Legislature(1999 - 2000)

02/26/1999 03:19 PM House L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 82 - IMMUNITY:CLAIMS ARISING FROM Y2K PROBLEMS                                                                               
CHAIRMAN ROKEBERG announced the committee's next order of business                                                              
was HB 82, "An Act relating to immunity for certain claims arising                                                              
out of or in connection with the year 2000 date change; and                                                                     
providing for an effective date."  The chairman commented he wanted                                                             
to focus on some of the insurance aspects of the Y2K problem and                                                                
impacts on the business community.  Mentioning a very recent                                                                    
possible committee substitute (CS), he indicated the bill drafter,                                                              
Mike Ford, would be available for discussion.  Chairman Rokeberg                                                                
stated he would entertain a motion to adopt Version H as a working                                                              
Number 1308                                                                                                                     
REPRESENTATIVE HALCRO moved that the committee adopt Version H,                                                                 
proposed CS for HB 79, labeled 1-LS0398\H, Ford, 2/26/99, as a                                                                  
working document.  There being no objections, it was so ordered.                                                                
Number 1327                                                                                                                     
CHAIRMAN ROKEBERG explained some of his motivations in working with                                                             
the drafter that resulted from the previous bill hearing [February                                                              
12, 1999].  Granting a blanket immunity for small businesses would                                                              
be inconsistent with the legislation's goal of making sure all                                                                  
businesses focus on becoming compliant and should not be penalized                                                              
if good faith efforts have been made and due diligence has been                                                                 
done.  Blanket immunity to those small businesses would give them                                                               
a "free ride."  The chairman indicated the proposed CS was more of                                                              
limited immunity bill, limiting the liability from causes of                                                                    
action.  He stated he was also sensitive to the criticisms about                                                                
what the bill should or should not contain, noting Representative                                                               
Murkowski had made some good points, especially regarding what                                                                  
constitutes due diligence.  Subsections (a)(1) through (a)(6) of                                                                
Section 1, beginning on page 1, line 13, outline the plan for due                                                               
diligence created by the drafter and [committee] staff.  Chairman                                                               
Rokeberg indicated there were some problems with taking this                                                                    
approach in the writing of statute - stipulating what constitutes                                                               
a plan - because any deviation from that plan might jeopardize the                                                              
ability to assert the defense.  He stated he thought this was best                                                              
left for the House Judiciary Standing Committee, noting this draft                                                              
sent a message to the state regarding what the House Labor and                                                                  
Commerce Standing Committee thought people should be doing.  The                                                                
chairman indicated this issue was somewhat beyond this committee's                                                              
purview.  The House Judiciary Committee could determine whether                                                                 
that specific language should be replaced with more generic                                                                     
language concerning good faith effort and due diligence, which                                                                  
would allow the courts to decide what the most reasonable test for                                                              
that would be.  He invited Mr. Ford to come forward, complimenting                                                              
him on the bill's drafting.                                                                                                     
Number 1507                                                                                                                     
MIKE FORD, Legislative Counsel, Legislative Legal and Research                                                                  
Services, Legislative Affairs Agency, came forward to testify.                                                                  
Number 1524                                                                                                                     
CHAIRMAN ROKEBERG indicated he would review the bill first and then                                                             
Mr. Ford could review it as well, making any appropriate                                                                        
corrections.  The chairman referred to page 2, subsection (b)(1),                                                               
beginning on line 13, as the "geek clause," intended to exclude                                                                 
people in the software, hardware, et cetera, businesses from                                                                    
receiving the protection provided in subsection (a).  [Subsection                                                               
(b)(1) read:  "(b) The defense in (a) of this section may not be                                                                
asserted (1) by a business that manufactures or sells software,                                                                 
firmware, microcode, hardware, or embedded microchips that create,                                                              
read, write, calculate, compare, sequence, or otherwise process                                                                 
data that consists of dates, times, or both dates and time if the                                                               
business represented that the software, firmware, microcode,                                                                    
hardware, or microchips were year 2000 date change compliant; this                                                              
paragraph does not apply to a business that only rents or leases                                                                
software, firmware, microcode, or hardware that is manufactured by                                                              
another person or;"].                                                                                                           
CHAIRMAN ROKEBERG commented this subsection said that if someone                                                                
was in the business and had a contractual obligations, those                                                                    
obligations should be enforced.  He noted there was a witness from                                                              
the business who wished to testify from Anchorage on this.  The                                                                 
chairman suggested "sells" should be inserted on line 19 in the                                                                 
exception, "this paragraph does not apply to a business that only                                                               
rents or leases software, firmware, ...", to exclude a retailer                                                                 
like COSTCO [COSTCO Wholesale Corporation] from subsection (b)(1).                                                              
Chairman Rokeberg said he was not sure the drafter had understood                                                               
the chairman's intentions with regards to subsection (b)(2), ["(b)                                                              
The defense in (a) of this section may not be asserted ... (2) in                                                               
an action based on a contract."]  Noting the committee had                                                                      
discussed that the contractual cause of action would be the                                                                     
foundation of almost all of these actions, he indicated the                                                                     
intention had been to allow the defense to businesses involved in                                                               
contracts, with the exception of those businesses specified in                                                                  
(b)(1), with the previously-mentioned exclusions.                                                                               
Number 1653                                                                                                                     
CHAIRMAN ROKEBERG commented the standards for bringing a class                                                                  
action suit [subsection (c)] had not changed from the previous                                                                  
version.  Subsection (d)(1) limits any award to economic damages                                                                
except for the case of fraud.  He noted this was consistent with                                                                
all of the other bills, referring to Congress's Senate Bill 96                                                                  
(S.96) introduced by Senator McCain which contained a prohibition                                                               
on punitive damages.  Subsection (d)(2) set out that the civil                                                                  
action had to be submitted to mediation conducted under the Alaska                                                              
Rules of Civil Procedure before a court action.  The chairman said                                                              
he further planned to ask Mr. Ford to insert a "cure" section,                                                                  
stating, "Before you can bring a cause of action, you should have                                                               
the right to remediate by curing the problem before you go to the                                                               
next step, which is mediation, and then the next step, which is the                                                             
courts."  The chairman indicated a major objective of the                                                                       
legislation was compliance and remediation to avoid litigation.                                                                 
Chairman Rokeberg stated the balance of the bill was basically the                                                              
same as the previous version, indicating he thought the repeal                                                                  
amounted to a defacto statute of limitations.  He mentioned to Mr.                                                              
Ford their previous discussion regarding the six steps of a due                                                                 
diligence plan, the controversy over whether that should be more                                                                
generic and be left to the courts, and the chairman's preference                                                                
for allowing the House Judiciary Committee to debate that issue.                                                                
Number 1784                                                                                                                     
MR. FORD noted it was a difficult decision, because if it was                                                                   
specified as in the bill people certainly knew what they needed to                                                              
do, yet there was the risk something important may have been                                                                    
omitted.  If it was made more generic, simply saying "'Do the right                                                             
thing,'" then it was up to the courts to decide.  Mr. Ford                                                                      
indicated this could be desirable because the courts could examine                                                              
the situations at the turn of the century and decide what the law                                                               
means at that time.  He said there were benefits and penalties for                                                              
both approaches.                                                                                                                
CHAIRMAN ROKEBERG stated he thought one of the biggest problems                                                                 
would be the embedded chip problem, and there was no real way to do                                                             
much about it in advance.                                                                                                       
Number 1824                                                                                                                     
REPRESENTATIVE MURKOWSKI stated she personally would prefer not to                                                              
have the specifics in the legislation, but suggested, if that was                                                               
to be retained, everyone could be satisfied by saying, "'The                                                                    
business makes the following efforts, including but not limited to                                                              
the following,'"  She indicated this would set out minimum                                                                      
specifics one would expect to be followed, but that perhaps there                                                               
might be more that could be looked to.  By spelling out items one                                                               
through six, if a business hadn't satisfied number four, it had not                                                             
done its due diligence.  Representative Murkowski noted she thought                                                             
this caused concerns but the language could be finessed.                                                                        
CHAIRMAN ROKEBERG directed this to Mr. Ford.                                                                                    
Number 1872                                                                                                                     
MR. FORD pointed to (a)(5) ["(5) comply with industry regulations                                                               
or requirements related to the year 2000 date change, including                                                                 
testing information systems for compliance with the year 2000 date                                                              
change; and"].  He commented they didn't know what these industry                                                               
regulations or requirements were and then they went on to say,                                                                  
"including testing ..."  Mr. Ford stated under Alaska's ["our"]                                                                 
laws "including" means "including but not limited to," so they                                                                  
already had an example of what Representative Murkowski had spoken                                                              
of.  He said, "This is a provision that isn't exactly the only                                                                  
thing we need to do.  Where it says, 'Do these things and maybe                                                                 
something else if it's an industry regulation requirement.'"  He                                                                
indicated the committee could follow Representative Murkowski's                                                                 
suggestion.  Mr. Ford confirmed using "including" before the six                                                                
items accomplished that purpose, stating, "Make efforts to avoid                                                                
damages claimed including the following six things, that means                                                                  
including but not limited to."                                                                                                  
CHAIRMAN ROKEBERG noted the committee could make that change,                                                                   
asking Mr. Ford if it would be helpful.                                                                                         
Number 1941                                                                                                                     
MR. FORD said it satisfied some of the mentioned concerns; the list                                                             
is no longer limited.  Mr. Ford indicated the downside, not                                                                     
necessarily a bad thing, was that this would require a business to                                                              
pay attention to other possible things outside the six listed items                                                             
in order to make the strongest defense.  He further commented he                                                                
thought it was a good idea.                                                                                                     
CHAIRMAN ROKEBERG confirmed it still required a business to do the                                                              
original six items.  Therefore, he said, it could still be argued                                                               
that these were too specific, "too much of a plan to stipulate                                                                  
statute."  He confirmed a failure to do one of the listed items                                                                 
raised the implication that the defense could not then be applied,                                                              
noting that became problematic.                                                                                                 
Number 2013                                                                                                                     
REPRESENTATIVE MURKOWSKI added there might be items which would                                                                 
absolutely have to be performed in certain industries like                                                                      
utilities, but which would not be necessary in other industries                                                                 
like  banks or grocery stores.  She stated she thought the more                                                                 
general they could make it, while still giving guidelines, the                                                                  
better off they would be.                                                                                                       
CHAIRMAN ROKEBERG commented on the need to give it some flexibility                                                             
without being too specific.                                                                                                     
MR. FORD noted the federal law did that.                                                                                        
Number 2054                                                                                                                     
REPRESENTATIVE HALCRO agreed with Representative Murkowski, noting                                                              
testimony from Commissioner-designee Poe on HB 57 before the House                                                              
Community and Regional Affairs Standing Committee regarding the                                                                 
efforts to check village clean water systems for any black boxes.                                                               
Representative Halcro indicated private enterprise wanted to avoid                                                              
Y2K failures in the interest of business success, and the committee                                                             
should be very protective of good faith efforts.                                                                                
CHAIRMAN ROKEBERG stated he would not object to making those                                                                    
changes in this section and thought the committee was generally in                                                              
Number 2109                                                                                                                     
REPRESENTATIVE MURKOWSKI asked Mr. Ford where the generic reference                                                             
was in the McCain legislation [S.96].                                                                                           
MR. FORD noted there was a good faith limitation under Section 5                                                                
[Section 5(d)] which stated damages were not received, except for                                                               
economic losses, if due diligence and reasonable care were                                                                      
demonstrated.  He confirmed he did not believe "due diligence" and                                                              
"reasonable care" were defined.  [Section 5(d) of S.96 IS: "(d)                                                                 
GOOD FAITH LIMITATION.-Damages in a Y2K action may not be awarded,                                                              
except for economic loss, against any defendant who demonstrates                                                                
that the defendant exercised due diligence and reasonable care to                                                               
prevent or remedy the Y2K failure according to generally accepted                                                               
standards of care and effort in the business activity in which the                                                              
defendant was engaged."]                                                                                                        
CHAIRMAN ROKEBERG indicated that was the direction they were                                                                    
heading.  He asked Mr. Ford if they would lose anything by not                                                                  
being specific, or if there were other considerations.                                                                          
MR. FORD replied it was probably better to use a generic provision                                                              
in an area like this where less rather than more was known because                                                              
the court could come in and say that, given what was known at that                                                              
time, due diligence was or was not exercised.  He commented that                                                                
was sort of what the courts were designed for, and that the                                                                     
principle of negligence has always been based on a reasonable                                                                   
person.  He noted this was really just an application of the                                                                    
reasonable person principle.                                                                                                    
Number 2160                                                                                                                     
CHAIRMAN ROKEBERG indicated they wanted to make this state statute,                                                             
coordinated or similar to federal statute, but:  1) they did not                                                                
know whether the federal legislation would pass, 2) the federal                                                                 
legislation contained provisions for state law.  The chairman noted                                                             
his idea was that they should pass a state law in the event the                                                                 
federal legislation did not pass, but support the federal                                                                       
legislation if it passed.  He indicated a state law could also be                                                               
useful in addition to federal legislation if anyone went "venue                                                                 
shopping," or something similar.  The chairman noted he would                                                                   
entertain a motion for a conceptual amendment from Representative                                                               
Number 2208                                                                                                                     
REPRESENTATIVE MURKOWSKI moved that the committee make a conceptual                                                             
amendment, Conceptual Amendment 1, adopting the language in S.96                                                                
[S.96 IS] regarding good faith limitations.                                                                                     
CHAIRMAN ROKEBERG indicated some of the economic loss language was                                                              
already in the bill.  He asked if there were any objections to the                                                              
amendment.  There being none, Conceptual Amendment 1 was adopted.                                                               
Number 2240                                                                                                                     
CHAIRMAN ROKEBERG restated his previous comments on subsection                                                                  
(b)(1), including the insertion of "sells," on line 19 between                                                                  
"only" and "rents".                                                                                                             
MR. FORD noted it looked like this was only intended to apply to                                                                
manufacturers, not to those selling other manufacturers' software                                                               
like COSTCO.                                                                                                                    
CHAIRMAN ROKEBERG questioned whether the drafting included service                                                              
providers, commenting that was his intention.  He clarified for Mr.                                                             
Ford that he wanted to exclude the retail shop, but not the                                                                     
software or hardware consultant firm that sold and/or consulted "in                                                             
the whole electronic area."                                                                                                     
Number 2323                                                                                                                     
REPRESENTATIVE MURKOWSKI suggested changing the language on line 14                                                             
[page 2] so subsection (b)(1) read:  "(b) The defense in (a) of                                                                 
this section may not be asserted (1) by a business that                                                                         
manufacturers or services software, ..."; and changing the language                                                             
on line 19 [page 2] so that the exception read:  "this paragraph                                                                
does not apply to a business that sells, rents or leases ...".  She                                                             
indicated this would accomplish both of the chairman's intentions.                                                              
REPRESENTATIVE HALCRO questioned how this would apply to CompUSA                                                                
[CompUSA Management Company] which both sold and serviced computer                                                              
Number 2359                                                                                                                     
CHAIRMAN ROKEBERG asked Mr. Ford to stand by, and stated the                                                                    
committee would take testimony from Scott Thorson in Anchorage.  He                                                             
confirmed Mr. Thorson had received Version H, the proposed CS.                                                                  
Number 2412                                                                                                                     
SCOTT THORSON, President and Owner, Network Business Systems (NBS),                                                             
testified next via teleconference from Anchorage.  He indicated he                                                              
had received the proposed CS only five minutes before, but had been                                                             
listening intently to the committee's discussion regarding some of                                                              
the bill's provisions.  Mr. Thorson stated Network Business Systems                                                             
was one of the largest computer networking companies in Alaska,                                                                 
currently employing 45 people, and was one of the few locally owned                                                             
and operated companies in its market space operating in the state.                                                              
He said he would not follow his prepared testimony, in order to                                                                 
focus on the committee's discussion regarding manufacturers and                                                                 
sellers of software products, indicating he was not sure the                                                                    
committee realized how little control a service provider such as                                                                
NBS had over the products it resold.  Network Business Systems has                                                              
zero control over the current Y2K compliance status of any given                                                                
product in the marketplace.  For example, Microsoft Corporation's                                                               
(Microsoft) Windows 98 operating system has been promoted as fully                                                              
Y2K compliant but recently a "patch" has been released to address                                                               
Y2K deficiencies.  Mr. Thorson noted this problem was pervasive                                                                 
throughout the industry, stating, "If you think about all of the                                                                
products that are out there in operation, all the different model                                                               
numbers and part numbers, all the different code that's in                                                                      
hardware, in embedded systems and in software, and realize that in                                                              
each of the cases, each product, there have been numerous revisions                                                             
in the process and the procedures in which a service provider like                                                              
Network Business Systems would use to mitigate Y2K problems.  As an                                                             
example, Novell [Novell, Incorporated] has released, I believe, two                                                             
or three different patches for their NetWare operating system                                                                   
Version 3 in the last six months I believe there's been three..."                                                               
[TESTIMONY INTERRUPTED BY TAPE CHANGE]                                                                                          
TAPE 99-17, SIDE B                                                                                                              
Number 0001                                                                                                                     
MR. THORSON continued, "... we may find ourselves in a situation to                                                             
where the manufacturer has changed the process to make a particular                                                             
product Y2K compliant.  We don't know anything about that because                                                               
the only way that you find out about these things is when you're                                                                
actively searching information about a given product, and we may or                                                             
may not know that they've changed their process -- and now Y2K ...                                                              
the calendar clicks over to January and all of a sudden this guy's                                                              
product, for whatever it is, doesn't work.  I'm not sure that it's                                                              
fair that we're held liable for it simply because we did the due                                                                
diligence, we followed the manufacturer's process at the time that                                                              
we did the work, and brought that product into year 2K compliance,                                                              
but subsequently since we did that work, the manufacturer has                                                                   
changed the process in which to do that."                                                                                       
CHAIRMAN ROKEBERG commented that Mr. Thorson was seeking some                                                                   
immunity along with everyone else because he was subject to the                                                                 
same problems.                                                                                                                  
Number 0048                                                                                                                     
MR. THORSON said they were pretty much at the mercy of the                                                                      
manufacturer.  He indicated he was very pleased such legislation                                                                
was being brought forward because he had been considering leaving                                                               
the Y2K business entirely.  He commented it was a bad thing to do                                                               
because their customers were not technically qualified to address                                                               
these problems, but there was a significant risk to his company.                                                                
His insurance agent has said it is impossible for them to get any                                                               
E&O [errors and omissions] coverage at this time for Y2K issues.                                                                
CHAIRMAN ROKEBERG indicated this was illuminating because these                                                                 
were the professionals needed to fix people's networks.                                                                         
Number 0082                                                                                                                     
MR. THORSON agreed, noting NBS was currently providing support for                                                              
approximately 450 networks.  Many of their customers have delayed                                                               
Y2K mitigation because of the customers are aware of the                                                                        
manufacturer's rapidly evolving environment.                                                                                    
CHAIRMAN ROKEBERG asked if the customers were waiting for all the                                                               
patches because it was cheaper to have NBS do all the work at once.                                                             
Number 0103                                                                                                                     
MR. THORSON replied it was cheaper than having NBS come back three                                                              
or four times to update patches the manufacturer said were no                                                                   
longer current.  He confirmed this presupposed the customers                                                                    
assumed their hardware and software were almost compliant                                                                       
initially.  Mr. Thorson noted a lot of the previously-discussed                                                                 
steps of mitigating Y2K problems made some sense, closely mirroring                                                             
the process NBS used.  He said there were some minor changes,                                                                   
commenting, " I could send you some documentation that we use as an                                                             
example that would lay out the steps that we currently follow for                                                               
doing this.  The only area of trouble that I see there is item                                                                  
number 5, where it says, 'comply with industry regulations or                                                                   
requirements.'  There are no industry regulations that I'm aware of                                                             
and I'm not really sure requirements would be the right word.  I                                                                
think that a word that would be more useful would be something like                                                             
'process or procedure that's designed by the manufacturer' because                                                              
that's typically the guidance or the guidelines that we as a                                                                    
technology company use to mitigate Y2K problems."                                                                               
CHAIRMAN ROKEBERG questioned whether Mr. Thorson wasn't under a                                                                 
contractual obligation to bring a particular network into Y2K                                                                   
compliance when he was hired and paid by that business to do that.                                                              
Number 0171                                                                                                                     
MR. THORSON said NBS used language in its contracts with customers                                                              
for Y2K work that absolved NBS of liability if the system did not                                                               
work.  The reason that language was included is because they are                                                                
depending on the manufacturers to tell them the correct way to fix                                                              
the problem without having any way of knowing whether the process                                                               
the manufacturers have created will work; therefore, NBS cannot                                                                 
give any guarantees.  There are also a lot of other issues                                                                      
involved.  For example, most networks are set up with software and                                                              
hardware from multiple manufacturers:  software from Microsoft,                                                                 
Novell, Corel [Corel Corporation] et cetera, and hardware from                                                                  
Hewlett-Packard [Hewlett-Packard Company], Compaq [Compaq Computer                                                              
Corporation], Cisco [Cisco Systems, Incorporated], et cetera.                                                                   
These various products can react with each other in very                                                                        
unpredictable ways when combined into a network.  For example, when                                                             
NBS creates a new network, they are expecting these products to                                                                 
interface together in a certain way, but this doesn't always                                                                    
happen, and the manufacturers aren't even aware of some of these                                                                
problems.  Mr. Thorson indicated that fixing Y2K problems was not                                                               
a black and white science.  They checked every product by part                                                                  
number, obtaining the Y2K compliance process for that product from                                                              
the manufacturer, generally downloading the information from the                                                                
manufacturer's website.  If NBS does this Y2K compliance work in                                                                
March of 1999, for example, and then in July of 1999 the                                                                        
manufacturer of one small component embedded inside one of the                                                                  
servers changes the Y2K compliance process for that component,                                                                  
there will be a problem on that network when the year 2000 date                                                                 
changes unless NBS catches this change somehow, although NBS might                                                              
not have any reason to revisit that manufacturer's website.  Mr.                                                                
Thorson indicated they could not give a guarantee because they                                                                  
couldn't know if the manufacturer's Y2K compliance process was                                                                  
correct and would not change after they had performed the work;                                                                 
they had to take the manufacturer's process at face value.                                                                      
Number 0328                                                                                                                     
REPRESENTATIVE HALCRO referred to a previous House Community and                                                                
Regional Affairs Standing Committee hearing on HB 57 [February 4,                                                               
1999], a bill that granted immunity to state government,                                                                        
municipalities, school districts, et cetera.  He commented another                                                              
Representative had noted even the federal government was not                                                                    
receiving guarantees from its Y2K contractors, which Representative                                                             
Halcro said had sounded strange at that time.  However, he                                                                      
indicated Mr. Thorson's testimony made this situation                                                                           
understandable.  He asked if this was a common contract clause in                                                               
Mr. Thorson's industry - that they could not be held liable because                                                             
they were depending on information from the manufacturer.                                                                       
Number 0371                                                                                                                     
MR. Thorson replied he thought it was a fairly common way for                                                                   
companies like his to mitigate this risk as much as possible.  They                                                             
have no way of knowing for sure that once a given piece of hardware                                                             
or software will really work once it is brought into Y2K compliance                                                             
per the manufacturer's recommendations; there are too many                                                                      
variables.  For example, he noted that even if they had the                                                                     
resources to check the seven or eight million lines of code in                                                                  
Microsoft's Windows 98, Microsoft restricted that source code                                                                   
information from the public domain.                                                                                             
REPRESENTATIVE HALCRO asked if Mr. Thorson thought the mere fact                                                                
that "they" [the businesses] had hired NBS to address the Y2K                                                                   
problems in their systems showed "they" [the businesses] were                                                                   
attempting to address any potential problems in good faith.                                                                     
Number 0438                                                                                                                     
MR. THORSON answered in the affirmative.  He indicated he believed                                                              
any company doing the best it could do, with what it had to work                                                                
with, should not be held liable.                                                                                                
Number 0470                                                                                                                     
REPRESENTATIVE MURKOWSKI indicated her concern that Mr. Thorson was                                                             
considering getting out of the Y2K business at this point because                                                               
of the potential for liability.  She referred to the McCain                                                                     
legislation [S.96], noting the federal legislation basically said                                                               
that anybody other than a manufacturer was only liable if there                                                                 
were instances of fraud [or] failure to exercise reasonable care.                                                               
She commented this might be something the committee would want to                                                               
look at in terms of how they could provide some measure of                                                                      
protection to those providing the service.                                                                                      
CHAIRMAN ROKEBERG indicated there would be a definition problem                                                                 
with the language in HB 82; they would have to define manufacturers                                                             
as those that create the source code, but those code writers aren't                                                             
manufacturers per se.  He asked Mr. Thorson whether the creation of                                                             
the code in the software was the ultimate problem.                                                                              
Number 0560                                                                                                                     
MR. THORSON said it was.  He knew of only four methods by which                                                                 
software could be Y2K compliant and it had to do with the                                                                       
formatting of a four-digit year date field.  He commented software                                                              
was also at the heart of hardware.  Mr. Thorson said he believed                                                                
the ultimate responsibility for Y2K compliance needed to be with                                                                
the manufacturer of the hardware or the software, provided that                                                                 
manufacturer be defined as the person who was actually responsible                                                              
for creating and selling the product into the distribution channel,                                                             
not the distributor.  For example, someone who creates a line of                                                                
business software products relying on Microsoft SQL Server.  He                                                                 
stated, "They may be using Microsoft SQL Server as the underlying                                                               
engine of the database that their line of business software                                                                     
application runs on.  In that situation there's two components:                                                                 
there's Microsoft's responsibility to be sure that SQL Server is                                                                
Y2K compliant, and the manufacturer or the creator of the line of                                                               
business applications that's taking that Microsoft SQL Server                                                                   
database engine and then adding code on top of that to create a                                                                 
package that manages a doctor's office or something like that."                                                                 
CHAIRMAN ROKEBERG agreed there was overwritten code, but asked,                                                                 
"What about the issue that revolves around legacy software like                                                                 
COBOL or UNIX programs that are old and they're still -- (indisc.)                                                              
almost embedded in the software (indisc.) larger mainframes or                                                                  
(indisc.) other servers?"                                                                                                       
Number 0658                                                                                                                     
MR. THORSON replied that was a real problem, commenting he didn't                                                               
operate in that area and hadn't give it much thought.  Noting he                                                                
hated to "throw gasoline on the fire ... a little bit,"  Mr.                                                                    
Thorson stated, "To take it one step further, there's also, you                                                                 
know, like COBOL code and FORTRAN code and a lot of the old legacy                                                              
hardware products as well, you know, down in the ROM [read-only                                                                 
memory] chips and in different pieces of hardware, there's memory                                                               
chips that have programs hard-coded into the chip itself.  And in                                                               
many cases, the person who wrote that code or the manufacturer that                                                             
created that chip may not even be in business any longer."                                                                      
CHAIRMAN ROKEBERG indicated Mr. Thorson's statement that he was                                                                 
considering getting out of the Y2K mitigation business concerned                                                                
the chairman.  The chairman noted it seemed Mr. Thorson was asking                                                              
to be granted some limited form of immunity for his work.                                                                       
Number 0720                                                                                                                     
MR. THORSON stated that was correct, emphasizing he did not expect                                                              
any government entity or agency to give him blanket immunity for                                                                
doing poor work.  Mr. Thorson indicated he had no problem with his                                                              
business being held responsible for mistakes it might make in the                                                               
performance of a Y2K compliance job for a customer; for example,                                                                
failing to check the server or failing to check the Y2K compliance                                                              
of a software product with the manufacturer.  However, it was very                                                              
difficult for him, from both the financial responsibility and moral                                                             
perspectives, to accept the prospect of being considered at fault                                                               
if someone's product failed even though NBS had done the work that                                                              
could be done to see if that product was, in fact, Y2K compliant.                                                               
He noted he wasn't looking for "a free ride;" he was looking for                                                                
help to manage a problem he really had no control over.                                                                         
CHAIRMAN ROKEBERG referred to Mr. Thorson's service contract                                                                    
Number 0792                                                                                                                     
MR. THORSON replied they'd done the best they could do, but it was                                                              
his understanding that still was not a strong position to be in.                                                                
He commented $600 million was a figure used in the industry for the                                                             
cost of resolving the Y2K problem; the legal liability was                                                                      
estimated to be over $1 trillion.  The current industry thinking is                                                             
that the liability will exceed the generated revenue by almost a                                                                
factor of two and that seems a "bad bet to go against."                                                                         
CHAIRMAN ROKEBERG said those were the Gartner Group, Incorporated's                                                             
numbers and had been mentioned quite frequently.                                                                                
MR. THORSON indicated he did not have the specific origin of those                                                              
numbers with him.  He thanked the committee for the opportunity to                                                              
testify and praised the committee for bringing this kind of bill in                                                             
front of the legislature.                                                                                                       
Number 0886                                                                                                                     
CHAIRMAN ROKEBERG, in an aside, commented that was a very key area                                                              
because of the embedded chips (indisc.).  The chairman confirmed                                                                
there were no other witnesses in Anchorage.  He invited Marianne                                                                
Burke of the Division of Insurance forward, noting a memorandum [in                                                             
the committee packet, dated February 24, 1999] had been sent out to                                                             
a number of insurers.  The chairman said Wally Cathcart of Cathcart                                                             
Limited had replied.  The memorandum's first question was:  Do                                                                  
current E&O [errors and omissions] and D&O [directors and officers]                                                             
policies protect against Y2K failure claims?  [Additional                                                                       
memorandum questions:  "2. Are Y2K failure policies readily                                                                     
available?  3.  What would be the impact of requiring these                                                                     
policies to cover Y2K failures?  4. What has the insurance industry                                                             
been doing to ensure Y2K compliance of the industry itself?]                                                                    
Chairman Rokeberg discussed Mr. Cathcart's response to the first                                                                
question and Mr. Cathcart's indication that Y2K insurance was very                                                              
limited or almost impossible to get.  He asked for Ms. Burke's                                                                  
comments.  [Mr.  Cathcart's response read:                                                                                      
     In response to your FAX of 2/24/99 the following is my                                                                     
     response to the questions posed.  These answers are after                                                                  
     consulting with major carriers who are involved in the                                                                     
     D&O and E&O coverages.                                                                                                     
     No. 1 - Standard E&O policies routinely include a Y2K                                                                      
     Exclusion.  On a case by case basis underwriters may                                                                       
     delete the exclusion after a careful review of Y2K                                                                         
     questionnaires.  D&O policies may have an exclusion, be                                                                    
     silent or offer coverage on a limited basis.  Any Y2K                                                                      
     coverage on a D&O policy will be for claims brought by                                                                     
     third parties.                                                                                                             
     No. 2 - No - Insurance Carriers view Y2K failure claims                                                                    
     to be foreseeable, known events.  (Last year there were                                                                    
     some policies available for very large companies (Fortune                                                                  
     Five-Hundred) but underwriting was very strict and very                                                                    
     few if any [were] written.[)]                                                                                              
     No. 3 - At this date I do not think this is possible.                                                                      
     No. 4 - Insurance carriers are developing their own                                                                        
     compliance policies and will provide status upon request.                                                                  
     Since the Y2K problem has become a coverage issue the                                                                      
     insurance industry has devoted extensive effort in                                                                         
     providing information and requiring written documentation                                                                  
     of compliance.]                                                                                                            
Number 0979                                                                                                                     
MARIANNE K. BURKE, Director, Division of Insurance, Department of                                                               
Commerce and Economic Development, came forward to testify next,                                                                
indicating John Ference, acting Deputy Director, the supervisor                                                                 
responsible for reviewing company filings was also present.  Ms.                                                                
Burke indicated the Y2K issue was a very major problem, as had been                                                             
testified to previously.  Unlike most risks one seeks insurance to                                                              
cover, there is no precedent for Y2K.  Basically there's no way to                                                              
underwrite - for an insurer to determine how much it needs to                                                                   
charge - for this type of coverage.  The Division of Insurance has                                                              
received a quite a few inquiries from insurance companies regarding                                                             
their particular filings.  In summary, without being able to                                                                    
quantify what a potential risk may be, it is very difficult for a                                                               
insurance company to determine what a premium should be.  The                                                                   
division is charged with making sure the companies also stay                                                                    
solvent, not taking on risks which would put them into an insolvent                                                             
situation.  The comments and discussion regarding Y2K coverage have                                                             
been occurring since the 1970s, contrary to what people might                                                                   
think.  The committee has received eloquent testimony that the                                                                  
solution was not ever really in one company's or one person's hands                                                             
because there are a number of software and hardware packages from                                                               
different manufacturers, with software programmed by different                                                                  
Number 1094                                                                                                                     
MS. BURKE stated giving the assurance that a system was Y2K                                                                     
compliant boggled her mind because of all the different components.                                                             
She referred to the multi-million lines of code and noted the                                                                   
companies have been quick to want make it clear they do not cover                                                               
Y2K exposure.  Ms. Burke mentioned the legal loophole that could                                                                
arise if companies stated they did not cover Y2K; an attorney could                                                             
say the company had not said they did not cover some other                                                                      
calamity.  If a company says it doesn't cover something, the                                                                    
inference is made that it covers everything else.  Ms. Burke                                                                    
confirmed it was extremely difficult to get E&O or D&O coverage                                                                 
that would include Y2K, but that it was available for a price.  She                                                             
noted it was a gamble, one that really concerned her as a regulator                                                             
regarding anyone taking on that liability on a mass basis.  She                                                                 
questioned what this could do to the solvency of those companies.                                                               
Number 1192                                                                                                                     
CHAIRMAN ROKEBERG indicated the committee had received a letter                                                                 
from VECO Corporation requesting that existing E&O and D&O                                                                      
insurance be statutorily mandated to be applicable to this                                                                      
situation.  However, his review of the circumstances and Ms.                                                                    
Burke's testimony seemed to indicate this would be bad public                                                                   
policy because it could potentially jeopardize the solvency of the                                                              
state's insurance industry.  He noted this was because of the                                                                   
unknown factors in the underwriting and the fact that there was a                                                               
foreseeable risk.  He asked Ms. Burke to comment on Mr. Cathcart's                                                              
response that an endorsement could be added to a policy after                                                                   
careful review of a questionnaire.                                                                                              
Number 1266                                                                                                                     
MS. BURKE said that was true.  If the client can demonstrate that                                                               
it is Y2K compliant to the underwriter, the client can get a rider                                                              
for the appropriate premium.  Ms. Burke noted this concerned her                                                                
because she wondered how anyone could be absolutely sure they were                                                              
completely Y2K compliant.  However, she commented there were no                                                                 
guarantees in the realm of insurance; it is a matter of taking risk                                                             
and one does whatever one can to minimize and control those risks.                                                              
Ms. Burke indicated it was a very strict area of underwriting and                                                               
the division required an insurance company to provide the division                                                              
with the underwriting information.  She commented the division had                                                              
had to work very carefully not to give one company an advantage                                                                 
over another since this could get into proprietary information and                                                              
everything that came into the division was public information.                                                                  
CHAIRMAN ROKEBERG questioned whether the division had been                                                                      
monitoring this situation.                                                                                                      
Number 1349                                                                                                                     
MS. BURKE stated the division was in a very unenviable position.                                                                
The division has to be Y2K compliant as a regulatory agency, but it                                                             
also has to make sure the insurance industry is Y2K compliant so                                                                
that the claims could be paid as they came due.                                                                                 
Number 1374                                                                                                                     
REPRESENTATIVE HALCRO referred again to HB 57, granting immunity to                                                             
state and municipal [governments], noting Commissioner-designee Poe                                                             
[Department of Administration] had spoken of "deep pockets."                                                                    
Representative Halcro asked if Ms. Burke supported granting some                                                                
kind of immunity to private enterprises that could show they had                                                                
tried to address this problem in good faith.                                                                                    
Number 1425                                                                                                                     
MS. BURKE replied she would qualify any kind of support,                                                                        
questioning what was "good faith."  She stated any granting of                                                                  
immunity had to be so carefully worded to:  1) avoid giving carte                                                               
blanche for someone to sit back and do nothing, 2) to avoid                                                                     
situations where fraudulent claims could be made.  However, she                                                                 
said the thought of the potential litigation was worse than the                                                                 
thought of the claims because of litigation's expense.  From a                                                                  
realistic point of view, she thought legislation was needed to                                                                  
limit potential litigation but needed to be carefully crafted.  Ms.                                                             
Burke indicated it didn't seem to be good public policy to hold                                                                 
people liable for something for which there was no precedent.                                                                   
REPRESENTATIVE HALCRO indicated testimony on S.96 related that the                                                              
combined exposure of tobacco, asbestos and breast implant,                                                                      
superfund lawsuits, et cetera, combined, would pale in comparison                                                               
to the Y2K exposure.  He asked if he was hearing that Ms. Burke                                                                 
would support this, with adequate protections.                                                                                  
Number 1571                                                                                                                     
MS. BURKE answered in the affirmative, commenting she always hated                                                              
to say she supported something in the abstract.                                                                                 
CHAIRMAN ROKEBERG stated the bill's concept was to minimize the                                                                 
amount of litigation and therefore minimize potential claims made                                                               
against the insurers.  He mentioned case law regarding the                                                                      
"Cincinnati Insurance Company."  Chairman Rokeberg asked if this                                                                
legislation would lower the amount of claims that might ultimately                                                              
be found to be payable if certain case law went against certain                                                                 
insurers.  Rephrasing, he stated, "In the overall spectrum,                                                                     
wouldn't this bill be good for insurance companies, 'cause it would                                                             
limit the amount of claims ... if any at all occur."                                                                            
Number 1652                                                                                                                     
MS. BURKE indicated the legislation did not specifically address                                                                
claims against insurers.  Ms. Burke indicated she thought the worst                                                             
litigation would be over whether or not coverage existed, stating,                                                              
"I do think this would help to minimize the situation, and at least                                                             
have control [over] the upper limits."                                                                                          
CHAIRMAN ROKEBERG asked Mr. Ford if Version H granted immunity to                                                               
the officers or directors of a corporation that performed due                                                                   
diligence and made a good faith effort as reviewed by the courts.                                                               
Number 1707                                                                                                                     
MR. FORD answered in the affirmative, but noted there was enough                                                                
room that there would continue to be litigation.  Even though the                                                               
courts might find that there is immunity, there would still be                                                                  
arguments over the key provisions.  However, this is a big step in                                                              
the right direction.                                                                                                            
REPRESENTATIVE HALCRO asked if there was a way to make the loser in                                                             
litigation pay.                                                                                                                 
MR. FORD replied, "(Indisc.) our system of civil justice here, the                                                              
loser does pay.  We have an excellent system, I think, as far as                                                                
efficiencies in managing civil litigation.  So, we have a number of                                                             
things in our law presently that tend to make people resolve their                                                              
differences before litigating it."                                                                                              
Number 1808                                                                                                                     
CHAIRMAN ROKEBERG commented that was the bill's purpose, indicating                                                             
the steps of a cure remedy, mediation, the courts with limitations                                                              
to actual damages, were all ways to minimize this burden without                                                                
removing the rights of those that had been damaged to seek a cause                                                              
of action.  That is the balancing act.  This is not intended to be                                                              
pure immunity; it's just a short-term tort reform for this                                                                      
particular issue.  Chairman Rokeberg confirmed from Ms. Burke that                                                              
Alaska businesses should not expect to be covered for Y2K unless                                                                
they had special riders or other provisions, or had been noticed                                                                
that their policies covered it.                                                                                                 
Number 1870                                                                                                                     
MS. BURKE added the division had some wording it would like the                                                                 
committee to consider.  She commented it would be helpful to Mr.                                                                
Thorson.  On page 2, line 14  [subsection (b)(1)], she suggested "a                                                             
business that manufacturers, sells, services [,] designs or                                                                     
provides services in connection with the sale of software, firmware                                                             
...".  Ms. Burke noted, then, if any of those people represented                                                                
that it was Y2K compliant, they did  not have the protections.                                                                  
CHAIRMAN ROKEBERG said that was the committee's point, commenting                                                               
he thought Mr. Thorson was arguing for the converse - minimizing                                                                
the scope.                                                                                                                      
Number 1974                                                                                                                     
REPRESENTATIVE MURKOWSKI asked what the division was doing to make                                                              
sure the entities it regulated were communicating to their clients                                                              
that the clients were not insured for Y2K failure.                                                                              
Number 2010                                                                                                                     
MS. BURKE replied, "We started two years ago with the domestics in                                                              
this state, requiring them to do a number of the things you list                                                                
here as well as a number of other things.  Our authority goes                                                                   
toward those companies.  Now, every company is domiciled in some                                                                
state - that is all the domestics and the foreign companies.  Each                                                              
state is doing the same thing.  Collectively we have decided that's                                                             
the best way to address the companies' compliance."  She said all                                                               
they could do was what industry standards indicated was                                                                         
appropriate.  Ms. Burke noted so much of the data of an insurance                                                               
company was date sensitive and commented that although they had                                                                 
begun this process two years ago, she had no illusions anyone could                                                             
tell her they were absolutely Y2K compliant.                                                                                    
REPRESENTATIVE MURKOWSKI confirmed the companies had at least made                                                              
the notification, were going through the education process, and the                                                             
awareness was out there.                                                                                                        
Number 2104                                                                                                                     
CHAIRMAN ROKEBERG thanked Ms. Burke for her testimony.  He referred                                                             
to page 2, subsection (d)(1), "(1) damages may be awarded for                                                                   
economic losses only unless the business against whom the action is                                                             
brought committed fraud; and" and asked Mr. Ford's regarding the                                                                
possible addition of "misrepresentation."  He confirmed fraud and                                                               
misrepresentation were different things, questioning whether a                                                                  
higher level of damages might be triggered if both occurred.                                                                    
Additionally, he asked what was typically done in the contract law                                                              
about that.                                                                                                                     
Number 2179                                                                                                                     
MR. FORD replied he thought they were mentioning an intentional act                                                             
when discussing fraud; misrepresentation may or may not be                                                                      
intentional.  Adding "misrepresentation" without preceding it with                                                              
"intentional" expands the group that could be held liable for these                                                             
kinds of damages.                                                                                                               
REPRESENTATIVE MURKOWSKI referred to the use of the term                                                                        
"intentional wrong-doing" in the federal legislation.                                                                           
MR. FORD indicated he thought that was the same thing as the fraud                                                              
concept, stating, "It's an intentional act when you know what                                                                   
you're saying is wrong."                                                                                                        
CHAIRMAN ROKEBERG confirmed from Representative Murkowski that the                                                              
federal legislation allowed for punitive damages.  The chairman                                                                 
proceeded, commenting he thought the federal legislation excluded                                                               
the joint and several liability damage concept and he would like                                                                
that added to HB 82.                                                                                                            
Number 2276                                                                                                                     
MR. FORD said Alaska did not have joint liability.  He commented                                                                
Alaska had had several liability but that was changed by initiative                                                             
in the 1980s, he thought.                                                                                                       
Number 2310                                                                                                                     
CHAIRMAN ROKEBERG referred to his previously-mentioned remediation                                                              
and cure element, stating, "I think in all instances that prior to                                                              
getting into mediation we should have the step of cure available as                                                             
a remedy to everybody."  He indicated even those businesses                                                                     
excluded from immunity by (b)(1) should have that right.  The                                                                   
chairman moved a proposed conceptual amendment, stating,  "I'd move                                                             
a conceptual amendment number 2 to add the cure - remediation and                                                               
cure to the (indsc.--interference with microphone) all instances."                                                              
He asked if there was any discussion or objection to Conceptual                                                                 
Amendment 2, "to add remediation and cure to all parties involved."                                                             
There being no objections, Conceptual Amendment 2 was adopted.                                                                  
CHAIRMAN ROKEBERG stated this brought the committee back the issue                                                              
in subsection (b) which Mr. Thorson had testified on.  The chairman                                                             
noted Representative Murkowski's thought about using language from                                                              
S.96, the federal legislation.                                                                                                  
Number 2443                                                                                                                     
REPRESENTATIVE MURKOWSKI indicated this provided that the immunity                                                              
defense could not be asserted by a manufacturer, and the alternate                                                              
language removed anyone else who had fraudulently represented and                                                               
had engaged in intentional wrongdoing from the immunity protection.                                                             
She commented they could probably provide protection to those like                                                              
Mr. Thorson by doing it this way.                                                                                               
CHAIRMAN ROKEBERG said, "Well, he's (indisc.) consider a computer                                                               
consultant that deals and services and perhaps..." [TESTIMONY                                                                   
INTERRUPTED BY TAPE CHANGE]                                                                                                     
TAPE 99-18, SIDE A                                                                                                              
Number 0001                                                                                                                     
CHAIRMAN ROKEBERG continued, "... nor is the source code software                                                               
writer, so, I mean we're looking at manufacturers of both hardware                                                              
and software here, I think.  I guess the one thing I'd like to                                                                  
include, though, is the software writers that made the original                                                                 
screw-up, if you will, ... that caused this problem in the first                                                                
instance."  The chairman indicated he was not in favor of the                                                                   
limited immunity applying to a computer consultant who wrote                                                                    
incorrect code for a hardware or software manufacturer.                                                                         
Number 0069                                                                                                                     
MR. THORSON suggested using the industry term "software developer"                                                              
instead of "software manufacturer."                                                                                             
CHAIRMAN ROKEBERG asked whether someone hired as a consultant to                                                                
write code, and who made an error, would be included in that                                                                    
MR. THORSON affirmed that.                                                                                                      
CHAIRMAN ROKEBERG asked Mr. Ford if he had any comments.                                                                        
MR. FORD questioned whether someone "develops" hardware as well.                                                                
Number 0166                                                                                                                     
CHAIRMAN ROKEBERG commented he thought so, noting that it would be                                                              
a manufacturer or developer of software, firmware, microcode,                                                                   
hardware, et cetera.  However, by omission that excludes service                                                                
and maintenance providers.  The chairman stated, "And the rationale                                                             
would be the testimony we heard, that these people -- I guess what                                                              
troubles me is - what I was trying to get at originally when we                                                                 
were working on this draft - was including the contractual                                                                      
language, where ideally (indisc.) should be protected by (indisc.)                                                              
contracts, and therefore you should be able to enforce those                                                                    
contracts against them (indisc.) because of this privity of                                                                     
contract thing.  So, that to me should be the prevailing entity                                                                 
there. On the other hand ... I want to assist these types of                                                                    
businesses so they will maintain their activities in bringing the                                                               
world into [Y2K] compliance."  He told members that Mr. Thorson,                                                                
former president of the "Resource Development Council" [Resource                                                                
Development Council for Alaska, Incorporated] and active in the                                                                 
Anchorage community, was a credible person whom he had known for a                                                              
number of years.                                                                                                                
Number 0313                                                                                                                     
REPRESENTATIVE HARRIS referred to page 2, line 19 [and 18], "...                                                                
this paragraph does not apply to ...".  He proposed perhaps                                                                     
inserting there the type of business that Mr. Thorson had talked                                                                
CHAIRMAN ROKEBERG commented they needed to clarify that this was a                                                              
retail outlet, suggesting "sells at a retail level".                                                                            
REPRESENTATIVE MURKOWSKI added, "Retail seller."                                                                                
CHAIRMAN ROKEBERG noted several other states had adopted that                                                                   
particular provision.  Commenting that was an easy fix, he reminded                                                             
committee members the issue was who should be excluded from the                                                                 
grant of limited immunity.  It is the manufacturer of the hardware                                                              
and software; it is the software developer if they define that                                                                  
person as someone who writes the code.  He confirmed including that                                                             
definition made it easier from a drafting standpoint.                                                                           
MR. FORD said he could work up something like that.                                                                             
Number 0409                                                                                                                     
REPRESENTATIVE HALCRO referred to page 2, line 14, "(1) by a                                                                    
business that manufactures or sells software, ...".  He suggested                                                               
the elimination of "or sells" on this line, indicating it seemed                                                                
redundant and confusing if "sells" will be included on line 19                                                                  
[lines 18 and 19: "... this paragraph does not apply to a business                                                              
that only rents or leases software, ..."].  He suggested simply                                                                 
limiting it to manufacturers on line 14.                                                                                        
CHAIRMAN ROKEBERG suggested the phrase, "manufacturers or                                                                       
REPRESENTATIVE HALCRO said it could be creators or developers.                                                                  
REPRESENTATIVE MURKOWSKI agreed with "manufacturers or develops".                                                               
CHAIRMAN ROKEBERG commented that was the code writer, known as the                                                              
"software developer" per Mr. Thorson's testimony.                                                                               
REPRESENTATIVE HALCRO added that if he was Microsoft, he not only                                                               
manufactured software, but he also sold it to the COSTCOs,                                                                      
CompUSAs, et cetera.                                                                                                            
Number 0479                                                                                                                     
CHAIRMAN ROKEBERG indicated the writer, the software developer, of                                                              
a bad Y2K patch which he made available on the Internet would be                                                                
culpable if someone relied on that patch.  The chairman proposed                                                                
using "manufacturers or develops" on line 14, removing "sells" on                                                               
line 14, and inserting "sells" on line 19.  He asked about adding                                                               
"retail or wholesale" on line 19, noting it was really the retail                                                               
business but questioning whether they should include wholesalers.                                                               
Number 0529                                                                                                                     
PAM LaBOLLE, President, Alaska State Chamber of Commerce, commented                                                             
she believed COSTCO was a wholesaler by definition.                                                                             
MR. FORD said he believed COSTCO was a hybrid, selling retail to                                                                
the public but wholesale to businesses, with divided hours.                                                                     
CHAIRMAN ROKEBERG asked whether they wanted to include wholesale                                                                
sellers of software, as well.                                                                                                   
MR. FORD agreed they would probably want to do that.                                                                            
REPRESENTATIVE MURKOWSKI suggested therefore leaving it as "sells".                                                             
CHAIRMAN ROKEBERG agreed, commenting on keeping it simple.                                                                      
Number 0595                                                                                                                     
REPRESENTATIVE HALCRO made a motion to amend page 2 as follows:  on                                                             
line 14, delete "sells" and insert "develops"; and on line 19,                                                                  
insert "sells" between "only" and "rents".                                                                                      
CHAIRMAN ROKEBERG labeled it Conceptual Amendment 3 and asked                                                                   
whether there was any objection.  There being no objection,                                                                     
Conceptual Amendment 3 was adopted.  He then asked whether line 21                                                              
should be deleted [subsection (b)(2), "(2) in an action based on a                                                              
MR. FORD explained, "Because subsection (a) allows you to assert                                                                
the defense, in any civil action you need (b)(2) to allow [an]                                                                  
action based on contract to go forward on the contractual                                                                       
provisions, and not to supply additional provisions that could be                                                               
used in that case."                                                                                                             
Number 0679                                                                                                                     
REPRESENTATIVE MURKOWSKI pointed out that it was an "or."  She                                                                  
asked whether it was any action based in contract.                                                                              
MR. FORD answered, "Right.  If you, in fact, ... aren't going to                                                                
affect the contract action, then you need to have this provision in                                                             
here.  If I have a contract with you that says A, B and C, and I                                                                
breach one of those provisions, you're going to sue me on that                                                                  
contract, and I could not assert this remedial process as a defense                                                             
in that action."                                                                                                                
Number 0713                                                                                                                     
CHAIRMAN ROKEBERG indicated that was a somewhat troubling policy                                                                
call because he wanted to maintain the right of contract to sue.                                                                
He mentioned discussions with Mr. Ford, noting they both agreed a                                                               
substantial amount of litigation would be under contract theory.                                                                
The chairman questioned that if any kind of immunity was excluded,                                                              
the situation was returned to suing under contract.                                                                             
MR. FORD said he believed there would be significant litigation on                                                              
a contract basis.  However, one can sue for economic damages                                                                    
without having a contract.  Mr. Ford stated, "And if so, then                                                                   
having these provisions in here would be good because, then, this                                                               
encourages those people to make those remedial efforts.  The                                                                    
question you have to answer here is whether you'd want the remedial                                                             
efforts to apply in a contract lawsuit.  If you think that has                                                                  
merit, then we'll need to change this, so that in a contract                                                                    
lawsuit they would also have this ... as a defense."                                                                            
CHAIRMAN ROKEBERG said he was torn about which way to go.  On one                                                               
hand, the obligation of a business is the issue.  On the other                                                                  
hand, if they don't grant the immunity, he questioned the reason                                                                
for a bill.  The chairman commented that almost all of the actions                                                              
would be contract actions, with few, if any, personal injury                                                                    
Number 0858                                                                                                                     
REPRESENTATIVE HALCRO noted Mr. Thorson had testified that in his                                                               
contracts with clients, it clearly stated that although he was                                                                  
doing the work, he could not be held responsible if something was                                                               
not Y2K compatible.  Representative Halcro posed a situation where                                                              
the inverse was true:  A hypothetical Mr. Jones owned the same kind                                                             
of company and was guaranteeing to clients that he could fix their                                                              
problems, and then claimed immunity under subsection (b)(1) when                                                                
something happened and the problems weren't fixed.  He asked                                                                    
whether subsection (b)(2) wouldn't then provide the person harmed                                                               
the right to sue based on the contract.  Although Mr. Jones would                                                               
be listed as having immunity, he would have signed a contract that                                                              
stated certain provisions and agreed to certain things.                                                                         
MR. FORD specified that under this provision, someone who has a                                                                 
contract was not immune and did not have this defense.                                                                          
Number 0924                                                                                                                     
CHAIRMAN ROKEBERG indicated they were now leaning toward deleting                                                               
it and allowing the defense to stand.  He commented they had                                                                    
narrowed the scope of subsection (b)(2), the "geek clause," and he                                                              
thought he would leave the right of the privity of contract to                                                                  
stand, which it would anyway.  He asked for confirmation that they                                                              
were not affecting that in any way, and that it stood alone.                                                                    
MR. FORD affirmed that.                                                                                                         
CHAIRMAN ROKEBERG said the policy call, then, was whether to grant                                                              
the immunity defense in contract cases.  He asked, "If we don't                                                                 
agree to that, then why have the bill, almost?"                                                                                 
Number 0977                                                                                                                     
MR. FORD replied that if they made a distinction on a contract                                                                  
basis, in this situation they were probably talking about the                                                                   
majority of cases.                                                                                                              
CHAIRMAN ROKEBERG said the bill had some other merit, because of                                                                
the class action mandates, limitations to actual damages except in                                                              
the case of fraud, and so forth.  He said it wasn't an easy                                                                     
decision, noting that contracts were the foundation of our entire                                                               
Number 1016                                                                                                                     
MR. FORD responded that this situation, though, with so many                                                                    
unknown factors, might justify this; it is basically adding a                                                                   
provision to the contract in statute.                                                                                           
CHAIRMAN ROKEBERG pointed out that it was a major step.  He asked                                                               
whether the intrusion on the "privity of contract" was warranted                                                                
because of the Y2K situation.                                                                                                   
REPRESENTATIVE HALCRO said he believed it was.  The uncertainty is                                                              
represented by the insurance industry's inability to clearly define                                                             
the risks and to offer coverage.  He said there was a tremendous                                                                
amount of exposure, but he indicated it was an isolated situation                                                               
because it was not a recurring event.                                                                                           
Number 1084                                                                                                                     
MR. THORSON told the committee he would not object to leaving in                                                                
the part of the bill that said if a person had a contract with                                                                  
someone, the language of the contract did not allow a claim of                                                                  
immunity under this bill.  When his business does a large job for                                                               
a customer, such as installing a new network or doing a Y2K audit,                                                              
they have specific contract that spells out what they will do for                                                               
that customer and what they are liable for.  He indicated he saw a                                                              
lot of the bill's value for him regarding situations not covered by                                                             
such a contract.  Mr. Thorson gave the example of fixing a                                                                      
customer's broken computer printer once - a service call typically                                                              
done without a contract - commenting he would be protected against                                                              
somebody saying "'Hey, these guys came out and fixed my printer one                                                             
time, and now it doesn't work because it's not Y2K compliant;                                                                   
therefore, they're liable.'"                                                                                                    
Number 1186                                                                                                                     
CHAIRMAN ROKEBERG suggested that when someone went and repaired a                                                               
printer, there was an implied contract and contract law principles                                                              
would apply.  He indicated what bothered him was not this                                                                       
particular situation but the circumstances under which the computer                                                             
consultant would agree to fix the Y2K problem, fail to do so, then                                                              
rely on this bill to excuse the failure to perform.  In that                                                                    
situation the chairman said he thought the privy of contract should                                                             
still apply.  He said if there is specific language about the Y2K                                                               
compliance, that should be superior if there is a written contract,                                                             
wondering if that might be the way to attack it.                                                                                
Number 1249                                                                                                                     
REPRESENTATIVE MURKOWSKI indicated she had not heard anyone through                                                             
hearings on the Y2K issue and in conversation giving expressed                                                                  
guarantees that no Y2K failures would occur.  She proposed that                                                                 
those service providers who signed a contract guaranteeing they                                                                 
would fix a Y2K problem negated their opportunity for immunity and                                                              
should stand on their own.                                                                                                      
CHAIRMAN ROKEBERG asked for Mr. Ford's thoughts.                                                                                
MR. FORD commented that if he were representing someone with a                                                                  
claim, and this language was in the statute, he would simply write                                                              
the complaint so that it was not based on the contract.  He said he                                                             
wasn't certain that any greater protection would be achieved by                                                                 
leaving it in there, stating, "The contract is what the contract                                                                
is, and it will be enforced by the courts."  He suggested that                                                                  
applying the defense in all cases might be simpler and actually                                                                 
fairer, because everyone would then know what is available and what                                                             
steps they should take.  Furthermore, people would not have to                                                                  
worry about trying to couch a complaint in a particular way to                                                                  
avoid defects.                                                                                                                  
Number 1341                                                                                                                     
CHAIRMAN ROKEBERG indicated the "case before the bar" was that one                                                              
had to complete the due diligence, go through the steps, and also                                                               
explain the breach of contract.  He noted that whether to leave it                                                              
in was a key issue.  He suggested that the committee hold off on                                                                
that amendment.                                                                                                                 
MR. FORD agreed to take the question back to his office for                                                                     
CHAIRMAN ROKEBERG asked Mr. Ford to address what the relationship                                                               
would be if both the state bill and the federal McCain legislation                                                              
[S.96] were enacted, whether or not the federal legislation stayed                                                              
in its current form.                                                                                                            
Number 1426                                                                                                                     
MR. FORD responded, "With the caveat, of course, that we don't know                                                             
what we will wind up with in this state, and we don't know what                                                                 
they will wind up with in Congress, this bill actually has numerous                                                             
provisions that are similar to the federal law.  The differences                                                                
really lie, I think, in the area of calculation of damages and also                                                             
- in their provision - in treating people who rent, sell or lease                                                               
software or hardware; that provision is fairly complicated in the                                                               
federal law, and they have a whole process you go through to                                                                    
determine whether a person who rents or leases, et cetera, is going                                                             
to be liable or not.  So, that's more complicated than we have in                                                               
our bill.  I think what they've tried to do here is basically put                                                               
up some more hoops you have to go through to get to the person who                                                              
rents and leases but doesn't manufacture; they can be held liable,                                                              
but you've got to go through a number of steps, and it's pretty                                                                 
difficult, from ... what I can see here.  They do have some                                                                     
limitations on damages, depending on the size of your business, and                                                             
we don't have that in our bill.  And the limitations are actually                                                               
on non-economic damages, not on economic damage; you can collect as                                                             
much economic as you can prove, but as far as the other side,                                                                   
there's a limitation on that.  They don't simply say you can't get                                                              
any; they say you can only get so much."                                                                                        
CHAIRMAN ROKEBERG asked whether punitive damages were capped or                                                                 
Number 1505                                                                                                                     
MR. FORD specified that punitive damages were allowed if they were                                                              
allowed under state law, but non-economic damages were limited.                                                                 
CHAIRMAN ROKEBERG said, "So that would be another reason to have a                                                              
state law is that under ... this type of a cause of action by                                                                   
excluding punitive damages, that would be  controlling (indisc.) in                                                             
the federal court," confirming from Mr. Ford that was correct under                                                             
that version.  The chairman commented HB 82 would "back-stop" the                                                               
federal law with a small amount of overlap.  He asked Mr. Ford                                                                  
whether this would discourage "forum shopping" to a degree, if the                                                              
federal law passed, because the bills weren't radically different                                                               
in approach.                                                                                                                    
MR. FORD said he thought it would do that, commenting that was one                                                              
reason to have federal legislation.                                                                                             
CHAIRMAN ROKEBERG asked whether that was a reason to have state                                                                 
legislation as well.                                                                                                            
MR. FORD responded, "My advice always is to proceed and not to                                                                  
think about the federal law at all, simply because you don't know                                                               
what will happen."                                                                                                              
CHAIRMAN ROKEBERG indicated Congress could still be working on its                                                              
bill in September, but the Alaska legislature needed to act this                                                                
legislative session on the Y2K issue.                                                                                           
Number 1582                                                                                                                     
REPRESENTATIVE MURKOWSKI informed members several other states have                                                             
said the immunity provision does not apply to a health care                                                                     
facility if death or bodily injury results from a failure or                                                                    
malfunction.  She asked whether that was something the committee                                                                
might want to include in the legislation.                                                                                       
CHAIRMAN ROKEBERG replied he was open to that idea.  One of the                                                                 
biggest concerns has been embedded chips in medical equipment, as                                                               
failure can be life-threatening.  He has seen conflicting reports                                                               
about the progress of the health care industry in addressing the                                                                
Y2K problem.  Chairman Rokeberg thanked the testifiers, announcing                                                              
his intention to take up HB 82 the following Wednesday [March 3,                                                                
1999].  He indicated HB 82 would be held over.                                                                                  

Document Name Date/Time Subjects