contract disputes involving 
the federal government. Title III's modifications to substantive law in 
civil suits may have a similar effect on government-initiated actions 
under consumer protection statutes. The limitations on the financial 
liability of corporate officers and directors contained in Sec. 306 
may, as discussed above, curtail the SEC's enforcement powers. The 
Department would urge this Committee to give fuller consideration to 
whether it is either necessary or advisable to reach Y2K actions in 
which governmental entities are parties, either as plaintiffs or 
defendants.
---------------------------------------------------------------------------
    \4\ See Sec. 3(6)./
---------------------------------------------------------------------------
    With respect to private litigation, we are concerned that the Act 
may reach more than Y2K lawsuits even though the stated purpose of the 
Act is to ``encourage the resolution of year 2000 computer date-change 
disputes involving economic damages without recourse to unnecessary, 
time consuming, and wasteful litigation.'' \5\ Titles II and III of the 
Act, which extensively modify state tort and contract law, apply to any 
``year 2000 claim.'' As currently drafted, however, a ``year 2000 
claim'' involves any cause of action or defense that directly or 
indirectly asserts ``any failure by any device or system * * * or 
software * * * in processing, calculating, comparing, sequencing, 
displaying, storing, transmitting, or receiving date-related data 
including [Y2K data].'' \6\ The term ``including'' strongly implies 
that Y2K date-related failures are simply one species within a larger 
universe of date-related failures covered by the Act. In that same 
vein, a ``year 2000 claim'' also includes any ``failure to recognize or 
accurately process any specific date,'' without limiting the coverage 
to Y2K problems.\7\ Title IV of the Act has a noticeably broader scope 
because it creates federal jurisdiction over class actions even if only 
one of the plaintiffs' claims is a ``year 2000 claim,'' thereby 
subjecting non-Y2K claims to the provisions of the Act.
---------------------------------------------------------------------------
    \5\ See Sec. 2(b)(2) (emphasis added).
    \6\ See Sec. 3(12), 3(13) (emphasis added)./
    \7\ See Sec. 3(13)(B)./
---------------------------------------------------------------------------
    It seems very likely that even a well-tailored definition will 
invite considerable dispute over whether or not certain lawsuits are 
subject to the Act. Plaintiffs' lawyers are likely to avoid styling 
their claims as ``year 2000 claims,'' and often will not know if a 
particular problem has indeed been caused by a Y2K failure. Conversely, 
defense lawyers will likely assert Y2K-related defenses in order to 
bring the claims under the terms of the Act. State and federal courts 
will then be forced to determine whether the Act, or normal state 
substantive law, controls. In light of the fact that the Act works 
great changes in state law, which may have a substantial impact on the 
outcome of any given Y2K-lawsuit, substantial disputes about the Act's 
coverage are likely to be common and will occupy much judicial time, 
significantly adding to the length and complexity of civil litigation.
    Even clear definitions are unlikely to aid courts forced to grapple 
with questions of the Act's coverage when a single cause of action has 
both Y2K and non-Y2K bases. If, for instance, a building security 
system fails because a Y2K computer chip malfunctioned and the security 
company also failed to secure the emergency exit door, a court would 
still need to determine whether to apply the Act notwithstanding the 
contributing non-Y2K cause or whether (and how) to sever the claim 
given the two causes. Wasteful use of scarce judicial resources on 
these coverage issues seems inevitable, with greatly increased costs of 
litigation for both plaintiffs and defendants.
                           concluding remarks
    In my testimony today, I have outlined the more important of the 
preliminary concerns of the Justice Department regarding the Year 2000 
Fairness and Responsibility Act. As noted above, there are ideas in the 
Act--alternative dispute resolution and provisions for pre-notice 
filing with an opportunity to ``cure,'' to name two--that the 
Department would like to aid the Committee in developing and crafting 
into appropriate legislative provisions. While we have concerns about 
some of the other provisions in terms of constitutional issues, public 
policy, practicality, and their effect on Y2K readiness incentives, we 
are eager to work with the Committee to address these concerns.
    In closing, let me say again that we are sympathetic to the need to 
act responsibly and expeditiously with any Y2K litigation legislation, 
but we believe that we need to know more about the nature and scope of 
any liability- or litigation-related problems that are likely to 
develop and with which current law, procedure, and practice would be 
unable to cope. Above all, we must do nothing that will undermine Y2K 
readiness. Accordingly, the Department urges the Committee not to act 
hastily. Rather, we urge you to reflect carefully before enacting 
legislative provisions, like the bill before you today, that would 
greatly alter the substantive and procedural law of the states with 
regard to Y2K lawsuits. Indeed, it would be useful to know the view of 
the states as to any novel approaches to Y2K liability or litigation 
and to study what the states are doing to prepare for Y2K lawsuits, as 
sufficiently responsive action by the states may obviate the need for 
Congressional action. We are committed to working with the Committee to 
formulate mutually agreeable principles that would form the basis for a 
needed, targeted, responsible and balanced approach to Y2K litigation 
reform.
    I thank you for the opportunity to address this Committee.

    The Chairman. Thank you, Ms. Acheson. We appreciate you 
coming. As I understand at least part of your testimony, a 
criticism of the bill is that certain provisions may have, 
``unintended consequences.'' I guess all legislation has some 
degree of unintended consequences. What I think we can agree to 
is the intended consequences of the bill.
    It is the intent of Senator Feinstein and myself, and 
hopefully others, that this litigation reduce frivolous 
litigation and create a strong incentive for industry to fix 
the Y2K problem. My personal belief is that you share those 
goals and that the Justice Department shares those goals.
    Will you work with us in order to refine this bill, the 
language of the bill, so that we minimize any unintended 
consequences that we can foresee?
    Ms. Acheson. Absolutely, Senator Hatch.
    The Chairman. That is important to us. You know, I think we 
have a lot of differences with some of the statements that you 
have made here today in the interpretation of this bill, but we 
are willing to work with you to see if we can resolve those 
differences.
    Let me just clarify a point that you have made in your 
testimony. I understand that the ``reasonable efforts'' 
provision is not an affirmative defense. All the provision does 
is allow some evidence that reasonable efforts were made by 
companies to fix the problem. So it is not an absolute 
affirmative defense.
    And we would differ on a number of issues that you have 
stated here today, but I also understand that the 
administration has consistently opposed certain civil justice 
reform measures, such as caps on punitive damages. Of course, 
the purpose of punitive damages is to deter future bad 
behavior, but punitive damages is most effective in intentional 
tort cases and in personal injury cases, at least as I view it.
    In general, the justification for the caps here is that in 
many cases the Y2K problem will be the result of neither 
negligent nor wrongful behavior. As such, punitive damages, if 
applied, would have little deterrent effect. Now, are you aware 
that personal injury cases are exempt from this bill, and that 
caps on punitive damages do not apply to those types of tort 
actions?
    Ms. Acheson. Yes, I am.
    The Chairman. Do you not agree that caps on punitive 
damages, particularly in the breach of contract cases in which 
historically punitive damages did not apply, create an 
incentive for companies to fix Y2K problems because litigation 
costs would be less likely to soak up capital needed to 
remediate the problem?
    Ms. Acheson. Well, I guess, Senator Hatch, on that point we 
may have some difference of perspective because I think, first 
of all, a point John Koskinen makes in his letter and a point 
that we make is on the readiness issue, the law both with 
respect to actual damages and compensatory damages and then 
punitive damages is as it is, and it was that way when parties 
entered into their various relationships here.
    So we are concerned that a change that would, in fact, 
remove some of the implicit pressures that exist in the law on 
defaulting or negligent or restless parties to correct their 
behavior or correct the problems that they have made for other 
people would be removed. So it is not as if we are suddenly 
larding punitive damage provisions onto a situation. The 
situation has developed in the context of already existing long 
since legal structures, and we are concerned with the impact 
and the message sent by removing them.
    Second, I would say that the point that you make about the 
bite of punitive damages in contract--I think you are 
absolutely right on as a generic and theoretical matter. 
Punitive damages are far--they are, I guess, maybe indeed rare 
in contract actions, and there is no reason why there should be 
more recoveries in Y2K litigation, really, either in the 
contract or the tort side of the house.
    So I guess our question would be if, in fact, the focus of 
this legislation is to deal with abusive or frivolous lawsuits, 
which I gather the word ``insubstantial'' is meant to collect, 
what about the meritorious cases? The frivolous, insubstantial 
cases that might come are going to be dealt with as frivolous, 
insubstantial, non-meritorious cases that already come in the 
State and Federal courts. And most of them, even if they are 
loaded up with punitive damage type claims, judges and other 
actors have procedures in place to deal with.
    So I guess our response is we don't see the need to change 
this structure with respect to this type of litigation and are 
worried that, in fact, the doing of it will send a signal that 
we don't intend.
    The Chairman. Well, we appreciate your testimony and I 
appreciate your kind offer to work with us and see if we can 
perfect this bill, because we file them and then we work on 
them and we try to get them perfect. And I would like to have 
the administration on board when we take it to the floor, 
assuming that this bill does come up on the floor.
    At this point, we will turn to Senator Leahy.
    Senator Leahy. Thank you, Mr. Chairman. I was just going to 
say who--no, I am not going to say that.
    The Chairman. He has been resisting all morning saying that 
you Republicans are in charge in the Senate; now, why can't you 
get the thing to run on time? [Laughter.]
    I can't blame him. I am a little upset myself.
    Senator Leahy. I am afraid you reminded me of a couple 
times when it was even worse when we were in charge. 
[Laughter.]
    That is the only thing that has kept me from resisting.
    The Chairman. I had a long list I was going to bring up.
    Senator Leahy. I am sure you did. [Laughter.]
    It is called mutual deterrence.
    This bill, as I said earlier, we have just barely gotten to 
see it. Even though there has been a lot of talk about it, it 
has only been in the last couple days we have seen it. And I 
have read it and I am concerned reading it that it appears to 
restrict the rights of consumers, small businesses, family 
farmers, State and local governments, and the Federal 
Government from seeking redress for the harm caused by Y2K 
computer failures.
    Let me ask you a series of questions. Does the Department 
of Justice agree that S. 461 restricts the rights of consumers 
from seeking redress for the harm caused by Y2K computer 
failures?
    Ms. Acheson. Senator, it certainly does, as it is currently 
drafted, appear that it would have that effect, assuming that 
consumers and small business proceeded with respect to Y2K 
claims the way I think we have come to understand they proceed 
with respect to other types of claims.
    Senator Leahy. Then it would be the same for small 
businesses seeking redress for the harm caused?
    Ms. Acheson. I agree.
    Senator Leahy. And does the Department of Justice agree 
that S. 461 restricts the rights of family farmers from seeking 
redress for the harm caused by Y2K computer failures under the 
same standards?
    Ms. Acheson. Putting family farms, in my experience, in the 
same category as small business--I cannot speak to anything 
particular about family farms, but I would assume they would 
face the same challenges.
    Senator Leahy. Assuming they are small businesses, they 
would?
    Ms. Acheson. Small business, yes.
    Senator Leahy. And State and local governments?
    Ms. Acheson. I think that the challenges for State and 
local governments are even more complicated. Yes, there are 
constraints, and they fall not only on the rights of the 
government themselves, of their contractual rights, and so 
forth, but the functions that we rely on them and the rights 
that we rely on them to enforce for the greater public good in 
the context of their regulatory and enforcement authorities. 
And it raises a lot of questions on those lines.
    Senator Leahy. You had said in your testimony about the 
Justice Department's analysis, speaking of the Department's 
analysis, ``Preliminary analysis indicates that this bill would 
be by far the most sweeping litigation reform measure ever 
enacted if it were approved in its current form.'' Can you tell 
us in layman's terms what that means?
    Ms. Acheson. Well, I think there are several levels to that 
statement. The first level is looking at what it would do to 
longstanding principles and substantive law in the area of 
contract law. Principles that have been outstanding in the 
common law for many hundreds of years would be undone 
specifically for this kind of legislation. And I can give you 
some examples if you like, but the same applies with respect to 
the underlying law of tort, negligence and recklessness.
    It would not only change substantive law, it would narrow 
the liability and damages recovery rights for plaintiffs. It 
puts a lot of procedural burdens on plaintiffs for this 
litigation that they don't ordinarily have. That is one whole 
layer that it would complicate, and I would be happy to amplify 
on any point of that.
    But the second is that it is the Federal Government--and 
this is another layer--stepping in and actually directing these 
changes to State substantive law and procedure and practice, 
which raises a whole other set of questions.
    Senator Leahy. Well, I am concerned about the terms and, of 
course, the lack of any case law in this because we are going 
into such a new area. I can see every plaintiff going into 
court on something like this and arguing that they are not a 
Y2K lawsuit so they can escape the strictures blocking out the 
questions of liability. Of course, every defendant is going to 
say, well, it is a Y2K lawsuit so that they can get the law's 
legal protection. And then the court is going to have to 
determine what is a Y2K lawsuit, without any stare decisis, 
without any past cases.
    In S. 461, they have definitions of ``year 2000 claim'' or 
``year 2000 failure.'' These are apparently words of art which 
trigger the special legal protections. Do we know how far the 
scope of those definitions go?
    Ms. Acheson. Senator, I don't think we do. And, in fact, I 
think one of the matters in the spoken testimony that I gave, 
but also in the written testimony we have focused on is the 
breadth particularly of the Y2K failure that seems to pick up a 
tremendous number and different aspects of failures in any 
device or system, or any software, firmware, or other set or 
collection of processing instructions. And it goes on and on 
and on, and then it says ``including the failure to accurately 
administer or account for transitions or comparisons from, 
into, and beyond the 20th and 21st centuries, and the failure 
to recognize or accurately process any date, and the failure 
accurately to account for the status of the year 2000 as a leap 
year.''
    It would seem to me, just as a narrow point but good 
example of your point, is that that is, it would seem to me, 
way overbroad for the problem that I understood we were 
concerned about. And, two, it is so broad that it will provide 
anybody trying to color anything as a Y2K claim a broad brush 
to do it.
    Senator Leahy. And I worry about the bill's breath too. We 
worked a lot with the Small Business Administration because 
most of the businesses in Vermont, even our newest high-tech 
businesses, are small businesses. They say 330,000 small 
businesses are at risk of closing down because of the Y2K 
problems nationwide. Another 370,000 could be permanently 
hobbled. It may not be any fault of their own. It may be that a 
small manufacturing company does just-in-time inventory, but 
their supplier is shut down, so they become shut down.
    S. 461 poses a 90-day waiting period on access to the 
courts for Y2K actions. Now, most of these small businesses may 
have limited cash flow, other resources. If a court doesn't 
grant injunctions or say you have got to wait 90 days, they 
could be out of business. Is that a concern that you share?
    Ms. Acheson. It is a concern. I mean, I think that is a 
provision that brings together, it seems to me, the tensions 
here because I think one of the things that certainly 
characterized the efforts of the industry, the concerns of the 
Senators, the concerns of the Federal Government, is a 
tremendously positive and constructive effort to fix their own 
problems, Y2K problems, and help other people fix theirs. And 
so it seems to me a tremendously positive policy idea to have a 
sort of stand-still time to effect a cure. On the very same 
point, it runs into the type of practical problems for small 
businesses that you have described.
    Senator Leahy. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Sessions.

STATEMENT OF HON. JEFF SESSIONS, A U.S. SENATOR FROM THE STATE 
                           OF ALABAMA

    Senator Sessions. Thank you, Mr. Chairman. I want to 
congratulate you and Senator Feinstein and the others who have 
taken the lead on this important issue.
    We do have a problem, in my opinion. The tort legal system 
is just not the way to settle this tremendously complex and 
expensive process of computer Y2K problems. I just don't think 
it is the proper way to do it. It is going to involve 
extraordinary expenses and random rewards to one person and 
zero benefits to another, costing huge sums of money and taking 
large amounts of time.
    I believe your analysis, Ms. Acheson, is just too naive in 
how these things are going to actually play out. What is going 
to happen is that in every county, every circuit court in 
America, hundreds, perhaps thousands of these cases will be 
filed. Plaintiff lawyers will be claiming punitive damages in 
every one of them as sort of a hammer, a threat; you could call 
it even an extortive-type threat to the company to force 
settlements even where settlements are not necessary.
    One of the individuals who is going to testify here today, 
I understand--Mr. Yarsike will testify that he is against this 
bill, but it took him 2\1/2\ years to get his case to 
conclusion. And that is what happens. We had testimony, Mr. 
Chairman, as you know, about the asbestos litigation. I have 
practiced law all my life until the 2 years I have been in this 
Senate, and I am horrified to know that in asbestos only 40 
percent of the money paid out by asbestos companies actually 
got to the victims of asbestos. Sixty percent was eaten up in 
litigation costs.
    So I think we are at an incredibly complex period. We are 
talking about $1 trillion in costs. That $1 trillion needs to 
go to fixing this problem. All the asbestos companies are in 
bankruptcy. We certainly don't want to have all our major 
computer companies in bankruptcy. They need to be spending 
their money fixing this problem.
    So I am really troubled by, I think, the analysis that you 
have presented. I think it is way too negative. I think this 
administration has got to deal with this problem. This 
administration does not need to be in the position of just 
stonewalling this and taking nothing but the trial lawyers 
position. Certainly, they will be making millions, and hundreds 
of millions of dollars out of the litigation--billions of 
dollars out of it.
    And I know they are the number one financial supporters of 
this administration, but we are going to have to do something 
for the people of this country. So I am a little disappointed 
in what I consider an excessively negative view. I know the 
chairman is willing to consider helpful comments to improve 
this legislation. I know Senator Feinstein would, too, but I am 
just real troubled about that.
    Let me just say this. Isn't it true under the 90-day rule 
that when you are talking about tens of thousands of cases that 
might be brought, isn't it likely that more small businesses 
will get their cases favorably disposed of and their problems 
handled quicker than if they all filed a lawsuit at the same 
time?
    Ms. Acheson. It is very hard to say, Senator, you know, and 
I think one of the points that we have tried to make here, and 
we believe it, is that, you know, you have a view about what is 
going to happen here. Other people have very different views 
about what is going to happen here, both with respect to 
failures and with respect to resulting litigation.
    We don't know, and that is what we are saying. And what we 
are saying is until we know, until we get a little bit of a 
better handle on the extent and nature of failures and the 
extent and nature of resulting litigation, before we undertake 
something that may well in the end be called for--we are not 
saying this is not called for; we are saying we simply do not 
yet have a factual predicate to know whether some or all of 
this may be called for--that we ought to continue to work on 
the Y2K problems.
    What I am hopeful of is that the small businesses that you 
are talking about have identified their Y2K problems, their 
own, the people upstream from them and the people downstream, 
and are working right now to solve those problems. As I 
understand, if you get out on the World Wide Web and you look 
at what is out there, there are businesses working hard on 
solving the problem, and spending a lot of money doing it.
    I don't know what money they may be spending for lawyers, 
and so forth, but what I am hopeful of is we won't have all 
these pieces of litigation lined up because we will have solved 
their problems. And I am not saying that, you know, there won't 
be any. Surely, there will be some.
    Senator Sessions. Well, it is the kind of problem I think 
you could send a good person in or a good computer company 
could have tried to design a system that they thought would 
work and they have tried to repair it and they found out they 
didn't. Three times the actual damages that is suffered by a 
company--isn't that a sufficient compensation, and would the 
risk of even more than that make companies reluctant to even 
attempt to undertake repair of systems?
    Ms. Acheson. Well, I think if you had a company that went 
in three times and actually tried hard to, you know, repair the 
problem, they may end up with the contract damages under the 
State law. But I don't see in that case how they should be 
liable for punitive damages. It seems to me punitive damages is 
when somebody does something truly outrageous, and attempting 
to respond to your customer and fix the problems----
    Senator Sessions. Well, limiting the punitive damages to 
three times actual losses seems like to me a pretty generous 
compensation and a fairly rational way to present some 
predictability to the companies who are undertaking to fix this 
problem. Wouldn't you agree that that would be helpful?
    Ms. Acheson. Senator, as a personal matter, I agree with 
you completely. I think the position of the administration on 
this issue has always been this is a matter for State law 
reform and State law process and State law legislative 
determination.
    Senator Sessions. Well, I agree with you. Most of the 
complaints you have made about the bill are simply that it 
changes existing law and, of course, that is what the goal of 
this legislation is, to change existing law to make it more 
rationally able to help us get through this crisis we are 
facing.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    [The prepared statement of Senator Sessions follows:]

                Prepared Statement of Hon. Jeff Sessions

    Computers have grown to be an integral part of our daily lives. 
Although studies differ on the extent of preparedness, most analysts 
agree that all Y2K problems will not be solved before January 1st. It 
should be expected that many people will suffer as a result of the Y2K 
computer bug. But because we live in a society in which people go to 
court and sue over even minor of inconveniences, I am inclined to 
believe the reports that claim litigation expenses associated with this 
problem could reach $1 trillion.
    In addition to the problems resulting from the computer failure, it 
is absolutely necessary that we not allow this flood of litigation to 
worsen the situation. Testimony before this committee on asbestos 
litigation revealed that only 40 percent of the money awarded to 
plaintiffs actually reached the victims. The other 60 percent was taken 
by attorney's fees and court costs. The Asbestos suits are symbolic of 
mass litigation that provide too little benefit to those individuals 
who suffer actual harm. We should try to prevent similar injustices 
from occurring in Y2K litigation. Legislation which encourages business 
to repair Y2K problems and not waste resources defending themselves in 
court serves the public interest. We must avoid costly, time consuming 
litigation in which the lawyers are the only real winners.
    Congress must also seek to avoid a situation where the court system 
has become so cluttered with marginal or frivolous lawsuits that 
individuals and businesses who have suffered genuine harm are not able 
to obtain relief. The legal system must focus on the legitimate 
lawsuits to ensure that they proceed in a timely fashion. An injured 
party does not need to compound that injury by enduring several years 
of litigation.
    I look forward to working with the Chairman and other members of 
this committee to promote legislation which will encourage businesses 
to work diligently on fixing the problem, minimize unnecessary, 
unjustified and frivolous Y2K lawsuits, but still protect those 
individuals with legitimate legal claims.

    The Chairman. Senator Feinstein.

  STATEMENT OF HON. DIANNE FEINSTEIN, A U.S. SENATOR FROM THE 
                      STATE OF CALIFORNIA

    Senator Feinstein. Thank you very much, Mr. Chairman.
    Welcome, Ms. Acheson. I must say I am somewhat surprised by 
the response to this, which I frankly find not very helpful. I 
think there is a major problem. I got into this because of the 
concern about what might happen and the fact that more than 20 
percent of America's high-tech jobs are in California.
    We tried to craft a moderate piece of legislation; it is 
certainly much more so than the House. I believe that some 
legislation is, in fact, going to pass. I think both Senator 
Hatch and I have said that we are eager to work with the 
administration. We are eager to see amendments, and I would 
certainly hope that the Administration would be willing to work 
with us on this.
    I think not to recognize the degree to which frivolous 
suits take place and the degree to which there is a possibility 
for these suits to take place even on a class action basis in 
the Y2K era is kind of like being an ostrich and putting one's 
head in the ground.
    What we have tried to do in this legislation is not prevent 
legitimate suits from going ahead, but be able to provide a 
dampening effect on the frivolous suit and the frivolous class 
action lawsuit, which we believe is brought sometimes just for 
the purpose of early settlement and the collection of money. 
So, that is the intent.
    I have said over and over again that we are willing to 
entertain amendments. We have tried to vet this legislation in 
the short time we have had. I have sent this legislation now to 
every major computer company that I know of in the State of 
California, asked them to review it. We have asked ATLA to 
review it and submit comments. We initially heard, well, they 
are just going to oppose it. Now, I am very hopeful that they 
will review it in a respectful way and present some amendments. 
But let me just end by saying I am somewhat surprised by the 
comments.
    Let me ask a couple of questions, if I can. You have argued 
that section 201 of the bill would enforce all contracts, even 
those that would otherwise be unenforceable. Yet, clause (c) of 
201 specifically states that the section will not apply to 
contracts that are unenforceable due to an infirmity of 
formation. We meant for this provision to exempt contracts of 
adhesion between a large company and one with no negotiating 
power and other unenforceable contracts.
    Do you think this exclusion is not clear? Do we need to 
change it?
    Ms. Acheson. I think it was our impression that that 
exclusion was unclear. I think that how we read this was that 
contracts that appeared to be carved out were contracts as to 
which a court determined that the contract as a whole was 
unenforceable due to an infirmity in the formation. And yet 
provisions that are unconscionable and have been held by State 
law or warranties and such like are really--they are just one 
piece of the contract.
    And the way most--I shouldn't say I know this as a matter 
of most States, but certainly the States that I have practiced 
in and are familiar with and the Uniform Commercial Code have 
overridden offensive warranty and sort of limited provision 
problems. And so the whole contract doesn't become 
unenforceable; it is just that provision gets thrown out.
    Senator Feinstein. Well, perhaps you would take a look at 
it and submit some language.
    Ms. Acheson. Absolutely, absolutely. I mean, contracts of 
adhesion, it seemed to me, when the whole contract is a problem 
would be picked up in your unenforceable contract thing, but 
the oppressive or offensive provision piece wouldn't.
    Senator Feinstein. Now, as you know--and I thank you very 
much. We would appreciate an amendment, and obviously we want 
this to be as right as it possibly can be.
    As you know, the House bill puts all punitive damage 
recoveries into a year 2000 recovery fund. In this bill, the 
plaintiff keeps punitive damage awards. The Administration has 
in the past opposed punitive damage caps for product liability 
legislation. However, this Y2K legislation affects only a 
narrow class of cases, those dealing with Y2K defects. These 
suits have never happened before and they are never going to 
happen again.
    I think that caps on punitive damages can in some instances 
be helpful in limiting frivolous litigation filed solely to 
force a quick settlement. Is the Administration opposed to all 
punitive damage caps, or are you willing to discuss narrow or 
limited caps in some circumstances?
    Ms. Acheson. Senator, we are willing to discuss that and 
anything else about this bill. One thing that I want to make 
very, very clear--in fact, a couple things I want to make very 
clear; one is we just saw this bill on Wednesday. Two, we have 
done our level best, working very, very hard since then to look 
at it from the perspective that we must as the Department of 
Justice.
    I am afraid maybe I have spent too many late nights on it 
and needed to sleep for 3 days and then read it because I don't 
think any of us intended it to sound as negative as apparently 
the committee thinks it does, and we regret that. We very much 
want to work with the committee on the bill and we want to keep 
talking about the nature of the problem that people see coming, 
that your constituents, that the computer industry does, what 
are the States doing, what do they think. Those are the kinds 
of things that we want to explore, but we are absolutely open 
to discussing every aspect of this.
    Senator Feinstein. Just one quick question. I would think 
the fundamental points are the provision for an arbitration 
process, the 90-day cooling off period. Of course, we don't cap 
attorneys fees, but we do cap, as Senator Sessions and Senator 
Hatch have said, the punitive damages. And the other big issue, 
I would think, for you is the proportionate liability. That is 
very hard for me not to see the justice in some proportionate 
liability, as opposed to allowing the person sometimes with the 
least liability but the deepest pockets getting the greatest 
penalty, which to me has always seemed like a very unfair part 
of the law.
    And I say this as a non-lawyer. It seems to me that your 
liability--or excuse me--your responsibility really ought to 
relate to your degree of liability. And in this case, you can 
see some of the larger companies really having to absorb 
tremendous losses if there isn't some protection against that.
    Ms. Acheson. And it seems to me, Senator, that is a very 
good example of looking to some positions about proportionate 
liability that are somewhere in between joint and several, on 
the one hand, and strict proportionate on the other. States 
have looked at this in other contexts and some have made the 
joint and several tag or responsibility come in when there is a 
certain level of responsibility. Others have had different 
approaches to it. There are a lot of different approaches out 
there, and we would be happy to look at any of them against the 
emerging nature of the problem and work with the committee on 
those and other aspects.
    Senator Feinstein. I thank you very much. And, Mr. 
Chairman, I want to thank you very much for your help and 
working together on this. And I think we both said we would be 
happy to receive amendments and take a look at them, but this 
is a very important bill.
    The Chairman. Well, thank you, Senator Feinstein. It is 
reciprocal. I really appreciate your going on the bill. We all 
know that when we file these bills, it is to create the 
controversies, and hopefully we have got it right the first 
time. But if we haven't, that is why we have a Justice 
Department to help us and aid us. And we are gratified that you 
are willing to reexamine this bill and look at it carefully and 
to give us your best suggestions on how we might make it more 
acceptable to the Administration, and hopefully to everybody 
concerned.
    We do appreciate that kind of cooperation and we will look 
forward to having it in the future. And if you could get back 
to us--this is on a kind of a fast track, so if you can get 
back to us within a relatively short period of time, we would 
appreciate it.
    Ms. Acheson. Absolutely, Senator.
    The Chairman. And we will just work with you and see what 
we can do to refine this bill and make it even better than it 
is. But something has to be done. We can't ignore these 
problems any longer, and everybody knows this is going to be an 
awfully expensive process if it devolves to a pure litigation 
process. And we can't allow that to happen if we have a 
reasonable way of preventing it.
    So thank you so much for being with us and taking the time.
    Ms. Acheson. Thank you.
    The Chairman. Good to have you here.
    Senator Bennett is not here yet, but when he comes in, we 
will interrupt whatever testimony is being given, unless it 
takes a sentence or two to finish, and let him give his 
testimony.
    We will introduce our second witness panel and we are very 
happy to welcome all of you here today. It consists of a 
variety of members from the technology industry and consumers. 
Addressing the committee first will be Harris Miller, President 
of the Information Technology Association of America, the ITAA. 
ITAA is the largest and oldest information technology trade 
association. It represents 11,000 software services, Internet, 
telecommunications, electronic commerce, and systems 
integration companies.
    Our second witness is Laurene West, from my home State of 
Utah. Ms. West has more than 20 years of health care 
experience. We are happy to have you here today. Not only is 
she a registered nurse, but she has also gained experience in 
medical informatics, designing, developing and implementing 
medical information systems. Ms. West has recently started a 
year 2000 consulting firm, so we are very interested in what 
you have to say here today.
    Senator Leahy. And, Mr. Chairman, you know I always listen 
to registered nurses.
    The Chairman. That is good. His wife is a registered nurse, 
and I listen to her, too, by the way.
    Our third witness is Mark Yarsike. Mr. Yarsike is a small 
businessman from Warren, MI. He is co-owner of Produce Palace 
International, a gourmet produce market in the Detroit suburbs. 
He is also the first person to ever file a Y2K suit.
    Our fourth witness is B.R. McConnon, President of Democracy 
Data and Communications, DDC, which is a grass-roots database 
management and communications firm. Mr. McConnon provides 
oversight of grass-roots technical activities for several 
leading corporate and association grass-roots programs.
    Our fifth witness is Harris Pogust. Mr. Pogust is the head 
of the Sherman, Silverstein year 2000 litigation group and is 
co-chairman of the Association of Trial Lawyers of America's 
Year 2000 Litigation Group. That is a very prestigious group. 
Mr. Pogust is an attorney with the law offices of Sherman, 
Silverstein, Kohl, Rose and Podolsky, located in New Jersey.
    Our sixth and final witness is Stirling Adams. As in-house 
counsel with the software company Novell, Mr. Adams works with 
technology license agreements and is a member of the Novell 
team that oversees the company's year 2000 preparation efforts. 
He is also the Chair of the Software and Information Industry 
Association's Year 2000 Committee, and is a member of the 
Business Software Alliance's Year 2000 Committee. So we are 
happy to welcome you as well.
    We are happy to welcome all of you here today and we will 
look forward to taking your testimony. Please understand that 
if Senator Bennett comes in, because of the pressures on him 
and others in the Senate, we will probably interrupt you to 
allow him to present his testimony.
    So we will start with you, Mr. Miller. Now, we would like 
you to watch the lights. We are giving each of you 5 minutes. 
When that red light goes on, I would sure appreciate it if you 
would just really wrap up very quickly.

 PANEL CONSISTING OF HARRIS N. MILLER, PRESIDENT, INFORMATION 
TECHNOLOGY ASSOCIATION OF AMERICA, ARLINGTON, VA; LAURENE WEST, 
 YEAR 2000 HEALTH CARE CONSULTANT, MIDVALE, UT; MARK YARSIKE, 
   CO-OWNER, PRODUCE PALACE INTERNATIONAL, WARREN, MI; B.R. 
    McCONNON, PRESIDENT, DEMOCRACY DATA AND COMMUNICATIONS, 
    ALEXANDRIA, VA, ON BEHALF OF THE NATIONAL FEDERATION OF 
  INDEPENDENT BUSINESS; HARRIS POGUST, SHERMAN, SILVERSTEIN, 
 KOHL, ROSE AND PODOLSKY, PENNSAUKEN, NJ; AND STIRLING ADAMS, 
       CORPORATE COUNSEL, NOVELL, INCORPORATED, OREM, UT

                 STATEMENT OF HARRIS N. MILLER

    Mr. Miller. Well, thank you, Chairman Hatch, and thank you 
and Senator Feinstein and Senator McConnell for introducing 
this bill.
    Revolution is about change, about new ideas and new 
challenges and new opportunities, about responding to the 
unknown, the unanticipated, and oftentimes the unbelievable. 
Who, for instance, would believe that in just a few short years 
the Internet would reach into every school, that E-mail would 
become just as important as telephones to business 
communications, that computers would cost less than the desk 
they sit on, or that two zeroes, or the absence thereof, could 
trip up our digital planet?
    Today, this information revolution, bringing education, 
health care, political empowerment and numerous other economic 
benefits to billions of people, and valued at almost $2 million 
worldwide according to a recent study by the World Information 
Technology and Services Alliance, is threatened by those two 
zeroes.
    That great philosopher, Yogi Berra, once said, I came to a 
fork in the road and I took it. The year 2000 software 
challenge is a fork in the road, presenting society with a 
choice about its immediate future. Unlike Mr. Berra, however, 
this committee and this Congress has to choose one of the 
forks. Down one path, we work together to correct our systems, 
assure uninterrupted consumer access to a very high level of 
products and services, maintain our business relationships and 
preserve stockholder values. The other way, however, systems 
are left unfixed because companies look to the courts to make 
things right or to recover damages that need not have occurred. 
Product and service delivery goes haywire, company reputations 
plummet, and we enter a lose/lose outcome. Not a difficult 
choice really, Senators.
    The Year 2000 Fairness and Responsibility Act of 1999 is 
legislation which rightly recognizes that remediation is vastly 
preferable to litigation. And although the clock is ticking, 
time remains to assess, fix and test many systems, and to 
develop contingency plans to prevent business disruption due to 
Y2K. Addressing the Y2K challenge will be difficult, but as 
Senator Hatch said, it is not an option.
    So how do we create the environment that encourages fix 
over fight? The simple answer is we create incentives to repair 
systems and remove disincentives to do so; remediate, not 
litigate. ITAA believes that following key principles are 
essential to any bill addressing year 2000 liability, and they 
produce the incentives and remove the disincentives needed.
    First, the language and the commitments of the contract 
will be the first point of reference to define the parties' 
rights and obligations. Second, we must have a uniform Federal 
approach to the resolution and litigation of problems 
attributed to year 2000 and making it the most equitable and 
predictable way to resolve Y2K disputes.
    Third, a vendor-supplier must have the opportunity to 
effect a cure of the Y2K problem before a lawsuit is filed. 
Fourth, the parties must be encouraged to seek to resolve 
remaining disagreements through non-litigation alternative 
dispute resolution, such as non-binding mediation.
    Next, defendants should be permitted to enter into evidence 
and use reasonable efforts in the circumstances to achieve year 
2000 readiness not only as a defense to allegations of 
negligence, but to serve to mitigate contract and statutory 
suits in any action to recover economic damages resulting from 
a year 2000 problems and as a means of encouraging--and this is 
very important--businesses to invest in fixing systems today.
    Next, all parties should mitigate their potential Y2K 
problems this year, and if a Y2K failure does occur, recovery 
in suit must focus on material defects and then should be 
limited to direct damages, except in cases of physical injury 
or fraud.
    Next, abusive and frivolous class action litigation should 
be eliminated. Parties with legitimate claims, however--and 
there will be some--must have their rights protected and the 
courts unclogged to handle those claims. And, last, legislation 
should be industry- and organization-neutral, with no sector of 
the economy or level of government obtaining special treatment 
or special exemptions not available to other entities.
    Critics of the eight principles I have just outlined and 
the legislation embodied in the bill that Senator Hatch and 
Senator Feinstein introduced usually trot out one of three 
arguments against it; No. 1, that taking legislative action now 
will encourage companies to stop fixing systems. Or, No. 2, 
they say just the opposite that legislation is not needed 
because fixes are going on. Or, No. 3, in logic which I find 
truly defies reason, they say we don't have to worry about it 
because the disease this legislation is meant to prevent, a 
tidal wave of lawsuits, has not presented itself yet.
    None of these arguments is in touch with reality. First, 
the bill creates incentives to fix the system because it says 
by taking action, you are going to be rewarded should you get 
into disputes. The incentives are to take action, not to not 
take action.
    Second, they argue that the Y2K problem is solved. Well, 
unfortunately, members of the Senate, that is not true. And 
Senator Bennett can talk to you more about that, but certainly 
more and more data is coming in indicating that while a lot of 
progress is being made, the problem is far from being solved. 
So the idea that we don't need legislation because the problem 
is solved is also inaccurate.
    The third issue which I have heard, and the Administration 
witness also raised, is we don't know how big the problem 
should be. Well, I did a simple Internet search recently and I 
typed in the words ``Year 2000 plus Attorneys.'' I got 11,000 
hits. There are a lot of lawyers out there who think they are 
going to make a lot of money out of this. Lloyd's of London as 
estimated $1 trillion in litigation.
    I don't mean to suggest that all year 2000 problems will be 
solved and there will be no personal injury or other cases 
which warrant litigation if this bill passes. But I do suggest 
that unless Congress acts now, many suits will be launched on 
frivolous or speculative grounds, tying up the courts and 
companies in an exercise which is as unnecessary as it is 
unproductive.
    Chairman Hatch, the legislation that you and Senator 
Feinstein introduced has incredibly broad support from all 
aspects of business--IT companies and their customers, small 
and large businesses, and companies across all sectors of our 
economy. I urge this committee to support the legislation. I am 
prepared to answer questions you may have.
    Senator Leahy [presiding]. Thank you, Mr. Miller.
    [The prepared statement of Mr. Miller follows:]

                 Prepared Statement of Harris N. Miller

                              introduction
    I am Harris Miller, President of the Information Technology 
Association of America (ITAA), representing over 11,000 direct and 
affiliate member companies in the information technology (IT) 
industry--the enablers of the information economy. Our members are 
located in every state in the United States, and range from the 
smallest IT start-ups to industry leaders in the custom software, 
services, systems integration, telecommunications, Internet, and 
computer consulting fields. These firms are listed on the ITAA website 
at www.itaa.org.
    ITAA appreciates the opportunity to express our industry 
association's strong support for the legislation being considered today 
on the Year 2000 (Y2K) software challenge. I am here to offer our 
perspective on the pressing need for Congress to pass this legislation 
and for businesses across the entire spectrum of our society to take 
advantage of and utilize its provisions so that our nation can take the 
responsible steps necessary to meet the challenge head on. In order 
successfully to make the transition to the new millennium, the Y2K 
challenge must be effectively addressed by all the affected 
stakeholders--governments, businesses, users and suppliers across all 
industries and enterprises around the globe. Though the clock is 
ticking, there is still time to assess, fix and test systems, as well 
as develop contingency plans to prevent business disruption.
    Almost every sector of American industry--small business and large 
companies alike--is already making massive investments to prepare for 
Y2K. An onslaught of unnecessary, costly, and time-consuming litigation 
at the turn of the century will, however, hinder rather than help 
efforts to cure potential Y2K problems. Rather than focusing on whom to 
sue, organizations should be in a partnership enterprise--working with 
key suppliers and customers, finding the answers, fixing any problems, 
and settling disputes quickly in order to prevent business disruption.
              our common goal: remediation not litigation
    Our common public policy goal should be to continue encouraging Y2K 
remediation, not litigation. While the Y2K technical challenge cannot 
be solved by legislation, well-conceived legislative initiatives, which 
implement a set of key principles, can play a constructive role. We 
believe that the Federal legislation introduced by you and Senator 
Feinstein and in the House of Representatives last week will achieve 
precisely that. This legislation is supported by a truly amazing 
coalition of trade associations and companies, representing the broad 
spectrum of the U.S. economy, because it is a fair, reasonable and 
necessary approach to the Y2K challenge. This coalition of interested 
parties includes potential Y2K plaintiffs, defendants and those that 
believe they could be BOTH!
    When passed into law your bill will (1) create incentives to 
assess, fix, and test systems before problems develop; (2) provide 
business certainty through a uniform Federal approach; (3) encourage 
contracting parties to resolve Y2K disputes-- particularly where there 
is only an economic loss--without litigation; and (4) screen out 
insubstantial lawsuits and actions not based on material defects, while 
preserving the rights of parties that suffer real harm. If there is 
personal injury or fraud or recklessness, this bill will NOT prevent 
the recovery of damages or reparations.
    I am not a lawyer, so my comments will not attempt to analyze the 
specific aspects of the proposed bill defining plaintiff rights or 
defendant responsibilities. Rather, what I can tell you is why our 
members, their customers and suppliers, the broad spectrum of companies 
and associations that have come together in support of your bill, and 
how our overall economy NEEDS and DESERVES this legislation.
                              itaa on y2k
    Over the past four years ITAA has been the leading trade 
association voice on the issue of successfully confronting the Year 
2000 challenge. We have long advocated that vendors and users become 
aware of and actively develop response mechanisms to identify the 
problems and remediate their systems. Our goal has been to make sure 
the parties receive the necessary information they require. We 
developed our own Y2K Product and Service Compliance Questionnaire over 
two years ago. In response to a specific request from Congress we 
established the first of its kind Y2K certification program for IT 
companies and enterprises that utilize IT to provide some certainty in 
a crowded and often confused marketplace. In the past two years, more 
than 100 user and provider organizations have successfully gone through 
the ITAA*2000 Certification Program. We have published and distributed 
free of charge a Y2K Solution Providers Directory--the 9th edition of 
which will be out next month. Our Internet website is the only place 
where the public and public policy makers can look to find all of the 
Federal and State bills on Y2K, and--unfortunately--all of the Y2K 
litigation.
    ITAA worked closely with the House, this Committee and the 
Administration, to write and unanimously get passed into law the 
Information and Readiness Disclosure Act because we and Congress were 
convinced that the threat of lawsuits was hampering the sharing of 
vital Y2K information between business partners. Organizations were 
afraid to provide and could not receive the information needed to 
successfully approach resolution of Y2K issues to ensure a seamless 
transition into the next century. Since the passage of the ``Good 
Samaritan'' law, which came about in large part through the yeoman 
efforts of your chairmanship, ITAA has produced a set of special Y2K 
Guidelines and has sponsored an Internet webcast explaining how to take 
advantage of the Act's provisions. Companies across the country now 
have a tool that allows them to share company-to-company information. 
At the same time, the rights of consumers remain protected, and the law 
did nothing to limit any cause of action that may grow out of actual 
Y2K-related losses.
    The legislation you and Senator Feinstein have introduced will 
broaden the protections contained in last year's information-sharing 
bill and will continue to keep organizations focused on the fix--not 
downstream litigation. This bill will serve to encourage vendors of all 
types to continue to put the time and resources into Y2K remediation 
and testing efforts in 1999. It will also serve to provide protection 
to those enterprises that are impacted by Y2K glitches even though they 
attempted to get their systems on track, by mandating, for example, an 
``opportunity-to-cure'' period before a Y2K lawsuit can be filed, and 
discouraging the award of consequential damage penalties against 
businesses impacted by events outside of their control. By focusing 
their time, energy and resources on fixing systems, rather than 
litigating lawsuits, business partnerships will continue and 
disruptions will be minimized.
    Inevitably, even if parties do everything possible between now and 
the Year 2000 to prevent disruptions, failures and resulting disputes 
will occur. Business relationships can survive these challenges, 
however, as long as the contracting parties work together towards a 
solution and approach the Y2K challenge as partners, realizing that the 
problems encountered should not lead to contract termination or 
litigation.
               bill criticisms turn blind eye to reality
    Let me take a moment to address three principle objections made by 
critics of this legislation. Contrary to logic and business practice, 
some have charged that legislation which gives companies a cure period 
is essentially an opportunity to delay, defer or deny that Y2K problems 
exist. Such a viewpoint turns a blind eye to the very nature of most 
business relationships, which is to do everything possible to assure 
customer satisfaction and a predictable revenue stream into the future. 
Meanwhile, bill provisions create clear incentives for both potential 
defendants and plaintiffs to take affirmative action on Year 2000--not 
hang back waiting for courtroom settlements. I refer here to the 
responsibility placed on companies to make reasonable efforts in 
anticipation of contractual or tort claims as well as the requirement 
to mitigate the likelihood of Y2K risks for those who might raise such 
claims. Buyers and sellers responding to these key provisions of the 
bill will implicitly reduce the size of exposures as well as actual 
damages and, as a result, minimize the need for lawsuits.
    Other critics are pointing out that we have not yet seen evidence 
of the prognosticated flood of litigation, and therefore we are 
developing a cure in search of a disease. Again, I am not a lawyer, so 
I can only report what I read and see. What I see is a stable of 
salivating legal factories gearing up. I am in the ``Internet 
business'' so-to-speak, so I used my trusty web access search engine 
last week and found 11,051 `hits' when I typed in the subject: ``Year 
2000 + Attorneys.'' My General Counsel is invited to speak at or is 
invited to attend two to three Y2K Litigation Seminars and Conferences 
a day. Is it prudent or responsible for Congress to wait for the 
inevitable flood or do what it can to provide sandbags now?
    There are some critics who contend that this legislation is 
unnecessary because companies, thank you, are moving ahead on a 
remediation path just fine without the bill. I have been traveling 
throughout the country and the world for four years--speaking to every 
private sector group and government agency you can think of--and we are 
not even close to full remediation.
    A recent ITAA Y2K contingency planning survey found that 87 percent 
of respondents, representing a wide cross section of industries, call 
Year 2000 a crisis for the nation and the world. Over half said Y2K 
will hurt their companies. Over one-third reported actual Y2K related 
failures.
    Our research is supported by other studies and analysis:

     In the government sector, the GAO reports 39 percent of 
federal systems are yet to be made Y2K ready. The National Association 
of State Information Resources Executives says that of 46 states 
included in a recent survey, most are not close to being compliant. A 
recent report from the National Association of Counties found 50 
percent of its survey base do not have a Y2K plan.
     A National Federation of Independent Business survey of 
small business owners in January 1998 found that 37 percent of those 
polled have either taken no Y2K action or do not plan to.
     A survey released in January by the Media Studies Center 
found that 53 percent of Americans agree that the Y2K problem is one of 
the most important problems facing the country--one percentage point 
more than had heard about the recent U.S. military action against Iraq.
     A January 1999 USA Today/Gallup Poll found 34 percent of 
respondents predicting major problems from the date bug generally and 
14 percent saying they expect to experience major problems personally.
     A Cap Gemini/Industry Watch Survey conducted late last 
year found on-time completion schedules for Year 2000 projects slipping 
for 90 percent of those polled. An October 1998 survey conducted by CIO 
Communications, Inc., found over two-thirds of the CIO's polled 
indicated that the job of the century will not get done on time, and 
that government officials and consumers should be getting prepared to 
cope with the consequences. Those consequences could include an 
economic slow-down in the U.S. Seventy three percent of respondents 
said Y2K has the potential to cool the economy. Over 50 percent thought 
Uncle Sam should be creating a disaster recovery fund and emergency 
management agency.

    The nation's Year 2000 glass is not half empty, but I think it is 
equally fair to conclude that much work and many risks to success 
remain.
    Protracted court action will not fix a single system. Litigation is 
not a Y2K remedy. It will merely clog the court system; keep truly 
harmed plaintiffs from getting quick redress; expose companies to 
public criticism; damage reputations; destroy supplier relationships; 
and divert attention and energy from technical corrections.
    It is for all of these reasons that large and small businesses--
suppliers and customers, vendors and users, plaintiffs and defendants--
have come together and urge you to pass this legislation as soon as 
possible.
                       essential bill components
    Let me briefly highlight a few of the key principles contained in 
the bill, which are essential components of any legislative framework 
seeking to encourage continuing remediation efforts, to resolve the 
disputes that may arise and to discourage unnecessary litigation.

     American businesses operate with the underlying 
expectation that they will be held to their contractual and statutory 
commitments, and expect their vendors, suppliers and customers to do 
likewise. Courts should not turn away from basic contract law 
principles and make new law because of Y2K. Contracts should not be 
``tortified'' and should remain the first point of reference to define 
the parties' rights and obligations in Y2K disputes. Where parties have 
negotiated contract terms and conditions that limit their respective 
obligations and liabilities, those limitations should be strictly 
enforced.
     Vendors of products or services must be given an 
opportunity to respond to the problem identified by the prospective 
plaintiff and to cure a Y2K problem before a lawsuit is filed. A 90-day 
notice period is already embraced in existing contract law and the 
Universal Commercial Code. It is in the overall interest of our society 
to provide the tools that will solve problems and disputes, not 
encourage litigation, which will not fix a single system.
     We welcome the provision in this bill that encourages 
parties to resolve disagreements through non-litigative means, such as 
non-binding mediation and other alternative dispute resolution (ADR) 
methods. It is in the long-term best interest of contracting parties to 
maintain an ongoing business relationship, and ADR, rather than 
litigation, maximizes resolution chances and minimizes transaction 
costs.
     The President told the nation last July that our nation's 
ability to respond successfully to the Y2K challenge requires sharing 
the responsibility of fixing the systems. All parties are encouraged by 
this legislation to continue their remediation efforts and to develop 
contingency plans because they will have a duty to mitigate Y2K damages 
they could reasonably have avoided.
     In any Y2K claim to recover economic damages resulting 
from a Y2K problem, a defendant should be permitted to plead and prove 
that it used reasonable efforts or due diligence in light of the 
circumstances to achieve Year 2000 readiness. While this is already an 
accepted standard in negligence or tort actions, we strongly support 
the inclusion of this evidentiary showing in contract actions: that in 
light of the efforts made by the defendant, the plaintiff's economic 
damages were not damages that the defendant could have reasonably 
anticipated or prevented. This provision will encourage continued 
remediation efforts because the supplier of goods or services will know 
THIS YEAR that all of the time, resources and money that it puts 
towards fixing its systems and the efforts made to contact its 
suppliers can be entered into evidence if--for reasons outside of its 
control--a Y2K problem does occur NEXT YEAR and a lawsuit is filed. And 
that if no such efforts are made, no such defense is available.
     Except in cases of personal injury or fraud, recovery in 
Y2K lawsuits should be limited to actual direct damages, and only when 
the defect is deemed to be material. Punitive damages have historically 
been given to deter the defendant or like defendants from engaging in 
similar behavior in the future. This is a unique situation which will 
not occur again, and a higher negligence standard should be required if 
awards beyond actual damages are to be provided.
     This legislation will not prevent parties with legitimate 
claims to have their rights protected, but abusive and frivolous class 
actions by opportunistic plaintiff attorneys will be discouraged.
  conclusion: working towards a constructive solution to a difficult 
                                 issue
    I will conclude by observing that the century date change challenge 
is formidable, and our attention and resources should be trained on 
developing solutions. Relying on lawyers and the courts to solve the 
problem is certainly not the answer. The IT industry is committed to 
helping the marketplace work through this difficult issue in a 
positive, constructive manner. This bill recognizes that establishing 
and maintaining partnerships with everyone in the `supply chain'--
upstream and downstream--will allow us to be able to confront the issue 
successfully and find ourselves enjoying January 1, 2000, rather than 
facing it with dread and trepidation.
    Thank you very much for this opportunity to appear before you 
today.

    Senator Leahy. Ms. West, it is good to have you here. The 
chairman had to step out just for a moment. You are going to 
think we are doing tag team here. He will come, I will leave. 
But please go ahead with your testimony.

                   STATEMENT OF LAURENE WEST

    Ms. West. Thank you. Members of the committee, and Mr. 
Chairman at the moment----
    Senator Leahy. I am not the chairman. I am just filling in 
for him.
    Ms. West. My name is Laurene West. I reside in Salt Lake 
City. I would like to ask that my full statement be inserted in 
the record of this hearing.
    Senator Leahy. It is so ordered.
    Ms. West. I am here today not as a spokesperson for any 
organization and not as a lobbyist for any company that is 
paying me to be here, but as an example of the situation being 
faced by millions of Americans as we move toward the year 2000 
event.
    I have been a registered nurse for 20 years. I have worked 
within all critical care areas of the hospital, including 
surgery and recovery. And I am also a deputy sheriff with Salt 
Lake County Search and Rescue. But my perspective on the crisis 
looming in health care does not derive from being a trained 
clinician, but from being a patient, perhaps a better informed 
patient than most other people in the United States.
    And as members of the committee are already aware, I suffer 
from a combination of disease processes. Specifically, I have a 
brain tumor that, without a daily supply of medication which is 
imported from a single factory in Sweden, my life expectancy is 
quite short. I have tried some kind of strategy to protect 
myself. That is because I am an informed consumer, but my 
strategy depends on everything happening at exactly the right 
time and a coordinated effort among the health care community, 
and also a significant amount of just plain good luck.
    After the first surgery on my head, I acquired a staph 
infection. I have had 13 surgeries since, and that staph 
infection is no longer susceptible to any known oral 
antibiotics. So I am completely dependent on an IV antibiotic. 
So if there are significant year 2000-related failures as far 
as distribution of any kind of drug that I am on, I will be a 
casualty. I will die.
    I am here representing 40 million medication-dependent 
patients, and I found that number a bit staggering when the 
Department of Health and Human Services gave me that number. 
That number represents one member of every family in the United 
States being at risk to year 2000-related failures, to the 
supply and distribution of medication.
    And I am here representing those that are on chemotherapy, 
those who are cardiac patients, those who are asthmatics, those 
who are epileptics, insulin-dependent diabetics who do not have 
any time to wait if they do not have access to their drugs, and 
also end-stage cancer or end-stage disease process patients who 
know they are dying and need a continual access to narcotics 
for pain relief. And I fall in that category. If there are not 
significant changes in the way that we are headed within the 
health care community, combining industry with government 
efforts, my death will be very slow, very painful, and I will 
not make it past March of the year 2000.
    I also am here representing those patients that are device-
dependent, those that have pacemakers, internally implanted 
defibrilators, neural stimulators, PCA pumps, insulin pumps. 
Most of those devices--the only option there is for those 
patients as far as testing is that the companies that produce 
those devices have said that they have done their own testing. 
There is no third-party testing.
    As a legal layperson, I can only conclude that the single 
greatest impediment to an aggressive program to assure the 
availability of all the products necessary to supply me and my 
40 million friends is the threat that whatever extraordinary 
steps the industry takes to attempt to assure the availability 
of their products will be viewed somehow by some lawyer as a 
confession of the inadequacy of their business model.
    Clearly, I don't want to die, and I am sure that my 40 
million friends don't want to die either. I have taken what I 
believe to be prudent steps in this regard, but I also realize 
the complexity of the manufacturing, distribution, ordering of 
raw materials, making sure that distribution cycles are changed 
to accommodate the increased needs.
    Am I suppose to stop or can I keep going?
    The Chairman. Keep going. If you can, wrap up.
    Ms. West. I will hurry.
    The Chairman. But I am going to give you some leeway here.
    Ms. West. OK, thank you.
    We know that the year 2000 is coming. We know that the 
medication supply, that the biomedical device supply will be 
affected. And we have the responsibility to help 40 million 
people so that they do not have to painfully die within the 
next year. That is our responsibility, that is my 
responsibility, that is the responsibility of industry, and 
that is your responsibility.
    Suing someone in the drug supply chain after my death only 
makes health care costs rise, and those people who are still 
living after me may not even be able to have access to health 
care because it will be so expensive. Any legislation which 
discourages that sort of economically irrational, opportunistic 
lawsuit I support, and I am confident that I can get 40 million 
other people to support that legislation as well.
    In my estate management documentation, I have had for years 
an express clause that says when I die, no one is to sue 
anyone. And I recently updated that so that that clause 
includes that if I die of anything related to year 2000 
failures that no one is to sue anybody over that as well. 
Legislation that discourages lawsuits against those who have 
used their best efforts, without malice, to fix year 2000 
problems, whether in health care or any other environment, I 
support, especially if it will, by easing fears of litigation, 
allow the specialists in every field to spend more of their 
energy remediating the problem and educating the public.
    And I know there are skeptics who do not believe that there 
is a tie between year 2000 liability legislation and my ability 
to get medicines. But I have worked in the health care field 
long enough that I have seen--I have actually for my own self 
experienced that litigation, the threat of litigation, has 
always driven a great deal of medical decisions. My fear of 
losing my malpractice insurance has made me make decisions that 
I would have preferred not to make.
    And in this case, most importantly, as I understand it, the 
liability legislation being discussed among you does not even 
apply to suits involving wrongful death. So there will be no 
impact on the rights of individuals to recover in the event of 
such a loss. And this gives us--by passing this legislation, it 
gives us the freedom to get back to work fixing the problem, 
making sure that those of us who need help, who know that if 
there is not significant intervention that we will not survive 
past first quarter of the year 2000--I support.
    I want to thank you especially for going over time, and 
also thank the members of the committee, and I am happy to 
answer any questions that you may have.
    The Chairman. Well, thank you. I think your testimony is 
very dramatic and it may bring home to people more than any 
other testimony I have heard just how important this year 2000 
problem is. So your traveling back here and helping us to 
understand this better is really a worthwhile thing, so we 
appreciate your being here.
    Ms. West. Thank you.
    [The prepared statement of Ms. West follows:]

                Prepared Statement of Laurene West, R.N.

    Mr. Chairman, members of the Committee, my name is Laurene West. I 
reside in Salt Lake City, Utah.
    I am here today not as the spokesperson for any organization, not 
as the lobbyist for any group that is paying me to be here, but as an 
example of the situation being faced by millions of Americans as we 
move towards the Year 2000 ``event.''
    I am an experienced health care professional. I have been a 
registered nurse since 1976, practicing in the Intensive Care, Surgery 
and Recovery. Also, I served as a Deputy Sheriff for Salt Lake County's 
Search and Rescue/Special Forces team.
    But my perspective on the crisis looming in health care does not 
derive from being a provider or trained professional, but from being a 
patient--albeit perhaps a better informed one than many.
    For as members of the Committee already are aware, I suffer from a 
combination of disease processes, most significantly a brain tumor 
which requires the daily administration of a pharmaceutical product 
which is imported into the United States from a single factory in 
Sweden.
    If my access to this medication is interrupted, I will die.
    As an informed patient, I have a strategy for attempting to assure 
that my access to the drugs, which keep me alive, is uninterrupted by 
Year 2000 events.
    But that strategy is complex, depends on many events happening in 
just the right sequence, and also not an insignificant amount of plain 
good luck. And it would be easy for you--or the Administration, or the 
Y2K experts to say ``see, this person is taking care of her own 
problem, we don't need to do anything special for her.'' But that would 
not be correct.
    Because I am not typical of the nearly 60,000,000--yes SIXTY 
MILLION Americans who are dependent on ready access to daily 
administration of medicine or procedures to stay alive.
    The number is indeed staggering--I was astonished when I first 
learned that the Department of Health and Human Services has itself 
estimated the number of dependent patients to be over 40,000,000. At 
least one member of every family in the United States will be at risk 
if Year 2000 related failures cause disruptions to the supply of 
medications.
    Start with those who are receiving antibiotics in post-operative 
care. Cancer patients receiving chemotherapy. Nitroglycerine for 
cardiac patients. Insulin for diabetics. Broncialdilators for 
asthmatics, Cyclosporin and Immuran for transplant patients. Hundreds 
of thousands who, like me depend on uniquely prescribed sole source or 
``orphan'' drugs for rare illnesses. Ambulatory individuals who are on 
oxygen on a daily basis. Dialysis patients. End-stage cancer patients 
who are on narcotics for pain relief as they painfully wait to die. The 
list goes on.
    Then there are those who are device dependent. Adults who require 
ventilators (12-20 breaths/minute) or preemie babies on jet ventilators 
(250-300 breaths/minute), sleep apnea monitors with embedded 
microprocessors. Those utilizing feeding devices for monitored 
intravenous or groshong catheterization. People with implants, such as 
pacemakers, internally implanted defibrilators, Insulin pumps or other 
devices where the Y2K readiness reports from manufacturers to date are 
based only on self certification, rather than actual documented third 
party testing.
    Clearly, the universe of individuals affected by continuing access 
not only to a reliable supply of prescription medications and electro-
mechanical medical devices is large. And while the risk to the entire 
population of medically dependent individuals is perhaps relatively 
small, who among us would want to sentence any one of these individuals 
to most likely a painful death because of a problem that can be 
anticipated, planned for, and corrected?
    I have had an extensive conversation over the past year with 
members of both the patient advocacy community, the health care 
providers and producers, and the government payors.
    As a LEGAL lay person, I can only conclude that the single greatest 
impediment to an aggressive program to assure the availability of all 
of the products necessary to supply me and my 60,000,000 dependent 
friends is the threat that whatever extraordinary steps the industry 
takes to attempt to assure the availability of their products will be 
viewed somehow by some lawyer as a confession of the inadequacy of 
their existing business model, and result in a lawsuit on behalf of any 
and every individual who might suffer in some way--no matter how 
modest--from a failure of the system to work as expected.
    Clearly, I do not want to die, and do not want my supply of 
Synthroid, Vancomycin and Vasopressin to become the decisional factor 
about whether I live or die. I have taken what I believe are prudent 
steps to protect myself. But I also recognize what the reality of the 
complex production and delivery cycle is for the products on which I 
and others depend. And based on my own moral system, I can not find it 
a good decision to ask that, should I die, my trustees sue my 
Physicians, the Hospital or the drug company because my supply of 
Synthroid, Vancomycin and Vasopressin did not arrive in time. No, we 
know Y2K to be an issue, so we can plan to make sure that the supply is 
available, that the raw materials are ordered, that the production 
cycles are adjusted, that contingency plans are put in place so that 
the supply of my drugs and the drugs required by millions of others 
will be available without interruption.
    That is our responsibility, that is the industry's responsibility, 
and, that is your responsibility.
    Suing someone in the drug supply chain after my death is certainly 
shutting the barn door after the horses have left. And legislation 
which discourages that sort of economically irrational opportunistic 
lawsuit makes good sense to me.
    In my estate management documents and letter of instructions to my 
executors, I have for many years had an express instruction that NO ONE 
BE SUED after my death. Unless it was plainly a criminal act that 
caused it, God's decision to take me can not be redressed by moving 
money around.
    I believe that legislation which discourages lawsuits against those 
who have used their best efforts to fix Y2K problems, whether in health 
care, or any other environment, makes good sense, especially if it 
will, by easing fears of litigation, allow the specialists in every 
essential field to spend more of their energies remediating their Y2K 
problems.
    I know there are skeptics who don't see the link between Y2K 
liability legislation and access to medicines. But I have been around 
health care delivery long enough to know that the threat of litigation 
has always, unfortunately, driven a great deal of medical behavior.
    And I am confident that as government agencies have begun to send 
questionnaires asking pharmaceutical companies about their Y2K 
readiness, as clinics have asked distributors to certify as to their 
Year 2000 delivery schedules, as the President's Council has asked 
industry associations to poll their members about Y2K readiness, 
concerns about that one-and-only what if situation becomes the tail 
that wags the dog, to coin a phrase.
    And most importantly, as I understand it, the liability legislation 
being discussed among you does not even apply to suits involving 
wrongful death or serious physical injury, so there will be NO IMPACT 
on the rights of individuals to recover in the event of such a loss.
    But in the business-to-business transactions that make up the 
complex food chain of drug and device delivery, a great deal of 
pressure and concern about the distraction of lawsuits could be 
relieved, allowing members of the industry to focus on the important 
job of figuring out how to assure continuing uninterrupted access to 
these critical medicines and tools.
    This freedom to get busy putting plans in place and practicing them 
to keep the delivery of critical medicines on track is the core of what 
is needed. And if that is one of the things the legislation you are 
considering will do, then I am all for it, and I think millions of 
others will be as well.
    I want to thank the members of the Committee for allowing me to 
appear today, and I will be happy to answer any questions you may have.

    The Chairman. Mr. Yarsike.
    Mr. Yarsike, Senator Bennett is here and I don't want to 
interrupt you in the middle of your remarks. Why don't we allow 
you to start over again and take Senator Bennett's testimony at 
this time?
    If you care to, Bob, you could do it right here beside me, 
if you would like, or you can go down there, either way.

 STATEMENT OF HON. ROBERT F. BENNETT, A U.S. SENATOR FROM THE 
                         STATE OF UTAH

    Senator Bennett. I can't avoid sitting where it says ``Mr. 
Kennedy.'' [Laughter.]
    Senator Feinstein. Welcome to our side.
    The Chairman. I am sure that will be a matter of great 
remembrance to him.
    We are happy to welcome Senator Bennett here today. Senator 
Bennett, more than any other person other than Senator Dodd, in 
my opinion, in the Congress has done more to try and resolve 
the Y2K problems. He is probably, in my opinion, more up on it 
than any other Senator, and so we are very honored to have him 
take time from his busy schedule and come here today to help us 
along the path of trying to get some sort of legislation that 
will help to resolve these problems.
    So we are very appreciative to have you here, Senator 
Bennett, and we look forward to taking your testimony.
    Senator Sessions. Mr. Chairman, I would like to join in 
these remarks, and say to Senator Bennett--I expressed to him 
personally just a few days ago how much I appreciate his 
leadership on this. I think it has helped move our Government 
forward.
    I will have to go to another appointment and I wanted to 
say to you I am sorry I will not be able to hear your remarks, 
but again to say how much I appreciate your leadership on this 
issue.
    Senator Bennett. Thank you. You will get a chance to hear 
them again tomorrow, and again and again and again.
    The Chairman. I don't want you to get too comfortable on 
that Democrat side of the table is all I can say.
    Senator Bennett. Don't worry.
    Thank you very much, Mr. Chairman. I appreciate it, and I 
apologize to the witnesses for barging in in this fashion. The 
schedule that we keep sometimes does this to us, but it can be 
rude and I assure you no offense was meant.
    I appreciate the opportunity of testifying. As you know, I 
have been studying this problem since 1996, when I first became 
aware of it as chairman of the Senate Banking Subcommittee on 
Financial Services and Technology; more recently, in my 
capacity as chairman of the Special Committee on the Year 2000 
Technology Problem. And along with Senator Dodd, who was on 
that subcommittee of banking and is now the ranking member and 
vice chairman of the Senate Special Committee, I have presided 
over 20 hearings on the Y2K problem. Ms. West has testified 
before our Special Committee during our hearing on 
pharmaceutical problems.
    We have looked at the effects of this on such disparate 
sectors as financial services, utilities, telecommunications, 
transportation, health care, general business and, of course, 
general government. Now, as widespread as these sectors may be, 
they all have one thing in common, and that is a fear of 
massive litigation as a result of Y2K-related failures.
    The Judiciary and the Commerce Committees are to be 
commended for acting quickly to address these legal issues 
created by Y2K because the problem will be upon us. If we wait 
for the next half of this session of this Congress, we will be 
too late. I told the Commerce Committee 2 weeks ago it is 
important that we find a reasonable and just means of handling 
the potential Y2K tidal wave of litigation because it threatens 
to overwhelm our judicial system--remember, all of these 
lawsuits will be triggered within a 30-day period of time and 
the courts are just not prepared to handle that compact a wave 
of litigation. Also, of course, it is because the time and 
money spent on preparing for endless lawsuits and counter-suits 
is time and money that is not invested in the research and 
development of Y2K solutions.
    We learned last year that one aspect of the fear of 
litigation involved the disclosure and exchange of information. 
And strange as that may seem to those of us who aren't trained 
to think like lawyers, the very commodity that could avert a 
Y2K crisis, information related to readiness, was being 
withheld because different sectors of the industry feared 
lawsuits if their disclosures proved ineffective.
    The Congress moved toward solving that problem when it 
passed the Year 2000 Information and Readiness Disclosure Act 
last year to promote free disclosure and exchange of 
information related to Y2K readiness. I am interested, Mr. 
Chairman, that among those who came to me and said thank you 
for passing this legislation were not only commercial 
enterprises and firms, but also government entities, cities, 
and counties, who came and said as a result of this 
legislation, we can now exchange information. I wasn't aware 
that they were afraid of litigation, but at that level, too, 
the passage of that Act has elicited some favorable response.
    Since the bill was signed into law in October of 1998, 
industry has told our committee that the logjam of readiness 
information has been broken. The Act has enabled businesses 
from all sectors--and as I say, I add to that small government 
entities as well--to make significant progress not only with 
their remediation efforts, but also with their contingency 
plans, and being able to share what one entity is doing with 
another has been helpful.
    But, unfortunately, disclosure of year 2000 readiness 
information is only part of the problem. The fear of litigation 
that lingered in the shadows for much of last year has now 
stepped forward, and it is shouldering aside what should be the 
overriding goal of everyone involved with this problem, which 
is remediation. The committee maintains its belief that 
remediation and contingency planning are of paramount 
importance. But our findings over the last year suggest that 
the fear of litigation is real and justified.
    Now, the Special Committee plans to set forth its findings 
in a report to be issued tomorrow, and I actually have a copy 
of it somewhere that I can hold up. You can read all about it 
in last week's Washington Post, but here it is, and this will 
be formally issued tomorrow and is available today.
    A quarter of all companies worldwide have yet to start any 
Y2K effort. According to the Gartner Group report, which is 
included in ours, between 30 and 50 percent of all companies 
worldwide will have at least one mission-critical failure. Now, 
that figure drops to 15 percent for companies in America, but 
that is still a very high figure. Fifteen percent of the 
companies in a country that is tied together with just-in-time 
interdependability having a mission-critical failure could be 
very serious.
    It is estimated that the correction of these failures will 
take at least 3 days in most cases, maybe longer in some, and 
that the cost per incident will run into the millions, which 
means that the total cost will run into the billions. This is 
only where the problem begins because no business operates in a 
vacuum in this day and age. Our economic sectors are 
inextricably bound together. The financial services sector 
depends on its ability to exchange electronic information 
between its members and with government agencies, and that 
means the telecommunications sector is involved.
    The manufacturing sector depends on just-in-time inventory 
and the exchange of electronic information to create a tight 
chain between suppliers, processors, manufacturers, 
distributors, retailers and consumers. And this linkage extends 
far beyond our shores to encompass international trading 
partners, creating a gigantic worldwide web of commerce. We 
have all gained from this interconnectivity. We have things 
available to us we never had before, and we have them at 
cheaper prices than we ever had before.
    But the price is that one company's inability to fulfill 
its contracts open it and all the companies that depend on it 
to liability. As a result, the Y2K failures of one company can 
set in motion the unraveling of all of its business partners. 
In a best-case scenario, a Y2K disruption will only last a few 
days. Even so, a few days is more than enough time for a vast 
array of businesses and individuals to suffer some kind of 
economic injury.
    All too often in this country, our first stop on the way to 
recovering our losses is at the courthouse. If litigation 
resulting from Y2K-related failures is anything like we are 
predicting, up to $1 trillion worth--I frankly think that 
number is a little high, but the experts keep giving it to us--
the courthouses will be standing room only and the Y2K 
litigation will last for years into the next millennium.
    Now, as much as I am concerned about the $1 trillion 
estimate, I am even more concerned about the cost to the 
economic infrastructure. Companies that have made every 
reasonable effort to become Y2K-compliant but experience 
failures anyway could end up in court and be put out of 
business by the cost of litigation. Critical suppliers to key 
industries might be lost altogether. Entire industries might be 
set back, causing an economic downturn with repercussions well 
into the millennium.
    If the lifeblood of our economy, which is capital, is 
diverted to support litigation, it cannot nourish the start-up 
enterprises that represent our future. If our technological 
industries are bombarded with litigation, they cannot afford to 
invest in the research and development essential to maintain 
our competitive position in the world. The question for 
Congress is whether or not there is an alternative.
    Now, Senator Hatch, you and Senator Feinstein have 
introduced legislation that may represent such an alternative, 
as has Senator McCain. I have not been able to study your bill 
closely enough to comment on the specifics of it. And lacking a 
legal education, my comment probably wouldn't be too helpful to 
you anyway, but I would ask that the following issues be 
carefully considered.
    Do not reward or encourage irresponsible behavior. There 
are some people who say, well, you pass this bill and that 
means people will say failure is an option; I am covered, I am 
protected. We cannot craft legislation that does that. The best 
deterrent to litigation is remediation, so we cannot consider 
any measure that would be interpreted as an excuse to stop the 
remediation efforts they have already begun. For many 
businesses, there is still time to fix the problem. Congress 
should not make inaction an attractive option by limiting the 
liabilities of the companies that are not responsible enough to 
take care of their own business.
    We also cannot consider any measure that could be 
interpreted as an excuse to stop disclosing their readiness 
status. As I said earlier, one of the big problems we have is 
getting information about how ready people are, and we must 
make sure that disclosure continues and increases. These 
disclosures force businesses to focus on their Y2K problems, 
and more importantly the information in these disclosures helps 
everyone prepare for Y2K remediation and contingency planning.
    We must take care to craft legislation that fully preserves 
the Government's right to bring action against business 
entities that have not complied with their requirements to 
report their Y2K readiness status. This goes to the heart of 
the SEC and what they are trying to do.
    Now, companies that have made reasonable efforts to 
remediate their Y2K problems ought to get credit for having 
done so. One way of doing that is to limit their liability if, 
despite all their efforts, they do have a Y2K-related failure 
that causes economic injury to another party. When I say limit 
their liability, I am talking about limit it to actual damages.
    It is counterproductive to punish a company that has acted 
responsibly and nonetheless experiences a failure with punitive 
damages. Punitive damages are meant to discourage similar bad 
behavior in the future. You are not going to have a future 
example like this one. It is a one-time event, and for that 
reason, for those who act responsibly and still experience a 
failure, punitive damages, in my view, are inappropriate. What 
is more, when responsible businesses have to pay damages that 
exceed the cost of the actual harm, their products, of course, 
end up costing more, and risky but vital services that they 
perform simply may stop. We all pay a price for unnecessary 
punitive damages.
    Now, as I said, I am not a lawyer. I can't help you with 
the details on legal concepts, but I do know that existing and 
hard-won statutes should not be altered by or confused with new 
Y2K provisions. The use of valuable enforcement tools should 
not be inadvertently curtailed by Congress' well-intentioned 
efforts to address the Y2K problem.
    We are not that far from Abraham Lincoln's birthday. Let me 
end with a Lincoln quote that I think is appropriate here. He 
said, discourage litigation. Persuade your neighbors to 
compromise whenever you can. Point out to them how the nominal 
winner is often a real loser in fees, expenses and waste of 
time. I think that applies to what we are dealing with here, 
Mr. Chairman. I salute you and Senator Feinstein for your 
efforts, and thank you again for allowing me to intrude in this 
fashion.
    The Chairman. Well, thank you, Senator Bennett. We 
appreciate you taking time from your busy schedule to be with 
us and we are grateful to have your statement. And we will look 
forward to everybody's suggestions on how we might improve this 
bill and make it even more effective than it is. Thank you.
    Senator Bennett. If I may now be excused, I have to go 
prepare my Y2K presentation to the entire Senate which is 
scheduled for tomorrow.
    The Chairman. We will be happy to excuse you and wish you 
luck there.
    [The prepared statement of Senator Bennett follows:]

            Prepared Statement of Senator Robert F. Bennett

    Thank you, Mr. Chairman, for asking me to testify on the subject of 
the Year 2000 technology problem. As you know, I've been studying this 
problem since 1996, in my capacity as the chairman of the Senate 
Banking Subcommittee on Financial Services and Technology and, more 
recently, in my capacity as the chairman of the Special Committee on 
the Year 2000 Technology Problem. Along with my esteemed colleague 
Senator Dodd, I've presided over almost 20 hearings on the Y2K problem 
and its effects on such disparate sectors as financial services, 
utilities, telecommunications, transportation, healthcare, and general 
business. As disparate as these sectors may be, they all have one thing 
in common: A fear of massive litigation resulting from Y2K-related 
failures.
    The Judiciary and the Commerce committees are to be commended for 
acting quickly to address the legal issues raised by the Y2K problem. 
As I told the Commerce committee 2 weeks ago, it is important that we 
find a reasonable and just means of handling the potential Y2K tidal 
wave of litigation not only because it threatens to overwhelm our 
judiciary system, but because time and money spent on preparing for 
endless lawsuits and counter-suits is time and money not invested in 
the research and development of Y2K solutions.
    We learned last year that one aspect of the fear of litigation 
involved the disclosure and exchange of information. Strange as it may 
seem to those of us who aren't trained to think like lawyers, the very 
commodity that could avert a Y2K crisis--information related to Year 
2000 readiness--was being withheld because different sectors of 
industry feared lawsuits if their disclosures proved inaccurate.
    The Congress went a long way toward solving that problem when it 
passed the ``Year 2000 Information and Readiness Disclosure Act'' to 
promote the free disclosure and exchange of information related to Year 
2000 readiness by providing, as an incentive, some liability protection 
for the release of certain types of information. Since the bill was 
signed into law on October 19, 1998, industry has told us that the 
logjam of Year 2000 readiness information has been broken. The Act has 
enabled businesses from all sectors to make significant progress not 
only with their Y2K remediation efforts, but with their contingency 
plans as well.
    Unfortunately, disclosure of Year 2000 readiness information is 
only one part of the problem. The fear of litigation that lingered in 
the shadows for much of the last year has now stepped forward, 
shouldering aside what should be the overriding goal of everyone 
involved with this problem--remediation. The Committee maintains its 
belief that remediation and contingency planning are of paramount 
importance, but our findings over the last year suggest that the fear 
of litigation is real and justified.
    The Special Committee plans to set forth its findings in a report 
to be issued tomorrow, but I can tell you now that it will not be a 
happy New Year for many businesses. Almost a quarter of all companies 
worldwide have yet to start any Y2K effort. According to the Gartner 
Group report, between 30 and 50 percent of all companies worldwide will 
have at least one mission critical failure; that figure drops down to 
15 percent for companies here at home. It is estimated that correction 
of these failures will take at least 3 days in most cases, and that the 
cost per incident could soar into the millions.
    This is, I'm afraid, only where the problems begin. No business 
operates in a vacuum in this day and age. Our economic sectors are 
inextricably bound together. The financial services sector depends on 
its ability to exchange electronic information between its members and 
with government agencies. The manufacturing sector depends on just-in-
time inventory and the exchange of electronic information to create a 
tight chain between suppliers, processors, manufacturers, distributors, 
retailers and customers. This linkage extends far beyond our shores to 
encompass our international trading partners, creating a giant web of 
commerce. We have all gained from this interconnectivity, but its price 
is that one company's inability to fulfill its business contracts opens 
it and ALL the companies that depend upon it to liability. As a result, 
the Y2K failures of one company can set in motion the unraveling of all 
its business partners.
    In a best-case scenario, Y2K-related disruptions may last only a 
few days. Even so, a few days is more than sufficient time for a vast 
array of businesses and individuals to suffer some kind of economic 
injury. All too often in this country, our first stop on the way to 
recovering our losses is the courthouse. If the litigation resulting 
from Y2K-related failures is anything like experts are predicting--up 
to $1 trillion worth--the courthouses will be at standing room only and 
Y2K litigation will last for years into the next millennium.
    The trillion dollar estimated cost of litigation is of great 
concern to me, but a far greater cost of this litigation is the cost to 
the entire economic infrastructure.
    Companies that have made every reasonable effort to become Y2K 
compliant but experience failures anyway could end up in court and be 
put out of business by the costs of litigation. Critical suppliers to 
key industries might be lost altogether, and entire industries might be 
set back, causing an economic downturn with repercussions lasting well 
into the millennium. If the lifeblood of our economy--capital--is 
diverted to support Y2K litigation, it cannot nourish the start-up 
enterprises that represent our future. If our technology industries are 
bombarded with litigation, they cannot afford to invest in the research 
and development essential to maintain our competitive position in the 
world. If businesses across the country are struggling to pay their 
legal bills, they cannot also pay to retain quality personnel or to 
expand into new markets. The U.S. economy and the American people 
simply cannot afford to pay the price of a litigation explosion. The 
question for the Congress is whether there is an alternative.
    Chairman Hatch, you and Senator Feinstein have introduced 
legislation that may represent such an alternative, as has Senator 
McCain. I have not been able to study your bill closely enough to 
comment on it directly, but I would like to make some observations that 
apply not only to your bill, but to any legislative proposals 
concerning Y2K litigation.
    Do not reward or encourage irresponsible behavior. Since the best 
deterrent to Y2K litigation is remediation, we cannot consider any 
measure that could be interpreted by businesses as an excuse to stop 
the remediation projects they've already begun. For many businesses, 
there is still time to fix the problem. Congress should not make 
inaction an attractive option by limiting the liability of companies 
that have not been responsible enough to take care of their own 
business. We also cannot consider any measure that could be interpreted 
by business as an excuse to stop disclosing their Y2K readiness status. 
These disclosures force businesses to focus on their own Y2K problems 
and, perhaps more importantly, the information in these disclosures 
helps everyone prepare for Y2K remediation and contingency planning. We 
must take care to craft legislation that fully preserves the 
government's right to bring action against business entities that have 
not complied with their requirements to report their Y2K readiness 
status.
    Companies that take reasonable efforts to remediate their Y2K 
problems ought to get credit for having done so. One way of doing that 
is to limit their liability if, despite all their efforts, they have a 
Y2K-related failure that causes economic injury to another party. It is 
counter-productive to punish a company that has acted responsibly--and 
still experiences a failure--with punitive damages. Punitive damages 
are meant to discourage similar bad behavior in the future. Since Y2K 
is a one-time event, punitive damages are inappropriate. What's more, 
when responsible businesses have to pay damages that exceed the cost of 
the actual harm, their products end up costing more and the risky but 
vital services they perform may simply stop. In the end, we all pay the 
price for unwarranted punitive damages.
    Any legislation that imposes new legal concepts onto our existing 
framework must be scrutinized with great care to avoid unintended 
consequences. I'm not a lawyer, and I'm afraid I can't help you with 
the details. I do know that existing and hard-won statutes should not 
be altered by or confused with new Y2K provisions, and the use of 
valuable enforcement tools should not be inadvertently curtailed by the 
Congress' well-intentioned efforts to address the Y2K litigation 
crisis.
    Finally, we need to do everything we can to encourage companies to 
take proactive measures to avoid litigation in 1999 before they are 
pulled into litigation in 2000. We ought to consider providing 
incentives for people to put off taking that trip to the courthouse so 
they can talk to each other first. As Abraham Lincoln said,

        Discourage litigation. Persuade your neighbors to compromise 
        whenever you can. Point out to them how the nominal winner is 
        often a real loser--in fees, expenses and waste of time.

Again, Mr. Chairman, thank you for moving on this issue, and for 
inviting me to testify.

    The Chairman. Mr. Yarsike, we will go back to you.

                   STATEMENT OF MARK YARSIKE

    Mr. Yarsike. Chairman Hatch, Senators, my name is Mark 
Yarsike.
    The Chairman. Just because I gave some leeway to Ms. West. 
[Laughter.]
    OK, go ahead.
    Mr. Yarsike. I will move along very speedily.
    Chairman Hatch and Honorable Senators, my name is Mark 
Yarsike and I am a co-owner, with Sam Katz, in a small business 
from Warren, MI. I am also the first person in the world to 
ever file a Y2K suit. It is an honor for me to appear before 
you today and I appreciate you allowing me to testify on the 
Y2K issue.
    I am grateful to you, Mr. Chairman, for wanting to hear 
from a real businessman from outside Washington as to how this 
legislation would affect me, and I suspect thousands of other 
small businesses in the country. I see that I am sitting next 
to some very distinguished individuals. Unlike these people, 
however, I do not have a team of analysts and specialists at my 
disposal, but I do have my story and it is a story that seems 
at odds with what they are saying about the interests of small 
business.
    I own a gourmet produce market in the Detroit suburbs. The 
produce business is in my blood. My parents and partner fled 
Europe and the Holocaust and came to this country from Poland 
after the Second World War. Taking advantage of the wonderful 
opportunities that America offers new citizens, within a few 
years they had managed to open their own small produce store in 
Detroit. My parents worked 7 days a week and instilled in me 
the values of hard and honest work. I grew up helping run the 
store, and I finally decided 13 years ago that it was time for 
me to follow in their footsteps.
    Four years ago, I found a great partner in Sam Katz and we 
opened a store in Warren. It is not easy these days being a 
small, independent grocer in an industry totally dominated by 
huge corporate chains, but I still believe there is opportunity 
for little guys like us who can offer our customers 
unparalleled service, who can adjust quickly to changes in the 
market, and who can treat our employees like family. However, 
it was not a large chain store which nearly destroyed my 
business a few years back. It was a year 2000 computer problem, 
and that is what I am here to talk about this morning.
    My parents had a cheap $500 register in their store. It was 
basic, but it worked. When I opened my store, I decided to take 
advantage of the most current technology, which is needed 
today. I spent almost $100,000 for a high-tech computer system. 
My computer system was top-of-the-line, or at least that is 
what we thought. They could process credit cards, keep 
inventory, and control cash. The company that I purchased them 
from spent hours extolling the virtues of the system. They sent 
a salesman from Chicago. They sent me sales literature. They 
promised that the system would last well into the 21st century. 
I believed them.
    Opening day was the proudest day of my life. As we opened 
the doors to the store, we were thrilled to see lines of people 
streaming in. The store was sparkling. Everything was ready, or 
so we thought. As people began to choose their purchases, lines 
began to form. Suddenly, the computer systems crashed. We did 
not know why it took over a year and over 200 service calls to 
realize it, but the credit cards with the expiration date of 
2000 or later blew up my computer, the one that I spent 
$100,000 on. The entire computer system crashed.
    Lines were 10 to 20 people deep. People were waiting with 
full carts of groceries and couldn't pay. We could not process 
a single credit card, could not take cash or checks. We could 
not make a sale. People began drifting out, leaving full carts 
of groceries behind. As my partner and I darted around the 
store trying to calm people down, we heard constant comments 
like, I will never come back here; who needs to wait in lines 
this long only to find that you can't even buy what you want. 
People walked out in droves. Many, I venture, have never 
returned. This happened over and over.
    We did not know what to do. We called TEC America, who had 
sold us the computer system. We called them over 200 times in 2 
years. Everyday, there were problems, lost sales, aggravation. 
We were struggling to keep afloat week to week. The company 
declared that it was doing its best to fix the problem, but 
refused to give us another system to use while they fixed these 
broken ones.
    Each time their technician visited my shop, the company 
insisted that the problem was solved, only to have the 
registers fail again hours later. I lost thousands of dollars 
and hundreds of customers. I was on the brink of disaster and a 
nervous breakdown. The company was still promising every day 
that they had the problem licked, and every day they continued 
to refuse to give me new registers. I could not focus on the 
day-to-day operations of my business. I was consumed with 
making sure the computer system functioned daily.
    I finally had to go out and buy a brand new system. I 
should have bought the $500 registers my parents used when they 
arrived from Poland. At least those worked. But the huge cost 
of purchasing the first system and then replacing it, on top of 
the lost sales and lost reputation, caused daily havoc and 
stress on my partner and myself and all the employees. And I 
was getting absolutely no satisfaction from the computer 
company which put me in this fix in the first place.
    I imagine that if I was one of those big corporate chains, 
I could have used my market power to compel the computer 
company to work out some sort of resolution. But being the 
owner of just one store, I did not have that option, so I 
turned to the court system. I approached an attorney and we 
filed a case in Macomb County. The system worked for me. The 
company who caused all this grief finally settled with me 2\1/
2\ years later. I was able to recoup some of my losses, but I 
will never get those hundreds of customers back or be able to 
rid the store of the reputation that it got for those long 
lines. In fact, if any of those customers are watching these 
proceedings today, I hope you will come back and give us a 
second chance.
    I am just a businessman. I am no expert on the legislation 
before the committee today, but my lawyer tells me that had 
this bill or others like it in Congress been in effect when we 
had our problem, the computer company never would have settled. 
If we were lucky, we would still be in litigation, but more 
likely my store would be out of business. I would not be a 
small businessman today; I would be a former small businessman. 
One hundred twenty families would be out of work, my landlord 
would have a ``for lease'' sign on the building, and I would be 
looking for a job.
    One thing I know now is that the so-called Y2K problem is 
not a Silicon Valley problem. It is a Warren, MI, problem, and 
it is not so much a high-tech problem as it is a problem of 
getting companies to take responsibility for their products and 
the need to repair or replace them. What we need are 
responsible businesses to take care of the problem now and not 
spend months and months of wasting time trying to get Congress 
to protect them.
    There are a number of very disturbing pieces in this bill 
which would quite literally have put me out of business had 
this law been in effect when I had my Y2K difficulties. I fear 
that many other small businessmen will suffer that fate if this 
committee does not step back for a minute and carefully 
consider what this bill would do.
    First, this 90-day waiting period. Take it from a real 
small businessman who works day to day in order to make ends 
meet. This will put thousands of people out of business. 
Waiting three full months to have the ability to even begin to 
bring a claim would have put me out of business. Every single 
day, I was losing money. Every single day, I came close to the 
point where I could not open my doors anymore. Ninety more days 
would have been too much.
    Also, realistically, any small businessman is going to try 
to get the company to fix the problem before they turn to an 
attorney. Lord knows, we called 200 times to give them a chance 
to fix it and they couldn't. Why would I hire and pay for a 
lawyer to take a simple step of making a phone call to a 
company? The problem is that some companies don't do the right 
thing once you call. I called over 200 times and they still 
couldn't fix my problem. Now, you want to add an additional 90 
days. Why? That has only one effect, to put me out of business 
and allow them to stall more.
    Next, why is everyone so worried about the software and 
hardware companies? What about the little guy who is the end 
user of the software product? I see that they get all the 
breaks in this bill. They get to ignore the State law 
provisions that protect me against the unscrupulous in all 
other industries, implied warranties, and State fraud statutes. 
They also get limitations on damages, limitations on joint and 
several liability. What do I get, besides a more difficult 
standard to prove if I finally manage to jump through the 
procedural hoops to get to court?
    Third, I would love to see legislation that holds the 
companies that are profiting off this problem responsible. The 
company that I bought my system from got away intact. If a 
company sells a faulty product and doesn't fix it, they should 
be held responsible, period. It seems like common sense to me 
and every other small businessman I talk to. Let's get some 
common-sense things like that into law. Let's actually do 
something that fixes the problem.
    All of these bills, with all due respect, make the problem 
worse by discouraging these companies from fixing the problem. 
I ended up having to replace my entire system for another 
$130,000. Give me a tax credit for those purchases; help me get 
SBA loans. Those are the kinds of things that will help, not 
this ``we have got to do something, so let's get with 
protecting a powerful set of lobbying groups who organize 
quickly to seek protection for themselves.'' I thank God I had 
a partner with some deep pockets or I would be out of business.
    Finally, if Congress is hell-bent on passing some kind of 
liability protection bill for large software manufacturers, at 
least exclude from the legislation small businesses who may end 
up being plaintiffs because they suffer commercial loss from 
software defects. Let the big guys cope with the new scheme if 
they want, but not us who have to make payrolls and who need 
protection of State laws.
    Long ago, while sitting in this little grocery store in 
Detroit, my parents taught me that sometimes people with the 
best of intentions can try to make a problem better, but end up 
making it worse. I understand what they mean. I know that 
Congress is trying to help, but before you act I now hope you 
will consider what this legislation will do to the small 
businessman. I know that is why you have allowed me to share my 
story and I am grateful you provided me the opportunity to 
testify today. I will be happy to try to answer any of your 
questions.
    Thank you, Mr. Hatch.
    The Chairman. Thank you, Mr. Yarsike. We are grateful for 
your testimony and we will certainly look at it very carefully. 
I might add that the 90-day period, had it been in effect in 
your case, would have been a tremendous incentive for them to 
get that problem solved in 90 days rather than the 2 years it 
took for you to finally win in litigation. That is the goal 
here. Now, we are going to look at this and we are going to 
look at all aspects of it. And, of course, one of the things we 
want to do is protect people just like you.
    Mr. Yarsike. May I say something?
    The Chairman. Yes, so you are just not limited to 
litigation.
    Mr. Yarsike. I don't think a small business can afford or 
will run straight to an attorney when they have a problem. They 
are going to call that company and say, help me out, I am in 
trouble here.
    The Chairman. Well, that is right, and the 90-day period 
may get you some help that you would not otherwise get because 
it is a solid notice to these companies, you better do what you 
can in 90 days.
    Mr. Yarsike. In 90 days, I couldn't afford to hire an 
attorney either at that point of the game. So I needed their 
help. I needed them to help me get my business going. And on 
top of it, they sold me a system in 1996 knowing that it wasn't 
Y2K-compatible, and that is another thing that is not in this 
bill. There are a lot of companies that still have items on the 
shelf for the next 10 months and will be selling these systems 
to businesses and they are not Y2K-compatible. And they are the 
ones that are defrauding our businesses in this country right 
now, and nothing in this bill--this bill protects those people 
who are selling these systems today, not being Y2K-compatible, 
and they should have known this 5, 10 years ago.
    The Chairman. Well, let me just say nothing in this bill 
would stop you from being able to sue for intentional actions 
of the company, at least the way I view it. And if that is not 
so, then we will try and change that.
    Second, the 90-day period is to get all these companies to 
realize you have got 90 days to remediate, you have got 90 days 
to get this thing straightened out. If you straighten it out, 
your damages are going to be much less. We are certainly going 
to pay attention to your testimony and see what we can do to 
resolve problems like yours because it is not fair for you to 
have to put up with 2 years of litigation in order to get a 
settlement that didn't even make you whole, according to your 
testimony here. So we will certainly take that into 
consideration. We appreciate you being here.
    [The prepared statement of Mr. Yarsike follows:]

                   Prepared Statement of Mark Yarsike

    Chairman Hatch, Senators, my name is Mark Yarsike, and I am a small 
businessman from Warren, Michigan. I am also the first person in the 
world to ever file a Y2K suit. It is an honor for me to appear before 
you today, and I appreciate your allowing me to testify on the Y2K 
issue.
    I am grateful to you, Mr. Chairman, for wanting to hear from a real 
businessman from outside Washington as to how this legislation would 
effect me and I suspect thousands of other small businesses in this 
country. I see that I am sitting next to some very distinguished 
individuals. Unlike these people, however, I do not have a team of 
analysts and specialists at my disposal. But I do have my story, and 
it's a story that seems at odds with what they are saying about the 
interests of small business.
    I own a gourmet produce market in the Detroit suburbs. The produce 
business is in my blood. My parents and partner fled Europe and the 
Holocaust and came to this country from Poland after the Second World 
War. Taking advantage of the wonderful opportunities that America 
offers new citizens, within a few years they had managed to open their 
own small produce stores in Detroit.
    My parents worked seven days a week and instilled in me the values 
of hard and honest work. I grew up helping run the store, and finally 
decided 13 years ago that it was time for me to follow in their 
footsteps. I found a great partner, Samuel Katz, and we opened a store 
in Warren.
    It is not easy these days being a small, independent grocer in an 
industry totally dominated by huge corporate chains. But I still 
believe there is opportunity for the little guy like us who can offer 
our customers unparalleled service, who can adjust quickly to changes 
in the market, and who treat our employees like family.
    However, it was not a large chain store which nearly destroyed my 
business a few years back--it was a Year 2000 computer problem, and 
that is what I am here to talk about this morning.
    My parents had a cheap $500 cash register in their store. It was 
basic, but it worked. When I opened my store, I decided to take 
advantage of the most current technology. I spent almost $100,000 for a 
high-tech computer system. My computer systems was the top of the 
line--or at least that is what I thought. They could process credit 
cards, keep inventory. The company that I purchased them from spent 
hours extolling the virtues of the system--they sent a salesman from 
Chicago, they sent me sales literature, they promised that the system 
would last well into the year 2000. I believed them.
    Opening day was the proudest day of my life. As we opened the doors 
to the store, we were thrilled to see lines of people streaming in. The 
store was sparkling, everything was ready. Or so we thought.
    As people began to choose their purchases, lines began to form. 
Suddenly, the computer systems crashed. We did not know why it took 
over a year and over 200 service calls to realize it was the credit 
cards with the expiration 2000 or later that blew up my computer--the 
one which I spent $100,000 on.
    The entire computer system crashed. Lines were ten to twenty people 
deep. People were waiting with full carts of groceries to pay but 
couldn't. We could not process a single credit card or could not take 
cash or checks. We could not make one sale.
    People began drifting out, leaving full carts of groceries behind. 
As my partner and I darted around the store trying to calm people, we 
heard constant comments like ``I'll never come back here,'' ``Who needs 
to wait in lines this long only to find you can't even buy what you 
want?'' People walked out in droves. Many, I venture, have never 
returned. This happened over and over.
    We did what anyone would do. We called TEC America, which had sold 
us the registers. We called them over 200 times. Every day there were 
problems, lost sales, aggravation. We were struggling to keep afloat 
week-to-week.
    The company declared that it was doing its best to fix the problem, 
but refused to give us another system to use while they fixed these 
broken ones. Each time their technician visited our shop, the company 
insisted that the problem was solved--only to have the registers fail 
again hours later.
    I lost thousands of dollars and hundreds of customers. I was on the 
brink of disaster and a nervous breakdown. The company was still 
promising every day that they had the problem licked, and every day 
they continued to refuse to give me new registers. I could not focus on 
the day-to-day operations of my business. I was consumed with making 
sure this computer system functioned daily.
    I finally had to go out and buy a brand new system. I should have 
bought the $500 dollar registers my parents used when they arrived from 
Poland--at least those worked.
    But the huge costs of purchasing the first system, and then 
replacing it, on top of the lost sales and lost reputation caused daily 
havoc and stress on my partner and myself and all the employees--and I 
was getting absolutely no satisfaction from the computer company which 
put me in this fix in the first place.
    I imagine that if I were one of the big corporate grocery chains, I 
could have used my market power to compel the computer company to work 
out some sort of resolution. But being the owner of just one store, I 
did not have that option.
    So, I turned to the court system. I approached an attorney and we 
filed a case in Macomb County, Michigan. The system worked for me. The 
companies who caused all this grief finally settled with me 2\1/2\ 
years later. I was able to recoup some of my losses.
    But, I'll probably never get those hundreds of customers back, or 
be able to rid the store of the reputation that it got for long lines. 
In fact, if any of those customers are watching these proceedings 
today, I hope you will come back and give us a second chance.
    I'm just a businessman. I am no expert on the legislation before 
the Committee today. But my lawyer tells me that had this bill--or 
others like it in Congress--been in effect when we had our problem, the 
computer company would have never settled. If we were lucky, we would 
still be in litigation. But more than likely, my store would be out of 
business.
    I would not be a small businessman today--I would be a former small 
businessman. One hundred twenty people would be out of work, my 
landlord would have a ``for lease'' sign on my store's front window, 
and I would be looking for a job.
    One thing I know now is that the so-called Y2K problem is not a 
Silicon Valley problem. It's a Warren, Michigan problem. And its not so 
much a ``high tech'' problem as it is a problem of getting companies to 
take responsibility for their products and the need to repair or 
replace them. What we need are responsible businesses to take care of 
the problem now--and not spend months and months of wasted time trying 
to get Congress to protect them.
    There are a number of very disturbing pieces of this bill which 
would quite literally have put me out of business had this been the law 
at the time I had my Y2K difficulties. I fear that many other small 
businessmen will suffer that fate if this Committee does not step back 
for a minute and carefully consider what this bill would do.
    First, this 90 day waiting period. Take it from a real small 
businessman who works day to day in order to make ends meet. This would 
put thousands of people out of business. Waiting three full months to 
have the ability to even begin to bring a claim would have put me out 
of business. Every single day I was losing money. Every single day I 
came closer to that point where I couldn't open my doors anymore. 
Ninety more days would have been too much. Also, realistically, any 
small businessman is going to try and get the company to fix the 
problem before they turn to a lawyer. Why would I hire and pay for a 
lawyer before taking the simple step of making a phone call to the 
company? The problem is that some companies don't do the right thing 
once you call. I called over 200 times and they still didn't fix the 
problem. Now you want me to wait an additional 90 days? Why? That has 
only one effect--to put me out of business and allow them to stall 
more.
    Next, why is everyone so worried about the software and hardware 
companies? What about the little guy who is the end user of a software 
product? I see that they get all the breaks in this bill. They get to 
ignore the state law provisions that protect me against the 
unscrupulous in all other industries--implied warranties, state fraud 
statutes. They also get limitations on damages, limitations on joint 
and several liability * * * what do I get, besides a more difficult 
standard to prove if I finally manage to jump through the procedural 
hoops and get to court?
    Third, I would love to see legislation that holds the companies 
that are profiting off of this problem responsible. The company that I 
bought my system from got away with their profit intact. If a company 
sells a faulty product and doesn't fix it, they should be held 
responsible. Period. Seems like common sense to me and every other 
small businessman I talk to. Let's get common sense things like THAT 
into law.
    Let's actually do something that FIXES the problem. All of these 
bills--with all due respect--make the problem worse by discouraging 
these companies from fixing the products. I ended up having to replace 
my entire system. Give me tax credits for those purchases. Help me get 
SBA loans. Those are the kinds of things that will help, not this 
``we've got to do something so let's start with protecting a powerful 
set of lobbying groups who organized quickly to seek protection for 
themselves.''
    Finally, if Congress is hell-bent on passing some kind of liability 
protection bill for large software manufacturers, at least exclude from 
the legislation small businesses who may end up being plaintiffs 
because they suffer commercial loss from software defects. Let the big 
guys cope with this new scheme if they want, but not us who have to 
make payrolls and who need the protection of state laws.
    Long ago, while sitting in their little grocery store in Detroit, 
my parents taught me that sometimes people with the best of intentions 
can try to make a problem better, but end up making it worse. I 
understand what they mean. I know that Congress is trying to help. But, 
before you act, I now hope you will consider what this legislation will 
do to the small businessman. I know that is why you have allowed me to 
share my story, and I am grateful you provided me the opportunity to 
testify today. I will be happy to try and answer any questions you may 
have.

    The Chairman. Mr. McConnon, we will go to you.

                   STATEMENT OF B.R. McCONNON

    Mr. McConnon. Thank you, Mr. Chairman. Good morning. My 
name is B.R. McConnon and I am from Alexandria, VA. I am the 
president and owner of Democracy Data and Communications, a 
grass-roots database management company located in Old Town. We 
currently have 18 full-time employees who manage a variety of 
databases for our clients, which include many of the Nation's 
largest corporations.
    I am pleased to be here today testifying on behalf of the 
National Federation of Independent Business regarding potential 
problems resulting from year 2000 failures. NFIB is the 
Nation's largest small business advocacy organization 
representing more than 600,000 small business owners in all 50 
States and the District of Columbia. The typical NFIB member 
employs five people and grosses $350,000 in annual sales.
    Nationwide, the small business community is making progress 
toward inoculating itself against the millennium bug. A recent 
NFIB Education Foundation study found that as of November 1998, 
1.9 million small firms have addressed their Y2K problems. I am 
proud to say that I am among them. Considering that I am a 
computer-based business, it should come as no surprise that 
becoming Y2K-compliant was important to the survival of 
Democracy Data.
    We have nearly 30 computers that run dozens of software 
packages simultaneously everyday. I depend on these systems to 
store and process data, and to make it accessible to clients 
through the Internet. Because I was concerned about their 
operation after the millennium date change, my chief technology 
officer and I initiated a series of intricate tests to ensure 
that each of our systems and software packages would continue 
to operate without Y2K problems. Although it cost my company 
several thousand dollars and took several days, it was worth 
it, considering my business would fail to operate if not Y2K-
compliant.
    Like most businesses, however, Democracy Data does not 
operate in a vacuum. I am dependent upon numerous vendors and 
suppliers who provide my company with the input data necessary 
for us to create several of our core products. These vendors 
include commercial data providers who supply geographic 
information systems or electronic mapping data, State 
governments who supply us with a range of geographic and other 
data, and other commercial vendors who rely on the U.S. Postal 
Service and the Census Bureau as primary data sources. I also 
rely on our clients' information system staff to supply us with 
the data that we store and manipulate, an absolutely essential 
function if we are to be able to do our part.
    Without the services these vendors provide and the data 
provided by the companies themselves, I would not be able to 
serve my clients as they expect. At the end of the day, their 
failure is my failure. In spite of all my efforts, however, I 
am still at risk should Y2K problems afflict my suppliers, 
clients, or financial institutions. In a perfect world, every 
business would take steps to fix their problems now, but that 
is not happening. There will be failures. There will be late 
shipments, damaged goods, and failed data delivery.
    For example, should the Postal Service fail to supply 
current, accurate data to our commercial vendor, that vendor in 
turn could not add their critical component to the data that we 
use. Consequently, Democracy Data would not be able to supply 
our clients with the data and services that they expect and 
need.
    While it is impossible to know the extent to which any one 
of us will be impacted, I do believe that we must prepare to be 
affected. That is why I am so pleased to see Congress taking 
action on this issue. I work hard everyday to deliver on my 
promises to clients. If one of my vendors has a Y2K failure 
that impacts my ability to serve clients, I could have serious 
problems on my hands, possibly even a lawsuit. I could be used 
by a client who is displeased with my services. If the 
situation could not be resolved any other way, I may have no 
choice but to sue my vendor. I have worked hard to build good 
relationships with my clients and the other businesses I depend 
on. Therefore, going to court against them is the recourse of 
last resort.
    Now, I am not a lawyer, but I do know from my own 
experience that it wouldn't take much of a lawsuit to knock a 
small business out of business for good. Two years ago, I was 
involved in a lawsuit that was not only expensive, but took up 
valuable time and kept me from running my business. Although 
that suit that was brought against me was ultimately dismissed, 
the lost revenue during the time that I spent with lawyers on 
interrogatories and depositions far exceeded legal fees. My 
experience just goes to show that lawsuits can seriously burden 
small businesses, regardless of whether you are plaintiff or 
defendant and regardless of whether the suit is legitimate.
    The emphasis should be on quick resolution of disputes, not 
on expensive and time-consuming litigation. For these reasons, 
I believe that any legislation Congress enacts should do three 
things.
    First, Congress must create incentives to mitigate, not 
litigate. It is essential that businesses of all sizes are 
urged to address their Y2K problems now. Otherwise, 2000 will 
go down in history as the year of the lawsuit. Every business 
depends on other businesses. The more problems we can 
anticipate and fix, the better it will be for everyone.
    Second, Congress must encourage the settlement of Y2K 
disputes to happen as quickly as possible. For a small 
business, it all comes down to the bottom line, cash flow. If 
my vendors do not provide me with the data and access I need, I 
cannot operate. If my clients aren't satisfied with the service 
I provide, they will stop using my company. It doesn't take 
long for a company operating in a competitive environment such 
as ours to go out of business. Disputes should be settled as 
quickly as possible and outside of the court, when feasible. 
Getting a court date can take months, if not years. What it may 
cost small business owners is their livelihood.
    Third, Congress must curb the desire to file frivolous 
lawsuits by placing limits on punitive damages. Ninety-three 
percent of NFIB members support capping damage awards for this 
very reason. Limiting punitive damages will keep unnecessary 
lawsuits to a minimum, but would not keep businesses from going 
forward with legitimate lawsuits in order to recover their 
actual damages.
    I believe the bill introduced by Senators Hatch and 
Feinstein, the Year 2000 Fairness and Responsibility Act, will 
accomplish these three important goals. Although some may argue 
that we don't need Federal legislation to address these issues, 
I disagree. Businesses need a push to get their own Y2K house 
in order, and the reward should be quicker dispute resolution 
and fewer lawsuits.
    I would like to thank the committee for the opportunity to 
testify before you today and hope that you will act quickly on 
this bill. I would also be pleased to answer any questions that 
you might have.
    The Chairman. Thank you, Mr. McConnon.
    [The prepared statement of Mr. McConnon follows:]

                  Prepared Statement of B.R. McConnon

    Good morning, Mr. Chairman and members of the Committee. My name is 
B.R. McConnon and I am from Alexandria, Virginia. I am the President 
and owner of Democracy Data and Communications, a grassroots database 
management company located in Old Town. We currently have 18 full time 
employees who manage a variety of databases for our clients, which 
include many of the nation's largest corporations.
    I am pleased to be here today testifying on behalf of the National 
Federation of Independent Business regarding potential problems 
resulting from Year 2000 failures. NFIB is the nation's largest small 
business advocacy organization, representing more than 600,000 small 
business owners in all 50 states and the District of Columbia. The 
typical NFIB member employs five people and grosses $350,000 in annual 
sales.
    Nationwide, the small business community is making progress towards 
inoculating itself against ``the millennium bug.'' A recent NFIB 
Education Foundation study found that, as of November 1998, 1.9 million 
small firms have addressed their Y2K problems. I am proud to say that I 
am among them. Considering that I am in a computer-based business, it 
should come as no surprise that becoming Y2K compliant was very 
important to the survival of Democracy Data. We have nearly 30 
computers that run dozens of software packages simultaneously every 
day. I depend on these systems to store and process data and to make it 
accessible to clients through the Internet. Because I was concerned 
about their operation after the millennium date change, my chief 
technology officer and I initiated a series of intricate tests to 
ensure that each of our systems and software packages would continue to 
operate without Y2K problems. Although it cost my company several 
thousand dollars and took several days, it was worth it, considering my 
business would fail to operate if not Y2K compliant.
    Like most businesses, however, Democracy Data does not operate in a 
vacuum. I am dependent upon numerous vendors and suppliers who provide 
my company with the input data necessary for us to create several of 
our core products. These vendors include commercial data providers who 
supply Geographic Information Systems (GIS) or electronic mapping data, 
state governments who supply us with a range of geographic and other 
data, and other commercial vendors who rely on the United States Postal 
Service and the Census Bureau as primary data sources. I also rely on 
our clients' information systems staff to supply us with the data that 
we store and manipulate--an absolutely essential function if we are to 
be able to do our part. Without the services these vendors provide and 
the data provided by the companies themselves, I would not be able to 
serve my clients as they expect. And at the end of the day, their 
failure is my failure.
    Though my own systems and software may be ``bug-free,'' I am still 
at risk should Y2K problems afflict my suppliers, clients or financial 
institutions. In a perfect world, every business would take steps to 
fix their problems now, but that is not happening. There will be 
failures. There will be late shipments, damaged goods and failed data 
delivery. For example, should the Postal Service fail to supply 
current, accurate data to our commercial vendor, that vendor in turn 
could not add their critical component to the data we use. 
Consequently, Democracy Data would not be able to supply our clients 
with the data and service that they expect and need. While it is 
impossible to know the extent to which any one of us will be impacted, 
I do believe that we must prepare to be affected.
    That is why I am so pleased to see the Congress taking action on 
this issue. I work hard every day to deliver on my promises to clients. 
If one of my vendors has a Y2K failure that impacts my ability to serve 
clients, I could have a serious problem on my hands--possibly even a 
lawsuit. I could be sued by a client who is displeased with my 
services. If the situation could not be resolved any other way, I may 
have no choice but to sue my vendors. I have worked hard to build good 
relationships with my clients and the other businesses I depend on. 
Going to court is the recourse of last resort--especially since Y2K 
problems can most likely be avoided.
    Now, I am not a lawyer, but I do know from my own experience that 
it wouldn't take much of a lawsuit to knock a small business out of 
business for good. Two years ago, I was involved in a lawsuit that was 
not only expensive, but took up valuable time and kept me from running 
my business. While I ultimately triumphed, the lost revenue during the 
time that I spent with lawyers on interrogatories and depositions far 
exceeded the legal fees. My experience just goes to show that lawsuits 
can seriously burden a small business, regardless of whether you are a 
plaintiff or defendant and regardless of whether the suit is 
legitimate. The emphasis should be on quick resolution of disputes, not 
on expensive and time consuming litigation.
    For these reasons, I believe that any legislation Congress enacts 
should do three things:
    First, Congress must create incentives to mitigate, not litigate. 
It is essential that businesses of all sizes are urged to address their 
Y2K problems NOW. Otherwise, 2000 will go down in history as the Year 
of the Lawsuit. Every business depends on other businesses. The more 
problems we can anticipate and fix, the better it will be for everyone.
    Second, Congress must encourage the settlement of Y2K disputes to 
happen as quickly as possible. For a small business, it all comes down 
to the bottom line--cash flow. If my vendors do not provide me with the 
data and access I need, I cannot operate. If my clients aren't 
satisfied with the service I provide, they will stop using my company. 
It doesn't take long for a company operating in a competitive 
environment such as ours to go out of business. Disputes should be 
settled as quickly as possible and outside of court when feasible. 
Getting a court date can take months if not years. What it may cost 
small business owners is their livelihood.
    Third, Congress must curb the desire to file frivolous lawsuits by 
placing limits on punitive damages. Ninety-three percent of NFIB 
members support capping damage awards for this very reason. If I am 
forced to enter into Y2K legal action with one of my vendors, I would 
do so only to recover what is owed to me. I don't want to ``punish'' my 
vendors--I want to continue working with them! The relationships I have 
built over time are essential to the operations of my business and no 
Y2K glitch should endanger them. Limiting punitive damages will keep 
unnecessary lawsuits at a minimum, allowing businesses to recover their 
actual damages more quickly.
    I believe the bill introduced by Senators Hatch and Feinstein, the 
Year 2000 Fairness and Responsibility Act, will accomplish these three 
important goals. Although some may argue that we don't need federal 
legislation to address these issues, I disagree. Businesses need a push 
to get their own Y2K house in order, and the reward should be quicker 
dispute resolution and fewer lawsuits.
    I would like to thank the Committee for the opportunity to testify 
before you today and hope that you will act quickly on this bill. I 
would be pleased to answer any questions you might have.

    The Chairman. Mr. Pogust, we will turn to you now.

                   STATEMENT OF HARRIS POGUST

    Mr. Pogust. Thank you, Chairman Hatch. It is an honor to 
appear before you today. My name is Harris Pogust and I am an 
attorney from Pennsauken, New Jersey. I work at a small firm 
which represents over 2,000 small businesses in the 
Philadelphia and southern New Jersey area. My firm's focus has 
always been on representing small business and their issues--
contract disputes, insurance issues, litigation, permit 
problems.
    It is only because the Y2K problem began to threaten the 
very existence of many of my small business clients that I 
became aware of the issue at all. I am here today, Senator, 
because many of those small businessmen just couldn't be here. 
As small businessmen, they could not leave their business on 
short notice. As doctors, they cannot reschedule their 
patients' appointments. But I have spent a great deal of time 
talking to them, however, and I am here to tell their story.
    They come from all over. They come from Pennsylvania, New 
Jersey, Delaware, Ohio and California, just to name a few. They 
all own different types of businesses--cleaning supply stores, 
furniture retailers, community hospitals, doctors, medical 
schools, just to name a few. They asked me to pass their names 
to you, if you are interested in hearing their stories in 
person.
    Beginning in 1998, one after another of my small business 
clients began to tell me horror stories about being taken 
advantage of by companies who sold them non-compliant software 
and hardware for thousands of dollars, only to turn around 
months or even weeks later and demand thousands more to make 
the product functional. It is only by being able to turn to a 
jury of their peers that they were able to obtain justice.
    My basic message to you, the message of all small 
businessmen who have faced this issue head-on and have been 
forced to deal with it, is that the current system works. The 
fundamental precept that has dispensed justice in this country 
for hundreds of years remains true today. If all else fails, a 
business knows that they can turn to the court system to obtain 
justice and to get resolution by a jury of their peers. 
Altering the system in any way will only hurt these small 
businessmen, who after all just want to sell furniture, treat 
their patients, and teach their students.
    I would quickly like to share some representative stories 
from my clients. In one case, two small business people who 
owned furniture stores down at the Jersey shore came into their 
business on January 3rd of this year, 1999, and tried to turn 
on their computer systems. For some reason, nothing happened 
and the system didn't work--a blank screen; they couldn't run 
their business. Those computers ran the whole 9 yards--lay-away 
plans, inventory. Everything that these furniture stores needed 
to run their business was contained on these systems. They 
called the vendor and the vendor said, sure, I will help you, 
but you have to pay me $10 or $15,000; if you don't, I can't 
help you. This would wipe them out. They are still today trying 
to fix this problem with that vendor and are looking elsewhere 
to solve the problem.
    Another situation: We represent a doctor from Atlantic 
County, Dr. Robert Courtney, who purchased a medical management 
software. The doctor is a sole practitioner, is a classic 
doctor that only exists in the movies. He is an ob-gyn. He has 
delivered generations of babies in some families, makes house 
calls, gives out his phone number, treats indigent patients, 
knowing full well that the practice will have to swallow these 
expenses.
    In 1996, he purchased this software package from the 
Medical Manager Corporation for $13,000. A year later, November 
of 1997, he gets a letter from Medical Manager saying, we are 
sorry to inform you, but the system that we sold you a year ago 
is not year 2000-compliant. But we are going to take reasonable 
efforts to fix it for you, but it is going to cost you $25,000. 
So he spent $13,000 in 1996 and now they are asking for $25,000 
a year later.
    The doctor wrote to Medical Manager, made calls. They 
ignored him. He called me. I wrote to them, told them the 
situation, and they turned around and said, sorry, we can't 
help you. So we filed suit in June of 1998. Within 60 days, 
Medical Manager invited us down to their offices in Florida to 
resolve the situation. And, thankfully, in December of this 
year we resolved the situation for 50,000 physicians across the 
country who now have saved between $20 and $30,000 apiece and 
can put that toward providing more care and better care to 
their patients instead of giving it to a software manufacturer 
who was trying to extort the money from them.
    One final situation. A small college in Philadelphia 
recently called me and told me they were being charged over 
$100,000 to repair their Y2K problem, despite the fact that 
they had in place a full and in-force maintenance agreement 
which provided for such repairs. The software company is 
totally ignoring that contract, basically saying we can't 
afford to do it, so you have to pay us. So, accordingly, the 
school doesn't know what to do, but what we know is that 
students will lose their scholarships, research won't be done, 
the library will have to do with old books, and only because a 
company didn't do what was right. Now, these are just three 
examples of the hundreds of phone calls I have received in the 
last 3 months, and I could tell you more if you would like to 
hear them.
    The problems that we see with this bill, just to scratch 
the surface, is, first, the 90-day waiting period. As Mr. 
Yarsike said, some of these small businesses can't handle the 
90 days. Many of these doctors, many of these furniture 
stores--in 90 days, they will be out of business by that time. 
The system works as it is now. We send letters, the clients 
send letters, and if they are ignored, then we file suit.
    Second, the bill contains a broad escape hatch to companies 
who supposedly do their best to fix the problem they caused in 
the first place. All a company apparently needs to do is make a 
few trips to the site and claim that they put forth their best 
effort to fix the problem. Then they can as Medical Manager did 
and say, well, we put our best efforts, but it is going to cost 
you $25,000.
    Now, who should pay for this problem? Should the small 
businessman who is just trying to run a business pay for this 
problem, or the companies who knowingly and intentionally put 
out defective products throughout this country and throughout 
the world?
    Further, such legislation would preempt existing 
protections of State law and the UCC. Businessmen entered into 
contracts knowing that the UCC and State fraud statutes were 
going to provide them with the necessary protections from 
faulty products. Businessmen, even those with only little 
stores, know that the products sold in commerce are required 
under the UCC and all 50 States to be fit and functionable and 
merchantable. These fundamental safeguards are wiped out if the 
proposed initiatives, and thus the victims, are left without 
the basic consumer protections that distinguish American 
markets from those around the world.
    This bill would also swoop in and declare one Federal, 
often heightened standard that must be shown by the innocent, 
injured victim. That is fundamentally unfair. Also, with the 
bill's various limitations on damages, joint liability and 
other areas of liability, the legislation favors defendants 
over plaintiffs at every turn. Why is this? Since personal 
injury cases are excluded from the legislation, then the bill's 
focus is on business suing business. Why would Congress want to 
favor one group of businessmen, the manufacturers who produced 
and distributed defective software, over a small businessman 
who is just trying to run his day-to-day operation? That is 
exactly what this bill does. Just ask the small businessmen who 
have been affected by these problems. They can tell you the 
reality, not the theory that others supposedly representing 
them might espouse.
    Mr. Chairman, I want to thank you again for letting me 
appear today. I know that everyone on this committee is seeking 
in good faith to help solve this problem. But what I think we 
are seeing out in the real America is that job one for the Y2K 
problem should be fixing the problem. That we seem to be 
approaching the issue by protecting those who are responsible 
rather than creating incentives for remediation is worrisome. 
If the pressure is building on Congress to take away some of 
the rights and remedies available in our court system, then 
please do not inflict this scheme on small business.
    I would be honored to answer any questions that you may 
have. Thank you very much.
    The Chairman. Thank you, Mr. Pogust. Just one question. I 
have been led to believe that in the Medical Manager case that 
there were out-of-pocket losses of about $1.45 million.
    Mr. Pogust. Medical Manager stood to make over $100 million 
if every doctor was forced to spend $20,000.
    The Chairman. I understand, but as I understand it, when 
the case was settled, you settled it for about that much and 
about $600,000 went to the class of businesses and about 
$800,000 to the attorneys. Am I wrong on that?
    Mr. Pogust. Well, that is just a small portion of the 
settlement. There are approximately 17,000 offices out there 
that had the product; 10 to 12,000 hadn't upgraded to the new 
version, so they were still not compliant.
    The Chairman. Did they agree to upgrade everybody?
    Mr. Pogust. They agreed to upgrade all those people.
    The Chairman. That was worth a lot more than the actual 
cash settlement?
    Mr. Pogust. No doubt. The number that you are throwing out 
or that you are discussing just deals with people who have 
already upgraded to the year 2000-compliant version. One of the 
options they had was to receive a cash rebate or to get more 
software from Medical Manager. So that was only 2 to 3,000 out 
of the 17,000 clients.
    The Chairman. It wouldn't have been that tough for the 
Medical Manager people, once they got the basic plan written, 
to cure the 2000 problem----
    Mr. Pogust. No doubt.
    The Chairman [continuing]. To have sent out a disk to every 
one of those people.
    Mr. Pogust. That is exactly right, but they chose not to do 
that until we filed our lawsuit. They ignored Dr. Courtney, 
they ignored my letters. We filed suit in June. By August, I 
was sitting in their offices in Florida and they are saying, 
let's resolve this, you know. I mean, one doctor bought the 
software in October of 1997 and gets a letter a month later. He 
spent $20,000 in October of 1997 and specifically asked whether 
it was compliant and they told him it was. And then he gets a 
letter the next month saying, whoops, it is not going to work, 
give us another $25,000. And it is just not Medical Manager. 
That case got a lot of publicity. It was written up in the Wall 
Street Journal. I get calls daily with the same story.
    The Chairman. This is very interesting to me. We have got 
to figure out a way to resolve these problems and make sure 
that justice is done here, and you make a pretty interesting 
case. So did you, Mr. Yarsike, I think. We are certainly going 
to look at what you have to say, and give us any other help you 
can. We would be glad to consider it.
    Mr. Pogust. Today, in 1999, these software companies are 
making trillions of dollars by forcing everybody to upgrade. So 
they are not the poor software company out there who is hurting 
and is being threatened. It is a gold mine for them, this year 
2000 problem. Everybody has to go out and fix their product. 
They are charging everybody. There are some companies that are 
doing the right thing and providing free fixes, but the 
majority of those are charging us.
    Thank you.
    [The prepared statement of Mr. Pogust follows:]

                  Prepared Statement of Harris Pogust

    Chairman Hatch, Senator Leahy, distinguished Senators it is an 
honor to appear before you today.
    My name is Harris Pogust, and I am a lawyer from Pennsauken, New 
Jersey. I work at a small firm which represents over 2,000 small 
businessmen in the Philadelphia and Southern New Jersey areas. My 
firm's focus has always been on representing small businesses and their 
issues: contract disputes, insurance issues, and permit problems. It is 
only because the Y2K issue began to threaten the very existence of many 
of my small business clients that I became aware of the issue at all.
    I am here today, Senators, because those small businessmen could 
not be. As small businessmen, they could not leave their businesses on 
such short notice. As doctors, they could not reschedule their 
patient's appointments. I spent a great deal of time talking to them, 
however, and I am here to tell their stories. They come from all over--
Pennsylvania, New Jersey, Delaware, Ohio, California. They own all 
types of businesses: cleaning supply stores, furniture retailers, 
community hospitals, and doctors. They asked me to pass on their names 
and phone numbers to any of you who expressed an interest in hearing 
their stories--the real story behind the Y2K issue and what legislation 
like this would do to them. They are not represented by any large 
Washington, D.C. organizations. But they are what they are--America's 
small businesses.
    Beginning in 1998, one after another, my small business clients 
told me horror stories of being taken advantage of by companies who 
sold them non-compliant software and hardware for thousands of dollars, 
only to turn around months or even weeks later and demand thousands 
more to make the products functional. It is only by being able to turn 
to a jury of their peers, or the threat of this, that they were able to 
obtain justice.
    My basic message for you--the message of all of the small 
businessmen who have faced this issue head on and been forced to deal 
with it--is that the current system works. The fundamental precept that 
has dispensed justice in this country for hundreds of years remains 
true today: if all else fails, and a business feels that they need to 
turn to the court system to get justice, to get deadlines, to get 
resolution by a jury of their peers. Altering the system in any way can 
only hurt these small businessmen who, after all, just want to sell 
furniture, treat their patients, or teach students.
    I would like to quickly share three representative stories that I 
have heard from my clients. Please remember, these are just a few of 
the many that I have heard. There are thousands--thousands--more horror 
stories like this.
    In one case, two small businesspeople who own furniture stores at 
the New Jersey shore faced severe financial hardship because of their 
systems crashing due to the Y2K problem. Like most furniture stores, 
they allow people to purchase products on lay-a-way plans. Someone buys 
a dining room set and has two years to pay it off. This software was 
supposed to track those payments and keep the accounts. The software 
cost $10 to $15,000--a huge outlay for a business of that size.
    One day, the computers were turned on and--nothing happened. The 
system was dead, due to a Year 2000 problem. They immediately called 
the company for help, since they stood to lose thousands--without the 
system, they would have no idea who owed them money, what their 
inventory status was, or who they owed money to. This could wipe them 
out. They called the company that sold them the software--and the 
company said, sure, we'll fix it--for ten thousand dollars. Ten 
thousand dollars these small businessmen simply couldn't afford, 
especially since they had paid that amount for the system in the first 
place.
    In another situation, a doctor in Atlantic County, New Jersey, 
purchased medical management software. The doctor, a sole practitioner, 
is the classic doctor that you think only exists in movies. He is an 
ob-gyn. He has delivered generations of babies in some families; makes 
house calls, gives out his home phone number. He treats indigent 
patients, knowing full well that his practice will have to swallow the 
expense. It's just him and Diane, his nurse/receptionist. He made a 
huge outlay of $13,000 to purchase this software, which was supposed to 
help him track his patients appointments, keep track of their medical 
records, and generally help him improve his patients health.
    The salesman for the company came to his office and promised him 
when he purchased the software that it would last for years. The doctor 
believed him. Twelve months later, the doctor received a letter from 
the company telling him what it had known when it sold him the 
software: it wasn't Y2K complaint. In order to make it complaint, the 
doctor was asked to pay $25,000--almost double what he spent on the 
original system! That's real money to a real small town doctor. It 
threatened to take him away from what he loves: being a sole 
practitioner who is a part of his patient's lives. Senators, if you do 
anything at all to address the Y2K problem, please deal with the Y2K 
profiteering issue. It's nowhere to be found in any of the bills I've 
seen to date.
    Finally in another situation, a college in Philadelphia is being 
charged over $100,000 to make their computer systems Y2K compliant. 
This is despite the fact that they initially paid $100K for the system, 
and paid thousands of dollars every year for a maintenance contract 
that supposedly provides for such services. What that means in 
practical terms to this small school is this: students will lose their 
scholarships. Research that could otherwise have been conducted will 
remain as theories in a notebook. The library will have to make do with 
books that are decades old. All because one company didn't do what was 
right.
    These are three of many examples of the real problems faced by real 
small businesses in the real world. Now, as an attorney who has been 
able to help those facing these situations, I would like to make the 
following points about why this bill, and those like it, would have 
devastated and probably forced these businesses to close their doors 
forever.
    First, the 90-day delay period built into this bill would be 
devastating to the small businessmen out there. If the furniture store 
has its computers fail on January 1, 2000, it faces immediate damage. 
Every day it has to continue meeting payroll. It has to pay the 
electric bill. It has to pay taxes. If they are forced to wait 90 days 
to even have the opportunity to do anything about it they would simply 
go out of business. Ninety days to a company like AT&T is nothing; to 
Jim's Furniture Store it is everything. For example, these furniture 
stores contacted the company involved and were told that they would not 
fix anything unless they paid $10,000. The furniture store simply 
couldn't afford that much. They were at a dead end. Not only does it 
make no sense to force that company to wait 90 days to do anything--it 
would push the company over the edge. I know this to be true--the 
businessmen I speak to tell me, and would tell you this too. Senators, 
the 90-day waiting period may be one thing if you're talking about a 
lawsuit between American Airlines and Intel. It means something 
entirely different for small companies who can barely make a payroll 
every week.
    Second, these bills all contain broad escape hatches to companies 
who supposedly do their best to fix the problem they caused in the 
first place. All a company apparently needs to do is make a few trips 
to the sites and claim that they did their best to fix the problem. Or, 
they can say ``I have a fix--it'll cost you $25,000, though.'' Or they 
can claim that they didn't have enough opportunity to fix the problem. 
Does the furniture store, for example, need to allow the company to 
come into their store as many times as they want--even into the 
hundreds--or face a claim that they did not provide an adequate 
opportunity to fix the problem? Moreover, precisely because many 
important terms are not defined, parties might well have to 
``litigate'' over the meaning of these terms rather than moving forward 
to have an expeditious resolution of the underlying problem itself. I 
assure you that this bill will create far more litigation than it will 
eliminate.
    Further, such legislation would preempt existing protections of 
state law and the UCC. Businessmen entered into contracts knowing that 
the UCC and state fraud statutes were going to provide them with the 
necessary protections from faulty products. Businessmen, even those 
with only their own little store, know that products sold in commerce 
are required under the UCC of all 50 states to be ``fit'' and 
``functional'' and ``merchantable.'' These fundamental safeguards are 
wiped out in the proposed initiatives, and thus the victims are left 
without the basic ``consumer'' protections that distinguish American 
markets from all others in the world. These bills would also swoop in 
and declare one federal, often heightened standard that must be shown 
by plaintiffs. That is fundamentally unfair.
    Also, with the bill's various limitations on damages, joint 
liability and other areas of liability, the legislation favors 
defendants over plaintiffs at every turn. Why is this? Since personal 
injury cases are excluded from the legislation, then the bill's; focus 
is on businesses suing other businesses. Why would Congress want to 
favor one group of businesses (manufacturers) over small business end-
users--the very group that can least economically sustain delay and 
commercial loss? That is exactly what this bill does--just ask the 
small businessmen who have been effected by these problems. They can 
tell you the reality--not the theory that others supposedly 
representing them might espouse.
    Mr. Chairman, I want to thank you again for letting me appear 
today. I know that everyone on this Committee is seeking in good faith 
to help solve this problem. But what I think we are seeing out in the 
real America is that Job 1 for the Y2K problem should be fixing the 
problem. That we seem to be approaching the issue from protecting those 
who are responsible rather than creating incentives for remediation is 
worrisome. If pressure is building on Congress to take away some of the 
rights and remedies available in our State court system, then please do 
not inflict this new scheme on small business.
    I would be honored to answer any questions that you may have.

    The Chairman. Mr. Adams, we will finish with you.

                  STATEMENT OF STIRLING ADAMS

    Mr. Adams. Thank you, Mr. Chairman. Good morning. I am 
Novell's attorney for year 2000 issues, and for several years I 
have been part of our company-wide team that oversees our Y2K 
preparations. Today, I would like to describe those 
preparations to kind of give a face to what it means for a 
software company to do that. I would like to thank this 
committee for exercising leadership in facing the Y2K 
challenge. I would particularly like to thank Senator Hatch and 
Senator Feinstein for their leadership with the Year 2000 
Fairness and Responsibility Act.
    Novell is the world's largest network software company, and 
over 70 million users worldwide are connected to networks 
running on Novell software. For the software products that we 
license, we have spent thousands of painstaking hours 
conducting tens of thousands of performance tests. Our purpose 
in doing this is to ensure that Y2K problems do not occur. If, 
after further testing or use, Y2K issues are discovered, we 
have a worldwide services organization that provides technical 
support in all of the world's major languages and they are able 
to create and distribute patches.
    We have placed an emphasis on communicating about Y2K with 
our customers. One way we accomplish this is through posting 
information on our Y2K web site. We have had this site up for 
several years, and I would like to thank the Senators for 
passing the Year 2000 Readiness and Information Act which has 
made us feel more comfortable about posting even more 
information on this site to help the customers.
    Through mass mailings, we have mailed to over a million 
customers free software tools to help them in their year 2000 
efforts. As a free service, Novell will provide to customers an 
individualized report on the Y2K status of products. We also 
include specific information on how, if needed, a product can 
be updated or how to install patches or upgrades. Thousands of 
businesses, representing tens of millions of users, have taken 
advantage of this service.
    We also provide a free subscription list of Y2K information 
updates. We have 60,000 businesses on this list; thousands more 
join each week. And for those who don't have Internet access, 
we provide information through toll-free phone lines and we 
have distributed tens of thousands of CD's containing the 
information on our web site.
    Despite our preparations and despite our communications, 
one of Novell's major concerns is that the normal market forces 
that encourage cooperative problem-solving are being 
overwhelmed by a fear of Y2K litigation. We believe the Year 
2000 Fairness and Responsibility Act would promote Y2K 
cooperation and preparation, and help restore the normal market 
forces in America.
    For example, section 201 ensures that terms agreed to in a 
contract are enforceable. This follows the intent of business 
partners and would remove some of the uncertainty businesses 
feel today when entering into contracts to perform Y2K 
services. Today, we are not sure what our risks are.
    Section 301 states an entity would be responsible for the 
proportion of harm caused by its actions, but not for the 
actions of others. With this, consultants would be more willing 
to work on the complex systems of companies that need 
assistance. Also, the codification of the duty to mitigate in 
section 104, along with section 202 and 303's ``reasonable 
efforts'' provisions, would have the definite effect of 
providing express incentives for technology users and 
distributors to resolve Y2K issues before they occur.
    We believe the notification requirements in section 101 
provide a simple mechanism to encourage cooperative problem 
resolution. Before filing a Y2K suit, a plaintiff would need to 
provide notice of the problem experienced. This makes good 
sense. Probably the least efficient way to notify someone of a 
problem is in a complaint filed in court.
    A significant benefit of the bill is that it would create 
uniform substantive and procedural guidelines for Y2K 
litigation. This would lead to outcome predictability and would 
have the direct result of facilitating quick settlements and 
efficient case management.
    The serious concern of Novell is the Y2K class actions that 
have been filed where class members have experienced little or 
no harm. Some of these suits have been dismissed because no 
harm had occurred, but the litigation costs were still very 
high. As should be clear, $500,000 spent in obtaining dismissal 
of a suit is money diverted from productive uses.
    The bill provides that a Y2K class action can only be 
brought if a majority of the class experience a material 
defect. This would help ensure that class actions are motivated 
by a legitimate injury to the plaintiff class. Let me emphasize 
that I do not mean to suggest that plaintiffs with legitimate 
claims should be prevented from having their day in court. 
Novell believes that the proposed Year 2000 Fairness and 
Responsibility Act strikes a fair balance to preserve 
legitimate rights to sue while implementing reasonable 
provisions to encourage preventive problem-solving.
    In summary, Novell shares the perspective of the broad-
based coalition in support of this bill, whose members notably 
include defendants or plaintiffs in Y2K litigation. This bill 
can help restore the normal market conditions of our Nation 
that assume as a starting point not expensive litigation over 
the slightest problem, but an environment of professional, 
cooperative problem-solving and service.
    Thank you for your time.
    [The prepared statement of Mr. Adams follows:]

                  Prepared Statement of Stirling Adams

    Mr. Chairman, Senators, good morning. My name is Stirling Adams. I 
am an in-house counsel for the networking software company Novell. I am 
Novell's lead attorney for year 2000 issues, and for several years I 
have been a member of the Novell team that oversees our Y2K preparation 
efforts, both for technology Novell uses internally, and for technology 
we license to others. Additionally, I chair the Year 2000 Committee of 
the Software & Information Industry Association, and I am a member of 
the Year 2000 Committee of the Business Software Alliance.
    I would like to thank this Committee for exercising leadership in 
facing the challenge the advent of the year 2000 presents. Novell 
believes the Year 2000 Fairness and Responsibility Act is a positive 
move in addressing this challenge, and I would like to especially thank 
Senator Hatch and Senator Feinstein for their leadership with this 
proposed legislation.
    I will first describe Novell's Y2K preparation efforts to give a 
face to what it means for a company to ``prepare for the Y2K.'' Then I 
will describe some concerns we have, despite our extensive 
preparations, about the litigious environment that is building in 
anticipation of the Y2K. I will explain how we feel provisions in the 
proposed Year 2000 Fairness and Responsibility Act address these 
concerns, to the benefit of both technology consumers and technology 
distributors.
                   broad support for y2k legislation
    While I am here to provide the perspective of and specific examples 
from a large high-tech company, first I would like to emphasize that 
the ideas behind the proposed Y2K legislation are supported by an 
exceptionally wide-spread coalition led by entities such as the 
National Association of Manufacturers and the U.S. Chamber of Commerce. 
The coalition included the National Retail Federation, the National 
Association of Wholesalers and Distributors, and the International Mass 
Retail Association, among many others. Note that just one of the 
coalition members, the U.S. Chamber of Commerce, represents over three 
million businesses and organizations in every business sector--96 
percent of these business are small businesses.
    Though members of this coalition have the potential to be either 
plaintiffs or defendants in Y2K-related litigation, the coalition has 
reached a consensus that this legislation would benefit its members 
generally. I think the reason for this is that the legislation would 
encourage cooperative efforts to reduce the total number of Y2K 
problems that occur, and while the legislation would place restrictions 
on litigation based on claims where no injury has occurred, it would 
also preserve the rights of entities to sue if they have experienced 
legitimate harm.
                       novell's y2k preparations
    Novell is the world's largest network software company, and over 70 
million users worldwide are connected to networks running on Novell 
software. Novell, like all other companies, is also a technology 
consumer. We have thousands of employees distributed throughout dozens 
of locations across the world. From our telecommunications and security 
systems to our accounting and payroll systems we use technologies with 
date functionality.
Testing
    We have carefully tested and re-tested these technologies. With 
some upgrading that we have largely completed, we believe our internal 
systems are in good shape. We are working directly with our suppliers 
and we are preparing and revising preparations and contingency planning 
to deal with unexpected Y2K issues that either we or our suppliers may 
face.
    As a developer and distributor of software products, we have 
obvious additional Y2K issues to prepare for. For the dozens of 
software products we are currently licensing, we have spent thousands 
of painstaking hours conducting tens of thousands of performance tests. 
We have also spent significant resources testing older products that we 
continue to support for date issues. These efforts are dedicated to 
preventing the occurrence of Y2K performance issues in our products.
    If despite these extensive efforts an issue is discovered, either 
by additional Novell testing, or by a customer, we have a large 
worldwide technical support organization that provides technical 
support to customers in all of the world's major languages, and where 
needed, we can quickly create and distribute software fixes. 
Additionally, we have a Critical Problem Resolution (``CPR '') 
organization that focuses on high priority support issues--this is 
essentially a software SWAT team that, if needed, can rush to provide 
maximum effort to resolve any serious technical issues.
Communicating with customers
    We are putting significant resources into providing our customers 
information and tools to help them prepare for their potential Y2K-
related problems. We have a Y2K web site that provides extensive 
information about our Y2K efforts and status. This site (http://
www.novell.com/year2000) has been visited by millions of customers. 
Just today, Monday, March 1, several thousand businesses will use this 
site to collect Y2K information on Novell products.
    We also provide a free e-mail subscription list through our Y2K web 
site. The 60,000 customers who have joined this list receive free 
mailings of significant issues relating to Y2K issues and Novell 
products. Thousands more subscribers join this list each week.
    For Customers without internet access, we also have toll-free phone 
numbers through which customers can call service representatives for 
Y2K information. And, we have created CD's that contain our Y2K web 
site contents. Tens of thousands of these CD's are distributed free of 
charge through Novell's reseller channels, sales force, through trade 
shows and other events attended by Novell customers.
Free Y2K tools and information resources
    Additionally, we have created information and software tools that 
can assist customers in Y2K remediation efforts. We make these tools 
available for free, and they can identify the specific versions of 
Novell software running on a customer's systems. As a free service, 
Novell will provide the customer an individualized report identifying 
which software versions the customer is running are supported for Y2K 
issues, and which older products may need a patch or upgrade, with 
specific information on how to obtain a patch or upgrade.
    Thousands of customers have downloaded these tools from our web 
site, and through direct mailings or hand distribution we have 
distributed over a half a million of these free information or tool 
mailings. We expect to mail, in total, over a million. To date, 
thousands of businesses representing over 10 million end users have 
taken advantage of this service.
                      the need for y2k legislation
    The Year 2000 Fairness and Responsibility Act addresses many of 
Novell's core concerns about Y2K litigation. To those who say it is not 
fair or appropriate to pass legislation that favors industry over 
consumers, or that protects businesses from accepting proper 
responsibility for their actions, let me be clear that Novell agrees 
wholeheartedly. Let's not pass a bill that does that.
    Instead, let's work with a bill that does something very 
different--that would be the Year 2000 Fairness and Responsibility Act. 
This bill encourages cooperative problem prevention, it preserves the 
rights of those with legitimate claims to sue, and it places 
restrictions on frivolous litigation.
    One might ask, with all of our preparations, what is Novell worried 
about? As an introduction to the answer, consider the various analyst 
estimates that the volume of Y2K claims will dwarf that of all civil 
litigation filed annually in the U.S., or that Y2K litigation costs 
will reach $1 trillion. I do not know if these figures will be 
accurate: I hope they are gross overestimates. But, as evidenced by the 
lawsuits that have already been filed prior to the plaintiffs 
experiencing damages, and by the law firms that have dedicated entire 
departments to preparing for and filing Y2K litigation, it seems 
completely reasonable to anticipate that Y2K claims could have an 
overwhelmingly negative impact on our court system and our economy.
         restoring the normal cooperative business environment
    What is industry worried about? As individuals, businesses, or 
governments, we all participate in a sophisticated economy based on a 
complex technology-based infrastructure; occasional hiccups and 
difficulties are a normal and accepted part of this complexity. One of 
our major concerns is that the normal market forces that encourage 
cooperative problem-solving in this environment will be overwhelmed by 
a hysteria driven by mass Y2K litigation.
    The following is a practical example of how this hysteria works to 
the detriment of technology users. There is a huge need for consultants 
to assist organizations in performing internal Y2K testing and 
remediation efforts. This need is so large because most organizations 
do not have either the internal resources or the expertise to perform 
these tasks. Though many individuals and companies offer such 
consulting services, some industry analysts are predicting there will 
not be enough Y2K consultants to meet the market need. One contributor 
to this lack is likely to be concerns about Y2K litigation.
    As an industry participant, Novell has seen specific cases where 
entities that do offer general consulting services have been extremely 
wary of widening their offerings to provide complete Y2K services. The 
concern is that even if top-quality consultants provide services in the 
most professional manner, because of system complexity, there may be 
some hardware, firmware, or software component in the system that may 
not react perfectly to the Y2K. Some companies and consultants are very 
definitely factoring into their business analyses the strong 
possibility that the risks of being sued for Y2K problems may outweigh 
the benefits to be earned.
Parties to contracts need to be confident that their agreements will 
        stand
    The above situation is a concrete example of a need addressed by 
the proposed legislation. Today, could a consultant worried about Y2K 
litigation reasonably limit its liability using standard liability 
limitations in the consultant's contract? The hope is that contractual 
limitations will be honored by courts, but enough questions exist in 
this area that the uncertainty has a direct impact on companies' 
decision-making processes. The end result is that fewer resources are 
available to the technology consumer who is preparing for the Y2K.
    Section 201 of the proposed legislation would ensure that the terms 
agreed to in a contract are enforceable. This is what business partners 
generally expect when they agree to a contract, and it is what the 
coalition, from small to large businesses across the business spectrum, 
is supporting. And, it would have a very real effect on Y2K 
preparations because people could reliably know what their risks and 
obligations will be.
Proportionate liability rules would facilitate cooperative Y2K efforts
    Some consultants shy away from performing complete Y2K services 
because they fear that if a Y2K problem occurs, even if the consultant 
is only partially responsible for the problem, it may be found liable 
for all of the damages. Section 301, Proportionate Liability, states 
that a party would only be liable for damages it was responsible for 
causing. This would allow entities to worry less about the litigation 
risks and more about how to fix Y2K problems. It's important to note 
that companies would still be expressly liable for their own 
responsibilities, and that this provision would not affect claims 
involving personal injury.
            reigning in unnecessary or frivolous litigation
    Another element of normal life in America has been that people are 
unlikely to engage in costly litigation over minor or non-existent 
harms, especially where market forces exist that encourage product 
suppliers to provide continually better products to meet competitive 
demands. This is changing. As you may be aware, some Y2K class actions 
have been filed based on situations where the user has experienced 
little, or in some circumstances, no harm.
    Such class actions are a serious concern to Novell. Some of these 
lawsuits have been dismissed exactly because no actionable harm had 
occurred to the plaintiffs. But notably, dismissal may not occur until 
after the defendant has spent hundreds of thousands of dollars in 
defending the claims. In case it is not clear, let me inform you that 
such an outcome has a direct negative impact on a company's productive 
output. $500,000 that is spent in defending a class action law suit is 
money diverted from hiring employees that could be placed on projects 
to develop new technology, or to enhance or support products. This 
works to the detriment of a defendant, of the technology users, and 
offers no benefit to the class of plaintiffs.
Notification requirements provide a mechanism to encourage cooperative 
        resolution without litigation
    Provisions in the proposed legislation address the concern of such 
non-productive litigation. For example, section 101 states that before 
filing a Y2K suit, a plaintiff would need to provide a defendant notice 
of what problem was experienced, what injury occurred, and what remedy 
is sought. If the defendant doesn't respond appropriately, then a suit 
may be filed; this provision does not apply to a plaintiff seeking 
injunctive relief. What this provides is a mechanism to encourage 
cooperative resolution without litigation. If a resolution is not 
reached, the plaintiff still has complete freedom to sue in court. The 
legislation also provides that a Y2K class action can only be brought 
if a majority of the members of the class meet a minimum injury 
requirement of having experienced a material defect. This would help 
insure that any Y2K class actions filed are motivated by legitimate 
injury to the plaintiff class.
    Let me emphasize that I do not mean to suggest that plaintiffs with 
legitimate claims should be prevented from having their day in court. 
Novell believes that the proposed legislation strikes a fair balance to 
preserve legitimate rights to sue while implementing reasonable 
provisions to encourage resolution without litigation.
                additional benefits to technology users
    As I mentioned earlier, the proposed contract enforcement and 
proportionate liability provisions would facilitate cooperation by 
businesses in working together to accomplish Y2K preparations. The 
proposed legislation includes other provisions that would benefit 
technology users.
The Duty to Mitigate and Reasonable Efforts sections would encourage 
        preventive actions by all parties
    As an example, section 104 states an entity cannot recover for 
damages it could have reasonably acted to avoid. This codification of 
the duty to mitigate, along with section 303, which provides that an 
entity's reasonable efforts to prepare for the Y2K can offer some 
protection against liability, are express incentives for all members of 
the technology community, from users to suppliers to developers, to 
resolve Y2K issues before they occur. Obviously the more issues that 
are resolved before the Y2K, the less technology users will experience 
Y2K problems.
Uniform Y2K liability guidelines would increase the efficiency of 
        pursuing claims in or out of court
    In case litigation is warranted, a significant benefit of the 
proposed legislation is that it would create uniform substantive and 
procedural guidelines for Y2K litigation. Uniform guidelines lead to 
outcome predictability and would have the direct result of making it 
easier for entities to decide whether or not to sue. If they choose to 
do so, uniform guidelines are more likely to facilitate quick 
settlements or more efficient trial processes. Obviously, the more 
quickly a case is resolved, the more judicial and litigant resources 
are preserved for other matters.
                               conclusion
    Novell shares the perspective of the broad-based coalition in 
support of the Year 2000 Fairness and Responsibility Act. The 
likelihood of an unparalleled surge of litigation represents a serious 
threat to U.S. resources. The proposed legislation would address this 
threat by encouraging cooperative efforts to prevent Y2K problems 
before they occur. And while the bill would place reasonable 
restrictions on litigation based on claims with little or no injury, it 
would preserve rights to sue for legitimate harms. The bill would also 
wisely establish uniform guidelines that would lead to more efficient 
resolution of Y2K claims that are filed.

    The Chairman. Thank you very much.
    Now, I have got to leave, but I want to ask just a couple 
of questions of you, Mr. Miller. Mr. Miller, you have heard the 
testimony of Mr. Yarsike and Mr. Pogust. Do you have any 
comments with regard to how this bill will actually affect the 
problems that they have raised here today?
    Mr. Miller. As I understand Mr. Pogust's situation, nothing 
in this bill would have restricted him from taking exactly the 
actions that were taken, except maybe at the end of the day 
there would have been less money going to the attorneys and 
more money going to the companies.
    The Chairman. Well, the one thing this bill would do is it 
would require a 90-day cooling off period where any company 
that doesn't utilize that time isn't going to be in business 
very long because they are stupid.
    Mr. Miller. Exactly. I think Mr. Yarsike obviously was 
getting the run-around, it sounds like, and this bill would 
give a very strong incentive from the vendor to respond 
quickly. And if the vendor did not respond quickly, he would 
basically be laying himself open for much more serious 
problems. I think you have crafted it very well, Senator.
    The Chairman. Nothing in this bill would prevent Mr. 
Yarsike's litigation, or Mr. Pogust's.
    Mr. Miller. Absolutely not.
    The Chairman. Do you disagree?
    Mr. Pogust. I would disagree with that. The ``reasonable 
efforts'' seems to be--section 303--a complete defense. It says 
it in section 303.
    The Chairman. It is not, though. It is not meant to be, and 
if it is, we will change it so that it is not. But what it 
becomes is it becomes an incentive to the companies to make 
reasonable efforts so that Mr. Yarsike doesn't have to go 
through what he went through and your clients don't have to go 
through what they went through.
    Mr. Pogust. With all due respect, Senator, it says, ``The 
party against whom the claim is asserted shall be entitled to 
establish as a complete defense to the claim that the party 
took measures that were reasonable.'' Mr. Yarsike had them in 
hundreds of times.
    The Chairman. Yes, but you are reading a paragraph--we have 
rewritten that where it is not an absolute defense.
    Mr. Pogust. I don't have that, so----
    The Chairman. We apologize to you for that.
    Mr. Pogust. I understand.
    The Chairman. But we have taken that into consideration 
because we think you make a good point.
    Let me just ask you this, Mr. Miller, because I am 
concerned about Mr. Yarsike's case. I am concerned about Mr. 
Pogust. I think that attorneys do a lot of good in this country 
by making sure that people do live up to contracts, do live up 
to their obligations. Product liability suits are suits that 
make companies make even extra efforts to try and make sure 
their products are safe, but there is an astonishingly broad 
coalition that supports this bill as it is currently written.
    Could you identify the main companies and associations that 
support this bill? And while I am at it, isn't it true that 
potential plaintiffs in Y2K claims, as well as defendants, are 
represented in the coalition that supports this bill as well?
    Mr. Miller. Absolutely, Senator. We have organizations such 
as the National Association of Manufacturers, the United States 
Chamber of Commerce, the American Insurance Association. Mr. 
McConnon testified on behalf of the National Federation of 
Independent Business; the National Retail Federation; Edison 
Electric Industry. We can supply the complete list of 90 
organizations and associations for the record, Senator.
    Clearly, we would not have had this broad-based coalition 
supporting the bill that you and Senator Feinstein have 
introduced unless they believed that this was going to protect 
all business organizations in business-to-business 
transactions. Several of the witnesses have focused only on the 
software and services industry and the hardware industry. In 
fact, there could be a trucking company that could be not only 
a plaintiff, but could also be a defendant if they can't 
deliver a product on a certain date.
    There could be a business that has nothing to do with 
producing products and services in the year 2000--Mr. McConnon 
addressed that--who could find himself sued by his customers 
not because he is a software company, but because he can't 
deliver. So I think what you have got here, Senator--it took 4 
to 5 months to put this coalition together--is a very, very 
broad-based coalition supporting this bill.
    The Chairman. Well, a very important provision of the bill, 
as has been raised, is the ``reasonable efforts'' provision. 
Now, this section allows the evidence to be presented by 
companies that acted with due diligence in attempting to 
resolve the problem. You state that this section acts as an 
incentive for a supplier of goods or services to fix the 
problem this year and not wait until litigation is commenced. 
Could you explain that to us?
    Mr. Miller. We are afraid, Senator, today that too many 
lawyers are advising their clients, don't go out of your way to 
try to be helpful because you are exposing yourself to 
liability and problems. We think your bill, if it is enacted, 
turns that around because, coupled with the commercial 
responsibility provision, the ``reasonable efforts'' section 
sends a strong message to all potential defendants.
    It says if you continue remediation efforts, following 
necessary elements of due diligence, take all the actions you 
possible can, and even notwithstanding all that there are still 
problems, the court must at least allow you an opportunity to 
present that evidence. So the incentive now shifts to having as 
much information forthcoming, being as helpful as you can. Just 
as you did with the Disclosure Act last year which was to 
incent people to give information, this incents people to take 
action because should there be a failure, they will be able to 
present that as one piece of evidence in any kind of legal 
dispute.
    Mr. Pogust. Mr. Chairman, can I just respond to this?
    The Chairman. Sure, of course.
    Mr. Pogust. I have never heard--I obviously don't talk to 
every lawyer in the country, but who would counsel their client 
not to fix a year 2000 problem because of the threat of being 
sued? It is the opposite, it is the opposite.
    Mr. Miller. Absolutely, Mr. Pogust. Even Mr. Koskinen, the 
President's Y2K czar, stated that publicly before this 
committee.
    Mr. Pogust. So they are telling them don't fix the problem 
so you won't be sued. If you don't fix the problem, you are 
going to be sued. That is the point.
    Mr. Miller. I defer to Mr. Koskinen and Senator Bennett. 
They will tell you that.
    The Chairman. Well, let me just say this, Ms. West. I was 
intrigued by your use of the metaphor of shutting the barn door 
after the horses have left to describe the practical results of 
suing someone in the drug supply chain after someone dies.
    By that, did you mean that we would better serve drug-and 
medical device-dependent people if we could provide a legal set 
of incentives for companies to fix their Y2K problems, and 
thereby ensure that they can make their deliveries in time to 
help them, than if we simply went after them after the fact?
    Ms. West. We need to put them in the position now where 
they are not continually looking over their shoulder wondering 
who is going to sue them next and allow them to get their 
operations and their medications and their procedures ready. As 
a nurse, I have looked over my shoulder many times and made 
decisions because I was afraid that what I charted would be in 
court.
    The Chairman. Well, let me just say this. Your testimony is 
very important here today because, naturally, I don't want you 
to die; neither does anybody else. Nor do I want those 40 
million people to suffer unduly or to die, so this is 
important.
    Look, there is no pride of authorship in this legislation. 
We have worked hard to try and come up with something we think 
will work and that will help to resolve these problems. I don't 
think it interferes with Mr. Yarsike's ability to sue in his 
case, or yours, Mr. Pogust, in your case. But there may need to 
be further changes and we would love to have you help us make 
them. I am open to that.
    I never think that what we do here is absolutely perfect. 
In fact, I think, to the contrary, many times we have to work 
within the framework of compromise and bringing people 
together. I have got people on the other side of the table who 
will never vote against anything the trial lawyers want. I have 
got people on my side of the table who will vote against 
everything they want. And I have got to find some way of 
bringing people together, so it is always somewhat imperfect, 
although I have to say I have gotten a few things through that 
I think have darn well been perfect. [Laughter.]
    Quite a few, as a matter of fact. I have to say when 
Senator Kennedy and I put it together, everybody kind of gets 
out of the way, but they all think it is as imperfect as it can 
be on both sides. It is a terrible thing to have the leading 
liberal and a conservative like myself get together on some 
matters. It so seldom happens, and occasionally it is a 
wonderful thing.
    Mr. Yarsike, I have great respect for you and what you have 
gone through in your troubled business life. No question about 
it, your testimony here is very important to me. I just want it 
to be made clear that Senator Feinstein's and my bill would not 
have prevented you from recovering compensation.
    As I understand it, you settled after 3 years of 
negotiation, and this bill does delay litigation for 90 days 
and requires the vendor to fix the system within that time. If 
that vendor doesn't, you have got a better case than before, in 
my opinion. Your case took 2 or 3 years, as I understand it, so 
this legislation might actually have helped you, at least the 
way we view it today.
    Now, help us to know; write to us. I am going to keep the 
record open for questions from all Senators on the committee. I 
would like to have you answer those within 2 weeks, earlier if 
you can, but you can help us to maybe find the flaws that do 
exist in this legislation. And we will do our best, you know, 
to help the companies who act in good faith to fix the systems 
to do so. Without legislation, these companies could stall in 
doing the things that you feel are critical to your industry 
and so many others as well.
    Mr. Yarsike. I just want to say in my case, this is the 
first lawsuit I have ever had in 41 years in America. I am not 
a suing type of person. We still ended up losing a couple 
hundred thousand dollars, but we were able to put it behind us 
and get on with our business.
    The Chairman. Right.
    Mr. Yarsike. But we feel we recouped some of our losses. 
There was no profit or extra.
    The Chairman. No, nobody is suggesting that there was.
    Mr. Yarsike. The other side of the coin is no matter what 
this bill passes, the way I read it there will still be hoggish 
attorneys out there trying to push lawsuits.
    The Chairman. Really? [Laughter.]
    Mr. Yarsike. But I feel that mainstream America, the small 
businessman like myself, just wants to get it down, get it 
done, and get moving on with business.
    The Chairman. Well, I am with you because I believe that 
legislation like this may prevent frivolous litigation, which 
is what we are trying to do. Important litigation like you have 
had to go through--of course, we don't want to interfere with 
that when clearly you were in the right.
    I also respect Mr. Pogust for the work that he is doing to 
try and represent small business people. I mean, I might 
disagree on individual cases because I might have to defend 
them or something like that if I were out in private practice. 
But the fact of the matter is that he does a service. Not all 
attorneys are voracious--well, almost not all attorneys. I am 
just kidding. Attorneys are essential to our society. Our 
litigation system is essential, but we also have to continually 
work on it so it is fair to everybody, and that we solve 
problems in advance, which is what this bill is aiming to do.
    Mr. McConnon, you have testified as a small businessman, 
and it seems to me you would rather, wouldn't you, get notice 
of a Y2K problem through a simple communication, which our bill 
would allow to happen, instead of hearing about it for the 
first time in a lawsuit?
    Mr. McConnon. Without a doubt, yes.
    The Chairman. And if you had a problem as a vendor and 
somebody notified you that, hey, they are having a problem, you 
would want to get it solved in this 90-day period, wouldn't 
you?
    Mr. McConnon. Absolutely. I would say one thing that I am 
struck by with both of these stories is that if I attempted to 
do to my clients, most of whom are considerably larger than I 
am, what people have attempted to do to this gentleman and this 
gentleman's client, I would be out of business much faster from 
market forces than from legal forces.
    The Chairman. Well, you spoke about how your relationships 
with your vendors and clients are the key to your survival as a 
small business. As a result, it seems that you already have a 
natural market incentive to settle a dispute as quickly as 
possible and, when feasible, outside of the litigation process 
or outside of court.
    Mr. McConnon. Absolutely. Having been through the process I 
was through a couple of years ago, again, even though that suit 
was dismissed, our goal in that litigation wasn't really to get 
justice because had justice been done, it would have ended more 
in my favor than it did. It was just to get out of the 
litigation because of the amount of time and expense that it 
was taking.
    The Chairman. Now, having expressed respect for you, Mr. 
Pogust, and attorneys like you who fight for small business 
people, you assert that the 90-day cooling off period could 
bankrupt small businesses. But most civil actions take a year 
or more to resolve and someone who brings suit immediately 
obviously is not going to obtain money damages for many months 
or years to come.
    Surely, you cannot suggest that it is a good thing for 
people to sue without first contacting the potential defendant 
to try and get it worked out. Now, in your case they didn't do 
it and they deserved to be sued.
    Mr. Pogust. Every case I have, I send a letter. I think 
everybody tries to resolve it without suing.
    The Chairman. Right.
    Mr. Pogust. And the UCC requires you to--if you have a 
breach of warranty, you have to send notice to the defendant 
anyway and give them a reasonable time to fix it. So it is 
already there, and all these are going to be breach of warranty 
claims. The lawsuits, the majority, that will be one of the 
counts, and if you want to have that in your lawsuit, you are 
required under existing law to give them notice and opportunity 
to repair and to fix the problem.
    The Chairman. Well, but they also know that it can take 1 
to 4 years, depending on the jurisdiction, before they have to 
comply or before a court might find them guilty or responsible. 
And that gives them more time to delay and to not do the things 
they should. See, I believe that the cooling off period will 
act as an incentive to fix Y2K problems, avoiding the need to 
hire expensive lawyers, and that it will be corrective to the 
system, which seems to me makes a lot of sense.
    But we will get you a copy of the current draft.
    Mr. Pogust. I appreciate that. Thank you.
    The Chairman. I would like you to look it over carefully 
and give us your considered suggestions as to what you think 
would make it better because, after all, it would help your 
clients, if Senator Feinstein and I are right on what we are 
trying to do here.
    Now, let me just end with you, Mr. Adams. The ATLA, or 
American Trial Lawyers Association, president, Mark Mandell, 
criticized the bill even before it was introduced in the 
Senate. And part of the problem is we have had various drafts, 
and you have had an earlier draft yourself, Mr. Pogust. But he 
criticized the bill because the bill allegedly creates a 
disincentive for companies to fix Y2K problems. According to 
Mr. Mandell, whom I respect, companies will wait for complaints 
to be filed before they fix any Y2K glitches. Do you agree with 
him on that?
    Mr. Adams. I don't, and if I could I would like to answer 
first with an example of how that wouldn't be the case.
    The Chairman. Well, I think you state in your written 
testimony that the bill encourages, to use your words, 
``cooperative problem prevention.''
    Mr. Adams. Right. A lot of small businesses, especially, 
but also governments and large organizations, don't have the 
internal resources to perform their own Y2K preparations or 
remediation efforts. So how do they get that done? They want to 
bring in another company, a consultant, to do that.
    There are specific cases where consultants are saying, you 
know, we provide a lot of services, but unfortunately we are 
not able to provide you year 2000 services because it is just 
too risky. There aren't the number of resources out there to do 
all the remediation that needs to occur. This type of bill sets 
up an environment where that consultant company can say, OK, I 
am going to follow the normal market forces. Is there a 
business opportunity for me? Am I going to make a profit? And 
then the legal consideration will be there, but it will be the 
normal consideration that we think about in our normal business 
operations. It won't be worry over being sued over the 
slightest problem.
    The Chairman. You also contended in your written statement 
that the bill preserves the rights to sue for legitimate 
claims, but places restrictions on frivolous claims. Could you 
explain how the bill can do both?
    Mr. Adams. Certainly. A couple of examples of the 
restrictions that we feel are reasonable on frivolous claims 
would be section 401, which is the minimum injury requirement. 
It says the class action can't be brought unless a majority of 
the class has a minimum injury. That helps ensure that 
frivolous litigation doesn't occur. And the less frivolous 
litigation that occurs, the more legitimate claims are brought 
quickly to resolution. If the courts are jammed with frivolous 
litigation, the legitimate claim may take an additional year to 
get recovery. That is one example.
    The pre-trial notice period which we have talked about 
quite a bit I feel is very important. Note that the plaintiff 
is required to give 90 days' notice, and then the bill as 
written would say that the defendant company needs to respond 
within 30 days. So that is the real time frame that we are 
talking about. You are going to get a response in 30 days. 
Nothing that happens during this period is going to diminish 
somebody's rights.
    If damage is occurring during that 90-day period, you are 
still going to be able to sue for that. What it is it sets up 
the 90-day period so that if companies are inclined to work 
things out without pursuing it through inefficient, often, 
litigation, there it is. It is an automatic time where you can 
work things out. If you choose not to do that, if a company--
today, a company can say, you know, go ahead and sue me, I am 
not going to provide you a solution. I think we have seen a 
couple of examples of that.
    If this legislation is passed, that could still happen. A 
company could say, you know, I am not going to provide you the 
response; I think I have got a claim. But what this legislation 
will do is it sets in a couple of standards that make it more 
likely for perhaps the defendants in the cases we have heard to 
say, wow, under these uniform guidelines I can see that, you 
know, if I haven't acted reasonably, if I haven't performed 
these particular operations, I am going to be liable. This is 
the time frame. It is going to make more sense for me to settle 
now. We feel it would lead to cooperative solutions.
    The Chairman. Well, this has been a most interesting panel. 
I want to thank all of you for being here. I think each one of 
you has added to our knowledge here today. Again, I will keep 
the record open because I want members of the committee--this 
is a Monday and sometimes it is very difficult to have 
everybody here on Monday, but I want members of the committee 
to have the opportunity to provide questions to you, which I 
will insist you answer within two weeks from this date.
    Each one of you has enlightened me here today and I am very 
grateful to have you all here, and I appreciate the effort that 
you have made to be here and the good testimony that you have 
given. So the last thing I am asking is that you and everybody 
else who is concerned about this matter read this bill, look at 
it, see how we can make it better. I will do my very best to 
try and bring both sides together and make it better and see if 
we can do something that literally pushes us down the road 
toward having a much more compatible system in the coming year 
2000 and other years as well.
    And if we work together, we might be able to solve some of 
these problems without having all the money go down the drain 
in litigation and courtroom costs and fees. And it would be 
better to do that, in my opinion. As much as I love my 
profession, it would be better to do that because there is 
still going to be lots of litigation out there, no matter what 
we do. And there will be people who will not act responsibly 
who should be sued, and I am sure that my colleagues in the 
profession are going to make sure that happens.
    But in any event, I want to thank each of you for being 
here today. You have been great. If I can limit the answers to 
the questions to a week from today, but they should get the 
questions in right away. If we can do that, we do want to move 
ahead with this.
    So with that, we will recess until further notice.
    [Whereupon, at 12:37 p.m., the committee was adjourned.]
                            A P P E N D I X

                              ----------                              


                         Questions and Answers

                              ----------                              


      Responses of Eleanor Acheson to Questions From Senator Hatch

    Question 1. As I understand at least part of your testimony, a 
criticism of this bill is that certain provisions may have ``unintended 
consequences.'' Well, I guess that all legislation has some degree of 
unintended consequences. What I think we can agree to is the intended 
consequences of this bill. It is the intent of Senator Feinstein and 
myself that this legislation reduce frivolous litigation and create a 
strong incentive for industry to fix the Y2K problem. I believe that 
you share our goals. Will you work with us to refine the language of 
the bill to minimize unintended consequences?
    Answer. I do share the goals that both you and Senator Feinstein 
have stated should underlie any legislation aimed at Y2K litigation--
that is, reducing frivolous lawsuits and preserving (or increasing) 
incentives to correct Y2K errors before they cause malfunctions. The 
Justice Department is committed to working with you and this Committee 
to create a bill that advances these goals in a manner that is fair to 
persons with legitimate Y2K lawsuits and that has few unintended, 
collateral consequences.

    Question 2. I also understand that the Administration has 
consistently opposed certain civil justice reform measures, such as 
caps on punitive damages. Of course, the purpose of punitive damages is 
to deter future bad behavior. But punitive damages is most effective in 
intentional tort cases and in personal injury suits. In general, the 
justification for the caps here is that in many cases the Y2K problem 
was the result of neither negligent nor wrongful behavior. As such, 
punitive damages if applied would have little deterrent effect. Are you 
aware that personal injury cases are exempt from this bill and that 
caps on punitive damages do not apply to those tort actions? Do you 
agree that caps on punitive damages--particularly in breach of contract 
cases--in which historically punitive damages did not even apply--
create an incentive for companies to fix Y2K problems because 
litigation costs would be less likely to soak up capital needed to 
remediate the problem?
    Answer. The Justice Department's primary concern with punitive 
damages caps in this bill is based on our preliminary analysis of how 
such caps would affect Y2K readiness efforts. We believe that capping 
punitive damages may be both ineffective and unnecessary. As you note, 
some number of Y2K malfunctions will not result from wrongful behavior, 
but punitive damages will not be available in those cases in any event 
under current state law. The same is true in contract actions. Even 
malfunctions resulting from negligence would not be subject to punitive 
damages because the standard for punitive damages is well above 
negligence.
    We appreciate that your bill exempts personal injury cases from its 
operation, but even here we have some concerns. The bill limits the 
definition of personal injury to claims for physical harm. Other kinds 
of harm--emotional, pain and suffering--are excluded from the 
definition. We are not sure how this provision will work in practice 
because any personal injury suit is likely to include claims relating 
to non-physical injury, but presumably punitive damages would be capped 
for those parts of personal injury cases relating to non-physical 
injury. Thus, while perhaps not intended, it appears that the bill 
effectively limits punitive damages even in personal injury cases.
    Moreover, we are concerned that legislation in this area be based 
on solid evidence of a problem requiring an appropriate solution. Your 
primary concern and ours is that businesses take the necessary steps in 
the remaining months to fix, in advance, Y2K problems so that they 
either do not occur or their effect is minimized. Accordingly, we will 
work to encourage incentives to correct Y2K errors and avoid frivolous 
lawsuits.
                               __________

       Responses of Mark Yarsike to Questions From Senator Hatch

    Thank you again for allowing me to testify before the Judiciary 
Committee on March 1, 1999 concerning the Y2K bill that you and Senator 
Feinstein have introduced. It was an honor to appear before your 
committee. That you spent so much time listening to my concerns speaks 
well of both you and the Committee's desire to insure a fair process.
    With all due respect, I remain convinced--utterly, without a 
glimmer of doubt--that this bill would have devastated my business, 
probably forcing me to shut my doors. It was only the threat of facing 
a jury of my peers in Macomb County, Michigan that forced TEC to settle 
with me. This bill's new scheme would have provided them with so many 
loopholes to hide behind--for example, the 90 day waiting period and 
the ``good faith exception'', just to name a few--that I would have had 
to give up. I'm just a small businessman--I can't fight the big 
companies.
    I remain anxious to work with you in order to help solve this 
problem. If I may make two suggestions:

   Create an anti-profiteering provision--Many companies, 
        including the one that I dealt with, are simply using the Year 
        2000 scare as a way to make money. If I am sold a faulty good 
        and then the company tries to charge more money to fix it (when 
        it should have worked in the first place), they shouldn't be 
        allowed to get away with it. Let's make it the law that if a 
        company sells a good that they know is faulty, and then 
        attempts to make money off of upgrading that product, they will 
        face civil and criminal penalties.
      If I sold a product--say a box of oranges--knowing that they were 
        spoiled, I would be responsible for refunding the customer's 
        money or replacing the faulty good. The idea that I could 
        charge the customer to make the box of oranges ``fit'' for what 
        they paid for in the first place is obscene--and yet that is 
        what these companies are doing on a daily basis! Let's not let 
        them get away with it.
      Sadly, this bill seems to provide protections at every turn for 
        these bad actors, but doesn't hold them accountable. If 
        anything, by heightening the burden that people like myself 
        have to face to prove wrong-doing, it makes it less likely that 
        these companies will ever face justice. That can't be what was 
        intended.
   Exempt Small Businesses from the bill--The bill and its 
        proponents claim to want to help small businesses survive the 
        Y2K crunch. I--and every other small business owner I speak to 
        about this new scheme--are convinced that the bill will do the 
        complete opposite. This bill should have an ``opt-out'' 
        provision for small business.
      I signed my contract with TEC knowing that state fraud and UCC 
        statutes protected me. I know those laws, I trust those laws, 
        and I expected those laws to work on my behalf should a bad 
        actor ever threaten my business. I don't want this new bill, 
        with its Federal preemption of state law and UCC provisions and 
        new procedural hurdles. If you are really trying to help me, 
        let me decide what's best for me. Allow me to take my chances 
        under state law as I always have, or allow me to use the new 
        law (I suspect no small businesses ever would make this second 
        choice--mark my words!)

Below are my answers to your questions:

    Question 1. Mr. Yarsike, I have great respect for you and what you 
have gone through in your troubled life. I just want it to be made 
clear that Senator Feinstein's and my bill would not have prevented you 
from recovering compensation. As I understand it, you settled after 
three years of negotiations. The bill delays litigation for just 90 
days and requires the vendor to fix the system. This legislation may 
have actually helped you in that companies must act in good faith to 
fix the system. Without the legislation they could stall. Do you want 
to comment?
    Answer. With all due respect, the basic assumptions in this 
question do not mirror business reality. First, TEC was dying to 
litigate this case for years. They made clear that they wanted to drag 
this out for as long as possible, knowing full well that at a certain 
point I could no longer absorb the cost and would have to give up. This 
bill would have been their dream--it provides them with dozens of 
escape hatches to hide behind. They'd say I didn't provide adequate or 
``particularized'' notice. They'd argue that they made a ``reasonable'' 
and ``good faith'' effort to fix my problem. They'd spend months or 
years litigating over the meaning of every new word and phrase. 
Meanwhile, each day I am losing money and customers.
    Any business will attempt to solve a problem without turning to 
lawyers and litigation. I made over two hundred phone calls to the 
company trying to get them to fix it. Two hundred! They professed to be 
doing their best--they would arrive at the store, tinker a bit, declare 
the problem fixed. Minutes later the system would crash again. Each 
crash cost me time and money. I still kept trying to turn to them for 
help. They simply would not fix the problem. Worse, they refused to 
provide me with new registers or a new system so that I could function 
while they fumbled around trying to ``fix'' the problem.
    I spent all that time trying to allow them to fix the problem. When 
I finally decided that I had enough--when I decided that 200 calls and 
200 chances for them to fix the problem were sufficient--I then turned, 
with great hesitation and sorrow, to the court system. That's not the 
way I am--I work on handshakes and honor. I didn't want to have to sue 
someone. It became necessary, however.
    So, 200 calls--200 notices--after the problem was first brought to 
the attention of the company, I decided to file suit. Almost 
immediately after that, the company decided to settle. They did so 
because they feared facing a jury of my peers and knew that if they had 
to defend themselves under normal contract and state fraud laws, they 
couldn't possibly win.
    What possible reason can you give me for the concept that, after 
making all of those calls and waiting all of those months for the 
company to fix the problem, I should have to give them yet another 90 
days to fix the problem? That's just 3 more months of delay--of loss of 
business and money--that you are providing to the company. I made a 
business decision on the day I filed suit that no other option was 
available to me. This tells me that my decision was wrong and forces me 
to put up with another three months of torture. Then another month for 
them to respond. Then more delay when they file a motion to dismiss. 
Then more delay as they litigate over the new terms and phrases and 
hide behind the new defenses which aren't defined.
    All of this adds up to one thing: My being forced out of business. 
I simply could not have waited another 90 days. If the company was 
going to do the right thing and fix the problem, they would have done 
so long before I filed suit.
    The idea that the legislation would prevent the company from 
stalling is quite frankly without any basis. This would permit them to 
do just that. Don't tinker with a system that worked perfectly for me--
once I filed suit they settled. Period. This would change that. Period.
    Senator, thanks again for the opportunity to respond to your 
questions and make my views known to the Committee. Feel free to call 
upon me in any way. I and all of the employees of this one produce 
store in Warren, Michigan hope that you will hear our voices and help 
us. This bill is not the way to do that.
                                 ______
                                 

       Responses of Mark Yarsike to Questions From Senator Leahy

    Question 1. Please elaborate on why you think this bill benefits 
big business to the detriment of small businessmen and women?
    Answer. This bill provides countless opportunities for delay and 
enhances the likelihood that big companies will litigate instead of 
settling these Y2K claims. The bill takes away the state provisions 
which normally provide protections to small businessmen like myself in 
one fell swoop--the UCC and its protections, gone. The state fraud 
statutes, gone. The other various protections each state has carefully 
legislated over the years in order to protect small business and 
consumers, gone.
    The bill creates a new scheme. It preempts all state law that I and 
other small businessmen counted on when we signed contracts. More 
importantly, it creates ambiguities and unclear defenses that create 
the opportunity for delay--just what big business wants and small 
business simply cannot afford. What is describing a problem with 
``particularity?'' Nobody knows. What is a ``good faith effort'' to 
solve a problem? Again, it is unclear. What is clear is that this 
legislation takes away all incentives to settle. That hurts small 
business, who cannot afford delay and litigation.

    Question 2. What do you think of the provisions in S. 461 that 
would have required you to give ``notice'' and then give TEC America an 
opportunity to fix the non-complaint problem?
    Answer. Those who argue that this is necessary are showing a 
fundamental misunderstanding of how the small business world works. 
First of all, the term is not defined. What is ``notice?'' Are the 200 
service calls I placed to TEC enough? Apparently not, because although 
I spoke with them over 200 times I never put anything in writing.
    More fundamentally, any business will attempt to solve a problem 
without turning to lawyers and litigation. I made over two hundred 
phone calls to the company trying to get them to fix it. Two hundred! 
They professed to be doing their best--they would arrive at the store, 
tinker a bit, declare the problem fixed. Minutes later the system would 
crash again. Each crash cost me time and money. I still kept trying to 
turn to them for help. They simply would not fix the problem. Worse, 
they refused to provide me with new registers or a new system so that I 
could function while they fumbled around trying to ``fix'' the problem.
    I spent all that time trying to allow them to fix the problem. When 
I finally decided that I had enough--when I decided that 200 calls and 
200 chances for them to fix the problem were sufficient--I then turned, 
with great hesitation and sorrow, to the court system. That's not the 
way I am--I work on handshakes and honor. I didn't want to have to sue 
someone. It became necessary, however.
    So, 200 calls--200 notices--after the problem was first brought to 
the attention of the company, I decided to file suit. Almost 
immediately after that, the company decided to settle. They did so 
because they feared facing a jury of my peers and knew that if they had 
to defend themselves under normal contract and state fraud laws, they 
couldn't possibly win.
    What possible reason can you give me for the concept that, after 
making all of those calls and waiting all of those months for the 
company to fix the problem, I should have to give them yet another 90 
days to fix the problem? That's just 3 more months of delay--of loss of 
business and money--that you are providing to the company. I made a 
business decision on the day I filed suit that no other option was 
available to me. This tells me that my decision was wrong and forces me 
to put up with another three months of torture. Then another month for 
them to respond. Then more delay when they file a motion to dismiss. 
Then more delay as they litigate over the new terms and phrases and 
hide behind the new defenses.
    All of this adds up to one thing: me being out of business. I 
simply could not have waited another 90 days. If the company was going 
to do the right thing and fix the problem, they would have done so long 
before I filed suit.

    Question 3. Why do you think that TEC America finally settled with 
you after refusing to successfully fix your Y2K problem after hundreds 
of service calls?
    Answer. Simple. TEC settled only when they faced the real 
possibility of having to justify their actions before a jury of my 
peers in Macomb County, Michigan. Knowing that I could easily meet the 
required burdens under the state UCC and fraud statutes, they quickly 
settled once I took the last-ditch effort of filing suit.
    This bill would have changed that calculus and encouraged TEC to 
litigate. I'd still be in litigation--if I wasn't out of business. This 
bill makes it more difficult to make my case against TEC by raising the 
burdens I must prove almost impossibly high. Why should it be more 
difficult for me to make my case--I was the one who was harmed! Why 
isn't Congress trying to help me--the innocent small businessman--
instead of helping those who caused this problem in the first place?
    The settlement occurred because the current system works. When 
people commit fraud, or act in a commercially unacceptable matter, they 
are forced to right their wrongs. That's exactly what happened with me, 
and that's what happens with others in my situation. This bill will 
change that and change everything to the benefit of those who caused 
the problem in the first place. That makes no sense, and it isn't fair!

    Question 4. What would have been some of the consequences to your 
business had you been required to wait 90 days to file your lawsuit 
against TEC America under the provisions of S. 461?
    Answer. Simple--I would have gone out of business. Maybe waiting an 
extra 90 days is not a big deal to AT&T or other large corporations, 
but I run my business month to month. Each month I have to pay my 
electricity bill. I have to pay my employees. I have to pay my 
suppliers. Waiting three months to get any recovery would be deadly to 
me and thousands of other businesses like me.
    Don't forget--every day that I had to wait was lost income, lost 
standing in the community, lost time. Ninety days of this--deadly! Why 
should I have to shoulder this additional burden? My case shows the 
unfairness of this--I provided months of notice and opportunity to fix. 
I only turned to litigation as a last result. Why, at that point in 
time, should I have to wait 90 MORE days? All rational businesses would 
try to get the problem fixed before having the expense of going to 
court. The 90 day provision is nothing but another 90 days of delay for 
big business at my expense.

    Question 5. What would have been some of the consequences to your 
business had your rights to sue TEC America been limited under the 
provisions of S. 461?
    Answer. Again, the answer is simple. S. 461 would have put me out 
of business. After long efforts to try everything else, my attorney and 
I decided that recourse to the court system was all that was left to us 
due to the company's refusal to do what was right. This bill makes that 
more difficult. The process is difficult enough on small businessmen. 
This makes it that much harder--and would be the last straw. I would 
have either gone out of business completely or had to cut expenses to 
continue the fight against TEC. That means failing to give my employees 
raises, or failing to pay for their health care, or refusing to 
contribute money and services to charities for years. That may not be 
the intent of this bill, but it is without a doubt its consequence.

    Question 6. As a small business owner, what do think Congress 
should do to address the Y2K problem?
    Answer. This is one of the most remarkable things about this bill: 
it does not do anything that will fix one computer, one software 
program, or one system. However, there are some great proposals out 
there that actually help small business to fight this problem. Senator 
Bond's S. 314 is a perfect example. Give me tax credits that help me 
absorb my expenses for dealing with the Y2K. Make it easier for me to 
get SBA loans. Those are the kind of actions that Congress should take.
    If you must pass this new scheme, however, exempt small business 
from this bill--we don't want any part of it! The bill and its 
proponents claim to want to help small businesses survive the Y2K 
crunch. I--and every other small business owner I speak to about this 
new scheme--are convinced that the bill will do the complete opposite. 
This bill should have an ``opt-out'' provision for small business.
    I signed my contract with TEC knowing that state fraud and UCC 
statutes protected me. I know those laws, I trust those laws, and I 
expected those laws to work on my behalf should a bad actor ever 
threaten my business. I don't want this new bill, with its Federal 
standards and new procedural hurdles. If you are really trying to help 
me, let me decide what's best for me. Allow me to take my chances under 
state law as I always have, or allow me to use the new law (I suspect 
no small businesses ever would make this second choice--mark my words!)

    Question 7A. Why are you so certain that S. 461 would have resulted 
in protracted litigation instead of a speedy settlement?
    Answer. This bill would have discouraged a speedy settlement and 
encouraged litigation by making it very difficult for me to bring a 
successful suit. I'm not a lawyer, but the bill seems filled with 
chances for these companies to delay: the 90 day waiting period; the 
redundant notice requirements; the good faith provisions; the 
heightened proof requirements. All of these cause delays and hurt small 
business--those very people who were wronged in the first place. They 
allow big business to drag out the expense of the litigation, either 
putting the small businessman out of business or causing them to give 
up out of business necessity. They provide secret loopholes that nobody 
understands--but I'm sure the big companies will find ways to exploit 
them all--at my expense.

    Question 7B. Why would TEC America have wanted to use protracted 
litigation instead of simply settling with you?
    Answer. Just like me, the people at TEC are businessmen. If they 
know that I have to prove very difficult standards, that they have 
scores of new defenses to hide behind, and that it will be more 
difficult and take me longer to reach a jury of my peers (all reality 
in this bill) then they will choose to litigate rather than settle. 
They know that the longer they drag this out the more strain I am 
under, and the more likely I will either go out of business or give up. 
By creating this new scheme, and all of its attendant protections for 
these bad actors, this bill encourages massive litigation and 
discourages the settlements that occur when a business has to actually 
face up to what is has done before a jury of normal folks.

    Question 8. The Chamber of Commerce, the National Federation of 
Independent Business, and other groups that claim to represent small 
businesses support S. 461. Do you agree with their stance? Why do you 
think they support this bill? Do you think that other small business 
owners agree with you or with them?
    Answer. Quite simply, I think these guys have been in Washington 
too long. They've forgotten what it is like to be a small businessman, 
juggling loans, meeting a payroll, waking up at four each morning to 
open the store and closing its doors at ten that night. If they were 
still in touch with that, they wouldn't stand where they do on this 
bill.
    They are not in touch with their membership. Every small 
businessman I speak to about this is shocked that these groups which 
supposedly represent them are acting as they are. I don't know why they 
are saying what they say--maybe they really are out of touch, maybe 
they have another agenda. They sure don't represent me, though.
    I'm actually a member of the Chamber of Commerce. Or, I was. When 
they recently called to renew my membership, I refused. I'm through 
with them. They are supporting a bill that would quite simply put me 
out of business. I won't allow them to say they represent me, because 
they don't. They have reduced the world into an almost ridiculous 
simplistic theory: plaintiffs are bad and any defendants are good. How 
can legitimate business interests stand behind such a proposition when 
it arbitrarily punishes small businesses like me, who have a terrible 
Y2K problem that someone else caused, and had to become a ``plaintiff'' 
when the manufacturer refused to fix the problem?
    Every small businessman I have spoken to, here in Warren and around 
the country, seems to agree with me. I guess that I would encourage the 
heads of these groups to spend a day with me hauling boxes and dealing 
with customers and vendors. Then I guess they may remember what it's 
really like out here in the trenches. Then I'm guessing they'd 
reexamine their support for this bill.
                               __________

       Responses of B.R. McConnon to Questions From Senator Hatch

    Question 1. As a small businessman, wouldn't you rather get notice 
of a Y2K problem through a simple communication, which our bill would 
allow to happen, instead of hearing about it for the first time when 
served with a lawsuit?
    Answer. As a small businessman, I would most certainly prefer being 
served with a notice of a Y2K problem to being served with a lawsuit. 
The last place a small business owner wants to end up is in the 
courtroom. The defendant's focus should be on fixing the problem, not 
dealing with attorneys and depositions. Every moment spent on the legal 
process is a moment not spent on fixing Y2K problems.

    Question 2. Speaking from personal experience with the lawsuit with 
which you were involved, wouldn't a 90-day cooling-off period have 
given you the option of, focusing your resources, in your words, on 
anticipating and fixing a potential Y2K problem and resolving the 
dispute out of court instead of causing you automatically to focus your 
resources on preparing your legal defense?
    Answer. My personal experience with the legal process would compel 
me to do everything possible to address problems and implement fixes 
during that 90-day ``cooling-off'' period. My suit was so incredibly 
wasteful and kept me from running my business. While it was eventually 
dismissed, there was no real winner. I can never recover the lost time 
and effort. Knowing I was facing a hard deadline to avoid a Y2K lawsuit 
would crystallize what already is a powerful incentive to address 
client Y2K concerns.

    Question 3. You spoke about how your relationships with your 
vendors and clients are the key to your survival as a small business. 
As a result, it seems that you already have a natural market incentive 
to settle a dispute as quickly as possible and, when feasible, outside 
of court. Assuming this, wouldn't it be good for small business if we 
could provide a legal incentive to make sure this natural market 
incentive doesn't get overwhelmed by an avalanche of frivolous 
lawsuits?
    Answer. I most certainly have a market incentive to address client 
problems. If I do not, I will not be in business for long. The biggest 
disruption to business that I can imagine would be ``an avalanche of 
frivolous lawsuits.'' Lawsuits would immediately make the nature of my 
relationships with vendors and clients adversarial, instead of the 
partnerships that they are now. Keeping us all out of court and focused 
on fixing problems is the best course of action for everyone, and the 
direction that Congress should guide us with legislation.
    We all are likely to be affected by Y2K issues. Small business 
owners will want rapid resolution of problems so that we can resume 
normal business operations. If we do nothing to encourage resolution of 
these problems, we cannot accomplish this goal.
                               __________

     Responses of Harris L. Pogust to Questions From Senator Hatch

    Question 1. You ask in your initial question the following: If this 
legislation is so harmful to small businesses why would the trade 
associations which represent those businesses support the legislation. 
You then go on to allege that my motives for testifying are based upon 
my own selfish reasons and that I have no concern for my client's well 
being.
    Answer. With all due respect, the very premise of this question 
that I am nothing but an advocate for litigation is incorrect. I invite 
any one of your staff members to come to my office and review the files 
that I am currently handling and the clients that I represent. More 
than 90 percent of my active files involve a small businessperson who 
has been taken advantage of or injured by the wrong of another and is 
seeking redress through the court system. Additionally, you will see in 
each and every file a letter, sent prior to litigation, which attempts 
to amicably resolve the matter. I serve my clients, the small 
businessperson who depend upon me to steer them through extremely 
difficult and challenging times and I do so with honor and with only 
their interests in mind. Any suggestion to the contrary, for example, 
that I would file a suit when a mere phone call providing notice will 
do, is unfair and untrue.
    You ask why the groups that supposedly represent small business 
don't seem to agree that the Act is harmful to the small businesspeople 
they represent. I would suggest that they are simply out of touch with 
their membership. The small businessman, Mark Yarsike, who sat on the 
same panel as I did, didn't seem to agree with the lobbyist who 
supposedly represent him. Neither do any of the small businesspersons I 
represent. Perhaps the leadership of these groups spend too much time 
in Washington and have forgotten what it is like in the trenches. I 
simply reiterate what I said in my testimony, I have the names and 
addresses of hundreds of small businesspeople who will tell you that 
the Act would harm them.
    As to Mr. McConnon's testimony, I would venture to guess that Mr. 
McConnon had not read the Act prior to testifying. Even if he had, he 
would not have understood or comprehended the broad and far reaching 
implications that the Act has. In his testimony Mr. McConnon emphasized 
three points. First, Congress must create incentives to mitigate the 
Y2K situation. He stated that ``it is essential that businesses of all 
sizes are urged to address their Y2K problems NOW.'' I agree 
wholeheartedly with this statement by Mr. McConnell. Unfortunately, I 
fail to see how the proposed legislation in any way helps us address 
the current Y2K situation. The Act's purpose is to limit lawsuits that 
occur after 1/1/00 and in no way creates an incentive for businesses to 
correct their Y2K problems today. To the contrary, common sense 
dictates that if the threat of litigation exists, a company will do 
more to correct the situation. I cannot comprehend the argument that 
has been expounded that companies are being counseled to be less active 
in solving their Y2K problems due to the threat of litigation. Such an 
argument defies all logic.
    I also agree with the second point made by Mr. McConnell that 
``disputes should be settled as quickly as possible and outside of 
court when feasible.'' As we well know, more than 90 percent of 
lawsuits which are in fact filed never of to trial. Additionally, it 
cannot be disputed that every individual would rather settle their 
disputes than litigate them. In each case I handle, as well as those 
handled by other members of my firm, we always attempt to amicably 
resolve disputes prior to resorting to litigation. Unfortunately, an 
amicable resolution is not always possible.
    The third and final point made by Mr. McConnell dealt with the need 
to curb the filing of frivolous lawsuits. I am still at a loss as to 
why there is this misconception that there will be such an increase in 
the filing of ``frivolous'' lawsuits resulting from the Y2K problem. 
While there indeed may be many lawsuits resulting from the Y2K problem, 
they are not the making of the trial lawyers but are the result of 
companies knowingly and intentionally selling defective software and 
products with embedded chips. By attempting to shift the focus of the 
Y2K problem from the party truly responsible to the trial lawyers is 
clearly unjustified and unfair. Furthermore, there are currently many 
safeguards in place which deter the filing of frivolous lawsuits. These 
include Federal Rule 11, as well as similar state statutes.
    These are the three areas addressed by Mr. McConnell. He concluded 
his remarks by stating: ``I believe the bill introduced by Senators 
Hatch and Feinstein, the Year 2000 Fairness and Responsibility Act, 
will accomplish these three important goals.'' He may be correct, but 
what he fails to understand is that the Act does much more than that. 
It will close the courthouse door to thousands of small businesspeople 
throughout this country who will lose their businesses if this Act 
becomes law.

    Question 2. You assert that the 90 day cooling period will act as 
an incentive to fix Y2K problems, avoiding the need to hire 
``expensive'' lawyers like myself. You further assert that this will 
correct the current system.
    Answer. In my ten years of practice, I have never instituted a 
commercial litigation without first contacting the other party in an 
attempt to try to amicably resolve the matter. I am quite sure that 
this is the practice of the vast majority of attorneys in this country. 
Everyone would like to resolve their disputes in the most expeditious 
fashion possible. Accordingly, I adamantly believe that your premise, 
that in most instances, lawyers file lawsuits prior to trying to 
amicably resolve their disputes, is flawed.
    The Act allows a responsible party to sit on their hands for 90 
days while the injured businessperson is left holding the bag. It is 
common knowledge, and has already been seen in the Produce Palace 
situation, that the Y2K problem could cause the total disruption and 
inability of a small businessperson to conduct business. If a business 
was required to wait 90 days, 90 days in which no business at all is 
being conducted, it would forever shut down many small businesses. As 
evidenced by Medical Manager's conduct, defendants in many situations 
do not appear anxious to resolve disputes until litigation is 
commenced.
    The Medical Manager is a classic example of how the 90 day waiting 
period would have caused massive damage to thousands of medical 
practices throughout this country. If the physicians were required to 
wait 90 days after Medical Manager was notified of the problem, 
thousands of practices would have been spending enormous sums of money 
unnecessarily upgrading to the Year 2000 compliant version of the 
software since Medical Manager was telling these practices that was the 
only way to become Year 2000 compliant. This is money which otherwise 
could have been used to create superior health care for the millions of 
patients instead of lining the pockets of a company that knowingly and 
intentionally sold a defective product and then attempted to make 
hundreds of millions of dollars from their own misdeeds.
    Furthermore, the filing of a lawsuit does not prolong the possible 
resolution of the matter. If anything, it speeds up the process due to 
the fact that clients would rather spend their money settling a matter 
than paying their attorney. The cases that drag on for years obviously 
had no possibility of settling early and the 90 day period would do 
nothing to help those situations.

    Question 3. You assert that the Medical Manager case, in which I 
was lead counsel, provided more benefit to the attorneys than to the 
class members.
    Answer. You seem to take the position that the settlement was 
unfair since the Company's out-of-pocket expenses were only $600,000 to 
the customers while paying $825,000 to the attorneys. Pursuant to this 
line of reasoning, if we were able to get everybody the free upgrade so 
that Medical Manager would have had $0 out-of-pocket expense to the 
customer, I assume that you would contend that the attorneys should not 
receive any attorney's fees at all. Unfortunately, you fail to see the 
benefit which was received by the thousands of physicians across the 
country in this case. Prior to my involvement in this matter, Medical 
Manager was charging its customers between $10,000 and $25,000 to 
upgrade their systems to become Year 2000 compliant. This was so even 
though Medical Manager had sold some of these non-compliant systems 
within weeks of announcing that these systems would not operate after 
12/31/99.
    Instead of Medical Manager pocketing approximately $225,000,000 
(15,000 customers  x  $15,000 per customer) from their own misdeeds, we 
allowed the physicians to keep this money to be used to improve health 
care in this country. I am very proud of the result. I wholeheartedly 
disagree with your assertion that the lawyers profited far more than 
their clients in this matter. You should also note that this settlement 
was entered into with the assistance of a Federal Magistrate.
    To clarify your question regarding the attorney's fees, as you are 
aware, there were four additional actions brought against Medical 
Manager in California, New York, Pennsylvania and Florida. The $825,000 
figure is to pay the attorneys in all of these cases. Additionally, the 
expenses that all of these attorneys incurred must be paid out of this 
lump sum. Although we are still calculating that number, it will be 
approximately $75,000. Accordingly, after expenses we will be left with 
approximately $750,000 to be divided between the various attorneys in 
this matter. I have reviewed the time expended by each of these firms. 
Multiplying that number by the attorney's hourly rate you arrive at a 
number which is extremely close to the $750,000 figure. Additionally, 
although the settlement was entered into in December of last year, work 
continues on this matter today. Notice of the settlement was sent to 
the approximately 15,000 members of the class. I receive several calls 
a day from physicians across this country discussing the settlement and 
thanking me for helping them in this situation. I personally respond to 
each one. Not one of these physicians has ever complained about the 
attorney's fees in this case. I myself have spent in excess of 500 
hours litigating and resolving this matter.
    Finally, I disagree with your statement that this case is ``a model 
of the abuse of class action procedures''. To the contrary, I believe 
the Medical Manager case is a model to be used to show the benefits of 
class actions. Here, without the class action mechanism, we would not 
have been able to obtain the outstanding result due to the prohibitive 
cost factors in bringing each case individually. Class action 
provisions exist because they have been found to bring justice to 
diverse and dispersed individuals or businesses who have been 
aggrieved. Had a class action suit not been filed in the Medical 
Manager case thousands of doctors would individually have had several 
options: (a) pay the upgrade fee of over $15,000 because it just didn't 
make economic sense to spend tens of thousands of dollars on a lawsuit 
for that sum; or (b) each doctor would have had to file an individual 
suit. Thousands of cases, all with the same operative facts, would have 
been filed in state courts throughout this country. Talk about clogging 
the system!
    Instead, what happened? Only a handful of cases were filed. All 
interested parties were contacted. Thousands of physicians got free 
upgrades or rebates. The system wasn't clogged, to the contrary, a 
quick settlement resulted. Efficiency ruled the day, and all involved, 
including the defendant, agree that the result was a win win for all 
parties involved.

    Question 4. This question deals with how the Act would have 
affected the Medical Manager case. Please note that my response deals 
with the Medical Manager case as well as how the Act would affect 
similar actions.
    Answer.

Sec. 101

    First, in my initial contact with Medical Manager, I requested a 
response to my demand that they fix Dr. Courtney's system within 
several weeks. I did in fact receive a response within that time in 
which Medical Manager refused to fix Dr. Courtney's problem. 
Accordingly, I filed suit. If I was required to wait an additional 75 
days, hundreds of physicians across this country would have been 
damaged by unnecessarily paying tens of thousands of dollars for 
upgrades to the Y2K compliant version of the Medical Manager system 
since they would have been unaware that an action had been instituted 
against the company. Additionally, the 90 day waiting period would have 
made no sense since Medical Manager refused to fix the problem well 
prior to the 90 day period. The Act does not take this into account. 
According to the Act, if the defendant responds within the 30 day 
window and says it won't fix the problem or responds with a totally 
inadequate response, you still need to wait an additional 60 days to 
file suit. An example of such a response may be that the company 
attempted to fix the Y2K problem during the course of the previous year 
and that it does not plan to do anything further. In such a case, 
making a plaintiff wait until the expiration of ninety days makes no 
sense.

Sec. 103(c)

    In the Medical Manager case we set forth a count under the New 
Jersey Unfair Trade Practices Act, N.J.S.A. 56:8-1, et. seq. Many 
states have similar statutes in which the state of mind of the 
defendant is a critical element in proving a deceptive or fraudulent 
act. In many actions, although you are quite sure that such a state of 
mind is present, the evidence of such is not revealed until discovery 
is taken. Under the Act the plaintiff is required to ``state in detail 
the facts giving rise to a strong inference that the defendant acted 
with the required state of mind.'' If a plaintiff fails to do so the 
defendant can file a motion to dismiss pursuant to Sec. 103(d)(1). 
Furthermore, Sec. 13(d)(2) further prolongs the litigation process and 
further increases the damages which are being sustained by a plaintiff 
whose business is shut down by a Y2K problem, by staying discovery 
during the pendency of such a motion. This could unnecessarily add an 
additional 30-60 days to the litigation process.

Sec. 201

    Every piece of software, as well as many products sold today, 
contain contractual terms which limit the manufacturers' liability as 
well as limit those damages which are recoverable in case of a product 
failure. In the Medical Manager case, we set forth a claim for breach 
of implied warranty of merchantability in order to overcome the 
limiting language in the software license agreement. In other similar 
cases, a claim for breach of express warranty has also been made.
    Pursuant to Sec. 201, such claims would be totally extinguished as 
long as the defendant places in the software license agreement or other 
similar document, language which limits or excludes liability or 
disclaims any and all warranties. According to the proposed 
legislation, if a manufacturer makes certain representations concerning 
the nature and character of its product and those representations turn 
out to be completely false, a plaintiff will be unable to recover under 
either a breach of contract or breach of warranty theory as long as the 
limiting language is contained in the contract. Such a result is 
patently unfair.

Sec. 302

    As previously stated, many consumer fraud statutes require that the 
plaintiff prove defendant's state of mind as an element of the cause of 
action. Here, instead of having to prove this element by a 
preponderance of the evidence, which is the standard of almost all 
other civil causes of action, the burden of proof is raised to clear 
and convincing evidence. Additionally, the burden of proof is 
inexplicably raised in sections (b) and (c) which pertains to 
negligence actions. I fail to see how this promotes the purpose of the 
Act, that being, the prevention of the filing of frivolous lawsuits and 
the solving of the Y2K problem. If every other civil cause of action 
requires only that it be proven by a preponderance of the evidence why 
should this be any different?

Sec. 303

    Section 303(2) may have totally extinguished Dr. Courtney's tort 
claims in this matter. This section provides, as a complete defense, 
that the party took measures that were reasonable under the 
circumstances to prevent the Year 2000 failure from occurring. Medical 
Manager did indeed take certain steps but were charging exorbitant sums 
to implement those steps.
    I appreciate you giving me the opportunity to take part in this 
process. I feel an obligation to reiterate my position and the position 
of the hundreds of small businesspeople who I represent regarding the 
Act. I have serious doubts concerning the stated purpose of the Act 
which I understand to be the prevention of the filing of frivolous 
lawsuits and the need to focus on solving the Year 2000 problem prior 
to January 1, 2000. The Act goes much farther than preventing frivolous 
lawsuits and in essence extinguishes the rights of many small 
businesspeople who have legitimate and proper claims. Additionally, it 
seems that the Act's focus is not on how to fix the problem prior to 
the next millennium but only how to prevent lawsuits due to a problem 
which was foreseeable and totally ignored by individuals in the 
computer industry. In your opening remarks at the hearing you stated 
that you and Senator Feinstein have ``sought to produce a bill that 
encourages Y2K problem-solving, rather than encouraging a rush to the 
courthouse. It is not our goal to prevent any and all Y2K litigation. 
It is to simply make Y2K problem-solving a more attractive alternative 
to litigation.'' Unfortunately, I believe that this Act could have just 
the opposite effect. It would discourage such problem solving due to 
the fact that the threat of litigation has all but been extinguished. 
The companies who created this problem would not be held responsible 
and the burden of dealing with the repercussions from the Y2K problem 
would be thrust upon the shoulders of the small businessperson.

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     Responses of Harris L. Pogust to Questions From Senator Leahy

    Question 1. Are you aware of any instances where manufacturers or 
vendors have tried to profit from Y2K problems of their own making?
    Answer. Sadly, the answer to this question is a resounding ``yes.'' 
It is ironic to me that this bill would provide protection to those 
very companies who have improperly profited off of the Year 2000 issue 
while limiting remedies of those who have already been hurt--the small 
business owners who are end users of non-compliant software and 
hardware. Examples of this ``profiteering'' abound--each small business 
person that I speak with has their own horror story.
    The companies that are profiting are almost breath-taking in their 
opportunism. First, they sell goods that they know are non-compliant 
while promising that the goods will last ``well into the future'' or 
``into the 21st Century.'' Then, often only months later, they demand 
thousands of dollars to make these very goods Y2K compliant. This bill 
would not only fail to punish such behavior but shield these companies 
from liability! If a car dealer sold a car knowing it had a defect and 
then demanded a month later thousands of dollars to make it functional, 
they would be roundly chastised--rightly so--and subject to liability 
based on fraud statutes, the UCC, and various other state laws 
protecting consumers from such behavior. For some reason, however, when 
the good involved is software or hardware, Congress seems poised to 
give these companies a free ``get out of jail'' card.
    The case of Dr. Courtney, a small town OB/GYN doctor from southern 
New Jersey, is a typical--and sadly not unusual--example of the type of 
profiteering that is occurring every day in the marketplace. Dr. 
Courtney purchased Medical Manager software for $13,000.00 in 1996--a 
huge expenditure for his sole practice. He did so only after a sales 
rep from the company came to his office and extolled the software, 
promising that it would last for over ten years.
    One year later, he received a letter informing him that the 
software would not last ten years--it would not even be functional 
within months--unless Dr. Courtney spent another $25,000.00 to upgrade 
the system. Within a year of paying $13,000.00, he was asked to spend 
another $25,000.00 just to make the software work as the company had 
promised it would! Dr. Courtney was not alone--at least 15,000 other 
doctors had purchased the software and were asked to pay for the 
upgrade. By selling non-compliant software and then charging each of 
these doctors at least $15,000.00 to upgrade, only months after paying 
the original purchase price, the company stood to gain $225,000,000. 
This is fraud of the highest magnitude--and yet such a company would be 
protected by this bill while the doctors would find it harder to recoup 
their losses. This cannot possibly be what Congress intends.
    The above example is not the only one I know of hundreds of such 
stories--for example, the medical school in Philadelphia that paid 
$100,000.00 for a system and was asked to pay $100,000.00 even though 
they had a software maintenance agreement which they paid thousands of 
dollars each year to keep in force and which covered such repairs. 
That's $100,000.00 that should go to scholarships, or textbooks, or 
treating indigent patients, not to a profiteering seller taking 
advantage of the Y2K scare.
    An anti-profiteering provision should be a prominent feature of 
this bill--where is it?

    Question 2. In your experience representing small businesses: (a) 
What would be the real world, practical effect of requiring small 
businesses to wait 90 days before pursuing legal claims against 
manufacturers, service providers, and suppliers for a Y2K problem? (b) 
Is it your experience representing small businesses that they try to 
solve their problems without spending the time and incurring the 
expense of litigation?
    Answer. The answer to the first question is simple: such a waiting 
period will cause businesses to either go bankrupt or descend further 
into debt as a result of the unfair situation they are placed in by 
unsavory retailers. The proposal is being touted as nothing but a 
benefit to small businessmen, but such a view shows a fundamental lack 
of understanding of how small business operates and the difficulties of 
surviving in today's competitive marketplace.
    First, before hiring an attorney and turning to the expensive 
justice system, any business will call the company who sold them the 
goods. To suggest otherwise is utterly lacking in any grasp of business 
reality. Any businessman will pick up the telephone, call the seller, 
and demand help in fixing the problem. It's a simple business 
decision--a call costs twenty-five cents, and hiring a lawyer costs 
more. Only if the businessman has tried and failed, after all possible 
efforts, to get a suitable response on their own will they turn to the 
court system. Therefore, a waiting period is already built into the 
system both in business reality and in state codes i.e., In UCC 
provisions requiring notice before filing suit).
    Second, once a company does all that they can to get the product 
repaired, and finally decides that there is no other recourse than to 
turn to a lawyer, that lawyer will almost certainly write a letter to 
the company, giving them yet another chance to fix the problem. This 
process will often provide months or even years of time to fix the 
defects. If all else fails, and the company has shown no willingness to 
fix the problem, why cause the small businessman to wait another 90 
days? It makes no sense--and is unfair.
    Ninety days to AT&T or Intel is perhaps not a difficulty. For my 
client's however--the furniture retailers, the dry cleaners, the auto 
repair shops--a 90 day wait, during which their systems do not work, is 
often a matter of business' life and death. I hear this from them every 
day--they react in horror when I tell them of this provision. The 
Committee heard this from Mr. Yarsike, the small produce store owner 
from Michigan, who testified alongside me at the committee.
    Bottom line--90 days of waiting equals a death sentence for too 
many businessmen.
    Bottom line--every small businessman I know already provides the 
company with notice and an opportunity to fix their faulty products. 
Nobody wants to be tied up in litigation--least of all a small business 
man with limited resources. Litigation should be, and is, a last resort 
for small businessmen. But providing for such a long waiting period is 
simply anti-business and provides more opportunity for wrongdoers to 
stall and delay doing the right thing.

    Question 3a. What would be the consequences to small business if S. 
461's provisions limiting Uniform Commercial Code remedies becomes law?
    Answer. When businessmen like Dr. Courtney sit down and sign a 
contract, they know that certain business fundamentals will protect 
them. If the person on the other side of the table commits fraud, they 
can be held accountable. If the other party sells a good promising that 
it is fit for a particular purpose but it ends up the good actually 
cannot perform that task, there is recourse for the wronged party. This 
bill takes that away from the very people who rely the most upon such 
laws. Withdrawing the protection of the various state's UCC is unfair 
and fundamentally against longstanding American ideas of justice.
    When two parties sign a contract, they do so knowing that these 
laws exist in the background. Dr. Courtney, for example, signed his 
contract for Medical Manager software back in 1996, knowing that the 
UCC and other state laws in New Jersey protected him from unsavory 
business practices. This bill would reach back three years and withdraw 
those protections from him--just at the time he needs them most! The 
implied warranties--all gone. The standards of proof he expected to 
have to prove in case he did need to bring suit--all altered to his 
disadvantage.
    If Dr. Courtney had agreed in the contract to five yearly payments 
to pay off the cost of the software and he failed to pay last year's 
amount due, he would be held responsible under the terms of the 
contract and pursuant to New Jersey state law. If Medical Manager 
breached the same contract and delivered goods that violated the UCC, 
however, Dr. Courtney would have to prove this case under the new 
Federal heightened standards--standards that didn't exist when he 
signed the contract. How can this be just?
    Business count on certainty. The UCC provides that certainty, and 
the popularity of the UCC in all 50 states has been a fundamental part 
of the economic vitality in our economy. All businessmen know that the 
UCC exists and will protect those who play by the rules and provide 
remedies against those who don't. Taking away the UCC--as the bill 
does--creates uncertainty. Businessmen may hesitate before signing a 
contract, knowing that in two years Congress may alter the terms of the 
contract, or withdraw the safety and certainty provided by the UCC.
    As the Justice Department noted at the hearing, this legislation is 
a massive, unprecedented departure from the norms established by years 
of contract, UCC, and state laws. This departure can only harm business 
and the economy, and ought to be considered in intricate detail before 
being passed into law. The small businessmen of our country deserve no 
less.

    Question 3b. In your opinion, what incentives does S. 461 provide 
for businesses to address their Y2K problems now?
    Answer. This bill provides NO incentives to address Y2K problems. 
As a matter of fact, it provides an incentive to do exactly the 
opposite. This is apparent on so many levels that it is difficult to 
know how to begin to describe the negative incentives.
    First, this bill makes it procedurally more difficult to hold bad 
actors accountable. New delays--for example the 90 day waiting period--
provide more time to stall. New procedural hoops to jump through--for 
example, the heightened notice requirements for class actions--make 
bringing these actions more costly, time-consuming, and challenging. 
The stay of discovery during the pendency of a motion to dismiss can 
cause months of delay. If a court fails to rule on such a motion for 
six months, for example--a not uncommon occurrence--no discovery can 
occur. Only after such a motion is disposed of can discovery begin. All 
of these delays hurt those who were wronged in the first place. They 
allow big business to drag out the expense of the litigation, either 
putting the small businessman out of business or causing them to give 
up out of business necessity.
    Second, the bill makes it more difficult for a plaintiff to prove 
their case by heightening the standards that must be proven. This 
provides an incentive to litigate instead of fix a problem. By raising 
these standards, the bill makes a bad actor's chance of success at 
trial more likely--making the choice to litigate instead of remediate 
or settle more attractive. The delays make it less likely that they 
will face a jury--again, providing an incentive to delay and then 
litigate.
    Third, the bill provides unfair loopholes for businesses to hide 
behind. This will effect the ability of businesses who have been 
wronged to get justice in several ways. First, the new absolute 
defenses and reasonable efforts provisions will provide yet more 
incentives to litigate--a company can make half-hearted plays at fixing 
a problem and go to trial, knowing it can claim a ``reasonable effort'' 
to fix the problem. Next, the bill creates undefined and previously 
unknown provisions of law for companies to litigate over. What is a 
``reasonable effort?'' What is ``commercial impracticality'' in the 
Year 2000 realm? Nobody knows, but the bad actors are sure to litigate 
every word of this bill, dragging out cases for years on such issues as 
what the definition of ``mitigation'' is or what ``commercial 
impracticability'' stands for. More delay, more likelihood that the 
small businessmen will go out of business to have to give up the suit.
    The negative incentives go on. The positive incentives are 
remarkably absent. Why not create a bill that helps those who are 
wronged instead of protecting those that created the problem in the 
first place? Such bills exist--S. 314, Senator Bond's recently passed 
bill which actually does positive things to help business deal with 
this problem is a perfect example. That's what businessmen need more 
of.

    Question 4. If the Senate Judiciary Committee were to decide to 
exclude small business plaintiffs from the scope of this bill, or were 
to give them the option of utilizing the features included in S. 461, 
what would be your response?
    Answer. Now that makes sense! Small businessmen stand to lose the 
most from this problem--they stand to go out of business. The large 
corporations can afford to take a one-time charge of $25,000 to upgrade 
their software. The small businesses I represent imply cannot afford 
such charges--it would mean laying off an employee, deciding not to 
provide health care to their workers that year, or shutting their 
doors.
    Congress should do everything possible to help these small 
businesspeople survive these problems which they didn't create. Allow 
them to rely on a jury of their peers without waiting extra months. 
Permit them to prove the same standards that they would need to meet in 
any other case where they are sold faulty goods. Allow them to turn to 
the locally crafted state law protections enacted on their behalf. And, 
if they decide that this new scheme can help them, allow them that 
choice.
    I'm not worried about the big businesses. I represent small 
businessmen, and that's what makes the South New Jersey economy run. 
Let the big businesses fight this out under this new scheme. Protect 
the small businessmen--let them opt out of this otherwise disastrous 
bill.

    Question 5a. What do you think of the provisions in S. 461 that 
requires plaintiffs to give ``notice?''
    Answer. As with the 90 day waiting period, this already happens as 
a simple business practice. When a computer crashes, the first call a 
company will make is to the people who sold them the software. They 
will call as many times as needed, until the problem is solved or until 
it is clearly futile to call anymore. Why require still further notice 
after that? A businessman will only turn to the courts after trying 
every other option. Notice was thus provided in every case I have ever 
heard of. This provision is a perfect example of a procedural loophole 
that benefits only the bad actors.
    Say, for example, that a company has their software fail. They call 
the company over 200 times to fix it. Two hundred calls later, the 
problem persists. Under this bill, the aggrieved party with the faulty 
software would have to provide still more notice--nonsense! Such 
additional notice is not required in the case of a faulty auto sold to 
a small businessman. It isn't required in a faulty piece of machinery 
it sold. Why should faulty software or hardware be any different? More 
delay, more chance for the bad actors to hide, more harm to the small 
businessman who is caught in the middle!

    Question 5b. In your experience, do most small businesses provide 
``notice'' to a manufacturer of a defective product before commencing 
legal action?
    Answer. Of course. As noted above, any businessman weighing the 
options will do so. Paying a lawyer versus making a phone call--no 
contest. A businessman wants one thing--to get functional again so he 
can do what he does best--sell furniture, treat patients, or train 
students. They don't want litigation, or legal fees, or the expense of 
a trial. They will do everything to avoid it--including, without fail, 
notifying the manufacturer of the problem and asking them to fix it. 
Suggesting that a businessman would do otherwise ignores the cost-
benefit analysis that all businesses would undertake in such a 
situation.

    Question 5c. Is it likely that there could be litigation over the 
operation of this provision?
    Answer. Yes. Like other provisions, this provides yet another tool 
for the at fault companies to litigate well into the future--instead of 
fixing the problem or facing justice under the normal. current system. 
The meaning of notice, the question of whether the notice is 
sufficient, and countless other issues provide pitfalls to small 
businessmen seeking to get reimbursed for their losses.
    For example, take the requirement that the notice identify and 
describe the problem ``with particularity.'' What does that mean? If I 
own a furniture store, I walk in one day, and my accounts receivable 
software no longer works, what do I have to say to meet this 
requirement? I don't know computers, I don't know what the problem is 
with ``particularity''--I just know that I suddenly have no ability to 
collect what is owed to me. The software was purchased from experts who 
have the knowledge to describe the problem ``with particularity.'' Will 
that furniture store be unable to satisfy this provision if their 
notice is simply that ``my computer software stopped working one day?'' 
Nobody knows--but you can be sure that the company who sold that faulty 
software will do their best to use that provision to try and argue 
such! More delay, more chance that justice is circumscribed.

    Question 6. Would this legislation be more likely than the current 
civil justice system to cause protracted litigation or speed resolution 
of disputes?
    Answer. This legislation, for the many reasons articulated above, 
will delay justice and do more to clog the court system than almost 
anything else imaginable. The bill creates vast new territory--new 
standards, new procedural requirements, preemption of state law * * * 
The current system has been tested. Procedural requirements are clear 
and precise in both state and federal courts. This new scheme creates 
uncertainty. Each term, each provision, each new loophole, each 
definition--all will be litigated for years. Why not let the current 
UCC, fraud, and contract laws deal with the problem?
    To date, the court system has shown a remarkable ability to handle 
these cases. Of the many dozens that have been filed, some cases have 
settled. Others are proceeding to trial. Still others have been 
dismissed by judges. The current system is working.
    Take Medical Manager and Dr. Courtney. Dr. Courtney filed suit in 
state court in New Jersey after all other options proved unfruitful. 
Within months, the company settled. It was without a doubt the threat 
of facing a jury in southern New Jersey, and defending their actions 
under well-settled provisions of state law, that forced them to settle. 
Nothing else. This bill would provide loopholes, escape hatches, 
heightened standards--all inducements to litigate for years, not to 
settle.

    Question 7. Do you think defendants will ever be held accountable 
under the bill given the way the good faith defense is currently 
structured?
    Answer. No--this provision will allow even the worst of actors to 
escape with their ill-gotten gains intact. What is a ``good faith 
effort?'' Apparently, a company can say ``We'll fix your problem 
immediately--just give is $100,000'' and that will suffice as a good 
faith effort. What if a company comes to the stores and tries over 200 
times to fix the problem--but fails to do so? They will argue ``good 
faith''--``hey, we came out 200 times!'' Lost is the fact that the 
problem was never solved, the business is disrupted for months, and the 
small business is still left holding the dysfunctional software.
    This creates an incentive to make the smallest possible efforts 
possible to satisfy this ``good faith escape hatch'' instead of 
actually fixing the problem. Defendants will hide behind this broad 
provision. Why solve the problem--just visit the site a few times, 
tinker a bit, and declare that you tried your best!

    Question 8. Why do you think that conclusions you have reached 
about this litigation differ so much from those of the technology 
companies that appeared at the hearing?
    Answer. Quite simply, the technology companies know that this 
problem is of their making. Software developers have warned these 
companies for years about the impending Y2K problem--since the 1960's! 
The technology companies stand to make millions on upgrades and new 
purchases as businesses and consumers are forced to upgrade their 
systems. Incredibly, there are still non-compliant goods being sold 
today!
    Of course, the software companies support this bill--they are the 
ones that are protected by it! They face profits--not bankruptcy like 
those who bought their products. And may I be so cynical as to suggest 
that this is seen as the first step toward product liability reforms 
that Congress has seen fit to defeat year after year?

    Question 9. If Congress were to enact legislation providing special 
legal protections to manufacturers of non-Y2K complaint software and 
hardware, would that be fair to those manufacturers who did the right 
thing and in vested the time and money to develop, manufacture, and 
market Y2K compliant software and hardware?
    Answer. Of course not. The responsible companies who did what they 
should have--and indeed were required to under the law!--deserve 
commendation for making their goods and products compliant. Those that 
didn't--those that sold non-compliant goods on purpose, knowing that 
the problem existed--deserve to face the consequences of their actions. 
This bill provides the promise of a free ride to the guilty!
    Many--indeed, hopefully most--companies did what any other industry 
or company would do. They learned of the problem and complied with the 
UCC. Before they sold the goods, they made sure that they would do what 
they were built to do, that they were fit for the purpose they were 
purchased for, and that they would not harm the very people who bought 
them. Before they sold their products and promised that they would take 
their customers into the next century, they made sure that those 
statements were actually true. Why protect the few who did not do what 
was right?
    If auto manufacturers learned that a certain defect would arise in 
all cars on a date certain in the future, they would be expected to 
sell no cars which had that defect. If 9 out of 10 companies took the 
time and money to fix the defect, they would face no threat of 
liability--they did the responsible and legal thing. The one bad actor 
should--and would--face liability if they knew of the defect but sold 
the good anyway. Why should the computer industry be any different? It 
isn't fair to those 9 responsible actors to swoop in just before the 
defect manifests itself and provide protection for their inaction. To 
do so would provide unfair profits and creates a future incentive to 
likewise not do the right thing. But that's exactly what this 
legislation does. Why? Nobody can seem to answer that simple question.

    Question 10. How likely are small businesses to recover damages in 
any legal proceeding if the heightened provisions in S. 461--requiring 
the plaintiff to show with clear and convincing evidence that the 
defendant actually knew or recklessly disregarded a known and 
substantial risk that a Y2K failure would occur--is enacted into law?
    Answer. These are incredibly high standards to meet, and few--if 
any--small businesses could meet such a burden. I cannot for the life 
of me understand why the wrong-doers here should benefit from such a 
rigorous standard of proof--at the expense of small business! It makes 
no sense.
    I know, as an attorney who litigates cases for small businessmen 
ever day, that meeting this burden will likely never happen. It's just 
too high. It's certainly not the standard that small businesses 
expected to face in such a situation when they signed their contracts! 
Talk about a free ride--this amounts, in practice and in reality--to an 
almost complete ``pass'' on all liability for any Y2K related wrongs.

    Question 11. Does this bill provide incentives for businesses to 
address their Y2K problems now?
    Answer. No. This bill provides every incentive for bad actors to 
delay indefinitely ever fixing their defective products.
    We know how to fix this problem--let's provide incentives to 
business to make the expenditures needed to keep their small businesses 
afloat. S. 314 does that. This bill does the opposite--its says to the 
high tech industry that they can delay forever--why fix the problem? 
Just litigate, and the little guy will be unable to afford protracted 
litigation.
    This bill will not fix one computer. It will do only one thing--
destroy thousands of small businesses while allowing those responsible 
for this mess to emerge with more profits than ever.
                                 ______
                                 

   Responses of Harris L. Pogust to Questions From Senator Torricelli

    Question 1. At the Judiciary Committee's March 1, 1999 hearing on 
the Year 2000 Fairness and Responsibility Act, you testified that the 
Medical Manager Corporation attempted to charge doctors for making 
their software Y2K complaint, even though the doctors purchased this 
software after Medical Manager represented that their product was Y2K 
compliant. Do you consider this to be profiteering? Do you have other 
similar examples of companies using their product's Y2K defects as a 
way to make a profit at the expense of their customers?
    Answer. As a result of the extensive publicity which resulted from 
the Medical Manager case, I have received hundreds of phone calls from 
small businesses across this country who are being charged thousands of 
dollars to correct their Year 2000 problems. In many situations the 
systems which need to be made compliant were purchased in the very 
recent past. These businesses range from physicians offices who are 
using software other than Medical Manager as well as physicians offices 
who are being charged to fix medical equipment which is not Year 2000 
compliant; municipalities who are being charged to fix their 911 
systems; furniture stores; medical schools; cleaning supply vendors; 
and law firms just to name a few. It is hard to believe that these 
software companies have the gall to charge thousands of dollars to fix 
systems which they knew were defective when they were originally sold. 
In the Medical Manager situation the company anticipated making in 
excess of $225,000,000 15,000 customers  x  $15,000 per customer) from 
their own misdeeds. Fortunately, they were stopped and as a result of 
our lawsuit the physicians were allowed to keep this money to be used 
to improve health care in this country. Unfortunately, millions of 
Americans are indeed paying these software companies thousands of 
dollars to fix systems which were knowingly and intentionally 
manufactured and sold in a defective condition. Why is the consumer so 
willing to make these payments? There are several reasons. First, they 
are unaware of their legal rights. They do not know that they have 
recourse for such conduct through our system of justice. Second, they 
are afraid to ``upset'' their software vendor since they need these 
computer programs to run their businesses. Once a business becomes 
comfortable with a software program they are very reluctant to change 
software companies since it means significant down time for 
installation and training as well as significant inconvenience. The 
comfort level they have obtained is great disincentive to demand that 
these companies fix the problem for free. Accordingly, although they 
don't feel that they should pay for these repairs, they feel they have 
no choice if they want to keep using the system.
    As a result, software manufacturers are making billions of dollars 
from the Year 2000 problem. Unbelievably, they are now asking the 
government to protect them from the monster they have created and from 
which they are profiting at the expense of the American public. This 
profiteering will continue next year when these same companies will 
charge exorbitant fees to fix the Year 2000 problems which undoubtedly 
will result.

    Question 2. Do you have suggestions on what could be done to 
improve the Year 2000 Fairness and Responsibility Act with respect to 
companies profiting by charging its customers for fixing Y2K defective 
products that they originally marketed or sold as Y2K compliant 
products?
    Answer. The main problem with the Act as it pertains to the issue 
of profiteering is that it fails to deal with the issue at all. There 
is no recourse against a company who tries to extort thousands of 
dollars from innocent consumers. The Act favors the manufacturer at 
every turn. It provides no protection for the consumer who is being 
asked to pay exorbitant fees to fix a problem which was knowingly 
thrust upon them. Such a result is patently unfair.
    The second problem with the Act is contained in Section 303. This 
section provides, as a complete defense, that the party took measures 
that were reasonable under the circumstances to prevent the Year 2000 
failure from occurring. Medical Manager did indeed take certain steps 
but were charging exorbitant sums to implement those steps. Such 
conduct cannot be condoned and certainly cannot be used as a defense in 
a lawsuit resulting from a Year 2000 failure.
    I appreciate the opportunity to express my views and the views of 
the hundreds of small businesspeople with whom I have discussed this 
issue. We must remember that although the Year 2000 problem has also 
been called the ``millennium bug'' it is not a computer bug. A computer 
bug is a software defect which resulted from an unintentional act on 
the part of the programmer. The problem that we are facing today did 
not result from the unintentional acts of the software companies. The 
Year 2000 problem has been discussed extensively throughout the IT 
community for the last 20 years. It is not a surprise. What has 
occurred is that these same companies saw the Year 2000 situation as an 
opportunity to greatly increase revenues. As John Kang, the President 
of Medical Manager, stated when commenting on the November 1997 release 
of Version 9.0 of the Medical Manager software: ``This important 
upgrade will be highly beneficial for our existing customers and will 
also provide us with new sales opportunities to those physician groups 
currently using legacy systems which must be replaced by Year 2000.'' 
Accordingly, it is clear that companies such as Medical Manager see the 
Year 2000 situation as an opportunity to greatly increase revenue. Such 
profiteering cannot be allowed to continue at the expense of the 
American public.
                               __________

 Responses of Stirling Adams to Questions From the Senate Committee on 
                             the Judiciary

    Question 1. ATLA President Mark Mandell criticized the bill--even 
before it was introduced in the Senate--because the bill allegedly 
creates a disincentive for companies to fix Y2K problems. According to 
Mandell, companies will wait for complaints to be filed before they fix 
any Y2K glitches. Could you please comment on this allegation?
    Answer. The bill provides some liability protections for a company 
that exercises ``reasonable efforts'' in preventing a problem (see Sec. 
303, Reasonable Efforts Defense). This is a strong incentive for 
companies to work to proactively prevent problems in order to receive 
this protection.
    If the legislation is passed, and if material Y2K problems occur, 
this bill does not prevent suits based on legitimate claims for 
damages. Therefore, companies also have the incentive to limit risk 
from such claims by acting proactively to prevent problems or minimize 
potential damages caused by Y2K problems.
    And, the 90 day pre-trial period outlined in section 101 of the 
bill does not provide protection from liability, it only provides a 
mechanism for parties to try to resolve issues before the expensive 
process of litigation is at full speed. Note that probably the most 
economically inefficient way to notify someone of a Y2K problem is to 
first file a law suit in court. Instead, section 101 encourages simple 
communication of Y2K problems before a costly suit is filed.
    Addtionally, the bill does not remove the normal market incentive 
for companies to work to prevent problems before they occur; within the 
competitive market environment, if a company doesn't provide timely 
service and thorough customer satisfaction, it is less likely to be 
successful.

    Question 2. You stated in your written testimony that the bill 
encourages, in your own words, ``cooperative problem prevention.'' What 
does that mean? You also contended that the bill preserves the right to 
sue for legitimate claims, but places restrictions on frivolous claims. 
Could you please explain how the bill can do both? What provisions of 
the bill deter frivolous claims and exactly how does the bill affect 
legitimate claims?
    Answer. Cooperative problem prevention is encouraged by section 
104, which states an entity cannot recover for damages it could have 
reasonably acted to avoid. This is an express incentives for all 
members of the technology community, from users to suppliers to 
developers, to resolve Y2K issues before they occur.
    And, as explained further in Response 3, provisions such as 201, 
Contract Preservation, and 301, Proportionate Liability, would help 
create an environment where companies can assist others in performing 
Y2K remediation or preparation efforts without fearing they will be 
held responsible for damages they did not cause or for liability they 
did not contractually agree to. Provisions such as these would help 
restore the normal market forces that encourage companies to identify 
technical needs and rapidly develop solutions to meet these needs. 
Right now, these cooperative market forces are diminished because of 
the fear of a wave of Y2K litigation.
    Frivolous litigation would be discouraged by, for example, Section 
401, requiring that a majority of the members of a plaintiff class must 
have experienced a material defect, and by Sections 101, Pre-trial 
Notice, and 103, leading Requirements, which require complaints to 
specifically identify harms caused by a Y2K problem. Additionally, the 
fact that the legislation would provide uniform substantive and 
procedural guidelines for Y2K-related suits would diminish the 
incidence of frivolous claims. Because litigants and courts would be 
better able to quickly establish whether a legitimate claims exists, it 
would be easier for courts to dismiss improper claims, and for 
defendants to fight frivolous claims.
    Legitimate claims are preserved in Titles I, Prelitigation 
Procedures, and IV, Class Actions. These titles set up a process to 
efficiently resolve claims, but do not prohibit claims from being filed 
as long as actionable damage has occurred. For example, the pre-trial 
notice and pleading requirements of Sections 101 and 103 do not 
restrict claims, but do require that Y2K complaints describe the Y2K 
problems giving rise to the suit and identify what resolution is 
sought. This would allow all parties to understand up-front what 
damages are alleged and what resolution is requested.

    Question 3. Cannot parties accomplish the goals of this legislation 
through private contractual terms? In other words, why is this 
legislation necessary? More specifically, how would this bill spur 
consultants to fix the Y2K problem?
    Answer. So many small businesses, governments, and even large 
businesses need technical assistance in performing Y2K preparation 
efforts that analysts are predicting there will not be enough 
consulting resources available to meet this need. Because our legal 
system hasn't dealt with the Y2K problem before, significant 
uncertainty exists as to whether courts will honor terms agreed to in 
contracts relating to Y2K-related services or liability. This 
uncertainty works to diminish the level of resources available for Y2K 
remediation.
    For example, we are aware of companies that provide general 
computer and system consulting services that either refuse to offer Y2k 
system preparation/remediation services or significantly limit such 
offerings, specifically because they are worried that contractual 
liability limits may not be honored by a court. Section 201 of the bill 
would ensure contractual terms are enforced. This would help 
consultants decide to offer Y2K services because they could contract to 
perform services with confidence that they understand what their 
resulting risks and obligations will be.
    Additionally, these consultants are most needed in working on 
complex systems made up of numerous hardware, software, and other 
system components. Some consultants don't offer complete Y2K services 
because they fear being held liable for all damages that occur on a 
system which they have worked on, even if they had little 
responsibility for, or only a minor role in preparing, the entire 
system. The bill's Section 301, Proportionate Liability, addresses this 
concern by stating a party would only be liable for damages it was 
responsible for causing. This would allow entities to worry less about 
the litigation risks and more about how to fix Y2K problems.

    Question 4. Would you care to comment on anything you heard today?
    Answer. We see two major objectives this bill seeks to accomplish. 
The first is to facilitate cooperative problem prevention so that fewer 
Y2K problems occur in the first place. The second is to establish an 
efficient legal framework so that frivolous claims are avoided or 
quickly dismissed, and where legitimate Y2K claims do occur, they are 
efficiently processed and resolved. The testimony from the witnesses at 
this hearing suggests that these objectives are widely shared, and we 
encourage you to proceed towards passing legislation that meets these 
goals.
                                 ______
                                 

      Responses of Stirling Adams to Questions From Senator Leahy

    Question 1. You mention a number of committees on which you serve 
and organizations to which Novell belongs in the course of your 
testimony. Did you, in fact, testify on behalf of Novell or are you 
also representing those other committees and entities, as well?
    Answer. I testified on Novell's behalf only.

    Question 2. Your testimony indicates that you think that the reason 
Senator Hatch's bill is broadly supported is because ``the legislation 
would encourage cooperative efforts to reduce the total number of Y2K 
problems that occur.'' Please explain, and be as precise as you can, 
the factual basis and your reasoning that lead you to that conclusion.
    Answer. The broad support of the bill is shown by the coalition 
supporting it, which is made up of over 80 organizations and 
associations, and includes entities such as the National Association of 
Manufacturers, the National Retail Federation, the National Association 
of Wholesalers and Distributors, and the International Mass Retail 
Association, among many others. Just one of the coalition members, the 
U.S. Chamber of Commerce, represents over three million businesses, 
over 90 percent of which are small businesses. Notably, most coalition 
members have the potential to be either plaintiffs or defendants in 
Y2k-related litigation.
    Cooperative efforts that would decrease the incident of Y2K 
problems are encouraged by section 104, which states an entity cannot 
recover for damages it could have reasonably acted to avoid. This is an 
incentive for technology users and suppliers to resolve Y2K issues 
before they occur. With this provision, an entity would be much less 
likely to avoid fixing a problem it was aware of because it felt it 
could just go to court after the advent of the Y2K to seek compensation 
for any damages that might occur.
    Additionally, as is discussed further in the responses to questions 
7-9, provisions such as 201. Contract Preservation, and 301, 
Proportionate Liability, would help create an environment where 
companies can assist others in performing Y2K preparation efforts 
without undue fear of being held responsible for damages they did not 
cause or for liability they did not contractually agree to.

    Question 3. Your testimony indicates that the legislation ``would 
place restrictions on litigation based on claims where no injury has 
occurred.'' Is it not true that the legislation would also place 
restrictions on litigation based on claims where injury does occur and 
even after injury has occurred?
    Answer. Yes. As discussed in the previous answer, for example, if 
injury occurs that could have been avoided by reasonable actions, 
section 104 would place limitations on recovery.

    Question 4. Your testimony includes a general description of the 
testing and customer communications Novell has undertaken in 
preparations for Y2K. Although you are Novell's ``lead attorney for 
Year 2000 issues'' you do not discuss the legal preparations that the 
company has made and is making. Would you describe in detail those 
preparations. In particular, include a complete description of the 
types of contractual arrangements in which Novell engages, the 
insurance arrangements Novell have made, the indemnification 
arrangements to which Novell is a party, and the legally-required 
disclosures Novell has made or is making.
    Answer. One element of our preparations for the Y2K has involved 
how much information about our Y2K testing processes we should make 
available. One factor in our decision-making process had involved the 
legal risks, some related to anti-trust issues, some related to 
providing fodder for frivolous claims. With the passage last year of 
the Year 2000 Information and Disclosure Act we have felt a little more 
free in making public Y2K information. As a result, we have released 
additional information about Y2K testing processes.
    Novell's Y2K preparations have addressed both our internal Y2K 
readiness, and the Y2K readiness of products we license to others. In 
both of these areas, our preparations have included reviewing our 
contractual arrangements with suppliers to verify whether the suppliers 
are obligated to provide Y2K-ready services or supplies. Beyond 
contract review, our effort has also included a technical review of 
many of our major suppliers. In situations where our testing has 
disclosed non-Y2K ready internal systems, we have generally chosen to 
upgrade that technology or we have installed a different system that is 
Y2K ready.
    Some of the types of contracts we sign that might be implicated by 
Y2K issues are contracts to purchase food services, telecommunications 
services, security services, utility services, package and mail 
delivery services, audit and accounting services, and information 
systems services. Other relevant contracts includes purchases of 
buildings, building systems such as elevators of HVAC, insurance 
policies, vehicles, and computers or software supplies. Contracts we 
make that involve our provision of licenses to someone else include 
contracts with original equipment manufacturers, distributors, software 
or service resellers, technical education centers, and end users. For 
contracts that we enter to purchase supplies for our use, we typically 
seek language that offers some guarantee against a failure to perform 
due to Y2K issues. In these contracts we do not typically seek 
indemnification for any damages that occur, but we do seek a commitment 
that the item is Y2K ready, and that if any issues come up, the 
supplier will address them promptly. In most of our contracts under 
which we sell licenses or services, we provide performance warranties, 
in some cases these spell out Y2K issues as a specific category covered 
by the performance warranty.
    Regarding our insurance policies, we have reviewed each of them to 
evaluate our coverage regarding Y2K issues. Regarding required 
disclosures, Novell has disclosed in its annual reports and quarterly 
10Q filings to the SEC information about our Y2K efforts; please see 
question 26 below for more information on these.

    Question 5. Please provide a thorough description of each legal 
action to which Novell has been a party that involves Y2K concerns.
    Answer. There are none.

    Question 6. Please provide a thorough description of each Y2K-
related claim or demand of dispute to which Novell has been a party 
that has not yet resulted in litigation. Include, if the claim, demand 
or dispute was against Novell how Novell responded and whether the 
matter has been resolved.
    Answer. While answering this question in detail might reveal 
business-sensitive information, please see the response to question 4 
for some information about Novell's approach to addressing Y2K 
readiness with other entities.

    Question 7. Please provide the factual basis and specifics for your 
testimony that ``Novell has seen specific cases where entities that do 
offer general consulting services have been extremely wary of widening 
their offerings to provide complete Y2K services.'' Be specific and 
complete and provide all documentary support for this statement.
    Answer. Here is a restatement of this issue from another source, 
the NACCB: The National Association of Computer Consultant Businesses 
is an industry association representing hundreds of companies that 
provide computer and engineering consulting services. The NACCB has 
previously provided the following testimony to the Senate to describe 
that organization's experience with this issue:

        NACCB member firms supply frontline technical experts that 
        provide a number of computer related services to clients on a 
        contract basis, including Y2K remediation services and 
        typically, these experts follow the specifications outlined by 
        the client.

        NAACB firms are in a unique position in that they provide the 
        necessary services to remedial the Y2K problem, but they 
        typically do not write the specifications for the remediation 
        process. We often refer to our businesses and their remediators 
        as the ``Good Samaritans'' in that they have the expertise and 
        knowledge to remediate the problem. Yet, our members are very 
        concerned about possible Y2K-related liability, especially 
        where they follow the specifications the client provides and 
        make a good-faith effort to fix the problem pursuant to these 
        client specifications.

        NACCB member firms may avoid Y2K remediation projects rather 
        than risk costly potential litigation in situations where 
        needed the staffing firm nor the computer consultant provide 
        the work specifications. This avoidance of Y2K remediation 
        projects by staffing companies in computer consultants will 
        further compound the Y2K problem. (mail [email protected] for 
        more info on this statement).

    And the following is a specific example of how the current 
environment can discourage companies from providing resources to remedy 
Y2K issues: In addition to the free Y2K information and tools Novell 
provides that inventory Novell products for software issues, Novell 
also licenses software that helps customers in surveying and managing 
all of their networked software to resolve Y2K issues. And, Novell has 
a large consulting services organization that assists customers 
assessing their Novell products for Y2K issues.
    Over the last year, we have had discussions with various companies 
about working to provide additional services to assist customers in 
evaluation or remediation of non-Novell products for Y2K issues. And, 
with at least one company we have struck a deal that allows us to 
distribute a technology that inventories numerous types of products and 
provides Y2K information about these products.
    However, as we have participated in these discussions, one factor 
that has dampened companies' enthusiasm in collaborating to provide 
full Y2K services across an end-user's system is the significant legal 
risks involved. This legal risk does not always prevent companies from 
choosing in the end to provide the service or collaborate with a 
product or service offering, but the risk is a definite factor in the 
analysis of whether to pursue the business opportunity. The concern by 
such companies is that even if they provide their products or services 
in a professional manner, because of the complexity of today's 
networks, there may be some system component that experiences a problem 
and subjects the Y2K services company to liability for damages to that 
component or to the entire system.

    Question 8. Please describe in detail and provide relevant legal 
authority regarding your statement: ``Today, could a consultant worried 
about Y2K litigation reasonably limit its liability using standard 
liability limitations in the consultant's contract? The hope is that 
contractual limitations will be honored by courts, but enough question 
exists in this area that the uncertainty has a direct impact on 
companies' decision-making processes.''
    Answer. For example, a consultant might agree in a contract with a 
company that needs Y2K remediation services that:

        Customer recognizes that Consultant will provide the testing 
        and evaluation services described in this contract, but agrees 
        that due to the complexity of Customer's systems, Consultant 
        does not guarantee that Customer's systems will not experience 
        any Y2K problems. Consultant shall not be liable for Y2K 
        problems in Customer's system that were not caused by 
        Consultant.''

    The concern of businesses today is that despite such contractual 
language, if Y2K problems occur and a lawsuit is filed, the plaintiff 
might successfully avoid the disclaimer above, either by making the 
claim ``outside of the contract'' as a negligence claim, or by claiming 
that because of the consultant's position of superior knowledge, or 
superior bargaining power, the disclaimer is not valid.

    Question 9. You argue that section 201 of the proposed legislation 
would ensure that the terms agreed to in a contract are enforceable. Do 
you interpret the bill to change the law with respect to adhesion 
contracts or the doctrine of unconscionability? If a contractual 
liability limitation was a matter of adhesion or would be found 
unconscionable under State or federal law could section 201 nonetheless 
require its enforcement?
    Answer. If a contract were to be found unenforceable as a whole, 
section 201 would not apply. Section 201 would apply if only an 
individual liability limitation were determined to be unenforceable by 
otherwise applicable law.

    Question 10. You argue for proportionate liability as a matter of 
federal law. If defendants are found jointly and severally liable is it 
not true that they can still legally determine their respective 
liability among themselves? The purpose of the doctrine of joint and 
several liability is so that the injured, innocent plaintiff not be 
left holding the bag. Is that not correct? Are you opposed to the 
traditional doctrine of joint and several liability in all legal 
contexts or any other legal contexts beyond that of consultants 
performing remedial Y2K services?
    Answer. While defendants may seek to determine respective liability 
among themselves, this may not be possible or practical where a 
defendant (perhaps the one chiefly responsible for damages) has no 
assets or no longer exists (due to bankruptcy or other reasons). Also, 
if $100,000 of damages occur, and a defendant is found 1 percent 
responsible, she may need to spend $300,000 establishing that someone 
else should cover the other 99 percent. So, the situation still exists 
where there is significant concern about a company being held 
responsible for damages beyond the degree of its involvement in the 
problem that caused the damages. Our testimony in support of a uniform 
principle of proportionate lability is limited to the context of Y2K 
actions, on the assumption that the Y2K presents a unique challenge to 
our court system that can be more efficiently addressed with specific 
modifications to that system.

    Question 11. You oppose frivolous lawsuits. We all do. The 
difficulty is in finding a process to separate frivolous lawsuits from 
those with merit without prematurely curtailing peoples' rights to 
relief. You argue for an extended notification period. What has 
Novell's experience been in this regard? Is Novell usually sued before 
there is more informal contact about the dispute? Does Novell sue first 
and ask questions later? Is the typical dispute scenario one in which 
there is contact before litigation is commenced?
    Answer. Our typical experience is that parties communicate with 
each other prior to litigation. Our support of the pre-litigation 
notice period is based on our view that the Y2K presents our economy 
with a very non-typical experience, as evidenced by suits that have 
been filed without prior meaningful discussions, or where no damage has 
been experienced.

    Question 12. Is there anything in the rules of State courts or 
federal courts that prevents parties to a lawsuit from ending such 
actions quickly if all is resolved to their mutual satisfaction?
    Answer We think a relevant issue here is how quickly a stage can be 
reached where parties can know their rights and the potential outcome 
of litigation well enough that they are satisfied with the potential 
results. Uniform procedural and substantive guidelines can make the 
process more efficient so that this result is reached more quickly, 
often before litigation occurs.

    Question 13. Is there currently any prohibition from parties to a 
Y2K dispute seeking to resolve their dispute by arbitration if they 
mutually agree to do so?
    Answer. No.

    Question 14. Is there any legal prohibition in State or federal law 
from doing everything possible to assure customer satisfaction by 
Novell?
    Answer. While there are no express ``prohibitions,'' we feel the 
benefit of legislation like this is that it helps create an environment 
where companies feel they can work together without experiencing a 
higher level of risk due to an anticipated wave of litigation, some of 
which, if the past year has been an accurate harbinger, will not be 
based on reasonable claims.

    Question 15. Does anything prevent Novell from seeking agreement 
from companies to adhere to mediation or arbitration of disputes?
    Answer. No.

    Question 16. Specifically, what has Novell's experience been to 
date with Y2K-related disputes?
    Answer. To this date, Novell has been able to resolve Y2K issues 
with its suppliers and customers. See the response of question 4 above 
for more information on Novell's efforts in working with its suppliers 
and customers.

    Question 17. You note that section 104 adds a federal statutory 
codification of the general duty to mitigate harm and damages. What 
justifies this particular federal statutory provision and what change 
and effect is intended?
    Answer. The benefit we perceive in this provision is the proactive 
action it can encourage. Though many companies and governments are on 
track for Y2K readiness for their own systems, all institutions depend 
to some degree on supplies or information from other entities. In this 
context, Y2K problems experienced within individual entities can be 
magnified by their effect on other entities in the same supply chain. 
This problem, and its unique context given the effect of the Y2K on 
most members of the economy at the same time, justifies federal 
legislation.

    Question 18. You indicate that you believe the bill creates 
``uniform substantive * * * guidelines for Y2K litigation.'' What are 
those guidelines?
    Answer. Uniform substantive guidelines include the codification of 
the duty to mitigate in section 104, the contract preservation 
provision in section 201, section 301's proportionate liability 
provisions, and the reasonable efforts provision of section 303. Also 
fitting in this category are the minimum injury or material defect 
provisions in sections 101, Notice Period, 103, Pleading Requirement 
section, and 401, Minimum Injury Requirement.

    Question 19. Does the Uniform Commercial Code already provide 
``uniform substantive guidelines'' for contract claims in State courts?
    Answer. To some degree, yes, but the UCC has not been adopted by 
each state in the same manner. To the extent that it does offer uniform 
guidelines, it helps facilitate commerce as entities feel more 
comfortable doing business in a greater number of jurisdictions.

    Question 20. John Koskinen the Chair of the President's Council on 
Year 2000 Conversion notes that he ``believes it would be 
counterproductive to establish a minimum standard of performance or 
activities after which legal protections are provided.'' He says: ``I 
would like to encourage leaders of every organization in the United 
States to keep asking if there is anything more they can do rather than 
seeking advice from their lawyers about when they have done enough and 
can move on to other issues.'' Do you agree? If not, what is your 
response?
    Answer. We agree that the focus of efforts regarding Year 2000 
issues should be based on problem solving, and not on a lawyer-based 
analysis of the risks posed by the threat of a historically large crush 
of litigation. We believe that appropriate Year 2000 litigation can 
facilitate such a focus on problem solving.

    Question 21. I saw that in a recent column in Computerworld Paul 
Gillin wrote that ``Vendors have had plenty of time to prepare for 
2000. The fact that some were more preoccupied with quarterly earnings 
and stock options than in protecting their customers is no excuse for 
giving them a get-out-of-jail-free card now.'' How do you respond?
    Answer. Regarding the time to prepare, from our corporate 
experience to the experience of the U.S. Government in pursuing its own 
remediation efforts, it appears that the task of preparing for the Y2K 
is so complex that there is not ``plenty of time.'' Each technology 
process or product in use needs to be tested on its own and with other 
technologies with which it interacts. This is a tremendously difficult 
and resource-intensive task. As discussed further in our responses to 
questions 2 and 24, we agree with members of the coalition that the 
bill offers benefits that are not unique to a particular industry.

    Question 22. Please give examples of a ``material defect, in a 
product or service as defined by S. 461. Please give examples of 
defects in a product or service that would not be ``material'' under S. 
461.
    Answer. If an elevator in a 10-story building would not rise above 
the 3rd floor, that would be a material defect. If a fully automated 
time-stamp machine required an initial manual advance of a lever or 
data element so that is would subsequently stamp the correct date, that 
would not be a material defect.

    Question 23. If Congress were to enact legislation providing 
special legal protections to manufacturers of non-Y2K compliant 
software and hardware, would that be fair to those manufacturers who 
did the right thing and invested the time and money to develop, 
manufacture and market Y2K compliant software and hardware?
    Answer. As discussed further in questions 2 and 24, we, with the 
broad coalition in support of Y2K litigation, believe that it provides 
benefits across industries and supply chains.

    Question 24. This is a circumstance in which business is coming to 
Congress asking for a special federal law to be enacted to provide 
special legal protections for them in connection with potential Y2K 
liability. Last year the tobacco industry came to Congress demanding 
special legal protections. At that time I urged that Congress insist 
first on full disclosure so that we could have a sense of what claims 
were being compromised. In this circumstance involving Y2K liability, 
should Congress insist on full disclosure in order to have a better 
understanding before passing special legal protections?
    Answer. We agree that legislation should be passed based on the 
best available information. The coalition that supports this bill runs 
horizontally across industries and vertically up and down the spectrum 
of company sizes. And, coalition members have the potential to be 
either plaintiffs or defendants in Y2K-related litigation. The reason 
for this, we perceive, is that coalition members believe Y2K 
legislation offers benefits that are not industry or business-size 
specific.

    Question 25. Do you think special legal protections should be 
granted to companies that have not complied with current legal 
requirements by making full and fair disclosure of their readiness, 
costs, risks and contingency plans?
    Answer. We do not advocate legislation to create special 
protections for companies that do not comply with current statutory 
requirements.

    Question 26. Please provide copies of all public disclosures that 
Novell has made about Y2K compliance.
    Answer. Our web site at www.novell.com/year2000 contains most of 
our publicly available Y2K information: this site is updated frequently 
with new or updated information. Please find attached a copy of most of 
this information. These documents include, Year 2000 Q & A, Year 2000 Q 
& A (Internal Business Systems), Year 2000 Status of Novell Products, 
Novell's Project 2000 White Paper, Novell Year 2000 Testing Criteria, 
and Year 2000 Web Resources. Also, we have made Year 2000 disclosures 
in our annual reports and quarterly SEC filings. The most recent of 
these was in our 1998 Annual Report, which can be accessed on our web-
site at http://www.novell.com/corp/ir/annual/financials/mda.html. Past 
disclosures are also found on our web site.

    Question 27. Please provide copies of all analyses and notes of 
conversations regarding Novell's Y2K compliance.
    Answer. Our web site at www.novell.com/year2000 contains 
information we have made public. Also, please see the response to 
question 26 above.

    Question 28. Do you think special legal protections should be 
granted to companies that have withheld information from a customer 
about their own Y2K problems?
    Answer. In the example of a trucking company, or a software 
company, that contracts to make deliveries that it knows it will not be 
able to make because its delivery system will be down for a time period 
to address Y2K testing or remediation, we do not favor a mechanism that 
would relax the company from its contracted obligations.

    Question 29. Do you think special legal protections should be 
granted to companies that have analyzed the costs and potential risks 
of Y2K noncompliance and made the calculated business decision not to 
make the investment needed to come into compliance? Might that type of 
calculation, the type of calculation apparently made by Ford in the 
exploding gas tank case, be affected by changing the law to make it 
harder for customers to seek legal redress for wrongs?
    Answer. The Ford case is an appropriate example for showing what 
this proposed legislation does not do. It generally does not apply to 
cases involving personal injury. And, as discussed above, we believe 
that the legislation will offer benefits to companies and industries 
generally because it facilitates a focus on providing solutions and 
because it discourages frivolous suits. We believe that can be 
accomplished without decreasing incentives for entities to prepare for 
Y2K issues.

    Question 30. Section 304 of S. 461 limits punitive damage award to 
``3 times the amount awarded to the claimant for actual damages'' or a 
dollar threshold depending on the status of the defendant as a company 
or individual as defined by the bill. Why are these limits in punitive 
damage awards tied to ``actual damages'' as defined in S. 461 instead 
of ``economic loss'' as defined in S. 461? Under what circumstances, if 
any, could a plaintiff receive damages for ``economic loss'' as defined 
in S. 461 under its provisions?
    Answer. It is our understanding that the concept behind limiting 
punitive damages in the Y2K arena is that this is a one-time event and 
so awards of large punitive damages over and beyond compensation for 
damage experienced would be less likely to serve the public policy 
objective of punishing defendants in order to increase incentives by 
that defendant and other entities to avoid similar harms in the future.

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                 Additional Submissions for the Record

                              ----------                              


       Prepared Statement of Hon. John Ashcroft, a U.S. Senator 
                       From the State of Missouri

    Mr. Chairman, I want to take an opportunity to thank you for 
holding this hearing and congratulate you and Senator Feinstein for 
introducing the Year 2000 Fairness And Responsibility Act. Your bill 
represents an important step in Congress' ongoing efforts to limit the 
scope and impact of the Year 2000 problem before it is too late. Last 
year, we passed the Year 2000 Information and Readiness Disclosure Act, 
which was an important first step in removing any legal barriers that 
could prevent individuals and companies from doing everything possible 
to eliminate Year 2000 problems before they happen. I was particularly 
gratified that I was able to work with you and others on the Committee 
to include the provisions of my temporary antitrust immunity bill, S. 
2384, in last year's bill. However, as I said at last year's mark-up, 
the Disclosure Act must be understood as only the first step in our 
efforts to deal with this problem. Your bill and Senator Bond's Small 
Business Year 2000 loan guarantee bill, which we will consider on the 
Senate Floor tomorrow, are the next logical steps in this ongoing 
effort.
    Countless computer engineers and experts are busy right now trying 
to solve or minimize the Year 2000 and related date failure problems. 
Part of what makes this problem so difficult to address is that there 
is no one Year 2000 problem. There are countless distinct date failure 
problems, and no one silver bullet will solve them all. Nonetheless, 
information relevant to solving one date failure problem may help solve 
other problems and eliminate date failure problems before they happen. 
We cannot allow concerns over frivolous litigation to chill the 
exchange of vital information.
    At the same time, we must ensure that those who do not make 
adequate efforts to address the Year 2000 problem are held to account. 
Real harm from inadequate efforts to address this problem must be 
compensated, and individuals must retain their capacity to receive 
compensation for injuries. However, we cannot allow the prospect of 
frivolous litigation between businesses to block efforts to avoid such 
injuries before they occur. We also must ensure that frivolous 
litigation over the Year 2000 problem does not consume the lion's share 
of the next millennium. While it is not possible for Congress to 
guarantee that private individuals and companies will be able to solve 
the Year 2000 problem, Congress can eliminate legal obstacles that 
stand in the way of private solutions. Information regarding existing 
software and known problems must be shared as completely and openly as 
possible. The current fear of litigation and liability that imposes a 
distinct chilling effect on information sharing must be alleviated.
    The Year 2000 Fairness And Responsibility Act appears to provide 
some much needed relief from the threat of frivolous litigation. The 
Act provides some important procedural innovations, such as the waiting 
or cooling off period, that may help avoid costly and drawn-out 
litigation battles. I am looking forward to today's hearing, which 
should help us fine-tune our approach. One principle that I suggest 
will be important in fashioning successful legislation is that we try 
to keep the legislation focused on what is unique about Year 2000 
litigation. There are many aspects of our civil justice system that are 
in desperate need of reform. However, if we attempt to address all 
those ills in a single bill, we may endanger a bill that could provide 
targeted relief to address the Year 2000 problem.
    Resources to address the Year 2000 problem, particularly time, are 
finite. They must be focused as fully as possible on remediation, 
rather than on unproductive litigation. Moreover, the availability of 
adequate development and programming talent may hinge upon a working 
environment that protects good faith remediation efforts from the 
threat of liability. Congress must prevent a fiasco where only lawyers 
win.

   Prepared Statement of Thomas J. Donohue, for the U.S. Chamber of 
         Commerce, and U.S. Chamber Institute for Legal Reform

                              introduction
    Mr. Chairman and members of the committee, I am Thomas J. Donohue, 
President and Chief Executive Officer of the United States Chamber of 
Commerce and Chief Executive Officer of the U.S. Chamber Institute for 
Legal Reform. The U.S. Chamber is the world's largest business 
federation, representing more than three million businesses and 
professional organizations of every size, in every business sector, and 
in every region of the country. The central mission of the Chamber is 
zealously representing the interests of its members before Congress, 
the Administration, the independent agencies of the federal government, 
and the federal courts. The mission of the Institute for Legal Reform 
is to reform the nation's state and Federal civil justice systems to 
make them more predictable, fairer and more efficient while maintaining 
access to our courts for legitimate lawsuits.
    Given the diversity of our membership, the U.S. Chamber of Commerce 
is well qualified to testify on this important topic. We are 
particularly cognizant of the problems that small businesses may face 
as the Year 2000 approaches because more than 96 percent of our members 
are small businesses with 100 or fewer employees and 71 percent have 10 
or fewer employees. I welcome this opportunity to provide testimony on 
the critical issue of Year 2000 (Y2K) reform and the urgent need for 
prompt action by Congress.
    I would also like to point out that I have unique distinction in 
that I represent the interests of both potential Y2K plaintiffs and 
defendants. Certainly under these conditions, you can appreciate the 
challenge at hand to bring about effective Y2K reform and yet preserve 
the interests of those whom I represent.
    I want to take a moment to recognize the tremendous work of 
Chairman Orrin Hatch, Senator Feinstein and the rest of this committee 
on the Y2K issue. This hearing and your legislative efforts, including 
last year's Information Readiness and Disclosure Act are critical as we 
all seek to move quickly to address the Y2K problem. I also want to 
express my appreciation for the leadership and commitment to the Y2K 
issue by Chairman John McCain of the Commerce Committee, Chairman Kit 
Bond of the Small Business Committee and Co-Chairman Robert Bennett and 
Christopher Dodd and the Senate Special Committee on the Year 2000 
Technology Problem. All of us owe you a great debt of gratitude for 
your efforts to work with us to address the Y2K problem quickly, fairly 
and in a bipartisan manner.
    During the next year, the world community will face the possibility 
of a very serious threat to the global economy caused by the transition 
of computing systems to Y2K compatibility. This is a challenge not only 
to our technical ingenuity, but also to the public's faith in our 
leading technology industries, the American business community, and 
government in general and our legal system.
    And the United States is not alone. All around the world, leaders 
are grappling with addressing the Y2K problem and its impact on their 
economies. This is particularly daunting given the U.S. leadership in 
the global economy and the implications due to our relationship with 
our trading partners abroad.
                            the y2k problem
    The Year 2000 computer problem started decades ago when, in an 
effort to conserve memory and time as well as to be cost-effective, 
programmers designed software that recognized only the last two digits 
of dates. Thus, when ``00'' is entered for the Year 2000, a computer 
may process the date as the year 1900. This can cause the computer to 
produce erroneous data or to stop operating, both of which have far-
reaching implications.
    No one knows for certain what the scope of the problem may be. 
However, our economy is critically dependent on the free-flow of 
information. If this flow is disrupted or halted, our nation's economy 
could be seriously damaged. Indeed, the Federal Reserve Bank of 
Philadelphia recently predicted that while the Year 2000 computer 
problem may boost the gross domestic product in 1999 by 0.1 percent, or 
$8 billion, due to the massive influx of resources to fix the problem, 
in 2000, however, the problem could shrink GDP by 0.3 percent due to 
Y2K disruptions. In fact, some estimates are that that the Year 2000 
computer problem could cost an estimated $119 billion in lost output 
between now and 2001.
    What will be the final impact of the Y2K problem on our economy is 
unknown. But we do know that it poses a very real and serious threat.
         business awareness and commitment to solve the problem
    To that end, American businesses have committed hundreds of 
billions of dollars and the extraordinary intellectual resources of its 
employees to meet the challenges we face as computer systems make the 
transition to Year 2000 compatibility. From laboratories to offices to 
other workplaces throughout the country, businesses are working 
diligently to ensure that America is prepared to address the challenges 
of the new millennium with as little disruption as possible to our 
economy and every day lives. This will be a tough and costly challenge. 
The Gartner Group, a technology consulting firm, estimates that 
software remediation alone will cost between $300 and $600 billion. 
This amount does not include the cost of repairing other factors, such 
as hardware, end-user software, embedded systems or litigation. 
According to the Cap Gemini Millennium Index released on November 10, 
1998 major Western economies have made progress in addressing the Y2K 
problem. Year 2000 spending nearly doubled in the six months before the 
report, and climbed 93 percent from $256 billion in April to $494 
billion by October. Projected cost estimates for software, hardware and 
labor expenses increased 20 percent from $719 billion to $858 billion. 
Furthermore, as of November 1, 1998, U.S. firms had expended 61 percent 
of their estimated Y2K budgets.
    While businesses are working diligently, cooperatively and 
responsibly to meet this challenge, we must still acknowledge and 
prepare for the likely possibility that some problems may occur. 
Unfortunately, even under best-case scenarios, we will not be able to 
find and fix every single Y2K problem. This includes the Federal 
government as well. In fact, the General Accounting Office (GAO) 
reported recently that the Federal government is having difficulty in 
meeting a March 31, 1999 deadline to find, fix and test all of its 
computer systems. Only 11 departments were given satisfactory progress 
ratings, seven were making slow progress and seven more were making 
unsatisfactory progress.
    But even if we fix most of the computer system problems, the Y2K 
problem is still expected to cause some disruptions. Some problems will 
not be fixed because of technical difficulties, some because of not 
starting soon enough, and some because of indifference.
                       concerns about litigation
    The true tragedy, however, is that some problems will not be fixed 
because of a fear of litigation or the transfer of resources from 
actually fixing the problem to defending lawsuits. While business is 
working to fix the problem, there are those in our society who are 
planning to exploit it. Unless steps are taken soon, we could 
experience an explosion in litigation. In fact, Giga Information Group, 
a technology-consulting firm, has estimated that the amount of 
litigation associated with Y2K will be $2 to $3 for every dollar spent 
actually fixing the problem. If this is allowed to proceed, guess who 
will bear the cost? It will ultimately be consumers. Obviously, this 
scenario would be a monumental tragedy for American businesses, workers 
and consumers.
    Business has good reason to be concerned. A report from the 
Newhouse News Service quoted a participant in the American Bar 
Association's most recent annual convention as describing Y2K as ``the 
bug that finally provides lawyers the opportunity to rule the world.'' 
In addition, at a seminar held at the ABA's convention, a team of 
lawyers estimated that the amount of legal costs associated with Y2K 
could exceed all the money spent on asbestos, breast implants, tobacco 
and Superfund litigation combined.
    Clearly, America has a choice. It can adopt a legal environment 
that encourages the sharing of information, the fixing of the problem, 
and the fast, fair and predictable resolution of legitimate claims for 
compensation. Or, it can allow a potential litigation explosion that 
could be very costly to American consumers. Just think of the impact 
this would have on our economy, job creation and maintenance, and the 
average American family. Can we run the risk of quashing those historic 
years of economic expansion with the lowest unemployment rate in three 
decades? Mr. Chairman and members of the Committee, this is a very real 
scenario and a very serious challenge that we have before us.
                       business' recommendations
    But something can be done and your bill. The Year 2000 Fairness and 
Responsibility Act does so. The business community and other 
organizations have worked with Chairman Hatch and Senator Feinstein to 
fashion legislation that directly addresses the Y2K problem. This bill 
encourages remediation, precludes exploitive and costly litigation 
while continuing to allow those with legitimate claims access to our 
legal system in addition to giving the courts the means to efficiently 
resolve Y2K-related disputes. In developing this bill, the coalition 
was happy to see that all interests were listened to and compromise and 
concessions from all the participants was required.
    The coalition represents a cross-spectrum of various industries and 
interests. It includes the U.S. Chamber of Commerce, the National 
Association of Manufacturers, the National Retail Federation, the 
National Federation of Independent Business, the National Association 
of Wholesalers and Distributors, the Edison Electric Institute, the 
American Insurance Association, the International Mass Retail 
Association, among many others. It is important to note that some 
members of this coalition represent both potential plaintiffs and 
defendants in Y2K-related litigation.
    Passage of S. 461, or one of the other similar bills currently 
pending in the Congress would accomplish several things. It would 
encourage remediation and minimize costs, thereby protecting the 
economy, jobs, taxpayers and consumers. Our national infrastructure and 
national security would also benefit.
    Before turning to the specifics of what S. 461 does, it is 
important for me to emphasize what it will not do. This legislation 
does not alter the rights of persons who are physically injured or 
otherwise truly harmed by a Y2K failure. It specifically excludes from 
its purview claims for personal injury. It allows those who experience 
harm because of a Y2K problem to have access to the legal system and to 
be fully compensated for their real losses.
    Over the past five years, most large and mid-size American 
companies have taken steps to address their Y2K problems. The anecdotal 
reports we are receiving indicate that the computer systems of most of 
these companies will be Y2K compliant and that during the next few 
months most of them will be testing their systems and preparing for 
January 1, 2000. Much work, however, must still be done--especially in 
the small business community.
    The consensus proposal is supported by large, mid-size and small 
businesses because it will both help and encourage them to address 
their Y2K problems. Passage of S. 461 or other similar legislation in 
the remaining months of 1999 would accomplish several things:

   Business and consumers will be encouraged to fix their Y2K 
        problems because they will not be compensated for damages they 
        could reasonably have avoided;
   Businesses will be encouraged to make efforts to fix Y2K 
        problems because those efforts will be made admissible in 
        contract cases and would be an absolute defense in non-personal 
        injury tort actions; and
   Consultants and other solution providers will know that the 
        terms of their contracts will not be altered if Y2K problems 
        occur, so they will have a greater incentive to take on 
        additional Y2K remediation work.

    If Y2K problems begin to materialize, S. 461 encourages both 
potential claimants and potential defendants to resolve their disputes 
without burdening the court system with expensive litigation:

   Before suing, potential plaintiffs will be required to give 
        potential defendants an opportunity to fix the Y2K problem by 
        giving written notice outlining their Y2K problem. The 
        potential defendants would then have 30 days to provide a 
        written response to this notice describing what actions they 
        have taken or will take to fix the problem. If not satisfied 
        with the response, potential plaintiffs may initiate a lawsuit 
        60 days after the receipt of the potential defendants' 
        response. This provision will accelerate the remediation 
        process if failures occur, eliminating the need for most 
        lawsuits and preventing the diversion of precious time and 
        resources from remediation to litigation.
   The legislation also encourages parties to resolve their Y2K 
        disputes through voluntary alternative dispute resolution 
        mechanisms.

    An important aid in discouraging litigation and encouraging 
settlement is a set of ``ground rules'' which ensures fairness to both 
parties and brings some certainty and predictability to the process. It 
is important to remember that S. 461 does not cover claims for personal 
injury. Some of the essential points of the bill are:

   It ensures that the terms contained in written contracts are 
        fully enforceable except in cases where a court finds that the 
        contract, as a whole, is unenforceable.
   To minimize the ``lottery'' aspect of litigation surrounding 
        Y2K, the imposition of punitive damages is limited. Any 
        punitive damages that can be assessed against a defendant are 
        limited to the greater of three times actual damages or 
        $250,000, or for small companies (those with less than 25 
        employees), to the lesser of three times actual damages or 
        $250,000.
   In tort actions, each defendant will only be liable for the 
        amount of damage in direct proportion to the defendant's 
        responsibility. This provision is modeled on the Private 
        Securities Litigation Reform Act of 1995.

    If Y2K failures lead to disputes that cannot be resolved without 
litigation, S. 461 provides additional procedural and substantive rules 
that small and large plaintiffs and defendants in the business 
community believe are fair and will promote efficiency. This includes 
expansion of Federal class jurisdiction for Y2K class actions and no 
strict liability for a Y2K problem.
    I must restate that this legislation does not alter a plaintiff's 
right to recover actual or consequential damages, bring claims for 
personal injury, nor does it unduly burden a plaintiff's access to the 
courts. In other words, the ability of any plaintiff to be made whole 
from losses resulting from a Y2K failure is not altered.
    Finally, I believe that a provision should be included that would 
reduce the likelihood of frivolous litigation by placing reasonable 
limits on the fees that attorneys stand to gain from this problem that 
threatens our national economy and national security. Such a provision 
should require that an attorney in a Year 2000 action not earn a 
contingency fee greater than the lesser of the attorney's hourly 
billings (not to exceed $1000 per hour) or an agreed upon percentage of 
the total recovery (not to exceed one third of the recovery). In 
addition, that provision should require that the presiding judge in a 
class action determine, at the outset of the lawsuit, the appropriate 
hourly rate (not to exceed $1000 per hour) and the maximum percentage 
of the recovery (not to exceed one third of the recovery) to be paid in 
attorneys fees. Such a provision would serve to both fairly compensate 
an attorney who takes on a meritorious claim while reducing the 
incentives for frivolous, speculative and exploitive litigation.
                               conclusion
    Unlike other national emergencies that hit without any warning, we 
now have an opportunity to directly address the Y2K problem before it 
hits. The business community is willing to do its part in fixing the 
Y2K problem, and to compensate those who have suffered legitimate 
harms. All that we ask is that Congress, the Administration and the 
courts work with us to ensure that our precious resources are not 
squandered and that our focus will be on avoiding disruptions. We look 
forward to working with you, the full Congress, and the Administration 
to pass a common-sense proposal for Y2K reform.

  Prepared Statement of David C. Crane on Behalf of the Semiconductor 
                          Industry Association

        the y2k challenge--a semiconductor industry perspective
An introduction to the issue
    The Year 2000 (``Y2K'') issue has emerged as perhaps the single 
most critical challenge facing today's business community. The Y2K 
challenge stems from a decades-old practice--that emerged at a time 
when conserving computer memory was considered essential because of its 
high cost--of storing and processing dates in a two-digit format. What 
this means from a practical viewpoint is that electronic products that 
process dates in this way, which could include everything from 
computers to the family VCR, may not know whether ``00'' means 1900 or 
2000. This confusion may cause such products to malfunction or shut 
down on January 1, 2000. Another date-related issue that companies are 
confronting arises from the practice of some computer programmers who 
use ``dummy dates'' such as ``99'' and ``00,'' which can trigger system 
shutdowns and other effects when dates that include those numbers are 
reached. Because electronic products are highly integrated into today's 
world, these problems can have far-reaching effects.
    While the Y2K issue may seem relatively simple, the solution is 
not. Basically, an electronic product can be considered Y2K ready if, 
when used properly, it is capable of correctly processing, producing 
and/or receiving dates in and between the years 1999 and 2000--
including leap year calculations--provided that all other products (for 
example software, hardware and firmware) used with the product properly 
exchange accurate date data with it. But evaluating whether an 
electronic product is Y2K ready is quite complicated. Many electronic 
products are collections of semiconductors and other parts that operate 
and interact according to instructions supplied by software. It is the 
interaction of all these hardware and software elements that determines 
whether a particular product is Y2K ready. And, evaluating that is 
further complicated by the fact that many such elements may have been 
made and/or programmed by different companies.
The unique challenges facing the semiconductor industry
    The semiconductor industry faces a considerable challenge in 
evaluating Y2K readiness issues. There are thousands of different kinds 
of semiconductors. The vast majority of semiconductors are incapable of 
generating, comparing or sorting date information. These semiconductors 
are unaffected by the Y2k issue. A small percentage of semiconductors 
are capable of generating or processing date information when software 
programs that perform these functions are added to the chip--the 
software is typically specified and owned by the customer, not the 
chipmaker. An even smaller number of chips have circuitry that is 
designed to generate or process dates, and even in this category the 
chipmaker may be manufacturing to customer specifications. Examples of 
chips that may be capable of generating or processing date information 
are non-volatile memory devices, real-time clocks and certain 
microcontrollers.
    In general, the semiconductor manufacturer does not design or 
develop the programming for the semiconductors that is sells. In the 
vast majority of instances, distributors, electronic product 
manufacturers or other entities or persons who buy and use 
semiconductors create the programming. In such instances, this 
programming is almost always the proprietary material of these third 
parties, not the semiconductor manufacturer. Because of the proprietary 
nature of this programming, a semiconductor manufacturer is not 
permitted to and therefore cannot verify that programming provided to 
it is Y2K ready, even in those instances in which it adds programming 
provided by the customer to its chip prior to shipment. For similar 
reasons, if a semiconductor manufacturer has been asked to manufacture 
to a design supplied by a customer, the semiconductor manufacturer 
cannot determine whether the semiconductor is Y2K ready.
    Further complicating this issue is the fact that semiconductors are 
an integral part of a larger ``embedded'' system that controls, 
monitors or assists the operation of a myriad of electronic products. 
Embedded systems provide control functions in numerous products, from 
the family VCR to microwave ovens to cars. They are also used in 
airplanes, medical equipment, electrical utility systems, manufacturing 
equipment and elsewhere. Embedded systems have the ability to compute. 
Typically, these systems also contain instructions (usually software) 
that determine how the end product operates and what it computes. 
Again, these instructions are in the vast majority of instances not 
developed by the semiconductor manufacturer, but rather by the 
manufacturer of the end product.
    Another critical issue is how the semiconductor device will work as 
part of an electronic product, which may contain other parts that are 
not Y2K ready. For example, a typical electronic product such as the 
family VCR or computer contains a collection of parts that work 
together. It is the interaction of all these elements that dictates 
whether the product is Y2K ready. In the case of the computer, these 
parts include the microprocessor, the BIOS (Basic Input Output System) 
that controls the interface between the operating system and the 
computer hardware and controls the system's real-time clock, the 
operating system and the software applications. Because it is the 
function of the product as a whole that determines whether a particular 
electronic product is Y2K ready, the manufacturer--or in some cases the 
distributor or owner--of the finished electronic product, whether that 
be a VCR or a computer, is the only appropriate entity able to fully 
test and evaluate whether that particular product is Y2K ready .
The industry's response
    Semiconductor manufactures are conducting extensive research and 
evaluation programs to resolve the Y2K issues within their control. As 
part of this comprehensive effort, manufacturers are working 
cooperatively with suppliers and customers to help resolve questions 
and concerns about the Y2K readiness of electronic products. Because of 
the complexity of these issues, the semiconductor industry supported 
the Year 2000 Information and Readiness Disclosure Act, which 
encourages companies to disclose vital information about Y2K issues so 
that they can work together to solve common issues.
    This statement is intended to help explain the relationship of 
``embedded systems'' to the Y2K issue. The ultimate solution to this 
question is beyond the control of the semiconductor supplier, who 
cannot identify Y2K readiness issues caused by circuitry or programming 
that was specified by others. Chipmakers can and will continue to 
assist their customers by providing information. Ultimately, the 
manufacturer of the finished electronic product is the only one capable 
of determining how the elements of the system function together as an 
integral unit and whether the product is Y2K ready. And at the consumer 
level, individuals and businesses must contact the manufacturers of 
electronic products to determine whether they are Y2K ready.

   Prepared Statement of Melissa W. Shelk on Behalf of the American 
                         Insurance Association

    The American Insurance Association is grateful for the opportunity 
provided by the Senate Judiciary Committee to offer testimony in its 
efforts to minimize the adverse economic impact of the Year 2000. The 
AIA represents more than 300 property and casualty insurers across the 
nation, insuring millions of families and large and small businesses. 
Our members are leaders in advocating loss prevention measures for our 
individual and business policy holders, and we're proud to say that AIA 
companies have worked diligently, some for as long as a decade, to 
ensure our systems are Y2K compliant to better serve our customers. Our 
industry has devoted real resources to facing this challenge; it's been 
estimated that insurers will spend between $6-8 billion for readiness 
efforts. Our customers expect us to fulfill this obligation, and we are 
doing exactly that.
    The Year 2000 computer challenge is a result of the dynamism and 
entrepreneurial spirit of the American high-tech industry. It is a 
tribute to this segment of our economy that in just a few short 
decades, everything from airplanes and automobiles to kitchen toasters 
is safer, more reliable, and longer lasting because of computer 
technology. The so-called ``Year 2000 glitch,'' where computers read 
only the last two digits of a year, was a decision made not of 
negligence but of the desire to push technology as far as it could go, 
as fast as it would go. And it is with this spirit that American 
businesses are working to solve this problem--hundreds of billions of 
dollars are being spent to solve potential problems before they occur. 
The business community is facing the Y2K challenge head-on.
    Even with this commitment and dedication to minimizing Y2K 
disruption, we can expect problems to occur. We conduct business in a 
global economy, and not every nation has matched our dedication and 
commitment to managing Y2K. And the pervasiveness of computer chip 
technology in our businesses and daily lives suggests that some 
problems will be undetectable until they arise. Estimates of economic 
loss range from the negligible to the catastrophic, we simply don't 
know. This lack of knowledge demands that we must be prepared as a 
nation to solve problems quickly, fairly, and with a minimum amount of 
discord.
    Last year, a bipartisan majority in Congress recognized that too 
often in our nation, the fear of frivolous lawsuits can jeopardize 
cooperative solutions to the Y2K problem. The Y2K Information and 
Readiness Disclosure Act of 1998 took steps to allow businesses to 
share information without fears that this cooperation would lead to 
courtrooms. We supported last year's efforts, and we're thankful that 
Congress is set to take the next step, in the form of discouraging 
litigation and encouraging remediation. The bipartisan commitment shown 
by Members of this committee was crucial to our success in 1998, and 
we're delighted that same spirit is shown on the issue of limited 
liability reform.
    The American Insurance Association has spent the last few months 
working with a coalition of more than 85 trade associations, individual 
corporations, and other business interests. These organizations--the 
Year 2000 Coalition--represent large and small businesses, technology 
producers and consumers, retailers, financial services, to name just a 
few. We represent both potential plaintiffs and defendants in Y2K 
litigation, reflecting a consensus desire to work together to avoid 
lawsuits. We are determined to fix problems, not profit from them.
    Members of the Year 2000 Coalition understand that the unknown 
extent of the Year 2000 and the fear of lawsuits can actually inhibit 
solutions, multiplying the disruptive impact of any systems failures. 
Those who would exploit the problem for personal gain are doing our 
nation a great disservice. Congress is to be commended for seeking 
reforms to minimize the economic costs arising from this once-in-a-
millennium event.
    The Year 2000 Coalition has crafted principles for limited Y2K 
liability relief legislation, many of which are reflected in S. 461, 
the Year 2000 Fairness and Responsibility. Our priorities are simple, 
and common-sense.
    We agree with sponsors of the legislation that contracts must be 
respected, and the legitimate ability to seek redress should not be 
impeded in any way. Nor should any liability reform adversely impact 
personal injury or wrongful death claims. Our goal is simply to 
streamline and expedite an often unruly, costly, and time-consuming 
system to protect the heath of our economy, while ensuring that 
fairness and predictability govern the process.
    In that spirit, the AIA supports:

   Legal incentives for businesses and contractors to fix Year 
        2000 problems before they arise, and without fear of frivolous 
        lawsuits,
   Limits on punitive damages to keep frivolous lawsuits out of 
        court,
   Limits on liability proportional to the defendant's 
        responsibility, and,
   Opportunities to settle disputes before they're litigated.

    Key to fairness, predictability, and speed is keeping disputes out 
of courtrooms such as the 90-day cure or cooling off provision that 
would encourage pre-trial solutions. We hope the Senate considers such 
a provision as part of any liability legislation, and are gratified the 
Hatch-Feinstein bill includes a similar measure. This 90-day ``cure'' 
period is critical to keeping parties' energies focused on solutions 
rather than litigation.
    The AIA and the Coalition also support other important reforms to 
encourage prompt resolutions. We are encouraging our members to promote 
alternative dispute resolution methods and remediation and we hope any 
legislation offers incentives to stay out of the courts.
    We believe that, because of the extent of date chip technology in 
our homes and businesses, class action reforms must be enacted to 
discourage predatory lawsuits. Reforms can restore some balance and 
fairness to a growing trend in our legal system, and again, ensure that 
legitimate claims are heard in a timely fashion.
    Our priority is to encourage a legal environment where problem-
solvers compete for business, not fear frivolous lawsuits, legitimate 
claims are resolved promptly, and where legal profiteering cannot take 
advantage of a once-in-a-millennium problem.
    These modest reforms, designed to focus on a unique and predictable 
event, will focus our energies on solving problems. They are not, as 
some have already suggested, ways to escape responsibility. The Year 
2000 Coalition and the American Insurance Association believe any 
package must respect negotiated contracts, grant no immunities, offer 
no excuses to businesses that refuse to address potential Y2K problems, 
and in fact expedite payment of legitimate claims.
    The Year 2000 Coalition is a result of the business community's 
desire to minimize economic costs and disruption from the Year 2000 
problem. This legal liability coalition is unique in that the reforms 
represent the consensus desires of both potential plaintiffs and 
defendants, and are focused on fixing the problem. American business 
has, through its investments to date, shown its commitment to avoiding 
disruptions. We ask that Congress and the administration join us in 
creating a legal climate that reinforces that commitment. Only then can 
we be sure we're doing everything possible as a nation to be ``Y2K 
OK.''


                                 
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