[Congressional Record Volume 144, Number 54 (Tuesday, May 5, 1998)]
[Senate]
[Pages S4368-S4370]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                            THE Y2K PROBLEM

 Mr. MOYNIHAN. Mr. President, in yesterday's Wall Street 
Journal Edward Yardeni, chief economist and managing director of 
Deutsche Morgan Grenfell, wrote that there is 60 percent chance that 
the year 2000 (Y2K) computer bug will cause a recession and that the 
U.S. may experience a $1 trillion drop in nominal GDP and a $1 trillion 
loss in stock market capitalization. A trillion dollar drop. I do not 
know if these predictions will come true, but I do know the millennial 
malady is real.
  In his op-ed, Mr. Yardeni encourages States to follow the advice of 
Bank of England governor Eddie George, who says the British government 
should freeze all regulatory and legislative changes that would burden 
the computers of financial institutions already struggling to fix their 
Y2K problem. In a similar gesture, Commissioner Rossotti has asked that 
provisions in the IRS restructuring bill be delayed until after the 
year 2000. This delay would allow the IRS to solve the year 2000 
problem before changes to the tax code are implemented. The 
Commissioner has sent us a six-page letter detailing how he would phase 
in such changes. Commissioner Rossotti knows what he is talking about, 
and I hope we will listen to him.
  This past Sunday, May 3, 1998, the front page of the Washington Post 
called attention to another important aspect of Y2K--the legal blame 
game. At issue: who should pay the cost of the millennium bug. If a 
date-related computer failure prevents an airline from flying, for 
example, who will make up the millions of dollars in lost ticket 
revenue? Should the airline just swallow the cost itself, or are its 
computer and software suppliers liable? How about individual 
programmers? Or the insurance companies that cover those parties?
  The article states that there are pending lawsuits on Y2K and that 
the suits are the first in what legal specialists predict could be a 
wave of litigation that eventually could prove more expensive and time-
consuming than the worldwide effort to fix the problem in the first 
place. According to the article, preliminary estimates for litigation 
and settlement costs range from $100 billion to $1 trillion. As a 
member of the recently established Special Committee on the year 2000 
technology problem, I hope that we will have the opportunity to take a 
closer look into the legal issues surrounding the Y2K problem.
  These articles illustrate the serious and far-reaching effects of the 
millennium bug. I have referred to Y2K as the ``13th labor of 
Hercules.'' People have begun to realize the magnitude of this problem. 
We must all work together to ensure the proper functioning not only of 
our Government, but of the economy.
  I ask that yesterday's Wall Street Journal op-ed, ``Y2K--An Alarmist 
View'' and the Washington Post's story, ``Year 2000 Bug Could Bring 
Flood of Lawsuits'' be printed in the Record. The material follows:

              [From the Wall Street Journal, May 4, 1998]

                         Y2K--An Alarmist View

                          (By Edward Yardeni)

       Concerns about the Year 2000 Problem--often called 
     ``Y2K''--have focused on the cost and difficulty of finding 
     and eliminating the software glitch in time. Most older 
     mainframe computer software systems, many personal computers 
     and millions of embedded semiconductor chips could 
     malfunction or even crash on Jan. 1, 2000, simply because 
     they read only the last two digits of the year, and may 
     interpret it as meaning 1900. But I believe most people are 
     not yet aware of the magnitude of the problem we face.
       A survey released in March by the Information Technology 
     Association of America indicates that 44% of responding 
     companies have already experienced Y2K-related failures under 
     operating conditions, and 67% report failures under test 
     conditions. The entire Y2K problem will not be solved. We 
     must prepare for the possibility of business failures and the 
     collapse of essential U.S. government services, including tax 
     collection, welfare payments, national defense and air 
     traffic control.


                           situation worsened

       I am a Y2K alarmist, having previously predicted a 40% 
     likelihood of recession in the wake of Y2K computer crashes. 
     Despite many warnings, the situation has only worsened: The 
     recession odds are now up to 60% in my estimation, and there 
     is even a possibility of a depression. The time has come to 
     mobilize against Y2K as if for a war. While we work to 
     minimize government and business exposure to Y2K, we must 
     also begin preparing to soften the inevitable disruptions 
     that will occur when the millennium bug bites.
       Our global and domestic markets for financial securities, 
     commodities, products and services depend completely on the 
     smooth functioning of the vast information technology 
     infrastructure. Information technology has helped create 
     modern versions of the division of labor, like just-in-time 
     manufacturing, outsourcing and globalization. Imagine a world 
     in which these systems are either impaired or completely 
     broken. Suddenly, people will be forced to do without many 
     goods and services that cannot be produced without 
     information technology.
       The likely recession could be at least as bad as the one 
     during 1973-74, which was caused mostly by a disruption in 
     the supply of oil. Information, stored and manipulated by 
     computers, is as vital as oil for running modern economies. 
     If information is harder to obtain, markets will allocate and 
     use resources inefficiently. Market participants will be 
     forced to spend more time and money obtaining information 
     that was previously available at little or no cost.
       How much could GDP fall? In the U.S., it dropped 3.7% from 
     peak to trough during 1973-74. We should prepare for a 
     similar fall in 2000. Furthermore, a 2000 recession is bound 
     to be deflationary. The U.S. may experience a $1 trillion 
     drop in nominal GDP and a $1 trillion loss in stock market 
     capitalization.
       Why am I so sure that we will fail to have all our 
     information-technology systems ready and that the disruptions 
     will be severe enough to cause a major global recession? 
     Fixing and responding to Y2K requires a cooperative and 
     collective approach, which has yet to be adopted by 
     businesses and nations facing the millennial malady.
       There is currently no global Y2K battle plan. Each company 
     and government agency is responsible for fixing Y2K on its 
     own. Even worse, there is no global campaign to increase 
     awareness of Y2K, and very few national efforts to alert the 
     public. Preventing disaster will depend on launching a 
     centralized international effort to direct several crucial 
     damage-control initiatives.
       British Prime Minister Tony Blair plans to put the Y2K 
     matter before the Group of Eight at its May meeting in 
     Birmingham, England. This should be an occasion for concerted 
     action. An international Year 2000 Alliance must emerge from 
     the meeting--which should include all 29 members of the 
     Organization for Economic Cooperation and Development--to 
     deal comprehensively with the worldwide Y2K problem.
       U.S. government reports indicate that the Pentagon has a 
     ``tight schedule for meeting its massive Y2K challenge,'' and 
     the situation in other nuclear countries is no better. The 
     military leaders of the G-8 states, especially the U.S. and 
     Russia, must jointly assess the risk of an accidental nuclear 
     missile launch or a provocative false alarm. They must 
     rapidly develop a fail-safe joint communication and 
     intelligence network to eliminate any such risks.
       The international alliance should establish Y2K ``sector 
     alliances'' to deal with the bug on an industry-by-industry 
     basis. The top priority should be to ensure the world-wide 
     supply of electricity, water and other utilities. Contingency 
     plans for rationing utility use should be prepared.
       Nothing should divert government or business resources from 
     fixing the millennium bug. The Y2K Alliance should encourage 
     states to follow the example of Bank of England governor 
     Eddie George, who says the British government should freeze 
     all regulatory and legislative changes that would burden the 
     computers of financial institutions already struggling to fix 
     their Y2K problem. Canadian Prime Minister Jean Chretien is 
     informing his cabinet that Y2K should be their top priority.
       The Y2K Alliance should consider requiring all nonessential 
     employees to stay home during the first week of January 2000. 
     Financial markets might have to be closed during

[[Page S4369]]

     this period. This global Y2K holiday would give information-
     technology personnel an opportunity to stress-test their 
     systems with a slow ``reboot,'' rather than under peak load 
     conditions. They could first test the integrity of basic 
     utility services. Then they could bring their own systems 
     on-line in a phased sequence that can pinpoint weak links.
       The Year 2000 Alliance should further require all members 
     to fund a Y2K emergency budget with an initial minimum 
     balance of $100 billion. This money should be spent on both 
     last-ditch efforts to repair or replace key computer systems 
     around the world and to implement contingency plans once the 
     weakest links have been identified. The funds may also be 
     needed to purchase strategic stockpiles of fuel, food and 
     medicine.
       The alliance should direct and supervise current efforts by 
     governments and companies to fix or minimize their Y2K 
     problems. Currently, each organization with a Y2K liability 
     establishes a triage process to identify ``mission-critical'' 
     systems. But there are no objective standards to determine 
     what is mission-critical. As a result, Y2K fixers are free to 
     reclassify mission-critical systems as noncritical.
       For example, the number of U.S. government mission-critical 
     systems dropped from 8,589 to 7,850 in just the three-month 
     period ending Feb. 15; much of the reclassification was done 
     by the Department of Defense. As the deadline approaches, the 
     pressure will only increase for organizations to define down 
     their systems, making it seem they have made greater 
     progress. Only improved monitoring and verification can 
     prevent such dangerous fudging.


                          Cooperative approach

       Those responsible for dealing with Y2K must decide whether 
     to fix their noncritical systems or to let them fail in 2000. 
     But without a cooperative or collective approach, it is 
     likely that some entities will kill supposedly noncritical 
     systems that are actually mission-critical to some of their 
     external, and even internal, dependents.
       Therefore we need to know if the products, services, 
     information, incomes and payments we rely on have been doomed 
     by the triage decisions of those who provide them. If so, we 
     might already be toast in 2000 and not know it in 1998 or 
     even in 1999.
                                  ____

  


                [From the Washington Post, May 3, 1998]

              Year 2000 Bug Could Bring Flood of Lawsuits

                       (By Rajiv Chandrasekaran)

       The year 2000 is still 20 months away, but the legal blame 
     game already has begun. At issue: who should pay the costs of 
     the ``millennium bug,'' a glitch that has left computers all 
     over the world unable to recognize dates after Dec. 31, 1999.
       Near Detroit, a grocery store is suing a cash register 
     manufacturer whose machines can't accept credit cards that 
     expire in 2000. In Ohio, a firm that makes accounting 
     software is being hauled into court by a Connecticut computer 
     company. And in New York, a well-known law firm is 
     spearheading a class action lawsuit against the developer of 
     popular computer virus-blocking technology.
       The suits are the first in what legal specialists predict 
     could be a wave of litigation that eventually could prove 
     more expensive and time-consuming than the world-wide effort 
     to fix the glitch in the first place. The cost of hiring 
     programmers and buying new computers is forecast by industry 
     analysts to be $300 billion to $600 billion. The price tag 
     for lawyers' fees and compensating people for any failures 
     that occur, through no one knows how many there will be, 
     could reach $1 trillion, according to some new estimates.
       ``We used to think that programmers would be the ones to 
     profit from this,'' said Lou Marcoccio, a research director 
     at the Gartner Group consulting firm. ``Now it's becoming 
     clear that lawyers stand to gain the most here.''
       Lawyers have started attending seminars on how to bring and 
     defend Year 2000 cases. Law firms eager to get in on the 
     action have set up Internet sites and sent out mass mailings 
     to attract clients.
       ``There'll be as many, if not more, lawyer-driven cases as 
     there will be customer-driven ones,'' said Kirk R. 
     Ruthenberg, a partner in the Washington office of 
     Sonnecschein Nath & Rosenthal who teaches a seminar on Year 
     2000 legal issues.
       Corporate executives complain that people already are so 
     afraid of being sued that they can't get a straight answer 
     from their banks, suppliers or vendors on whether their 
     computer systems will be ready to function in the new 
     century. Requests for information about readiness are routed 
     through lawyers--not technicians--who send out boilerplate 
     language saying the company is working hard and is highly 
     confident its systems will be ready.
       At the same time, insurance companies are furiously 
     rewriting policies and seeking legislative changes to protect 
     them from what they expect to be a wave of claims--and finger 
     pointing--when computer systems fail.
       If a date-related computer failure prevents an airline from 
     flying, for example, who will make up the millions of dollars 
     in lost ticket revenue? Should the airline just swallow the 
     cost itself, or are its computer and software suppliers 
     liable? How about individual programmers? Or the insurance 
     companies that cover those parties?
       Preliminary estimates for litigation and settlement costs 
     range from $1200 billion to $1 trillion, a figure advanced by 
     the Lloyds of London insurance company and the Giga 
     Information Group, a consulting firm in Cambridge Mass.
       That could rival legal fees and settlements associated with 
     such products as breast implants, asbestos or tobacco. Andrew 
     S. Grove, chief executive of computer chip maker Intel Corp., 
     recently predicted that ``this country is going to be tied 
     down in a sea of litigation'' over the next decade because of 
     the Year 2000 problem. ``It's going to put the asbestos 
     litigation to shame,'' Grove said.
       The big explosion of such suits probably won't start until 
     next year, industry specialist said. But Marcoccio, who 
     monitors Year 2000 work at 375 large law firms, said he knows 
     of about 200 disputes that already have been settled out of 
     court. ``Most of them were resolved for substantial sums, 
     between $1 [million] and $10 million per settlement,'' he 
     said.
       No Year 2000 case has yet been decided by a court, but 
     legal observers and technology companies are watching closely 
     the first class action suits, all of which have been brought 
     by the high-profile New York law firm of Milberg Weiss 
     Bershad Hynes & Lerach. A win by Milberg, the nation's most 
     prolific filer of class action suits accusing companies and 
     executives of securities fraud, could lead to quick flood of 
     similar suits experts said. Even a loss wouldn't necessarily 
     dissuade further legal action, they said--only a change in 
     lawyers' litigation strategy.
       Milberg's first case was filed in December on behalf of 
     Atlas International Ltd., a New York computer equipment 
     vendor, which charged Software Business Technologies Inc. of 
     San Rafael, Calif, with breach of warranty, fraud and unfair 
     business practices. Milberg alleges that SBT is improperly 
     forcing customers, including Atlaz, to buy a pricey new 
     version of its accompanying software to correct the date 
     glitch instead of providing a free ``patch'' to fix the 
     problem.
       ``They knowingly sold them a product that was materially 
     defective and failed to disclose that,'' said Salvatore J. 
     Graziano, a Milberg lawyer representing Altaz, which is 
     seeking more than $50 million from SBT. ``Our position is 
     that the upgrades should be given free.''
       A lawyer representing SBT said that after the suit was 
     filed, the company started offering a free software ``patch'' 
     to fix the problem in versions of its software used by Atlaz. 
     But he acknowledged that the repair won't work for other, 
     earlier editions of SBT's software. ``The engineering task of 
     going back and altering all the old [software] code is 
     substantial,'' said David M. Furbush, an attorney 
     representing Atlaz.
       Milberg's other two class action suits--one against Ohio 
     accounting software firm Macola Inc. and the other against 
     anti-virus software maker Symantec Corp.--make similar claims 
     for the same reason: The companies are requiring users to pay 
     for new versions of software that are Year 2000-compliant.
       Despite the recent lawsuits, software companies don't 
     appear to be backing down from the upgrade charges. In 
     January 1997 only about 1 percent of software vendors were 
     charging for Year 2000 upgrades, Marcoccio said. By this 
     January, 29 percent were, he said. ``They see the year 2000 
     as a way to sell new software, to make money,'' he said. ``It 
     can be a risky strategy.''
       A spokesman for Symantec, which makes the popular Norton 
     AntiVirus software, said that people who use virus-checking 
     software should be buying updates anyway to get the latest 
     protection. ``You need up-to-date products to scan for 
     viruses,'' said spokesman Richard Saunders, who added that 
     the Milberg suit ``is without merit.''
       In all three of the Milberg cases none of the plaintiffs 
     has yet suffered actual Year 2000-related computing problems.
       Produce Palace in Warren, Mich., already knows what that's 
     like. Its cash registers will not accept credit cards that 
     expire in the year ``00'' or beyond. If a cashier swipes such 
     a card through the magnetic reader on a register, it can 
     cause the store's entire computer system to crash, said Brian 
     P. Parker, the store's lawyer.
       ``Imagine a Saturday afternoon and the registers go down in 
     all 10 aisles,'' Parker said. ``It's been chaotic for them.''
       After unsuccessfully trying to fix the problem, the store 
     sued the cash register maker, TEC America Inc., and its 
     distributor, All American Cash Register Inc. Last month 
     Parker said a mediator recommended that the Produce Palace be 
     compensated $250,000. The store has not formally decided 
     whether to accept the settlement; Parker said he expects the 
     case to go to trial. A TEC America spokesman would not 
     comment on details of the suit.
       Lawsuits against technology companies may be only the first 
     step in a years-long stream of litigation. Specialists 
     predict that by late 1999, when some businesses start to 
     experience system failures, a second round of chain-reaction 
     lawsuits will ensue among all sorts of companies.
       An auto parts maker that fails to get raw material because 
     of a Year 2000 failure at a supplier might sue the supplier. 
     The automaker that relies on the parts maker to stock its 
     assembly line might then sue the parts company, because it 
     has failed to deliver its parts on time and cost the 
     automaker sales.

[[Page S4370]]

       Investors who see a company's stock price slide because of 
     Year 2000-related expenses and system failures could mount 
     class action suits, claiming that corporate officers failed 
     to adequately inform shareholders of the problem. ``Both 
     breach of contract suits between businesses and shareholder 
     suits will be rampant,'' said Jeff Jinnett, a lawyer with the 
     New York firm of LeBoeuf, Lamb, Greene & MacRae.
       Hoping to stem such lawsuits, a coalition of technology 
     firms and other businesses in California have urged the state 
     legislature to pass a bill that would immunize companies from 
     Year 2000 suits if they warn customers of the problem and 
     offer free upgrades. The bill was defeated by a key committee 
     last month after strenuous opposition from the state's trial 
     lawyers.
       But state officials across the country are moving quickly 
     to protect themselves against litigation. Bills that would 
     limit state agencies from liability if their computers suffer 
     date-related failures recently have been signed into law in 
     Virginia, New Hampshire and Georgia.
       A final wave of litigation, experts said, will begin in 
     2000 and involve insurance companies, as defendants seek to 
     force their insurers to cover their legal fees and any 
     damages they are ordered to pay. The cost to the insurance 
     industry could reach $65 billion, said Todd A. Muller, an 
     assistant vice president at the Independent Insurance Agents 
     of America, a trade group in Alexandria.
       ``There's going to be a huge impact on the insurance 
     industry,'' Muller said. ``Because the industry has deep 
     pockets, we expect [trial lawyers] to do everything possible 
     to drag us into these disputes.''
       Insurance industry executives said they expect businesses 
     to file claims under various types of common corporate 
     policies, including property insurance, general liability 
     insurance, and directors' and officers' liability insurance. 
     Property insurance claims, for example, could result from 
     actual physical damage caused by a Year 2000 malfunction, 
     such as fire sprinklers that accidentally go off, experts 
     said.
       The insurance industry is moving quickly to prevent such 
     suits by revising policies to exclude Year 2000-related 
     claims on the grounds the peril wasn't known to exist when 
     the policies were created, and as a result, premiums never 
     were collected for such coverage. The Insurance Services 
     Office Inc., which authors generic policy language used by 
     most large insurers, already has gotten regulators in 40 
     states to approve such exclusions, said Christopher Guidette, 
     an ISO spokesman.
       At the same time, insurers are arguing that the problem was 
     entirely predictable, and therefore isn't coverable, because 
     insurance is only for the unpredictable.
       ``This is a foreseeable event. People have known for more 
     than 98 years that this was coming. . . . We're not going 
     to be the bank of last resort to pay for this,'' said 
     Steven Goldstein a spokesman for the Insurance Information 
     Institute, a trade group in New York.
       But whatever steps the insurers take, predicts Muller, 
     ``when their claims are denied, people are going to go to 
     court.''
       Lawyers who have gone after companies over asbestos and 
     breast implants already have started preparing litigation 
     strategies for the date glitch.
       ``Insurance sells itself as a public-service operation,'' 
     said Eugene R. Anderson of Anderson, Kill & Olick in New 
     York, who has won dozens of cases against insurers. ``They 
     are the safe hands, the rock of Gibraltar, the good 
     neighbors. When there's a problem they can't just say, `Oh 
     well, we don't cover that.' It's contrary to the very idea of 
     insurance.''
       Unlike in breast implants and asbestos cases, some lawyers 
     said the lack of ordinary human victims in Year 2000 
     litigation could make it tougher to ask a jury for multi-
     million-dollar damages. Others caution that the scope of the 
     litigation will rest on the number of systems that actually 
     fail, a figure impossible to determine today.
       But there is broad agreement that no matter how severe the 
     glitch eventually proves to be, a cadre of lawyers will find 
     reason to sue. ``There's too big of a jackpot here,'' 
     Marcoccio said.

                          ____________________