The Year 2000 Information and Readiness Disclosure Act.

• Author: Burton, Steven G.

Will the New Law Have Unintended Consequences?

On October 19,1998, President Clinton signed into law the "Year 2000 Information and Readiness Disclosure Act"[1] (hereinafter referred to as the act). The law is the culmination of a proposed bill submitted by the Executive Office of the President to Congress on July 27,1998, by Jacob J. Lew of the Office of Management and Budget and John A. Koskinen, chair of the President's Council on Year 2000 Conversions. In the submittal letter, the OMB stated that the proposed act was "intended to promote open sharing of information about year 2000 solutions by protecting those who share year 2000 information in good faith from liability claims based on exchanges of information."[2] Quoting the President, the OMB said, "The purpose of this legislation is to `guarantee that businesses which share information about their readiness with the public or with each other, and do it honestly and carefully, cannot be held liable for the exchange of that information if it turns out to be inaccurate.'"[3]

Commenting on the Senate bill, the Senate Judiciary Committee said the purpose of the act was to "help break the silence and encourage full disclosure and exchange of year 2000 computer problems, solutions, test results, and general readiness."[4] The bill was to provide "limited liability protection for a limited time for specific types of year 2000 information that is considered essential to remediation efforts."[5] However, Congress did not intend the act to "provide liability protection for failures that may arise from year 2000 problems."[6]

While the act takes an important and substantial step toward attaining nationwide Y2K compliance by encouraging parties to share information regarding the extent of their capabilities to process information through the year 2000, at the same time it creates a situation where the information being exchanged may not, in fact, be very reliable. Ultimately, Congress may have unintentionally encouraged the exchange of misinformation among market participants regarding Y2K processing capabilities, particularly by those who wish to ignore the problem, or, worse yet, by those who wish to take advantage of the processing problems presented by the turn of the millennium. In turn, the dissemination of such unreliable information may leave market participants in the chain of commerce who rely on such information to their detriment with little avenue for redress.

Although as a preliminary matter encouraging the exchange of information will help market participants obtain a better understanding of the level of nationwide year 2000 compliance, any legislation regarding the Y2K crisis also should be drafted with the overriding objective of encouraging businesses and government agencies to become Y2K compliant so as to preserve the free flow of goods and services. The legislation also should assist market participants in performing their own Y2K assessments and should encourage them to implement programs to protect the chain of commerce.

The Year 2000 Information and Readiness Disclosure Act encourages the exchange of information by restricting federal and state evidentiary codes, by limiting liability for those who disseminate such information, and by creating antitrust exemptions for those who share year 2000 information. Examples of the types of compliance statements that would fall under the protections of the act include: representations made by year 2000 solution providers to their customers; the representations made by vendors and suppliers to manufacturers and service providers; and the representations made by customers and clients to their vendors and suppliers.

Y2K Readiness Disclosures v. Year 2000 Statements

In keeping with its goal to encourage the exchange of information regarding Y2K readiness, the act distinguishes between two types of statements that one can make regarding the year 2000. The two key terms defined by the act are "year 2000 readiness disclosures" and "year 2000 statements." Although the act protects both types of statements to a certain degree, Congress has afforded more protection to a "year 2000 readiness disclosure" than to a simple "year 2000 statement." As one might expect, because a readiness disclosure is given more protection under the act, it is similarly more narrowly defined. In contrast, just about any type of statement regarding the year 2000 would fall under the definition of a year 2000 statement.

* Year 2000 Statements

Generally speaking, a "year 2000 statement"[7] under the act would include any communication concerning a party's year 2000 processing capabilities. This includes communications regarding a party's plans for verifying the extent of its Y2K processing capabilities, or for implementing corrective measures regarding its Y2K processing capabilities. It also includes a party's communications regarding testing for problems and solutions related to year 2000 processing, or its statements which review or comment, whether directly or indirectly, on its year 2000 processing capabilities.

What has been excepted from the definition of the term "year 2000 statement" are statements which have been filed with the Securities and Exchange Commission, or with federal banking regulators under the Securities and Exchange Act, and any disclosures that are made when soliciting an offer or sale of securities.[8] Thus, the filings and disclosures required by the SEC are not protected under the act.

Because of its broad definition, it is difficult to imagine a scenario in which a communication concerning the year 2000 would not be considered a "year 2000 statement" under the act. The year 2000 communication can be made by any party to any other party, or to the public in general. A year 2000 statement can concern any assessment, test, comment, or estimate concerning the processing capabilities of any product or service which has as its basis a year 2000 processing issue. For example, it is not uncommon today for businesses to obtain information regarding the year 2000 compliance of their vendors and customers. In addition, in an effort to keep ongoing financial relationships with such vendors and customers, businesses often disclose information about their year 2000 preparedness or their efforts to become year 2000 ready by the turn of the millennium. Any such statements would fall under the foregoing definition. Thus, these statements are protected under the act.

* Year 2000 Readiness Disclosure

In actuality, a "year 2000 readiness disclosure" is merely a more narrowly defined subset of a year 2000 statement. To constitute a "year 2000 readiness disclosure," certain criteria must be met. The act defines a "year 2000 readiness disclosure"[9] as a written year 2000 statement which has clearly been identified as a "year 2000 readiness disclosure," which has been set forth on tangible or electronic medium which is retrievable in a perceivable form and which was made by or with the approval of a party regarding that party's year 2000 processing capabilities.

A couple of these criterion are noteworthy First, only written statements are included in this more restrictive definition. In contrast, to constitute a year 2000 statement, oral communications will appear to suffice. In addition, the act requires that a year 2000 readiness disclosure be labeled as such. Finally, a year 2000 statement will not constitute a year 2000 readiness disclosure unless it is issued by or with the approval of the party about whom the statement concerns. Thus, opinions made by third parties that are published without the approval of the party who is the subject matter of the year 2000 statement will not constitute a "year 2000 readiness disclosure." Anyone receiving a document labeled "year 2000 readiness disclosure" should pay particular attention to the subject matter contained within the disclosure since the protection afforded to such disclosures under the act is considerable.

Evidentiary Exclusions

One of the principal effects of the act is to make available an evidentiary exclusion to parties making year 2000 readiness disclosures.[10] This provision within the act essentially sets forth an evidentiary safe harbor for those year 2000 statements which satisfy the requirements under the act's definition of the term "year 2000 readiness disclosure." The evidentiary exclusion affects both federal and state evidentiary codes. In general terms, the act provides that in the event that certain actions are brought against a party who has made a year 2000 readiness disclosure, the year 2000 readiness disclosure cannot be used against the party to prove the accuracy or truth of any year 2000 statements which are made within the year 2000 readiness disclosure.

* Covered Actions

It is important to note that the act itself, including its evidentiary exclusion, does not affect all types of causes of action. Rather, the evidentiary exclusion only applies to "covered actions" which are further defined within the act. A "covered action"[11] under the act is any civil action brought under federal or state law with the exception of actions brought by public entities and agencies acting in a regulatory supervisory or enforcement capacity. Although the types of actions to which this evidentiary exclusion apply are quite broad, the act exempts actions based on year 2000 issues which are brought by consumers[12] with respect to year 2000 statements that were made to the consumer by a party who sold a consumer product or service to the consumer.[13] Thus, for most government regulatory enforcement actions, the states' and federal government's evidentiary burdens have not changed. Moreover, consumers should not be...