Mr. Chairman, Distinguished Members of the Committee:

My name is Jeff Jinnett and I am President of LeBoeuf Computing Technologies, L.L.C., a business subsidiary of the law firm of LeBoeuf, Lamb, Greene & MacRae, L.L.P., of which law firm I was formerly a Partner and now serve as Of Counsel and as Head of its Year 2000 Practice Group. I have devoted 100% of my time since 1996 to advising law firm clients on the Year 2000 problem. I have also worked with Y2K technical experts to develop methodologies to use in auditing Y2K remediation projects from a risk management “best practices” point of view and to assist companies to develop due diligence records of their Y2K remediation efforts for use in Y2K-related litigation. I have testified on the Y2K problem before the U.S. Senate Banking, Housing and Urban Affairs Committee, Subcommitee on Financial Services and Technology on two occasions. I appreciate the opportunity to testify before this Committee and wish to note that the testimony I give today represents my personal views and does not necessarily represent the views of either LeBoeuf Computing Technologies, L.L.C. or its parent law firm. I ask that a copy of my written statement be included in the record.

S. 1554 (the “Fairness in Punitive Damages Awards Act”) deals in a thoughtful and measured way with the problem of the increasing prevalence of arbitrary and excessive punitive damage awards (see Moller, Pace & Carroll, Punitive Damages in Financial Injury Jury Verdicts (RAND 1997); see also, American College of Trial Lawyers, Report on Punitive Damages of the Committee on Special Problems in the Administration of Justice pp 13-15 (1989)). In light of the potential for a flood of litigation arising out of the Year 2000 computer problem possibly involving arbitrary and excessive punitive damage awards bearing no reasonable relationship to the actual damages suffered by the plaintiff, I believe that S. 1554 is also very timely in that regard. Overview of the Year 2000 Computer Problem

Since numerous hearings have been held on the Year 2000 computer problem, both here in the Senate and in the House of Representatives, I will only briefly give an overview of the technical issues involved. The so-called “Y2K” or “Millennium Bug” problem arises because many business application software programs written over the past few decades use only two digits rather than four digits to represent the year. Therefore, on January 1, 2000, unless the software is corrected, most computers with date-sensitive programs will recognize the year as “00" and may assume that the year is 1900 rather than 2000. This could either force the computer to shut down (a hard crash) or lead to incorrect calculations (a soft crash). Some software programs perform forward-looking calculations involving dates in the next century, resulting in earlier “event horizons”. Indeed, some companies have already experienced systems problems caused by the Year 2000 problem. For example, the March, 1998 Y2K survey conducted by Dr. Howard Rubin of Rubin Systems, Inc., which surveyed approximately 128 major companies (the majority of which expect to spend more than $100 million on their Y2K projects), reports that about 37% of the companies surveyed had already encountered a Y2K-related systems failure (see the Internet Uniform Resource Locator (URL) of “http://www.hrubin.com/2000/results.html”).

It is understood that programmers in the past used two digits rather than four digits to represent the year in order to save then-expensive memory during processing and that they believed that the software they designed would have been replaced before the turn of the century. Unfortunately, many of the software programs (“legacy systems”) they designed are still in use. In addition, the Year 2000 computer problem can exist not only in software programs, but also in computer hardware and in embedded microprocessors in non-computer equipment (for example, microcontrollers operating building equipment such as security systems, HVAC systems, elevators and telephone equipment, on factory floors, on ships and in utility plant operating equipment).
Why Business Disruption in the U.S. Private Sector Appears Inevitable

Some level of business disruption due to the Y2K problem appears inevitable because many organizations are behind schedule in the implementation of their Y2K remediation plans (see, e.g., the Gartner Group survey, referenced in Julie Stacey, “How Things Stack Up for 2000", USA Today, December 17, 1997 at pg. 10A; see also, the Rubin Systems, Inc. March, 1998 survey, which indicates that 78% of the 128 companies surveyed reported that their rate of missing milestones in implementing their Y2K remediation plans is increasing). In addition to the problem of delayed remediation work, additional disruptions may arise due to organizations having underestimated the budget needed to correct their Y2K problem (see, e.g., the Rubin Systems, Inc. March 1998 survey, which reports that 85% of the 128 companies surveyed had underestimated their Y2K costs).

Further, since many companies rely on suppliers, distributors and other third parties which may not all become Y2K compliant in time, failures in the weak links in the supply and distribution chain could cause the entire chain to fail (see, e.g., L. Freeman and L. Meador, “Year 2000: The Domino Effect”, Datamation, January, 1997, located at the Internet URL of “http://www.datamation.com/PlugIn/workbench/yr2000/stories/depend.htm”). Exacerbating this problem is the fact that some organizations are having some difficulty obtaining information about the Y2K compliancy status of products and services provided by third parties due to the fear of the third parties that the requested information could be used against them in later litigation (see, e.g., the March, 1998 Rubin Systems, Inc. survey, which reported that 86% of the 128 major companies surveyed ranked business partner and vendor compliance and cooperation as “very to extremely low”).

Finally, not every aspect of the Y2K problem is fully known at this time. Although fairly detailed statistics are available as to the estimated cost of remediating all of the impacted hardware and software worldwide, the estimates with respect to the cost of remediating the embedded chip problem appear to be less definite (see, e.g., “The Millennium Bug Problem in Embedded Systems”, located at the Internet URL of “http://www.iee.org.uk/2000risk”; see also, Capers Jones, The Year 2000 Software Problem: Quantifying the Costs and Assessing the Consequences (Addison Wesley 1998) at pp. 230-231; see also, M. Frautschi, “Embedded Systems and the Year 2000 Problem (The OTHER Year 2000 Problem)”, located at the Internet URL of “http://www.tmn.com/~frautsch/y2k2.html”). In a sense, the embedded chip problem is the part of the Y2K iceberg which is partially hidden under the water.
The Resulting Y2K Litigation

If disruptions do occur due to the Y2K problem, as currently seems inevitable, litigation is likely to follow close behind. In testimony before the U.S. House of Representatives on March 20, 1997, Ann Coffou, a Managing Director of the Giga Information Group, estimated that Y2K-related litigation might near or exceed $1 trillion (see the Internet URL of “http://www.itpolicy.gsa.gov/mks/yr2000/hearing.htm”). If this occurs, Y2K litigation costs could exceed by many times the estimated $300 billion total annual direct and indirect costs of all civil litigation in the U.S. (see, e.g., Jack Kemp, “Common Good Above Profits”, The National Law Journal, Nov. 4, 1996, at p. A20; H. Moskowitz and R. Wallace, “Loser Pays: A Deterrent to Frivolous Claims”, New York Law Journal, March 7, 1996 at p. 2; Robert Smith, “Saving Ourselves from Being Lawyered to Death”, Washington Post, December 23, 1996, at p. C04). I personally cannot predict how much litigation ultimately will result from the Y2K problem, since it depends on how successful organizations are in fixing their mission-critical systems and in implementing viable business continuity “fallback” plans. I would not be surprised, however, if a significant amount of litigation results from Y2K-related failures.

Indeed, lawsuits have already been filed with respect to a few issues surrounding the Y2K problem. Of particular interest are the class action lawsuits against software vendors wherein the plaintiffs allege, in part, that the vendors sold software which was defective in that it was not Y2K compliant and wrongfully charged their customers for upgrades to make the software compliant, rather than issue the upgrades as free corrective software “patches” (see, e.g., Atlaz Int’l Ltd. v. Software Bus. Techs. Inc., No. 172539 (Cal. Super. Ct., Marin Co., filed Dec. 2, 1997); Capellan v. Symantec Corp., No. CV772147 (Cal. Super. Ct., Santa Clara Co., filed Feb. 19,1998); Cameron v. Symantec Corp., No. CV772482 (Cal. Super. Ct. Santa Clara Co., filed May 7, 1998); Paragon Networks Int’l v. Macola, Inc., No. 98CV0119 (Ct. of C.P., Marion Co., Ohio, filed April 1, 1998); Issokson v. Intuit Inc., No. CV773646 (Cal. Super. Ct., Santa Clara Co., filed April 28, 1998)). Although the complaints generally allege fraud, breach of warranties and deceptive trade practices, the underlying legal theory which the plaintiffs’ attorneys seem to be trying to establish (see, e.g., allegation no. 1 in the Issokson case discussing the “latent Year 2000 defect”) is that Y2K non-compliant software is inherently defective from day one. If this principle wins the day in court, it may be easier for plaintiffs to argue that hardware and software vendors should be held liable on essentially a strict product liability basis for damages arising out of computer system failures due to the products not being Y2K compliant and therefore being inherently “defective” and “dangerous”, thus reducing the possible defenses which could be used by the defendants.

Although some Y2K litigation has already been filed, I personally believe that the bulk of significant technical failures due to the Y2K problem will occur on or after January 1, 2000 and therefore the bulk of Y2K litigation will be filed after the turn of the century. Some types of cases can be predicted with relative assurance. For example, computer system failures could cause companies to fail to perform contractual obligations in a timely manner, leading to breach of contract suits. The company sued might itself sue the hardware and software vendors which sold it the non-compliant third party hardware or software or the consulting firms which had assisted the company in its unsuccessful Y2K remediation and testing. If the impacted company with failed computer systems is a public company, the company’s stock price might fall, resulting in a shareholders’ suit against the company claiming that the company’s SEC disclosures did not fully disclose the extent of the company’s Y2K problem (see, e.g., the Testimony of SEC Commissioner Laura Unger and Year 2000 Disclosure Task Force Survey, supplementing her testimony, wherein it was noted that “many companies are not following the specific guidance provided in revised Staff Legal Bulletin No. 5") (see the Internet URL of “http://www.sec.gov/news/extra/y2kcfty.htm”).

Although some Y2K system failures could conceivably result in personal injury (for example, if medical devices fail) or in property damage (where, for example, a building sprinkler system malfunctions in a fire, resulting in the destruction of inventory), a significant portion of Y2K-related damages could be comprised of purely financial losses. For a good exposition of one type of financial loss which could arise due to the Y2K problem, I recommend the Computer Sciences Corporation study of the foreign exchange market, which estimated that if a securities settlement clearing house with a three percent (3%) market share were to have trouble settling trades due to a Y2K problem, the damages caused by that failure could total between $3.6 to $5.2 billion within five days (see Sustaining Stable Financial Markets Through the Millennium: A CSC Year 2000 Research Report (Computer Sciences Corporation 1998) at pg. 18).

Indeed, a few recent technology failures in the telecommunications area (unrelated to the Y2K problem) make it clear how easily business operations can be disrupted due to a computer problem, with serious financial consequences. On April 13, 1998, a software error in a single switch resulted in the nationwide communications failure of a major carrier, impairing some corporate customers’ network-based businesses, interrupting some electronic financial transactions and inhibiting the ability of some retailers to authorize credit transactions. On May 19, 1998, the control system of a communications satellite malfunctioned, causing the satellite to go into a spin, disrupting credit card authorization services, interfering with paging services and interrupting the distribution of certain television programs (see, e.g., Testimony of Joel C. Willemssen of the GAO, before the House of Representatives Subcommittee on Oversight, Committee on Ways and Means, “Year 2000 Computing Crisis: Telecommunications Readiness Critical, Yet Overall Status Largely Unknown” (June 16, 1998), located at the Internet URL of “http://www.gao.gov”).

The above telecommunications-related examples are just a sampling of possible disruptions which can result from computer system failures in a variety of industry sectors. For a more in-depth analysis of actual and potential computer systems failures, see the Association for Computing Machinery (ACM) Forum on Risks to the Public in Computers and Related Systems, moderated by Peter Neumann of SRI International (located at the Internet URL of “http://catless.ncl.ac.uk/Risks”)(see also, the Institute for Crisis Management’s DataCast(tm) database of computer-related business disruptions during the last twenty years that could reoccur as a result of the Y2K problem, located at the Internet URL of “http://www.crisisexperts.com”).

Our society has become increasingly dependent on computer systems. According to one report, U.S. private sector investment in software and data processing rose from eighteen percent (18%) of total investment in 1981 to forty-one percent (41%) in 1996, with the information processing category growing at an annual rate of twenty percent (20%) as compared to growth in total investment of only five percent (5%) (see, e.g., D. Coyle, “Hard Figures for a Software-Driven Economy”, The Independent, June 6, 1996, at pg. 26). These figures underscore the fact that the U.S. economy has evolved into a high technology, knowledge-based economy where computer failures are likely to have a far greater negative effect than they would have just fifteen years ago (see, e.g., M. Rogers and D. Gonzalez, “Can We Trust Our Software?”, Newsweek, January 29, 1990). Aside from the business interruption costs, lost revenues and litigation costs that an organization may suffer due to a computer failure, organizations need to factor in as well the negative effect such a failure could have on the reputation of the business, especially if very high punitive damages are awarded against the business in litigation.

Punitive damages are possible in Y2K lawsuits involving financial damage claims. For example, under New York law, punitive damages are allowed in order to vindicate the public interest and deter morally culpable conduct both from the defendant and other potential wrongdoers (see, e.g., Walker v. Sheldon, 10 N.Y. 2d 401 (1961)). Although courts in most states are reluctant to award punitive damages in cases concerning only breach of contract, some states permit the award of punitive damages in order to deter morally culpable conduct (see, e.g., Werner, Zaroff, Slotnick, Stern & Askenazy v. Lewis, 588 N.Y.S. 2d 960 (N.Y. Civ. Ct. 1992)). Punitive damages also have been awarded in the past in connection with computer-related systems failures involving claims of fraud or intentional misrepresentation (see, e.g. The Glovatorium, Inc. v. NCR Corp., 684 F. 2d 658 (9th Cir.)(affirming an award of punitive damages against a computer vendor for intentional misrepresentation of computer system’s performance); VMark Software, Inc. v. EMC Corp., 37 Mass. App. Ct. 610, 642 N.E. 2d 587 (1994) (on suit to recover software license fee based in part on alleged unfair and deceptive trade practice, Court declined to award punitive damages, but noted that for “knowing” misstatements, punitive damages are available)) For a more detailed exposition of potential parties, causes of actions and defenses in Y2K-related litigation, see J. Jinnett, “Legal Issues Concerning the Year 2000 Computer Problem”, Understanding, Preventing and Litigating Year 2000 Issues (Practicing Law Institute 1998) at pg. 103.
Why the Award of Arbitrary and Excessive Punitive Damages in Y2K Cases is Possible

Jury selection in Y2K litigation is likely to become a critical issue for defendants if excessive punitive damage awards are possible. Recent focus group research indicates that prospective jurors in Y2K-related cases may be very concerned about the Y2K problem and may have a tendency to overreact once actual computer systems failures begin to occur (see, e.g., unpublished 1998 Y2K research study by Image Engineering, Inc. (email “imageeng@ntr.net”)). DecisionQuest, a leading litigation support firm, has found in its Y2K focus group studies that the focus group members tended to evaluate the responsibility of the defendant on two key factors: control and knowledge (see, e.g., Dr. David Davis, “What do Jurors Think?”, Litigation Strategy for Year 2000 , pp. 57-72 (Law Journal Seminars-Press 1998)). If a defendant company had full control of its Y2K remediation plan and full knowledge of the nature of the Y2K problem, the focus group members appeared more likely to be willing to assess damages (including presumably punitive damages) against the company in the event it failed to become Y2K compliant.

I have organized and witnessed mock Y2K trials and now recognize as a result of the mock trials that it is relatively easy to state the plaintiffs’ case and relatively hard to explain how difficult the Y2K problem is to solve on the defendants’ side. The Y2K case may be a very simple case for a plaintiffs’ attorney to present to a jury. Essentially, the defendant will be presented as having used two digits instead of four digits in its computer programming in order to save money (in the plaintiffs’ terms, out of greed). Then, even though it was known for decades that the computer systems would not function properly past December 31, 1999, the defendant waited until 1996 or 1997, for example, to put a Y2K remediation program in place. The plaintiffs will emphasize that the Social Security Administration began its Y2K remediation program in 1989 and that had the defendant company begun its remediation program at the same time, it would have been completed well in advance of the year 2000. Finally, the plaintiffs will note that it is a simple matter of “two digits to four digits” and that companies had even trained high school graduates to do Y2K corrective work, so the remediation work is not exactly rocket science. At that point, the actual jurors, who may be even more sensitized to the Y2K problem than they are presently because they have either personally suffered due to it or know someone who has, may be very susceptible to a plaintiffs’ attorneys’ request to “send a message” to corporate America that they should never again allow a computer system problem like the Y2K problem to occur.

Juries may be selectively “sensitized” to the Y2K issue, however. A power plant failure in one area of the U.S. might create a ripple effect, impacting hospitals, telephone companies, governmental offices and private sector companies in the surrounding geographic area. Jurors drawn from that area may be in a much more punitive mood than jurors drawn from a geographic area relatively untouched by major infrastructure failures due to the Y2K problem. This may result in jury awards across the U.S. which are unpredictable and arbitrary. For an excellent exposition of how the Y2K problem may impact U.S. families in their day-to-day lives (and the potential differing local impact of the Y2K problem within the U.S.) , I recommend Edward and Jennifer Yourdon’s Time Bomb 2000, published in 1998 by Prentice Hall PTR (see, especially, the chapter “The Ripple Effect of the Year 2000 Phenomenon”, located at pg. 387).

One additional problem in the Y2K litigation area is that juries may award high punitive damage awards, thinking that the awards will not be that damaging to the defendant because the defendant’s insurance will cover the jury award. Unfortunately, this may not be the case, since in some states, such as Connecticut and California, insurance policies are not permitted to cover extracontractual awards for punitive damages directly assessed against the tortfeasor (see, e.g., Mealey’s Litigation Reports, “Insurability of Punitive Issues in Award Challenge”, June 25, 1997). Also, although many insurance underwriters have not finalized their coverage positions with respect to Y2K-related losses, the trend currently appears to be that underwriters may deny coverage for certain comprehensive general liability and business interruption losses caused by computer systems failures arising out of the Y2K problem, arguing that CGL insurance covers only “fortuitous” losses and the Y2K problem is not a “fortuitous” event and business interruption insurance does not cover business slowdowns caused by computer problems (see, e.g., The “Millennium Bug” Analysis of Exposure (Swiss Re America 1998) at pp. 12-14; see also, CPCU Society, The Year 2000 Crisis: Identifying and Managing Exposures: Live Satellite Broadcast Workbook (1998)).

I believe strongly that S. 1554 would serve a very useful purpose in restraining the award of arbitrary and excessive punitive damages in Y2K-related litigation. Punitive damages are meant to punish reprehensible conduct and deter future misconduct. The use of two digits rather than four digits in software programming to represent the year over the past few decades arguably constituted good business judgment, not reprehensible conduct. For example, Dr. Leon Kappelman, the Co-Chair of the Society of Information Managers’ (SIM) Year 2000 Task Force, has calculated that a company which has developed software using two digits rather than four digits over the past 35 years could conceivably have saved more in computer memory costs than it would spend on actual Y2K remediation (see L. Kappelman, Year 2000 Problem: Strategies and Solutions from the Fortune 100 (Thomson Computer Press 1997) at p. 53). Further, the awarding of punitive damages in a Y2K case is not going to serve any deterrent function, since the Y2K problem will only occur this once.
The “Shadow Effect” of Punitive Damage Awards in the Y2K Arena

S. 1554 could also have a beneficial impact on the “shadow effect” with respect to punitive damage awards. Since companies often share data and software with each other in the course of normal business operations, it is likely that plaintiffs will sue not only the defendant company whose computer system failed, but also any third party which arguably might have given non-compliant software or data to the primary defendant, contributing to the failure. Essentially, even though the Y2K “Millenium Bug” is not technically a computer virus since it does not replicate itself, the insertion of non-compliant data or software into a compliant computer system could act similar to a computer virus and “contaminate” the compliant system. Due to joint and several liability theories of recovery, third party defendant companies may be faced with shouldering 100% of the damages caused by a bankrupt defendant, even though the still-solvent third party defendant only was responsible for 5% of the damages. Y2K-related litigation in this case would begin to resemble Superfund site litigation. Rather than risk joint and several liability and possible unlimited punitive damage awards, these third party defendants may be forced to settle out of cases at very high settlement levels. These settlements will have a negative ripple effect on the companies’ insurance premium rates and retention levels. The extra costs incurred by these companies could very likely end up being passed on to consumers in the form of higher priced goods and services. Severely impacted defendants might have to curtail operations, resulting in job layoffs or even in bankruptcies.

Finally, the fear of becoming the subject of excessive punitive damage awards may also deter companies from sharing Y2K compliancy information or cooperating in company-to-company or industry-wide Y2K testing, for fear that the information shared may be used against them in subsequent litigation. President Clinton recognized this problem and has proposed the introduction of “Good Samaritan” legislation to provide a limited litigation protection to companies willing to share Y2K-related information. For example, if a company were to determine that a vendor’s software was not Y2K compliant, the company could share that information with others without fear of liability for trade disparagement, so long as the disclosing company (a) did not know that the information was false, and (b) did not disclose the information with reckless disregard for its truth or falsity. The “Good Samaritan” bill is a good first step toward encouraging Y2K information sharing and cooperation, but I believe that passage of S.1554 would be a valuable further step in that regard.
Addition of An ADR Provision to S. 1554

If this Committee would be willing to consider potential additions to S. 1554, I would suggest that a provision be added encouraging the use of alternative dispute resolution (ADR) by parties. The use of ADR in the Y2K arena before arbitrators technically proficient in the computer systems impacted by the Y2K problem could result in more cost-effective adjudication of Y2K disputes. Organizations such as the CPR Institute for Dispute Resolution are currently attempting to fill this need by forming national, interdisciplinary panels of neutral experts to use mediation and other forms of ADR to help resolve Y2K disputes. S. 1554 could be revised to add a separate section which would provide that in business-to-business disputes (excluding consumer actions) not involving personal injury claims, corporate plaintiffs would be barred from seeking any damages in excess of direct or contractual damages unless they agreed to non-binding mediation through ADR prior to instituting a court action. If the corporate plaintiff sought only direct or contractual damages, it could proceed directly to institute a legal action in court, rather than proceeding first with ADR mediation.

Some companies in the private sector have taken the initiative to promote the ADR concept. For example, E. I. du Pont de Nemours and Company, Inc. (“DuPont”) is working with other major industry leaders to develop a Y2K treaty or “Pledge” which, once signed by DuPont and the other signatory companies, would bind the signatories, subject to the sharing of Y2K information and certain other conditions, to waive any claim for punitive damages against each other and to agree to use ADR in the initial instance for any Y2K-related claim they might have against each other. The DuPont work in this area indicates that numerous companies in the private sector would welcome the passage of S. 1554 as a legislative solution to the problem of runaway punitive damage awards, especially if S. 1554 were to be revised to include a provision encouraging ADR proceedings. This is especially the case, since corporations may find themselves involved in various lawsuits where they are plaintiffs in some and defendants in others.
Companies Most at Risk May be Smaller Businesses

Although I highlighted the Y2K treaty work being undertaken by DuPont and like-minded major corporations, the Y2K problem may actually pose a greater danger to medium-sized companies. The Fortune 500 companies have sufficient information technology personnel and financial resources to be able to substantially increase their Y2K staffing and funding late in 1999 if determined to be necessary. Medium sized companies (for example, those below the Fortune 1000) tend to have fairly complex computer systems, but rather lean in-house information technology staffs and a reduced capacity to greatly increase their Y2K remediation budgets late in 1999. It has been predicted by some Y2K experts that some medium-sized companies may encounter tightened bank lending policies in 1999, putting pressure on their planned Y2K spending. Some consultants have predicted as well that the Y2K problem may result in the bankruptcy of a significant number of smaller companies (see, e.g., J. Golter and P. Hawry, “What Every Loan Officer Needs to Know about the Year 2000 Computer Problem (But Doesn’t Know How to Ask)”, FDIC Banking Review (1998), where one Y2K expert is quoting as having estimated that small firms with less than 1,000 employees face a 3% chance of experiencing business failure due to the Y2K problem, while mid-sized firms with between 1,000 to 10,000 employees (approximately 30,000 in total in the U.S.) face a 5-7% risk of business failure due to the Y2K problem (i.e., the bankruptcy of from 1500 to 2100 mid-sized companies)).

Some analysts even envision a possible recession due to the Y2K problem. For example, Edward Yardeni, the Chief Economist for Deutsche Bank Securities, predicts a 70% chance of a recession due to the Y2K problem (see, e.g., the Internet URL of “http://www.yardeni.com”). Further, a survey conducted of the members of the Washington, D.C. Year 2000 Users’ Group entitled “The Estimated Impact of the Year 2000 Problem in the United States” (Released April 21, 1998) reveals that of the 230 members of the users’ group responding, 84% believed that the Y2K problem will trigger at least a 20% drop in the stock market (over 1800 points)- and at least some bankruptcies (see the Internet URL of “http://www.wdcy2k.org/survey”).

There are some sources of Y2K assistance currently available to small businesses. For example, the Small Business Administration has been actively promoting Y2K awareness programs to small businesses and the American Bankers Association has worked to develop Y2K materials for its member banks, which includes smaller community banks (see, e.g., the Internet URL of “http://www.marketpartners.com/ABAReadinessComment.htm”). Unfortunately, one aspect of the Y2K litigation threat is that large companies at the turn of the century may decide to do business only with other companies known to be Year 2000 compliant or large enough to represent a “deep pocket” in the event they fail to be compliant so as to be good for damages, to the detriment of smaller businesses. Computer Sciences Corporation, in its Y2K report noted above, estimated that in the foreign exchange market, cautious trading due to fears that another trading partner might not be Y2K compliant could itself result in hundreds of millions of dollars in business being lost. Given the potentially higher Y2K risk profile of smaller businesses, passage of S. 1554 could justifiably be viewed as a pro-small business initiative.
Impact on Governments

In addition to the impact excessive punitive damage awards may have on the corporate defendants themselves, the resulting drag which excessive Y2K litigation may have on the economy can also result in reduced tax revenues to the states and the federal government. One consultant has estimated, for example, that the cost of Y2K remediation (which under current accounting rules should be expensed when spent rather than amortized over time) could cost the State of New Jersey alone almost $2 billion in tax revenues over a three year period (see the ITAA Year 2000 Outlook for April 18, 1997 located at the Internet URL of “http://www.itaa.org”). The March, 1998 Y2K study by Dr. Howard Rubin confirms the dramatic shift of information spending by corporate America, showing that 20% of the 128 major companies surveyed have deferred new software development work and 33% have deferred development of new software enhancements or functionality. This shift heavily toward system maintenance and away from technology enhancements, if exacerbated by high Y2K litigation costs, could result in lower productivity and lower tax revenues to governments. It can also negatively impact the job market for a state’s citizens.
Restoring Rationality, Certainty and Fairness to Punitive Damage Awards

The Y2K problem may not represent the end of the world as we know it, but it poses a serious threat not only to business as usual for large and small companies, but also to governmental entities and private citizens. That the litigation threat is real is evident from the surge in legislation on a state level whereby states are reclaiming sovereign immunity so that they cannot be sued if their computer systems fail due to the Y2K problem and third parties are injured (see, e.g., Nev. Rev. Stat. Ann. Section 41.0321 (1997); Ga. Code Ann. Section 50-21-24 (13) (1997) and Va. Code Ann. Section 8.01-195.3 (8) (1997)). The Y2K problem impacts every organization in the public sector and the private sector and the sooner we realize that we are all in the same boat, the better. A sensible legal regime will encourage organizations to cooperate on sharing critical Y2K solutions and conduct Y2K cooperative testing where appropriate, secure in the knowledge that if litigation ensues due to a systems failure, any punitive damages which might be imposed will bear a reasonable relationship to the compensatory damages awarded. Rather than allow plaintiffs to pin the Y2K problem on those individual companies unlucky enough to be named as defendants in Y2K suits and “send a message” to corporate American, we need to recognize that the Y2K problem arose out of accepted industry practice, followed both in the private sector and the public sector until very recently. The Y2K problem is a societal problem impacting every aspect of our society and can not legitimately be seen as the fault of any one company.

S. 1554 is a thoughtful and measured response to the problem of arbitrary and unpredictable awards of punitive damages, often in an excessive amount well out of proportion to the compensatory damages awarded. The potential of excessive punitive damages in connection with Y2K litigation, which litigation could represent the next major wave of litigation in the U.S., further emphasizes the need for the passage of S. 1554.
Statutory Precedent for S. 1554

As a final note, Congress has the authority to enact a statutory limitation on punitive damages as envisioned in S. 1554 since punitive damages could constitute a very real burden on interstate commerce. Congress has enacted legislative caps on litigation damages in other similar cases which compare favorably to this situation, such as in (a) The Volunteer Protection Act of 1997 (Pub. L. 105-19), (b) The Private Securities Litigation Reform Act of 1995 (Pub. L. 104-76), (c) The Asset Conservation, Lender Liability and Deposit Insurance Protection Act of 1996 (Pub. L. 104-28), and (d) The Price-Anderson Amendments to the Atomic Energy Act of 1954.

Mr. Chairman and distinguished Members of the Committee, that concludes my testimony and I would be pleased to address any questions you may have.