Y2K Lawsuits: Let the Games Begin

If you predicted that the discussion of legal liability for Y2K failures would heat up as we got closer to the moment of truth, you were right. With the shift from compliance programs to contingency planning it is not surprising that legal responsibility for Y2K failures is the next topic for discussion. Technology suppliers have started to lobby for statutory immunity, while the plaintiffs’ bar is gearing up for a litigation bonanza.

At press time there were 43 Y2K related lawsuits filed; 27 of these are class actions. The number of cases and their status changes daily. Anyone can follow their progress through the following dedicated websites:

http://www.softwarelitigation.com/ y2k.html

http://www.thefederation.org/ Public/Y2K/lawsuits.html

http://www.2000law.com/html/ lawsuits.html

The good news for Canadian suppliers, for now at least, is that all of the actions to date were filed in U.S. courts. One might have expected a similar pattern in Canada, but significant differences in the two legal systems are probably the cause of the discrepancy.

In contrast with their U.S. counterparts, in most provinces, lawyers are not permitted to charge a contingency fee. In a contingency fee regime, a lawyer may waive the fee if he loses the case, in return for a percentage of the award in case of a win.

Moreover, in Canada, a plaintiff in a class action may be exposed to the risk of having to pay the legal costs of a successful defendant, which is not usually the case in the U.S. This risk tends to discourage class actions except those with manifest merit.

The very first Y2K case filed was not a class action. It is also the type of case that is likely to arise in Canada. The complaint was brought in June 1997 by Produce Palace, a grocery outlet, against TEC American Corp., the manufacturer of its computerized cash register system. In the pleadings, the grocery store complained of crashes in the system caused by the use of a credit card with expiry date after 1999.

The case was settled in September of 1998 with a payment of US$260,000 being awarded to Produce Palace. You may say a modest amount, but just think of the outcome if, instead of Produce Palace, the expiry date induced a computer crash on the national point of sale system of a major retailer.


The class actions are also not for high stakes on the part of the individual plaintiff consumers but potentially represent large aggregate payments by the software suppliers. The central allegations are generally the same: plaintiffs allege breach of warranty, misrepresentation, fraud and/or deceit, and in some cases rely on statutory rights pursuant to consumer-protection oriented legislation.

At issue in a number of class action cases is whether the customer is entitled to a free upgrade. Some of the cases have been settled with the supplier agreeing to provide a free upgrade to recent versions, with discounted prices for upgrades to those still using earlier versions. One settlement of this kind also addressed those who have already purchased a Y2K compliant upgrade. They became entitled to a substantial discount on future purchases from the supplier.

The cases also include shareholder class actions against directors and officers and investment advisors for failure to make full disclosure about the company’s Y2K status and exposure.

The number of Y2K cases is growing daily as is the number of settlements. The list of defendants includes the likes of IBM, AT&T, Lucent, Intuit and Microsoft. These are early cases and the outcome, at least in some, is based on the lack of present harm. They are, however, worth following because the principles developed in the early decisions will have an impact on later cases with greater economic consequences.

Gabe Takach is a partner at the Toronto law firm of Tory Tory DesLauriers & Binnington where he heads up the firm’s technology contracting practice. He can be reached at [email protected]

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