BILL ANALYSIS
AB 1710
Page 1
Date of Hearing: April 21, 1998
ASSEMBLY COMMITTEE ON JUDICIARY
Martha Escutia, Chairwoman
AB 1710 (Firestone and Cunneen) - As Amended: April 13, 1998
SUBJECT : LIABILITY: COMPUTER DATE FAILURES IN YEAR 2000
KEY ISSUE : SHOULD CIVIL SUITS AGAINST THE DESIGNERS AND
MANUFACTURERS OF COMPUTER SYSTEMS, PROGRAMS AND SOFTWARE, WHICH
RESULT FROM A COMPUTER DATE FAILURE, BE LIMITED TO REMEDIES
AVAILABLE UNDER CONTRACT LAW?
SUMMARY : Makes contract law the exclusive remedy in civil actions
based on a computer date failure. Specifically, this bill :
1) Specifies that a "Year 2000" action, including one to recover
damages, shall be based solely on contract, provided the
plaintiff has not suffered any personal injury (excluding
emotional harm) and the defendant has made available, at no
charge to the buyer, a repair or replacement for an
off-the-shelf computer program first introduced after December
31, 1997.
2) Exempts software firms and related computer companies from
lawsuits claiming fraud, negligence or unfair competition or
business practices, including derivative or shareholder
actions, if the defendant:
a) gave notice by mail to all registered buyers of the computer
system or any component thereof,
b) gave notice by publication in a newspaper of general
circulation and by posting notice on the defendant's World
Wide Web site on the Internet,
c) identified in these notices the computer software that may
experience a computer date failure, and explained the
manner by which the buyer could obtain repair or
replacement of the software, if available, or additional
information.
EXISTING LAW specifies the measure of damages recoverable in tort
and contract actions.
FISCAL EFFECT : Unknown
COMMENTS : This bill purports to limit the recovery in Year 2000
cases to an exclusive remedy in contract damages. The authors
state that the failure of computers to recognize the start of the
next century threatens to wreak havoc on our economy and may
significantly increase the cost of doing business in California.
The sponsor of the bill is the Association for California Tort
Reform.
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The author states: "The unfortunate truth is that, in dealing
with the millenium bug, an awful lot of money, $2 billion
according to one estimate, will be spent on attorney's fees and
litigation, rather than on addressing this very real problem.
Resources that might be spent repairing or replacing failed
computer systems will instead produce big fees for the trial
lawyers
who view this looming catastrophe as, sadly, yet another
money-making opportunity."
"The legislation I propose . . . will reduce the amount of damages
that companies will be required to pay in lawsuits for millenium
bug related computer failures. Simply put, where there's no
personal injury, the measure would limit the kinds of lawsuits
that may be filed to only those available under contract law,
namely breach of contract and breach of warranty. In other words,
the measure will allow a plaintiff to recover any consequential
business loss, in addition to the costs of repair and replacement
resulting from the computer failure."
"However, in order to obtain the reduction in exposure that my
measure would provide, AB 1710 requires manufacturers of computers
and software to take pro-active steps to prevent Y2K problems from
occurring in the first place. Specifically, my measure requires a
computer manufacturer to notify their own purchasers of expected
Y2K problems, provide notice of expected problems in major
newspapers, and, most importantly, provide purchasers of computers
or software that [experience] Y2K-related problems with repair or
replacement at no charge to the purchaser."
Background : The Year 2000 problem, nicknamed "Y2K" or the
"millenium bug," is due to the fact that many, mostly older
computer programs were written to use the last two digits of a
year as the year identifier. For example, "85" translates to
1985. On January 1, 2000, those programs will see the year "00"
as 1900, leading to miscalculations and potentially severe
problems for business. Analysts are afraid those digits will
confuse computer systems, causing them to crash. It is important
to note that this problem arose from a deliberate design decision.
The Y2K problem started about 30 years ago when early computer
codes were written in two digit codes to save both computer time
and hard disk space. This decision was intentional and was done
as a cost-saving device.
If a computer does not read a date correctly, it may produce
erroneous results. The problem not only affects mainframe
computers and their programs, but also personal computers and
every piece of hardware that contains a microchip. Affected
systems may include, among others: office systems,
telecommunications and mobile equipment; gas, water and electrical
utilities; national defense systems; transportation, including
aircraft, trains and traffic signals; security and fire control
systems; water and sewage systems; elevators; medical diagnostic,
monitoring and life support systems; banking, including ATMs,
credit cards and paychecks; and environmental monitoring
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equipment.
Forty-four percent of respondents in a report released by the
Information and Technology Association of America have already
experienced Y2K glitches and 67% reported failures under test
conditions. Ninety-four percent said that the millennium bug
"constitutes a crisis for the United States and the rest of the
world." Estimates of the cost to correct this problem run as high
as $600 billion. The question presented to the Committee is how
do we respond to this crisis?
Arguments in Opposition : The Consumer Attorneys of California
(CAOC) opposes this bill because it limits consumers' and small
business' rights against the computer industry for damages that
flow from what they suggest is the likely computer shut down in
the year 2000. It is CAOC's position that this bill goes against
the long-standing goal of the tort system: to deter wrongful
conduct and encourage responsible behavior.
CAOC makes the following statement: "According to its sponsors,
AB 1710 is intended to protect high tech companies from frivolous
lawsuits. Was the lawsuit filed by a Michigan grocer who lost
business when his cash registers would not accept credit cards
with year 2000 expiration dates frivolous? What about a small
butcher shop that loses its inventory when the freezer shuts down
due to the Y2K glitch? Or even the failure to detect an
environmental leak because monitoring equipment shuts down.
Immunizing the computer industry for a crisis of its own making is
bad public policy. The primary goal must be to achieve
compliance, rather than creating immunity from full
responsibility, which will provide an incentive to procrastinate.
The primary indirect cost cut off by AB 1710 will be loss of
income from business interruption. However, loss of key
personnel, loss of customers, loss of reputation can also be
expected, which will also go uncompensated under AB 1710. Under
AB 1710, the butcher cannot recover for his primary loss, the
business loss resulting from the Y2K glitch."
The Motion Picture Association of America (MPAA) is strongly
opposed to this bill because their member companies "invest[ed]
millions of dollars in their computer systems with the reasonable
expectation that the system [would] work, regardless of the year
in which it was operated." MPAA explains that the millenium bug
"threatens computer systems ranging in function from production to
distribution of motion pictures." "Any disruption . . . of the
magnitude that is forecasted if the Millenium Bug is not
corrected, could . . . create incalculable losses that may stymie
the substantial economic growth that the entertainment industry
has provided to California." MPAA believes that this bill "is an
unfair attempt to take away substantial legal rights that our
member companies, their employees and California consumers have
under current law. These parties should not be penalized for the
lack of foresight and reasonable care demonstrated by certain
segments of the software industry."
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David Edward Ross, a software engineer for over 35 years, informs
the Committee that, as long ago as 1969, he was working with
software that would correctly handle dates beyond December 31,
1999. He states, "The only reason that more modern software
cannot handle the year 2000 is that insufficient attention was
given to its design, programming, and testing." Mr. Ross believes
that enacting this bill would encourage software developers to
continue "cutting corners" by protecting them even if they create
"cheap software" that does not solve all the Year 2000 failures.
Another independent information systems consultant had the
following to say: "As a matter of professionalism and customer
service, programmers should thoroughly test their applications.
There is no excuse for 'buggy codes' and programmers shouldn't
have the right to fall back on the law to protect them . . .
[Programming] Year 2000 codes is more critical since it is a key
element in the information systems of business and government
agencies. If it isn't coded properly and tested thoroughly it
could be worse than never coding at all, since it would compound
an already major problem."
Dean A. Morehous, an attorney who practices in the high technology
industry, writes to say that AB 1710 is potentially harmful and
extremely unlikely to achieve its authors' legislative objectives.
"If enacted, AB 1710 will inject additional confusion into the
law and further burden California businesses already struggling to
achieve Year 2000 compliance. The bill also has features which
are unhelpful to both consumers and small businesses."
Mr. Morehous states that the bill is based on the faulty
assumption that the
Year 2000 problem will jeopardize the growth of the high
technology industry. He contends that it clearly will not.
"Most evidence indicates that Year 2000 compliance and conversion
efforts have spawned a thriving sub-market within the high
technology sector as users scramble to remediate their systems and
traditional technology vendors (and newcomers) offer Year 2000
product solutions and consulting services."
He also warns that the bill is likely to have exactly the opposite
effect by generating confusion about the appropriate measure of
damages in Year 2000 failure cases. "If anything, it seems more
likely that AB 1710 will spawn collateral litigation concerning
its scope and application, its uncertain defined terms and whether
or not a claim was caused by a computer date failure as defined in
the bill."
Arguments in Support : The Silicon Valley Software Industry
Coalition, with over 240,00 members, argues that there are three
specific reasons for supporting this bill: "the Year 2000 problem
is a result of a programming imperative and is not a matter of
individual fault"; "the best solution is for those who developed
the software to provide the fix"; and "massive litigation which
attempts to recover punitive damages and other large settlements .
. . does not serve the public interest and [will] have no
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deterrent value . . . because of the one-time nature of the
problem."
The State Farm Insurance Companies provide the following statement
in support: "AB 1710 will help the computer and software
industries address the Y2K issue by deterring frivolous claims.
The California Business Roundtable recently cited the high costs
of litigation, particularly the dramatic growth in damages
available under tort law, as being one of the greatest barriers to
doing business in California. The Y2K issue presents fertile
ground for the exploitation of this trend. Already at least two
class-action [type] lawsuits have been filed in California based
on Y2K issues. . . . Many predict a virtual explosion of such
claims as the millenium approaches." Finally, State Farm
highlights that "AB 1710 leaves undisturbed legitimate contract
claims that may exist based on the failure of a particular
computer or software."
Intel Corporation strongly believes that the Year 2000 problem
"requires a broad based solution and that this bill will encourage
that approach." Intel mentions the notice provisions for repair
or replacement, and the free upgrade for the "off the shelf"
software versions put on the market after December 31, 1997, as
especially noteworthy. The California Manufacturers Association
supports the bill for the same reasons.
The Semiconductor Equipment & Materials International (SEMI)
writes in support of AB 1710, stating, "The upcoming Millennium
should not serve as a basis for unwarranted litigation." Based in
Mountain View, SEMI represents more than 625 California companies
employing over 70,000 people in the state. Importantly, sixty
percent of SEMIs member companies are small businesses employing
fewer than 25 persons.
SEMI states in support that "AB 1710 represents an effort to
encourage companies to address the issue immediately, remove any
incentives for lawyers to exploit the Year 2000 issue, and ensure
that disputes can be settled fairly and quickly." SEMI notes that
a Year 2000 lawsuit has already been filed against Symantec
Corporation by Proposition 211 backer Bill Lerach.
SEMI further states: "The bill would protect companies caught in
the middle of the issue who might be exposed unfairly to damage
claims due to a computer
date failure.
The American Electronics Association (AEA) represents the largest
manufacturing sector in California-electronic and information
technology, employing over 724,000 workers. AEA member companies
include more than 3,000 nationwide and more than 1,500 of those
companies are located in California.
AEA states: "This area is ripe for litigation at almost every
level of the high-tech industry. Potential liability exists for
directors and officers for failure to take timely or appropriate
steps to cure the problems both as manufacturers and sellers of
technology and as directors and officers responsible to
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shareholders. . . .There is no silver bullet solution. Each
company is faced with a line-by-line review of all code for all
programs they use. Further, the problem may be embedded in the
firmware of a device or burned into the computer chip itself."
The American Insurance Association (AIA) believes that AB 1710 is
a balanced, fair solution to the legal issues raised by the Year
2000 problem. AIA expresses concern that Year 2000 lawsuits that
are aimed at exploiting the problem rather than providing the
solution. In contrast, AIA argues, AB 1710 seeks a solution by
requiring "software makers of newly sold products to provide a
free upgrade to solve the problem. For older programs, it
requires the software maker to provide notice that the system may
experience a computer date failure and explain the manner by which
the individual may obtain repair or replacement of the system or
software."
The Personal Insurance Federation of California (PIF), which
represents approximately 40% of the personal line insurers in the
state, including State Farm, Farmers, SAFECO, 20th Century,
Progressive and Colonial Penn Insurance Company, supports this
bill.
PIF believes that "this measure addresses the inability of
computer systems to manage the transition and date change from
1999 to 2000 and related issues arising from the anticipated
failure of computer hardware and software.
AB 1710 addresses such failures by fashioning exclusive remedies
for the anticipated and unavoidable computer failures. In sum,
PIF concludes, "This measure will assist both the public and
private sector in confronting issues which will arise relating to
computer failures and at the same time will allow individuals
redress through contract remedies."
The California Chamber of Commerce reminds the Committee that
California's computer industry is critically important to our
state's economy. "This problem, commonly known as Y2K, must be
addressed through informing users of their options with regard to
computer failures." The Chamber urges passage of this bill
because it will give California high-tech business, and those that
use these systems for their own businesses, some predictability as
to their liability regarding Y2K.
ISSUE #1: DERIVATIVE AND SHAREHOLDER ACTIONS : In subsections (a)
and (b), the bill says that in any action, "including one based on
breach of contract, derivative, shareholder or any alleged
failure" to fix or detect a flaw in a system or program, the case
"shall be deemed to be based solely in contract." The inclusion
of the words "derivative and "shareholder" in the bill may be
problematic. Derivative or shareholder suits are typically
brought on breach of fiduciary duty or securities fraud theories
against the directors or officers of a company and are not limited
to a contract recovery.
Exactly what contract relationship is the bill referring to in the
shareholder
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or derivative suit context? The only contracts between the board
members and officers of a company presumably are their employment
contracts with the company. Is that the contract the bill is
targeting? Or is it intended to refer to the contract under which
the software or hardware was originally purchased?
Bill opponent Dean Morehous (see opposition above) raised this
issue as well, stating: "[T]his aspect of AB 1710 will greatly
confuse California law concerning the damages recoverable in
shareholder and derivative suits since it will apply to any suit
which arises, 'directly or indirectly,' from a Year 2000 failure.
By including this language the author . . . has unwittingly
broadened the scope of the bill such that any plaintiff suing in a
shareholder or derivative suit could cite a downturn in a
company's financial fortunes because of a Year 2000 incident as
the basis for bringing his suit. Unfortunately, this is an
invitation for more, not less litigation." "The damages
limitation proposed in the bill actually protects corporate
neglect or, even worse, wrongdoing by minimizing its consequences
to those in position to prevent or limit the harm of not being
ready for Year 2000."
ISSUE #2: ELIMINATION OF FRAUDULENT CLAIMS : The bill does away
with all claims for fraud. While one can debate the merits of
such an approach, there could be Year 2000 cases where fraud is an
appropriate claim. First of all, the danger of never-ending fraud
claims may be exaggerated. There will likely be very little
evidence of scienter by vendor defendants in connection with Year
2000 claims. However, there might be some cases where misleading,
deceptive, or outright fraudulent business practices will have
caused damage to California businesses and consumers in connection
with the Year 2000 problem.
For example, some experts affirm that there are still vendors
selling non-compliant software and/or upgrades for software that
could have been fixed for the Y2K bug before its release. Most
vendors certainly knew better at some point during the 1990s and
clearly know better now about the Year 2000 issue. The Committee
may wish to consider if by providing immunity from tort liability
to such vendors (or others), this bill will provide little
incentive for those vendors to either change their business
practices or get on with the work of fixing their products. Why
should such unscrupulous vendors be insulated from tort liability
if such intentional conduct can be proven?
ISSUE #3: RECALL AND REPLACEMENT PROVISIONS : The bill comes close
to legislatively mandating a recall or complete replacement of
non-Year 2000 compliant software or products as the price for
securing the damages limitation for products first sold in 1998.
Opponents point to numerous problems with this part of the bill.
First, litigants will argue that the process (described in
subsection (a)(1)(B) of the bill) is the only way vendors can
avoid anything beyond contract liability. While the provision of
a free upgrade might be warranted in some circumstances, it is not
the only remedy that might be appropriate. Moreover, there might
be situations where liability is not warranted in either contract
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or tort, yet a vendor might feel compelled to develop a Year 2000
"patch" for a product no longer in wide usage. The limitation of
the proposed statute to "off the shelf" products is also likely to
generate collateral litigation about what "off the shelf software"
means. Does any customization of the "off the shelf" software
render AB 1710 inapplicable?
In the final analysis, the problem with the authors' proposed
measure is that not all Year 2000 failure cases will be amenable
to a contract measure of damages. This "one size fits all"
approach may be an overly simplistic view
of the kinds of claims Year 2000 failures might generate.
Related Pending Legislation : SB 2000 (McPherson), currently
pending in the Senate Judiciary Committee, would provide immunity
to public entities from liability arising from an incorrect date
generated by a computer or other information system.
REGISTERED SUPPORT / OPPOSITION :
Support Opposition
Assn. of California Tort Reform Consumer Attorneys of California
Silicon Valley Software IndustryMotion Picture Association of
America
Coalition Dean A. Morehous, Jr.
Intel Corporation David Edward Ross
California Manufacturers Assn.
State Farm Insurance Companies
California Chamber of Commerce
Personal Insurance Federation
American Insurance Association
American Electronics Association
Semiconductor Equipment & Materials
Analysis prepared by : Al Hernandez Santana / ajud / (916)
445-4560