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APRIL 13, 1999     10:00 am

This statement, by Eleanor D. Acheson, Assistant Attorney General, United States Department of Justice, reflects the Justice Department’s preliminary views regarding the proposed Year 2000 Readiness and Responsibility Act (H.R. 775).


 The Year 2000 Readiness and Responsibility Act ("the Act") is one of several bills that have been introduced in the House and the Senate to address the possibility that Y2K computer failures will spawn an avalanche of litigation.  On March 1, I testified before the Senate Judiciary Committee and presented the Department’s initial views on the Year 2000 Fairness and Responsibility Act (S. 461) introduced by Senators Hatch and Feinstein.  The Act currently being considered by this Committee is very similar to the Hatch-Feinstein bill, but contains a number of additional provisions with which we have additional concerns.

 The Administration approaches the idea of legislation to address Y2K litigation issues with three defining principles in mind.  First, nothing should deter or distract us from taking every step necessary or desirable to make all systems Y2K compliant.  Thus, we favor legislative proposals that will create incentives to fix Y2K problems now and we will oppose proposals that create disincentives to Y2K readiness.  Second, we understand both the importance of discouraging frivolous litigation and the need to keep the courts open for legitimate claims, especially those brought by small businesses and consumers with limited resources to press their cause.  Finally, we must be mindful that Congressional amendment of state substantive laws, as well as state procedures and practices, is not a step to be taken without real and compelling reasons.  And, even in such circumstances, there may be constitutional and significant federalism policy reasons to avoid those extraordinary means.

 With these principles in mind, we think it is critical to ask the follow questions.  First, does the legislation respond in a narrowly tailored manner to a real problem?  In other words, do we know where Y2K problems are likely to occur, whether there will be a proliferation of frivolous Y2K actions by opportunistic parties, and which sectors of the economy such litigation might impact?  Second, does the legislation support B or does it undercut B the incentives that encourage companies to fix Y2K problems now (thereby avoiding costly malfunctions before they occur)?  Third, is the legislation targeted at frivolous lawsuits or will it prevent businesses and consumers with legitimate claims from vindicating their rights?  Fourth, does the legislation comport with the Constitution and do so in a way that forecloses reasonable challenges to its constitutionality?  Finally, would the legislation create more public policy and practical implementation problems than it would solve?  While we share the desire to act responsibly and expeditiously to bar truly frivolous litigation brought by those seeking to exploit this unique situation, we feel it is important to answer these questions thoughtfully before enacting any legislation.

 We have yet to answer any of these questions fully with respect to the bill before the Committee.  But our preliminary analysis indicates that this bill is the most sweeping of any of the Y2K-litigation bills yet proposed in either chamber B and would be by far the most sweeping litigation reform measure ever enacted if it were approved in its current form.  The bill makes dramatic changes in both federal procedural and substantive law and state procedural and substantive law.

 I will now outline the Department’s thoughts on the current bill, and will begin with the provisions that alter substantive law affecting Y2K claims.

Modifications to Substantive Law

 Titles II, III, and V of the Act, as well as § 605, together modify the substantive contract law, tort law, regulatory law, and attorney-ethics law of all 50 states, and federal law as well, as they apply to Y2K-related actions.  Such an across-the-board approach, particularly one that entails amendment of areas of law traditionally left to the states, is unprecedented.  To better understand how extensive these changes are, and the Department’s analysis of those changes, each area is discussed separately.  Because Title II applies to federal, state, and local governments, Title II would also seem to alter government contracts law significantly (including suits under the Contracts Disputes Act).

            Modification of Pre-Existing Y2K Contracts

            Title II of the Act amends federal and state contract law as it applies to "year 2000 actions" and, in so doing, effectively modifies the terms of already-negotiated contracts and existing contractual relationships.  Most of these provisions appear to narrow, and in some cases eliminate entirely, the grounds and extent of relief available in breach-of-contract actions.

            The Act, § 202 in particular, appears to create a "reasonable efforts" defense in Y2K contract actions that would allow a defendant who had otherwise breached the terms of a contract to show that the efforts it took to implement the contract were "reasonable" so that it could  "limit[]" or "eliminat[e]" its liability.  As far as we are aware, this would be a novel defense in contract law.  As a general matter, a party to a contract is obligated to fulfill its promises and is liable to the other party for damages to the latter resulting from the former’s breach of the contract absent force majeure or other extremely rare circumstances.  It does not matter whether the party breaching the contract made reasonable efforts to avoid a breach.  This widespread rule of basic contract law has been in existence for hundreds of years in the common law, is currently reflected in our contract statutory schemes (e.g., the Uniform Commercial Code), and is essential to commerce.

          In a similar fashion, the Act would require a court, unless there is some defect in the formation of the contract, to enforce all written terms of a contract.  Most state legislatures have adopted some version of the Uniform Commercial Code ("UCC"), which renders unenforceable in commercial contracts certain written terms B warranty disclaimers, unconscionable contract terms and "adhesion contracts," to name a few.  These sections of the UCC are designed to protect both individual consumers and businesses from particularly egregious contract terms imposed upon them by contracting parties with far greater economic power.  Section 201, however, would appear to validate all written terms of a contract, even though they were ineffective or illegal at the time they were made because they disclaimed certain kinds of warranties, are unconscionable, or render the contract an unenforceable "adhesion contract."

         These provisions of Title II may be unfair both to American business and to American consumers.  Creating a post hoc "reasonable efforts" defense that absolves parties to Y2K-related contracts of their contractual obligations would be unfair to the contracting plaintiffs who bargained - and paid - for contract compliance by the other party.  That a breach resulted from a Y2K malfunction does not change the fact that the proposed reasonable efforts defense deprives parties to a contract of their paid-for bargain.  Similarly, mandatory enforcement of only the written terms of a contract will upset the expectations of those businesses and consumers who relied upon the UCC for protection against unconscionable terms and illegal disclaimers.  Thus, these provisions seem extremely unfair and may, in many cases, leave without any remedy legitimately aggrieved plaintiffs who prudently bargained for protection against Y2K failures.
        The reasonable efforts defense also appears to undercut the incentives for potential contract defendants to discharge their contractual duties to prepare for - and prevent - potential Y2K errors.  Presumably, under most bargained-for contracts, these defendants would be fully liable for a breach of contract if Y2K malfunctions occur; as modified by the Act, these defendants would be able to reduce or avoid liability, even if Y2K errors occur, as long as they made "reasonable efforts" to implement the contract.  By curtailing the extent of their contractual liability, the Act may also curtail their incentives to meet the terms of the contract.  Thus, the Act may actually fail to serve its own avowed purpose - "seek[ing] to encourage businesses to concentrate their attention and resources in the short time remaining before January 1, 2000, on addressing, assessing, remediating, and testing their Year 2000 problems."1

        We also note that Title II may implicate constitutional interests and issues.  There may be contracts for which a legislatively imposed post hoc reasonable efforts defense would raise issues under the Takings Clause of the Fifth Amendment.  Contracts for computer services or software often contain explicit allocations of responsibility for remedying defects.  Businesses that paid for maintenance and for commitments by vendors to remedy software defects, including defects that might cause Y2K failures, could file claims for compensation from the government if federal legislation invalidated those commitments.  Title II’s requirement that state courts in some circumstances apply substantive state law as that law existed on a particular date in the past may also raise some constitutional concern.  These provisions effectively deny to state legislatures (and apparently state common law courts) the power to modify their own substantive law, even changes of general applicability, as they see fit to respond to changing circumstances.

         Finally, Title II raises some fundamental policy and practical implementation problems that bear greater consideration.  Initially, it is not clear how modifying the rules of liability that apply to meritorious contract actions will necessarily deter frivolous Y2K claims, which by definition will be filed regardless of the rules of liability.  Moreover, the provisions requiring enforcement of all written contract terms would seem to displace the judgment of nearly all state legislatures that certain types of contract terms in commercial contracts are against public policy.  We strongly question whether sufficient study has been made to justify hastily discarding a principle of contract law that has become a cornerstone of consumer protection in so many states for very good reasons.  In the same vein, requiring courts to apply state law as it existed at some date in the past withdraws from states their authority to respond reasonably to changing circumstances.  It may also prove to be difficult for courts to ascertain what the law was on a prior date, given how the evolution of judge-made law is often seamless and therefore difficult to "freeze" in time.  The Act may also require courts to apply state law to various parts of a contract from three different time periods B the current law, the law as of January 1, 1999, and the law at the time of contract formation.  This would, at a minimum, complicate what might otherwise be a relatively straightforward application of state contract law.

        Modification of Substantive Law Governing Tort and Other Non-Contractual Law

        Title III of the Act modifies federal and state substantive tort law (and other civil law) as applied to "year 2000 actions" for money damages.  Title III would not apply to "personal injury" cases, but defines "personal injury" so narrowly B by excluding mental suffering, emotional distress, and other elements of harm traditionally recognized as legitimate bases for tort recovery B that only suits for physical injury damages would seem to be excluded.  Within the broad range of lawsuits covered by the Act, Title III places a greater burden of proof upon Y2K plaintiffs in these lawsuits, creates new defenses, and significantly limits the damages that may be recovered.  Several sections appear to preclude liability or recovery even when a defendant is clearly at fault.  We continue to doubt that it is sound policy for Congress to displace state law in such a dramatic way.

        One of our major concerns is that the Act in general, and this Title in particular, apply to enforcement actions brought by federal, state, and local governments.  Applying the Act’s substantive and procedural limitations to these sovereigns is likely to interfere with their ability to enforce their own laws.  More to the point, Title III’s modifications to substantive law in civil suits may have a similar effect on government-initiated actions brought under a number of federal and state statutes that rely upon traditional mechanisms of tort law for their proper operation.  CERCLA, for example, imposes liability upon the "operator" of a facility and holds defendants jointly and severally liable - all to ensure that environmental damage is cleaned up.  The Securities and Exchange Acts rely upon the potential liability of corporate officers and directors and upon mandatory disclosure of information as means of ensuring compliance with its complex provisions.  Eliminating or curtailing these mechanisms - as Title III does - may severely undermine the efficacy of the government’s enforcement powers in these (and other) areas.  That Title III might also apply to citizen suits brought under regulatory statutes further adds to our concern.

      We also have many concerns with the application of Title III to private actions.  Sections 302 and 303 significantly alter the rules of liability for Y2K actions involving money damages.  Section 302 would seem to bar some Y2K actions based on a negligence theory.  Under ordinary principles of tort law, some Y2K negligence claims are likely to require proof that the defendant "should have been aware" of the potential Y2K failure and/or its likelihood to injure the plaintiff.  Section 302(a), however, raises the plaintiffs’ burden in any cause of action requiring actual or constructive awareness on the part of the defendant by making them prove that the defendant "actually knew" or "recklessly disregarded a substantial risk."  This "recklessness plus" standard would seem to preclude any such claim premised on culpability short of recklessness - that is, the standard appears to exclude negligence.  Section 302 would also require plaintiffs to make this showing with "clear and convincing evidence," which is more difficult to meet than the "preponderance of the evidence" standard normally applied in civil lawsuits.

        Section 303 erects a "reasonable efforts" defense similar to that contained in Title II.  This provision would establish a complete defense to liability -- no matter how much the defendant was at fault (for example, the defendant could have recklessly disregarded a known risk of Y2K failure).  Such a defendant would have no responsibility for the damages suffered by the plaintiff as long as the defendant made reasonable, albeit unsuccessful, efforts to fix the defect.  Section 303 would also bar recovery to the extent it is based solely on the defendant having "control" over a facility, system, or product.  As discussed above, this could seriously undercut the EPA’s ability to reach parties who would have otherwise been financially liable for environmental damages under CERCLA and the Clean Water Act as the "operator" of a vessel or facility from which hazardous substances are released B even though they took no preventive steps whatsoever to address Y2K issues.

         Section 104, while titled "Duty to Mitigate," appears to create a defense that bears little  resemblance to the common-law duty to mitigate.  At common law, plaintiffs are not usually permitted to recover from defendants any damages they could reasonably have avoided.  By contrast, §104 appears to act as a complete bar to recovery if a defendant can show that the plaintiff should have known of information that "could reasonably" have aided the plaintiff in avoiding the injury upon which his Y2K claim is based - even if that information had been provided by someone other than the defendant.  Thus, § 104 sweeps far beyond the fairness concerns that animate the common law duty to mitigate when it imposes an affirmative duty on plaintiffs to find information B but no duty on defendants to provide it - or else face dismissal of their lawsuits.
        Other provisions of Title III would curtail significantly the types and amount of damages Y2K plaintiffs may collect should they prevail in establishing liability.  Most dramatically, § 305 would appear to foreclose the recovery of "economic losses" - that is, financial damages that flow from the defendant’s tortious activity B unless they are incidental to personal injury or property damage claims.  Although a "no economic loss" rule might make sense for tort claims engineered to subvert the damages limitations in existing contracts (e.g., claims for tortious interference with a contractual relationship), § 305 is not so limited.  Far more broadly, § 305 would preclude recovery in any non-contractual case that does not involve personal injury or damage to tangible property.  Thus, § 305 would appear to grant defendants full immunity from civil suits involving fraud and misrepresentation (including securities fraud), where financial loss is unlikely to be unaccompanied by any personal injury or property damage.  Even the much-criticized "economic loss rule" is limited to negligence and strict products liability claims.

        Additionally, § 304 sets forth when and to what extent punitive damages may be awarded in Y2K actions.  Section 304(c) caps the punitive damages that may be awarded on Y2K claims, limiting damages against most defendants at the greater of $250,000 or three times the plaintiffs’ actual damages, and limiting damages for individuals and small-business defendants at the lesser of $250,000 or three times the plaintiffs’ actual damages.  More dramatically, § 304(b) provides that no punitive damages may be awarded unless the plaintiff proves by clear and convincing evidence that the defendant "specifically intended to cause injury to the plaintiff."  This standard is unlikely ever to be met, so the caps would be largely irrelevant (as would the creation of a "Year 2000 Recovery Fund") because punitive damages would almost never be awarded.

         In a similar vein, § 306 would cap the personal liability of corporate officers and directors in Y2K actions at the greater of $100,000 or their past 12-months’ compensation.  We are not convinced that it is necessary to cap the liability of these corporate actors -  who are already protected in most states by the "business judgment rule" that insulates them from liability as long as they act reasonably in governing the affairs of the corporation - and the insurance companies who insure them.  Indeed, the provision does not even make any exception for these corporate officers’ intentional acts.  As a result, the practical effect of this provision might well constitute a windfall to insurance companies, who have been paid for unlimited coverage but will have to pay only up to the cap.

         Title III may also significantly impact whether a prevailing Y2K plaintiff will actually be able to recover his damages.  Section 301 provides that a Y2K plaintiff may recover from each defendant only the amount of damages that defendant was responsible for causing.  This would abolish all species of "joint and several liability," which in varying forms permits tort plaintiffs to hold any one defendant responsible for more than its share of damages.  Because Y2K malfunctions may be caused by the complex interaction of software programs and computer hardware from several defendants, it may be impossible to apportion liability in any meaningful way.  At the very least, § 301's rule of absolute proportionate liability will place a greater burden on plaintiffs who will be forced to track down all potential defendants in order to receive a full recovery.  Moreover, because many of these software and hardware companies are mid- to small-sized companies that are created and dissolved with some regularity, it is more likely that the rule of "proportionate liability" will create "orphan" liability that cannot be assigned to any still-existing defendant.  Allowing "orphan" liability to go uncompensated might, as noted above, displace CERCLA’s "joint and several liability" provisions and severely curtail the government’s ability under CERCLA to establish cleanup responsibility for sites involving a "toxic soup" of hazardous substances where there are a large number of potentially responsible parties.  It would also place all of the risk of such orphan liability on the injured plaintiff.

         In considering these changes to substantive state law, the Department has a number of concerns.  First, we do not believe that the need for some of these provisions has been demonstrated.  With regard to § 301's rule of  "proportionate liability,"for example, the Department understands why a pure "joint and several liability" rule may, on occasion, be deemed unfair to defendants, but only a handful of states currently follow such a rule.  Instead, many limit a defendant’s "joint and several" exposure to certain defendants (for example, those who are at least X% responsible for the plaintiff’s injury) or to certain percentages (for example, X times the defendant’s proportional liability).  As a result, we would urge the Committee to investigate further the need to foreclose widely accepted forms of "joint and several liability" before resorting to an absolute "proportional liability" rule - which lies at the extreme end of the spectrum of potential options.

         We would also urge the Committee to examine the link between the Act’s underlying purposes and its provisions.  To the extent that this Act aims to preclude states from altering their substantive tort law so as to favor Y2K plaintiffs, the widespread federalization of state tort law effected by Title III would appear to sweep too broadly.  Before enacting any law, we believe it would be necessary to study whether the possibility of such state action is a real one and, if it is, whether it is appropriate as a policy and constitutional matter for the federal government to prevent state legislatures from passing laws.

         Second, it appears that a number of Title III’s provisions might provide disincentives to achieve Y2K readiness.  Limiting a defendant’s liability by circumscribing his duty of care with a "reasonable efforts" defense may in fact undercut the incentives to take all necessary steps to make computer systems and other machinery Y2K compliant.  Although some of the proponents of the Act argue that limiting liability in advance gives potential defendants more incentive to fix Y2K problems now because they will get some "credit" for their "reasonable efforts," this argument is unpersuasive to us.  Given that the goal today is to avert Y2K failures before they happen, rewarding a person for only making "reasonable efforts" - instead of fixing the problems completely - seems counterintuitive.   By the same token, capping punitive damages for Y2K defendants - or, worse yet, making the standard for recovery of such damages impossible to meet -would reduce the deterrent effect of those damages.  This would accordingly leave potential defendants with less reason to take action now to avoid Y2K problems before they occur, and with more reason to make the economically motivated decision that discovering and fixing Y2K problems is not worthwhile because the costs of doing so would outweigh any potential liability for failing to do so.

         Third, we fear that some portions of Title III may, as a practical matter, have undesirable (and perhaps unintended) collateral consequences.  As noted above, the bill as currently drafted covers civil actions initiated by government entities, including regulatory agencies.  The SEC, for example, currently has responsibility for safeguarding the integrity of the securities markets, and towards that end has been active in bringing cases designed to promote timely Y2K compliance by market intermediaries.2  Title III, and § 306 in particular, would likely interfere with these SEC actions.  The Act is also likely to engender confusion in private securities fraud actions, which are already covered by specialized provisions in the federal securities laws that contain liability protections, such as the 1998 Securities Litigation Uniform Standards Act and the 1995 Private Securities Litigation Reform Act.  Overlaying an additional layer of liability protection on top of these existing protections threatens to create a confusing and possibly conflicting set of legal standards that would lead to more complex, prolonged litigation over which set of liability protection provisions applies.  As noted above, the Act’s apparent elimination of operator liability may seriously undermine the government’s efforts to enforce the environmental laws.  Title III’s provisions may have a second, unintended effect - creating federal court jurisdiction over Y2K-related civil actions.  Because it would amend rules to govern liability, and require courts to apply a federally prescribed rule that differs from the rule prescribed by current state law, the Act might be construed to create a federal cause of action over which federal courts would have jurisdiction.
         Modification of Regulatory Law

         Section 605 of the Act would preclude federal and state agencies from imposing civil penalties on small businesses for first-time violations of federal information collection requirements if those violations result from a Y2K failure.  We are concerned that granting small businesses one "free pass" with respect to Y2K-related failures could seriously undercut the incentives those businesses have to become Y2K compliant.  The consequences of allowing some of this information to go unreported could be devastating: firefighters and emergency workers might not have adequate information to respond safely to a chemical spill if a small business does not report its hazardous chemical inventories; or the public may not be informed about, or the government may be prevented from, responding to serious threats to a community’s drinking water supplies.

         Risking these consequences might be acceptable if there was a genuine need for this protection - that is, if there was some danger that federal and state agencies would otherwise "penalize" small businesses out-of-business for failing to comply with federal information reporting requirements.  But this is clearly not the case.  Current law and Administration policy already require agencies to issue policies to provide for the reduction or waiver of civil penalties for small businesses under appropriate circumstances.3  In fact, some federal agencies have already developed special policies for Y2K-related violations.  The EPA, for instance, recently issued a policy stating that it would waive civil penalties for pollutant discharges that occur when a company tests its systems to ensure that they are Y2K compliant and when the company meets certain requirements.4  In a similar fashion, the SEC  has been careful to make every effort to obtain voluntary compliance before bringing enforcement actions against broker-dealers and transfer agents who have not reported their Y2K readiness; when that fails, the SEC has still been mindful of the size of the entities involved and has not sought large penalties from small firms.  In light of the ability of these agencies to account for and accommodate the good-faith efforts of small businesses to become Y2K compliant, we do not believe that a statutorily mandated "free pass" is warranted.5  We encourage government-backed assistance and technical help for companies to become Y2K compliant, but oppose shielding companies, large or small, from complying with the law.  These are many of the concerns that prompted the Department to oppose the Small Business Paperwork Reduction Act of 1999 (H.R. 391), which would give small businesses one free reprieve from any regulatory information reporting requirements, Y2K-related or not.6

         Modification of Attorney-Client Law

         Title V of the Act purports to displace the law that governs the relationship between a litigant and its lawyer with respect to Y2K lawsuits.  Section 504 imposes upon all lawyers involved in "year 2000 actions" a duty to disclose fee arrangements to their clients "up front."  Sections 503 and 505 cap attorneys fees.  The remaining sections require attorneys to keep their clients informed of settlement offers and to provide a monthly detailed statement of hours and fees spent on the matter.  Section 508 grants clients a cause of action for damages against any attorney who fails to comply with the provisions of Title V.

         We are skeptical that there is a need for federal micro-management of the attorney-client relationship in Y2K cases, particularly when there are already state laws in place that require attorneys to disclose fees up front and to keep their clients informed.  Adding a layer of federal regulation may be duplicative and therefore unnecessary, and at the very least should be enacted only after careful study has revealed deficiencies in existing mechanisms for regulating attorneys that would be especially dire in the context of Y2K matters.  As far as we are aware, no such study has been undertaken.   Section 508 raises special concerns itself, since it would appear to invite more litigation, a presumably undesirable result for legislation with the avowed purpose of "avoid[ing] unnecessary, time-consuming and costly litigation based on Year 2000 failures."7

         I have flagged some of the Department’s chief initial concerns regarding the provisions of this bill that would amend the substantive law applying to Y2K-related claims.  Indeed, the Act’s extensive amendments to state substantive law raise many unknowns about how Y2K litigation would operate under such a regime.  For example, will small businesses and consumers injured by wrongful conduct still be able to obtain compensation for the harm that they suffer?  The changes to current law appear to make it much more difficult, if not impossible, for small businesses and consumers to invoke traditional contract remedies, and significantly limit claims under statutory and tort law even in the face of reckless or intentional wrongdoing.

         The Act amends procedural requirements attendant to Y2K litigation as well, and it is to those provisions I will now turn.

        Pre-Litigation Procedures

         Title I of the Act would impose some pre-litigation obligations upon plaintiffs seeking to bring civil claims premised on Y2K malfunctions.  Section 101 requires plaintiffs to notify potential defendants of their intention to file a lawsuit 90 days in advance, and requires defendants to respond by explaining what actions they have taken, or will take, to "cure" the Y2K defect that forms the basis for the plaintiff’s lawsuit.  Section 102 encourages parties to use alternative dispute resolution mechanisms for resolving their Y2K claims.  Section 103 imposes heightened pleading requirements on plaintiffs’ Y2K-related claims by mandating that they plead with particularity the facts supporting their allegations of material defects, their prayer for damages, and their proof of the defendant’s state of mind.  Section 103 also stays discovery while any motion to dismiss based on failure to comply with these pleading requirements is pending.

         The Department supports mechanisms that encourage parties to settle their disputes without litigation, and looks forward to working with the Committee to craft appropriate provisions.  In this regard, we are pleased to note that there are various voluntary U.S. and global efforts to encourage the resolution of Y2K disputes without litigation.  We have urged all sectors of the economy to identify and fix Y2K problems where they exist, but where they cannot or may not be fixed, contingency planning is an important way to eliminate or minimize the harm from the Y2K bug.  Voluntary plans under which companies pledge to consider or use alternative dispute resolution to resolve Y2K disputes can be an important part of contingency planning for potential problems arising from Y2K failures and a constructive way to address the fear of litigation.

         There may be significant constitutional issues with the federal government imposing procedural requirements on state courts, however.  We would nevertheless welcome the opportunity to work with the Committee in exploring the need for these requirements and in fashioning provisions that avoid the constitutional, practical and process concerns that arise from imposing procedural requirements upon state courts.

        Federalizing Y2K Class Actions

         The provisions of Title IV would grant the federal district courts jurisdiction (either original or by removal) over most Y2K-related class actions in which at least one of the defendants and one of the class plaintiffs are from different states.  While the Act requires district courts to decline jurisdiction over certain Y2K class actions involving securities and grants them discretion to decline jurisdiction over class actions that involve primarily in-state parties and issues or that involve few plaintiffs or little money, it is unlikely that either of these discretionary grounds will be invoked very often.  We note that these provisions are similar to those contained in legislation proposed in the last Congress and to which the Department had significant objections.  Title IV also imposes new and possibly onerous notification requirements on the class plaintiffs.

         The Department is not convinced that the benefit to be gained by federalizing Y2K class actions, if any exists, outweighs the cost.  Unlike Titles II and III, which  alter substantive state law, Title IV - by permitting removal and then remand stripped of class allegations - does little more than effectively impose federal procedural law on Y2K class actions.  We do not believe that it is appropriate B or desirable - to supplant the state courts’ class certification procedures.  Because, in our federal system, states are encouraged to experiment and take different approaches to judicial administration and substantive law, the Act’s imposition of federal class certification standards on state class actions may be perceived to be an attack on federalism itself and the Constitution’s allocation of authority between the state and federal governments.  Imposing federal certification requirements on state court class actions may also require federal courts to dismiss meritorious class actions that would have otherwise proceeded to resolution in the state courts had state certification standards not been displaced.

         Title IV would also impose a heightened notice requirement on Y2K class actions.  Instead of the constructive notice now permitted in "opt-out" class actions under the Federal Rules of Civil Procedure, § 402 requires plaintiffs to send direct notice to every class member via first-class mail with a return receipt requested.  If the plaintiffs cannot verify individual class members’ actual receipt of the notice, those members are excluded from the class unless they affirmatively "opt in" to the class action.  This may severely cripple the ability of private parties to bring some legitimate class actions.  For example, these notice requirements might preclude a securities class action premised on a fraud on the market theory because it is often impossible to identify (and hence notify) the victims of such schemes in advance.  At a minimum, this new notice requirement imposes significant costs on the Y2K class action plaintiffs that no other class action plaintiff must bear, and is not guaranteed to provide any benefits.  Because these new notice requirements would apply to Y2K class actions litigated in state court as well as federal court, § 402 might also raise constitutional concerns similar to those raised by Title I’s procedural commands to the state courts.


         As a final matter, the Department has a number of concerns regarding the scope of the Act.  For the reasons noted above, we are very concerned that the Act appears to cover Y2K lawsuits initiated by federal and state governments and their agencies, which are explicitly included within the Act’s definition of "person."8  The consequences of applying the Act to government suits and citizen suits brought on behalf of the government are far reaching, as we have explained elsewhere.

         We are also concerned that the Act may reach more than Y2K lawsuits even though the stated purpose of the Act is to "encourage[] businesses to . . . avoid unnecessary, time-consuming and costly litigation based on Year 2000 failures."9  Titles II  III, and V of the Act, which extensively modify state tort, contract, and attorney-ethics law, apply to any "year 2000 action."  Because a lawsuit is a "year 2000" action if it contains just one "year 2000" claim or defense, the Act would seem to bring wholly non-Y2K related claims under its auspices if they are joined with a single Y2K claim (or countered by a single Y2K defense).  Thus, the sweeping modifications the Act works on pre-existing contracts and on substantive state tort and attorney-ethics law would govern as to claims that having nothing to do with Y2K issues.  This seems to be unnecessary, and unwise as a policy matter, given the Act’s aim of addressing potential Y2K litigation.

         Even if the Act were limited to "year 2000 claims," the Act’s definition of "year 2000 claim" may still be overbroad.  As currently drafted, a "year 2000 claim" involves any cause of action or defense that directly or indirectly asserts "any failure by any device or system . . . or software . . . in processing, calculating, comparing, sequencing, displaying, storing, transmitting, or receiving date-related data  including [Y2K data]."10  The term "including" strongly implies that Y2K date-related failures are simply one species within a larger universe of date-related failures covered by the Act.  In that same vein, a "year 2000 claim" also includes any "failure to recognize or accurately process any specific date," without limiting the coverage to Y2K problems.11   The definition also includes "potential" year 2000 failures, as well as actual failures, thereby sweeping in claims premised on computer or mechanical problems that do no more than resemble year 2000 failures.

         It seems very likely that even a well-tailored definition will invite considerable dispute over whether or not certain lawsuits are subject to the Act.  Plaintiffs’ lawyers are likely to avoid styling their claims as "year 2000 claims," and often will not know if a particular problem has indeed been caused by a Y2K failure.  Conversely, defense lawyers will likely assert Y2K-related defenses in order to bring the claims under the terms of the Act.  State and federal courts will then be forced to determine whether the Act, or normal state procedural and substantive law, controls.  Often, that determination may not be made until long after the plaintiff is obligated, under the Act, to comply with the Act’s pre-litigation obligations and exacting pleading requirements.  In light of the fact that the Act works great changes in state law, which may have a substantial impact on the outcome of any given Y2K lawsuit, substantial disputes about the Act’s coverage are also likely to be common and will occupy much judicial time, significantly adding to the length and complexity of civil litigation.

         Even clear definitions are unlikely to aid courts forced to grapple with questions of the Act’s coverage when a single cause of action has both Y2K and non-Y2K bases.  If, for instance, a building security system fails because a Y2K computer chip malfunctioned and the security company also failed to secure the emergency exit door, a court would still need to determine whether to apply the Act notwithstanding the contributing non-Y2K cause or whether (and how) to sever the claim given the two causes.  Wasteful use of scarce judicial resources on these coverage issues seems inevitable, with greatly increased costs of litigation for both plaintiffs and defendants.

        Concluding Remarks

         I have outlined the more important of the concerns of the Justice Department based upon its preliminary review of the Year 2000 Readiness and Responsibility Act.  As noted above, there are ideas in the Act - alternative dispute resolution, for example - that the Department could support, if properly implemented.  While we have concerns about some of the other provisions in terms of constitutional issues, public policy, practicality, and their effect on Y2K readiness incentives, we are eager to work with the Committee to find solutions to the concern about frivolous litigation that underlies this legislation.

         In closing, let me say again how conscious we are of the need to act responsibly and expeditiously with any Y2K litigation legislation, but we believe that we need to know more about the nature and scope of any liability- or litigation-related problems that are likely to develop and have a far better sense of just how, and in what respects, current law, procedure, and practice would be unable to cope with these problems.  Above all, we must do nothing that will undermine Y2K readiness.  We therefore urge you to reflect carefully before enacting legislative provisions, like the bill before you today, that would greatly alter the substantive and procedural law of the states with regard to Y2K lawsuits.  Indeed, it would be useful to know the view of the states as to any novel approaches to Y2K liability or litigation and to study what the states are doing to prepare for Y2K lawsuits, as sufficiently responsive action by the states may obviate the need for Congressional action.  We are committed to working with the Committee to formulate mutually agreeable principles that would form the basis for a needed, targeted, responsible and balanced approach to Y2K litigation reform.

 I thank you for the opportunity to submit the views of the Department of Justice to this Committee.

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