Y2K - Will there be a Litigation Explosion?

John Peysner
Principal Research Fellow, Solicitor
Nottingham Law School
Nottingham Trent University
john.peysner@ntu.ac.uk

Abstract

This article uses the prospect for Y2K litigation as a case study to consider how litigators in the United Kingdom, operating in a new risk managed environment for financing and conducting cases, will react to the challenge of this problem and whether this will trigger a major growth in litigation. It concludes that for a variety of procedural and financial reasons, as well as pro-activity by lawyers in avoiding litigation, any increased activity will not be so significant as to constitute an 'explosion'.

Citation: Peysner J, 'Y2K - Will there be a Litigation Explosion?', 1999 (2) The Journal of Information, Law and Technology (JILT). <http://elj.warwick.ac.uk/jilt/99-2/peysner.html>. New citation as at 1/1/04: <http://www2.warwick.ac.uk/fac/soc/law/elj/jilt/1999_2/peysner/>

1. Introduction

Like rapping, personal training and the Internet itself the sport of 'lawyer bashing' is one of the many imports from the USA that are shaping our view of society. This new blood sport does not concern itself overmuch with facts[1] but the perception is that lawyers, and in particular litigators, are out of control and are about to bring the economy down around our ears in a welter of writs and claims for exorbitant damages. This article examines that assumption in the light of a case study: the litigation activity anticipated as a result of the Millennium Bug. It considers whether the current arrangements for financing and ordering litigation activity in England and Wales are capable of responding to a major challenge such as YK2.

2. Assumptions

This article does not need to conclude there is a real Y2K problem. This might seem an odd comment but it is fundamental to the way in which modern litigators organise their activities. Conceding that there is a shared perception of a genuine risk created by the Millennium Bug and that the problem is not merely hype then the litigator is called on to perform two functions[2]:

2.1 Risk Management

This involves litigators, often in conjunction with their non contentious colleagues, identifying problems and operating risk management systems to eliminate the risk, manage it or transfer it. This type of activity will take place most frequently in the commercial sphere. Litigators acting for large companies will 'scope' the Y2K risk and, acting conservatively, assume that it exists. They will advise that, for example, a failure by their client company to perform an obligation caused by a software problem may cause repercussions down the supply chain with consequent damage claims. That problem may be internal or external to the company, but either scenario may creates a contingent risk. Internally, the company may need to appear to be struggling for compliance as well as hopefully being compliant.[3]

The lawyers will attempt to eliminate or manage the risk by suggesting changes in contract conditions or by inserting exclusion clauses against liability. They will attempt to transfer the risk by testing current insurance cover or suggesting that extended cover be obtained. This may be difficult as the steer offered by the insurance industry is that millennium risks are not insurable being predictable and avoidable (Insurers won't cover 2000 bug damage, Independent on Sunday, 26^th July 1998, page seven) Attempting to avoid cover in this way may be difficult if an accident, for example a fire, is caused partly by a fortuitous event, a lightning strike, but also by an allegedly non-fortuitous occurrence, failure of a computer-controlled fire control system. Insurers are attempting to limit their exposure by taking the same approach as the banks and distributing compliance questionnaires, on this occasion backed up by the insured's obligation of uberimae fidae. (Barlow Lyde Gilbert, 1998).

Pro-active risk management will be supplemented by the development of dispute resolution strategies.

2.2 Preparing for Dispute Resolution

The millennium problem is an unusual challenge for litigators because, at present, it seems to be a mainly contingent problem.[4] Litigators and courts dislike moot problems and will normally only start preparing for litigation after a triggering event has occurred. (Thus, a drug may be defective but until it produces adverse symptoms it is unlikely to be the subject of court action.)[5]

2.3 Post Millennium Dispute Resolution

To advance our speculations we must make some further assumptions:

The next task is to attempt to delineate the types of disputes that may emerge and to predict which matters will be the subject of lawyer activity and which will be determined in other ways or simply left unresolved. The answer lies in an examination of a complex and evolving matrix between the financing of litigation and the risk management of individual, or groups of cases, which will be the subject of the rest of this article.

3. The New Financial Environment for Dispute Resolution

What motivates litigators? As service providers in a competitive market their ability to operate depends on the level of profitability of the work that they do. In this way they are no different from supermarkets with products to sell: if nobody buys they go out of business. Litigators see themselves as professionals and indeed many exhibit the high levels of integrity and ethics that befit the true professional. However, their prime motivation must be to obtain a level of fee income that allows them to run their firms and earn profits and this is particularly true in the commercial or contractual sphere.

When creating a strategy for millennium claims the litigators first question will be: have I instructions from a client that will lead to a certainty, or acceptable probability, of being paid for my work? The latter part of the question - the probability issue - represents a novel challenge to litigators that is discussed below, after the basic framework for costs in litigation is discussed.[7]

3.1 The Historic Funding Basis of Litigation

The basic rule in litigation is that the loser pays both sides legal costs: 'costs follow the event'. These 'party and party' costs can be less than the 'solicitor and own client costs' (conventionally they are normally about two thirds of this figure), the same but never more. This is because of the indemnity principle: the winner cannot recover costs if there is no obligation to pay costs. In this scenario the solicitor acting for a client takes no risk as long as money is received on account and interim bills delivered and paid. The client takes all the risk: paying the other side damages and costs if the case is lost and paying his own solicitor if the case is won but the costs cannot be recovered from the defendant. This was the historic costs system with one breach in the indemnity principle with the introduction of legal aid. (A legally aided client is normally protected against adverse costs consequences by the operation of Section 17 of the Legal Aid Act 1988.)

3.2 The New Basis of Funding Litigation

The potential millennium challenge to litigators coincides with a major shift in litigation funding which involves an increasing shift of risk and reward in litigation from client to lawyer: to so called 'no win no fee' litigation. This has created a menu of different fee structures and, in principle, wider access to lawyers' services:

The common factor in all these arrangements, which have come to prominence in the last two years, is the sharing of risk by the lawyer; in effect, the lawyer betting on his or her own judgement. If there is to be a post-millennial litigation explosion then, to a significant extent, it will be promoted by these new forms of funding. However, this explosion has two components: lawyers willing to fuel the flames and material to combust. The next sections of this article examines that material and considers what types of potential legal cases will be thrown up by the Y2K problem, what prospects of success do they offer claimants and what, if any, procedural limitations are there to prosecuting these claims?

4. Case Theory

Before examining the types of cases that might emerge post Y2K it is necessary to review the current approach adopted by skilful litigators to their work. A potential litigation explosion will be fuelled by the commencement of claims. This is no longer a simple process of the lawyer waiting in his or her office anticipating instructions. Litigators are becoming increasingly involved in the process of deciding whether action should be taken. This pro-activity takes two forms:

Central to this process is the construction of an early Case Theory for the matter: an analysis of the legal, factual and evidential matrix of the case, which suggests success. Thus, in a tort case the lawyer must pin down the elements of duty, breach and causation to damage, what are the material facts and what evidence is available to support them. Crucially the quality of the evidence, oral, documentary or expert, must be assessed. In a world of hourly fees and relaxed clients the pressure to use a Case Theory approach would be limited to the dictates of professionalism; the economic incentives suggest that lawyers should avoid making an early case assessment. They would be best advised to obfuscate, delay and arrange settlement at the last minute (at the door of the court) to increase their bills (See Zuckerman A A S, 1995). In the post-millennial world such clients will be an endangered species as Case Theory becomes a necessity, not an option.

Once claims start attention then switches to the defendants. If all actual or potential defendants fold their cards early and settle then the explosion fizzles out. In fact cases do not resolve so simply for a number of reasons:

5. A Partial Taxonomy of Cases: Which Problems will lead to Active Disputes?

Applying the broad approach outlined above this article now tentatively ventures into a speculation into two broad area of disputes; Non-Optional Commercial Disputes and Packaged Software and Systems, and goes on to consider which might inspire litigation? The incomplete exercise that follows incorporate three levels of analysis:

5.1 Non-Optional Commercial Disputes

Modern business methods involve an increasing reliance on IT support and diminishing levels of redundancy: if the computer system breaks down there may well be no alternative method of organising production or communication (does anybody remember how a telex machine works?). The pace of business, particularly in manufacturing, and the whole supply chain is increasingly geared to 'Just in Time' requirements that will not tolerate delay. How are companies reacting to the prospect of hardware or software crashes?

Applying the three stage analysis:

This analysis suggests that litigation in this area will be the last resort and will only take place if there is no option or as a spin off of supply chain problems where a non compliant element causes difficulties that spread up or down the chain and whose risk has not transferred or eliminated by insurance or altered contractual arrangements.

5.2 Packaged Software and Systems

Much of the hardware and software systems that are ubiquitous in homes and businesses are sold 'off the peg'. They are relatively inexpensive and to most customers they are 'black boxes': completely incomprehensible bits of kit that either work or don't work in mysterious ways.

Again, applying the three stage analysis:

5.3 The Fast Track

The Fast Track system for cases limited to GBP 15,000 or under introduced under the new Civil Procedural Rules might seem ideal for such relatively small matters. It offers a system of procedural rationing with cases proceeding on tramlines towards a trial within 30 weeks. This constrained attitude to litigation would seem to suggest that the costs of the case would be lower than at present[13] and the costs of the trial itself will be fixed. It is also an ideal system for conditional fee litigation, in a suitable case, as it is attractive to litigators who have to invest fewer resources in the case and, therefore, their 'non win no fee' speculation is limited. However, the current system of 'costs following the event' is retained so the losing claimant, whilst protected against his own solicitor's costs still has to pay the losers costs. He also has to pay both sides disbursements and in this type of case experts fees may be high. The solution is after the event insurance but in this area of speculative litigation cover may not be obtainable or the premiums may be prohibitive. In many cases both claimants, insurers and lawyers will be frightened by the prospect of taking on multi-national suppliers of computer products who are likely to fight cases hard for fear that one successful case will open the floodgates.[14]

5.4 Group Actions and Class Actions

If the Fast Track cannot solve the problem might a solution be found in grouping cases together thus equalising the position of claimants and defendants and making litigation more attractive to the 'little guy'? In the USA Y2K litigation is already proceeding in two areas: cash register systems (Neil S, 1998) and in cases concerning medical management software, voice-processing systems, telecommunication applications, ant-virus software and personal finance systems using the class action method. (Bureau of National Affairs Inc., 1998)

The Class action procedure, allied to the legislative, financing and cost system available in the USA, offers a unique environment for pro-active, innovative litigation and is ideally suited to dealing with problems such as consumers and small businesses facing a litigation challenge[15]. Class actions require at least one extant claim which shares common factors of law and facts with others and which is, in itself, representative of others. The court is then asked to certify a class and this may be granted where the common factors predominate over questions affecting only individuals; the defendant has accepted, or refused to accept, the sense of taking a common approach to the litigation and individual cases would carry the risk of inconsistent results. The court then appoints one or more plaintiffs as class representatives with their attorneys. Commonly, such attorneys will be acting under a contingency fee arrangement offering them between 30 and 40% of damages awarded. Damages may be modest in each case, but aggregated together and increased by exemplary or punitive damages (not available in Y2K litigation in the United Kingdom) the potential prize can be very large. Attorneys will advertise for new cases to join the class, financed by contingency fees and, crucially, because 'costs do not follow the event' in the US system (apart from relatively minor expenses associated with a trial) the risk to the plaintiff is small and, thus, insurance is unnecessary.[16]

There is no exact comparator within United Kingdom procedures. (See, generally, Mildred M, 1991). The nearest approach is the Group Action, which recognises the advantages of bringing together numerous cases with common characteristics to benefit both the parties and to take pressure of the court list. Group Actions vary in format but commonly they will share common pleadings on generic issues together with 'bolt on' additions in individual cases. The cases will be managed by a judge who will give common directions for trial and, normally, the lawyers for the claimants operate through a steering group. Group Actions have been used extensively in the field of personal injury but their track record has been mixed. In cases involving asbestosis, deafness and lung disease against employer claimants have been successful but in pharmaceutical cases (Benzodiazapine), medical devices (Norplant), and, latterly, tobacco results have not been good. The difficulty here is that the generic costs of researching such difficult cases (often involving groundbreaking epidemiology or clinical experts) have to be shared between the claimants and, thus, the financial advantage of joining the group may be limited.

New methods of financing, such as Conditional Fee Agreements, may make such cases attractive to lawyers, but insurance is unlikely to be available to soften the adverse costs consequences of losing.[17] Cases involving Y2K software may not involve such high generic costs, as the compliance problem may be simpler to prove. However, each uninsured individual claimant still faces liability for rateable costs, which remains a major disincentive.

6 Conclusions

There is little doubt that litigation will emerge from the inability of organisations to resolve the Y2K or the costs of rectification work. Surveyors will be sued for failing to spot compliance problems in security systems of buildings; embedded chips in fire alarms will fail and buildings will burn down and intranets will crash with consequential disruption to business, disputes with insurers and customers and much wailing and gnashing of teeth. However, in the view of this author the concept of massive litigation implications arising out of the millennium problem (Zirin J D, 1997) So get ready for some massive litigation') is unlikely to be realistic, at least on this side of the Atlantic. Pro-active, pre-event legal advice and drafting will tend to mitigate the effects in the commercial world. In the context of retail sales of defective software or hardware the financial and procedural environment in the United Kingdom is unfavourable to mass litigation. The mere existence of problems is not, in itself, sufficient to promote litigation; all the elements - high damages, risk free litigation, active lawyers and user friendly procedures - must be in place before mass litigation starts: the lawyer driven apocalypse suggested by the merchants of hype is unlikely to happen.

Cases

Thai Trading v Taylor [1998] QB 781.

Liebeck v McDonald's Restaurants, NM, Bernalillo County 2^nd Jud Dist Ct, no CV-93-02419, Sept 14, 1994.

References

Barlow Lyde Gilbert Solicitors (1998) 'Year 2000' BLG Insurance Law Quarterly Issue 36.

Bureau of National Affairs Inc. (1998) Year 2000 Law Report, Vol.1, No.6, pp 287-328 and < http://www.bna.com/y2k/>.

Day M (1999) 'Stubbed Out' The Guardian 27^th February and 'Out of Puff' Law Society Gazette, 12^th March.

Gjertsen L A (1997) '2000: the Year of the Lawsuit' National Underwriter , Vol.101, Issue 30 p6.

Kelly S (1997) 'Court in the Act', Computer Weekly, 13^th February 1997.

Mildred M (1991) 'Liability in Tort: Group Actions' in Miller C J Product Liability and Safety Encyclopaedia Division IIIA, Issue 41 (London: Butterworths).

Neil S (1998) '2000 Reasons to Sue; COIs are standing up for their rights on Y2K problems, but they may face liability themselves', PC Week, Vol.15, No.10, p83.

Peysner J (1999) 'Focus Groups and Analogue Vignettes: Modelling and Piloting in Civil Procedural Reform', Civil Justice Quarterly forthcoming.

Zirin J D (1997) 'Bugs bite and lawyers litigate', Forbes, Vol.159, No.14, p100.

Zuckerman A A S (1995) 'Reform in the Shadow of Lawyers' Interests' in Zuckerman A.A.S. and Cranston R. Reform of Civil Procedure (Oxford: Clarendon Press).

Footnotes

1. The most egregious example of 'lawyer bashing' is the McDonald Coffee Cup 'Scandal'. The case of Liebeck v McDonald's Restaurants ( 1994) has been reported world-wide as an example of greedy lawyers and client obtaining millions of dollars for a mild scalding. The whole case is characterised as an instance of the evils of the US contingency fee system. In fact, it represented the tip of an iceberg of similar accidents, the injuries required eight days hospitalisation and were disabling for two years, the case only came to trial because the defendant refused mediation and the damage award represented general damages within the reasonable range with a punitive award to reflect the jury's view of the defendant's conduct. (See Litigation Funding, The Law Society, Issue One, March 1999).

2 . The activity of the banks in requiring compliance from their commercial customers with the threat of withdrawing overdraft facilities in default seems to this author to be far more germane than any amount of media advertising by the Government: if the banks are worried then, perhaps, we should all worry.

3. The banks seek compliance by questionnaires interrogating customers as to whether they have carried out tests of their systems etc. The banks are likely to assume, following classic risk management principles, that customers who speedily and comprehensively fill in such questionnaires are likely to be compliant while the sluggards require closer examination. This may not be the true picture but it represents a sensible cost/benefit approach. In the USA appearance has an additional advantage; a corporation that can demonstrate that it made an effort to eliminate the bug, even if it was not successful, may avoid a punitive damage claim. (Gjertsen L A, 1997) Punitive damages of this type do not exist in the English jurisdiction but similar strategies of advertised compliance strategies can be seen in the discrimination sphere e.g. 'As employers we are committed to anti-racist and anti-sexist policies and working towards equal opportunities policies.'

4. The first cuckoo of this particular spring is the widespread refusal of electronic readers in shops to accept credit cards with expiry dates after 1999. At present a phone call to the credit provider normally solves the problem - but will it lead to litigation? See section 5.4 above.

5. Provisional damages in personal injury claims are an exception but they are tied to an extant claim.

6. The Civil Procedural Rules (HMSO), introduced on the 26^th of April 1999 as part of the reforms promoted by Lord Woolf, include at Part One (Rule 1.4.2.e) a requirement on the court to actively manage a case by: 'encouraging the parties to use an alternative dispute resolution procedure if the court considers that appropriate and facilitating the use of such procedure'.

7. Alternative Dispute Models of resolving disputes are not relevant here as the 'winning' party has no right to its costs except as part of an agreed settlement. An arbitration agreement will provide for the costs to be provided for at the end of the reference in various ways as the parties agree.

8. This is dramatically illustrated by the recent tobacco litigation. The lawyers involved in these cases acted under conditional fee agreements. The case was speculative and the potential costs in millions of pounds so insurance was not obtainable. When the cases were struck out on a limitation point the only way that the lawyers were able to protect their clients from bankruptcy was too offer undertakings not to renew litigation against the defendants for any future client for a decade. (Day M, 1999)

9. Thai Trading concerned a defective bed. The husband of the claimant conducted the litigation on the basis that he would only charge if he won the case. Domestic harmony suggested he would be best placed not to charge if he lost.

10. During recessions construction companies tend to concentrate on increasing their income by arguing over extras on contracts in arbitration proceedings; when work picks up they concentrate on charging more on the contract and arguing less.

11. In the Prisoners Dilemma the police arrest suspects who, isolated from each other, face the choice of co-operating with the police and, on the face of it, saving themselves or standing firm and saying nothing. This latter co-operative option is the most effective in maximising each individuals position because it prevents the police using each suspect's information against the others and then against himself.

12. Computer equipment and software are unusual products in so far as by the time a defect emerges the replacement version may be both cheaper and better than the original. This offers the manufacturer of allegedly defective equipment the strategy of offering replacements at substantial discounts, which still include a profit element.

13. Whilst procedural rationing should save costs research in the USA by the RAND Institute for Civil Justice into similar systems suggest that lawyers who have to work more quickly may well charge more thus defeating the object of the exercise. The original design of the Fast Track proposed fixed costs at all stages but this has been postponed. (For a discussion of this research see Peysner J, 1999.)

14 . Part One of the new Civil Procedural Rules enjoins the court, so far as practical, to put the parties in an equal position in litigation. This might involve limiting the number of exports on both sides but, in reality, procedural constraints cannot turn David into Goliath and the prospect of taking on a major company will remain daunting for the individual claimant.

15. John Harr's book, A Civil Action, Vintage, is a remarkably accurate description of the travails of a litigator conducting a class action in the particularly difficult area of toxic tort litigation. It may be unique in being a useful reference book for students of litigation and also the basis of a major Hollywood film. A debate on the current prospects for class actions in the USA can be found in International Commercial Litigation Issue 33, September 1998 at p4 'US general Counsel disagree about class actions as Viagra claim emerges'. The Viagra class action involved claims by individual patients whose health insurer is refusing to cover the cost of the drug. The article also discusses this author's favourite class action: the suit brought against Mike Tyson and Don King Productions Inc. for the loss of enjoyment of the Tyson/Holyfield 'pay to view' fight brought to an early close by Tyson's aural appetites.

16. The Year 2000 Law Report mentioned in the text contains at page 311 examples of current class actions with their Case Theories.

17. The Lord Chancellor's Department has a working party currently examining the problems of group actions. The withdrawal of legal aid for most cases presents additional difficulties.