THE YEAR 2000 MALPRACTICE BUG:

It is September 15, 1998. Mr. Jones walks into your law office, complaining of a serious injury resulting from an automobile accident which occurred two months earlier. Since the extent of the injury will be unknown for some time, you note in your computerized docket system that the suit must be filed by July 14, 2000 when the two-year statute of limitations expires. Unfortunately, however, your software is infested with the so-called "Millennium Bug" and, as a result, the statute of limitations is missed. Malpractice? You bet.

Here is another example. Acme Corporation asks you to review a preprinted software license agreement which it received from FutureWare Company. According to the FutureWare salesperson, the new software is "Y2K Compliant", which means that it will continue to work properly after January 1, 2000. You advise Acme that the license agreement looks pretty standard, although it contains no such warranty. The agreement also includes standard language excluding all warranties except "90 days parts and labor." Regrettably, the software doesn’t work after the turn of the Millennium. Malpractice? Probably.

Many attorneys believe the looming Year 2000 Crisis will be the next legal "gravy train", on a scale comparable to asbestos claims and breast implant claims. This may prove to be a correct assessment. But as the foregoing examples illustrate, the Millennium Bug could bite many attorneys with malpractice claims against them. Those claims can arise both from the attorney’s own malfunctioning computers, from giving faulty advice to clients regarding Y2K problems, and from negligently litigating Y2K claims.

Let’s focus on the cause of the Year 2000 Crisis. Since the inception of computers almost 50 years ago, systems designers and programmers have almost always treated the "date field" as having only two digits. For example, the year 1990 would, for data processing purposes, be treated in a data field as "90", the year 1995 would appear as "95" and so on. By creating a data field of only two digits, rather than with four or even three digits, computer systems were given more efficient storage for important data and, perhaps more significantly, were able to process date-related calculations faster. These calculations were for functions such as recording payments on account, invoice dating, receivables aging, the calculation of interest on overdue payments and many other purposes.

Until the last few years, almost every computer system has been designed with a two-digit date field. Now, however, industry has recognized that this design technique, if not remedied, will cause a serious problem once the clock passes midnight and the year 2000 arrives. Once we enter the year 2000, computers which have used a typical two-digit date field will go from "99"(for the year 1999) to "00"for the year 2000. At that moment, the computer may recognize that new date as 1900. It is even possible that the new date of "00"will be unrecognizable to the computer. In either case, chaos could result. Some experts predict that the Year 2000 computer problem will cause the collapse of our economy, or the destruction of the Internal Revenue Service and the like. Others conclude that the problems caused by the Year 2000 Crisis are greatly exaggerated and that it will turn out to be no more than a minor inconvenience. All experts, however, conclude that the Year 2000 Crisis will be (and, indeed, it already is!) a bonanza for lawyers who practice information technology law. It has also been a godsend to older programmers who know the early programming languages such as COBOL, for they are now very much in demand.

An attorney owes a client a duty to exercise that degree of reasonable knowledge and skill that lawyers of ordinary ability and skill possess and exercise. (1) "Ordinarily when an attorney engages in the practice of law and contracts to prosecute an action on behalf of a client, he impliedly represents that [1] he possesses the requisite degree of learning, skill, and ability necessary to the practice of his profession and which others similarly situated ordinarily possess; [2] he will exert his best judgment in the prosecution of the litigation entrusted to him; and [3] he will exercise reasonable and ordinary care and diligence in the use of his skill and in the application of his knowledge to his client’s cause." (2) Examples of legal malpractice can include:

As the foregoing demonstrates, the traditional principles relating to attorney malpractice have been, and will continue to be, applied to many different types of claims against lawyers. As this article shows, the Y2K Crisis will undoubtedly give rise to lawyer malpractice claims which result from "the application of these old rules to new stuff." These Y2K malpractice claims will likely include the three types enumerated above, among others.

Practitioners can run into potential malpractice problems through their own software malfunctioning. Many firms have computerized calendaring systems to keep up with appointments, as well as due dates for accomplishing tasks. One immediately apparent malpractice problem is that an attorney will miss filing a complaint within the statute of limitations, miss a trial date, or miss some other filing deadline, such as submission of a witness list, because the calendaring software has broken.

Litigators are not the only attorneys with potential Y2K problems. Any legal action which needs to be taken periodically and might be tracked by computer is a potential landmine. For example, corporate reports need to be filed. UCC-1 financing statements need to be renewed every five years. Any failure to file papers or take action on a timely basis can risk a client losing valuable rights.

Y2K problems are not limited to calendaring software. They can appear in any software which uses dates. By way of example, most word processing software records the date that a document has been created and/or last modified. Most practitioners would be lost if their word processing software wouldn’t work when they return from their New Year’s 2000 holiday. Most phone systems are computerized. Attorneys keep electronic address files. Thus, any software in the attorney’s office, not just calendaring software, which could keep the firm from operating if it failed should be checked to ensure that it is Y2K compliant.

An attorney, or any other business, is not out of the woods by checking only their computer software. Many pieces of equipment have embedded computer chips which could malfunction in the same way as software. For example, the attorney’s electronic pocket calendar would be a clear candidate for a Y2K problem. Some of the copying machines or fax machines could have embedded chips. Clearly, any electronic devices have the potential of having the Millennium Bug.

The greater problem for attorneys is likely to arise from giving negligent advice on Y2K issues. On the most basic level, malpractice claims can arise from an attorney failing to make his or her clients aware of potential Y2K problems so the clients can take corrective actions. Practically all businesses have at least some sort of computerized record keeping. Many businesses are completely dependent upon their computer systems. If the attorney doesn’t flag Y2K issues to the client, it is likely that if a business’ computer fails and the business suffers a loss, included in the suit against the software vendor will be a malpractice claim against the attorney for failing to make the business aware of potential Y2K problems.

Other, similar issues can arise for attorneys representing publicly traded corporations. Publicly traded corporations are required to make disclosures in their SEC filings as to their Y2K compliance and the cost of any Y2K remediation. If those disclosures prove to be inaccurate, investors will inevitably make securities fraud claims, which, as in other types of securities fraud cases, would include claims against the attorneys who helped prepare the filings. Banks have similar reporting requirements to the appropriate regulatory authorities. Indeed, since banks’ record keeping software depends upon recording accurate data by date, a financial institution will need to be particularly diligent to ensure that its software is Y2K compliant.

Attorneys more directly involved with Y2K issues will, obviously, face more potential malpractice liability. For example, an attorney could commit malpractice while performing an investigation currently in vogue known as a "Y2K Legal Audit". In addition, a lawyer negotiating a software contract with a programmer or consultant to repair Y2K problems (commonly known as a "Y2K remediation contract") also could commit malpractice.

A Year 2000 legal audit includes reviewing a client’s existing or past software licenses to determine, among other issues, [1] whether the software vendor may have warranted the software in question to be Y2K compliant, [2] the client’s remedies in the event the software fails on January 1, 2000, and [3] when the statute of limitations for any claim involving failure of the software might expire. Since software licensing transactions are governed by the UCC (6), in most circumstances the statute of limitations for claims regarding performance of the software would expire four years from the tender of delivery, not from the discovery of the defect. (7) A contractual provision might shorten this time period to as little as one year, but a warranty of future performance, i.e., that the software will be free of defects for a period of two years, could extend it. (8) Thus, with some software, the statute of limitations for bringing a Y2K claim could potentially expire before the software even fails. If a Y2K flaw is discovered in the software, and brought to the attorney’s attention, prior to the expiration of the statute of limitations, even though the software is currently operating properly, an attorney could face a malpractice suit if he or she failed to file suit in time.

In addition, an attorney performing a Y2K legal audit would want to review the client’s insurance policies to determine whether there might be insurance to cover losses caused by a Y2K- related failure, such as business interruption insurance. Attorneys representing software vendors will also wish to review the client’s insurance policies to determine whether there could be coverage for any Y2K claims. For example, D&O policies will generally cover directors and officers against claims arising from inaccurate securities disclosures, but corporate counsel should ensure that there are no exclusions from the policies for Y2K liability. To the client’s surprise, there might not be coverage for non-compliant software, since many CGL and E&O policies have exclusions for contractual liability. Since most software licenses are governed by the UCC, failure of the software is generally considered to be a breach of contract, which could be excluded from insurance.

Additional malpractice problems can arise from negotiating licensing agreements for software which is supposedly Y2K compliant. An attorney representing a software licensee would want a warranty from the vendor that the software would operate properly after December 31, 1999. The licensee’s attorney would also want the longest possible testing period for the software and would want to resist any shortening of the limitation period for bringing suit. In contrast, the software supplier’s attorney would want to limit, as much as possible, any warranties as to Y2K compliance, as well as limitations on the licensee’s remedies. In addition, the supplier’s counsel will likely insist upon a contractual limitation on your client’s right to recover consequential damages, which would potentially be the bulk of any claim arising from a Y2K-related failure. Obviously, if the proper issues are raised and the software supplier’s attorney won’t agree to a proposed provision in an agreement which is designed to protect your client, the client must also be advised of the potential risks in going forward with the deal so that it can make the appropriate business decision.

Year 2000-related legal malpractice claims can also arise from litigating Y2K claims. As mentioned above, one pitfall is the fact that the statute of limitations for Y2K claims could expire before the software does, since the statute would expire four years after tender of delivery, whether or not the Y2K defect is known. However, that could be one of the least of the problems facing attorneys litigating Y2K claims, and those problems will be faced by plaintiffs’ and defendants’ attorneys alike. Since computer software licenses are governed by the UCC, counsel will need to be fully versed in the provisions of the Code, particularly the sections dealing with warranties and disclaimers, acceptance and rejection, and remedies, including limitations of damages. They will also need a working familiarity with copyright and patent law, since those issues may also become involved, as well as familiarity with computer software, operating systems and industry customs and usages. It will be practically impossible to effectively litigate Y2K software cases without a basic understanding of the software product (which may be an embedded chip), which is considerably more complicated than most products.

Attorneys will also need to pay close attention to developments in the law. There is no doubt but that once Y2K cases begin heat up, there will be a surge of published opinions as well. Since most of those opinions will be decided under the UCC, which theoretically should be uniformly interpreted among the states, a decision from, for example, California would be instructive as to what the law should be in Kansas, and vice versa. As a result, Y2K litigators will need to keep abreast of decisions across the country, rather than just in their own states. Malpractice claims could easily arise from an attorney’s failure to know about the latest Y2K decision, whether that decision is from his or her own state or from other states.

Keeping abreast of UCC decisions will not be enough, however. Due to the nature of how opinions are circulated and published, judicial opinions tend to run somewhat behind the cutting edge of the law. While an attorney is not obligated to correctly predict future developments in the law, he or she is obligated to be aware of changes in volatile areas of the law, make his or her clients aware of the fact that the law is unsettled, and use his or her best professional judgment as to the direction of future trends. (9) Thus, while an attorney does not have an obligation to accurately predict the future direction of the law, he or she does have an obligation to ascertain the current state of the law and to use their learning and skill to make an informed decision based upon the current state of the law.

In claims for economic damages resulting from the failure of goods to perform properly, the courts have almost universally limited a buyer’s remedies to those under the UCC and explicitly excluded any tort remedies, apart from fraud in the inducement. (10) As a result, tort remedies are limited to instances where the defective product causes personal injury or damages other property. Where the product fails to function, or only the product itself is damaged, the buyer’s remedies for the value of the product and any damages resulting from the failure of the product are in contract.

Nonetheless, practitioners will also need to keep an eye on developments in the negligence and product liability areas as well. Without a doubt, clever plaintiffs’ attorneys will do their best to advance theories to circumvent limitations of remedies and disclaimers of consequential damages provisions in license agreements. Those theories could include fraud in the inducement, negligence, negligent misrepresentation, breach of fiduciary duty, and even claims under deceptive trade practices or consumer fraud statutes. At some point, a judge might find merit in one of those arguments and publish an opinion. Malpractice claims could easily arise if a licensee/buyer’s attorney failed to advance the latest argument to help his or her client’s case, or if a vendor’s attorney was unaware of the latest theory, and was caught flatfooted and failed to advance a counterargument, or failed to advise his or her client of a vast increase in its potential exposure in a suit.

In a related area, attorneys will also need to keep abreast of insurance coverage decisions as well, whether they are directly litigating coverage claims or if their clients have insurance which might arguably cover a Y2K claim. There could be first party claims to recover remediation costs or damages for business interruption, as well as third party claims from plaintiffs seeking to recover damages caused by failed software. (Not to mention subrogation claims by insurers who have paid first party claims.)

Just as there will be rapid development in Y2K liability decisions, there will almost certainly be a similar rapid development in Y2K insurance coverage decisions. Many insurers view this litigation as being very similar to the situation involving environmental claims at the beginning of pollution coverage litigation. Issues concerning rights of the insured, defenses available, construction of policy language regarding coverage, exclusions and limitations, and the time in which to assert claims, will all need to be addressed. Counsel will necessarily need to know the current state of the law to advance their client’s interest, whether they might be representing insurers or insureds. This is not the province of defense counsel, either. Plaintiffs’ counsel will obviously prefer to have insurance for their claims, rather than relying upon the economic health of the defendant. Indeed, in some instances the plaintiff may be able to claim directly against the insurance policy. Malpractice claims could arise if a plaintiff’s attorney won a significant judgment against an insolvent defendant if the claim could have been covered by insurance.

The Year 2000 Crisis may well prove to be the next great litigation boom, but a great part of that boom may prove to be legal malpractice claims arising from a failure to properly deal with Y2K issues. Practitioners will need to be particularly vigilant to maintain their own computers and keep abreast with the latest developments in the law to avoid potential malpractice. However, the Y2K crisis does not create any new obligations on the part of attorneys. It directs their existing obligations to their clients into a new area. The list of potential areas of malpractice in this article is by no means exhaustive. The types of malpractice claims which could be brought are limited only by the imaginations of plaintiff’s malpractice attorneys.