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
+ teleconferenced
= bill was previously heard/scheduled
HOUSE LABOR AND COMMERCE STANDING COMMITTEE
February 26, 1999
3:19 p.m.
MEMBERS PRESENT
Representative Norman Rokeberg, Chairman
Representative Andrew Halcro, Vice Chairman
Representative Jerry Sanders
Representative Lisa Murkowski
Representative John Harris
Representative Sharon Cissna
MEMBERS ABSENT
Representative Tom Brice
COMMITTEE CALENDAR
* HOUSE BILL NO. 79
"An Act relating to letters of credit under the Uniform Commercial
Code; and providing for an effective date."
- HEARD AND HELD
HOUSE BILL NO. 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."
- HEARD AND HELD
(* First public hearing)
PREVIOUS ACTION
BILL: HB 79
SHORT TITLE: UNIFORM COMMERCIAL CODE:LETTERS OF CREDIT
SPONSOR(S): LABOR & COMMERCE BY REQUEST
Jrn-Date Jrn-Page Action
2/03/99 132 (H) READ THE FIRST TIME - REFERRAL(S)
2/03/99 133 (H) LABOR AND COMMERCE, JUDICIARY
2/26/99 (H) L&C AT 3:15 PM CAPITOL 17
BILL: HB 82
SHORT TITLE: IMMUNITY:CLAIMS ARISING FROM Y2K PROBLEMS
SPONSOR(S): REPRESENTATIVES(S) ROKEBERG, Dyson
Jrn-Date Jrn-Page Action
2/05/99 144 (H) READ THE FIRST TIME - REFERRAL(S)
2/05/99 144 (H) L&C, JUDICIARY
2/12/99 (H) L&C AT 3:15 PM CAPITOL 17
2/12/99 (H) HEARD AND HELD
2/12/99 (H) MINUTE(L&C)
2/16/99 228 (H) COSPONSOR(S): DYSON
2/26/99 (H) L&C AT 3:15 PM CAPITOL 17
WITNESS REGISTER
VINCENT USERA, Assistant Attorney General
Commercial Section
Civil Division (Juneau)
Department of Law
P.O. Box 110300
Juneau, Alaska 99811-0300
Telephone: (907) 465-3600
POSITION STATEMENT: Testified briefly on HB 79.
MELODY LITTLE, Assistant Vice President
National Bank of Alaska;
Alaska Bankers Association
301 West Northern Lights Boulevard
Anchorage, Alaska 99507
Telephone: (907) 265-2938
POSITION STATEMENT: Testified in support of HB 79, asked questions
regarding specific language.
MIKE FORD, Legislative Counsel
Legislative Legal and Research Services
Legislative Affairs Agency
130 Seward Street, Suite 409
Juneau, Alaska 99801-2105
Telephone: (907) 465-2450
POSITION STATEMENT: Answered legal questions as the drafter of
the proposed Version H committee substitute for HB 82.
SCOTT THORSON, President and Owner
Network Business Systems
1577 "C" Street, Suite 205
Anchorage, Alaska 99501
Telephone: (907) 272-2888
POSITION STATEMENT: Testified on HB 82.
MARIANNE K. BURKE, Director
Division of Insurance
Department of Commerce and Economic Development
P.O. Box 110805
Juneau, Alaska 99811-0805
Telephone: (907) 465-2515
POSITION STATEMENT: Answered questions on HB 82.
PAM LaBOLLE, President
Alaska State Chamber of Commerce
217 Second Street, Suite 201
Juneau, Alaska 99801
Telephone: (907) 586-2323
POSITION STATEMENT: Commented very briefly on COSTCO Wholesale
Corporation during discussion of HB 82.
ACTION NARRATIVE
TAPE 99-17, SIDE A
Number 0001
CHAIRMAN NORMAN ROKEBERG called the House Labor and Commerce
Standing Committee meeting to order at 3:19 p.m. Members present
at the call to order were Representatives Rokeberg, Halcro,
Sanders, Murkowski and Harris. Representative Cissna arrived at
5:15 p.m. The chairman noted Representative Brice had indicated he
was ill that day.
HB 79 - UNIFORM COMMERCIAL CODE:LETTERS OF CREDIT
Number 0207
CHAIRMAN ROKEBERG announced the committee's first order of business
was HB 79, "An Act relating to letters of credit under the Uniform
Commercial Code; and providing for an effective date." The
chairman indicated the same bill had been introduced the previous
session and had received a very thorough House Labor and Commerce
Standing Committee and subcommittee hearing, proceeding through the
House, but not the Senate. [The sponsor statement read:
The basic purpose of the revision of Article 5 of the
Uniform Commercial Code [UCC] is to update the law
governing the $200 billion U.S. letter-of-credit
industry. All 50 states and Puerto Rico, Guam, and the
District of Columbia have adopted the UCC, including
Article 5. It now necessary for Article 5 to be revised,
to recognize changes in technology and in commercial
practices, so as to avoid litigation over the increasing
number of issues that are no longer adequately dealt with
in the decades-old current law. One of the main features
of this revision is the simplification of Article 5.
Another is its recognition of the Uniform Customs and
Practices for Documentary Credits, a body of material
that is used in conjunction with most international
letters of credit.
Letters of credit are used to obtain payment as a backup
to other kinds of credit extension; they are very
important in international trade. Prior ambiguities in
the law dealing with the concept of fraud in the
transaction are clarified. Article 5 becomes much
simpler and less detailed because of the explicit
reliance upon standards of practice. It continues to
provide rules that can be waived or modified by agreement
between the parties.
This revision of Article 5, promulgated by the National
Conference of Commissioners on Uniform State Laws in
1995, has already been enacted in 39 jurisdictions and,
as of January 15 of this year, is pending in the
legislature of an additional jurisdiction. It is
necessary for Alaska to enact this bill in order to keep
up with the developments in the commercial law area, and
avoid becoming a commercial backwater.]
Number 0269
REPRESENTATIVE MURKOWSKI asked if the bill was identical to the
previous bill.
CHAIRMAN ROKEBERG indicated that was his understanding. He noted
Mr. Usera from the Department of Law was there to assist in
presenting the legislation, in the absence of Art Peterson, the
uniform law commissioner and drafter of (indisc.).
Number 0310
VINCENT USERA, Assistant Attorney General, Commercial Section,
Civil Division (Juneau), Department of Law, came forward to testify
on HB 79. He noted he was present in the absence of others besides
Mr. Peterson as well. Mr. Usera said he had received the
assignment only that day, was somewhat familiar with the issue and
could answer general questions, but was not prepared to answer
major questions. He stated he'd been told it was exactly the same
as the previous year's legislation, it was a uniform bill, and that
there were no legal problems with it. It modernizes letter of
credit law.
Number 0386
CHAIRMAN ROKEBERG called a brief at-ease at 3:23 p.m. The
committee came back to order at 3:24 p.m.
Number 0390
CHAIRMAN ROKEBERG stated his best recollection of the legislation
was that, as noted in the bill, a number of states had already
adopted this provision of the Uniform Commercial Code. It provides
for letters of credits, the main types of instruments in the
practice of international banking, particularly. The chairman
indicated Alaska's statutes were outmoded and it was necessary to
bring the state's practices for international finance and exchange
up-to-date. Alaska is one of the few states which has not yet
adopted this. He recalled that Art Peterson [of Juneau] and Jerry
Kurtz of Anchorage, two of Alaska's uniform law commissioners
serving on the uniform law committee, had done some very thorough
work on the previous session's legislation.
Number 0469
REPRESENTATIVE HARRIS asked why the previous bill had not passed
the Senate last year.
CHAIRMAN ROKEBERG commented the bill had died of "legislative
inertia" in the Senate Judiciary Standing Committee. He confirmed
there hadn't been any serious problems with the bill.
Number 0506
REPRESENTATIVE MURKOWSKI, drawing a parallel to the current HB 83
and financial repercussions that would arise if that legislation
was not adopted by its deadline, asked what the downside was to not
moving HB 79 this legislative session besides simply failing to be
on the same level as the other states that had adopted it.
CHAIRMAN ROKEBERG replied it was an impediment to commerce in the
state, putting Alaska out of coordination with other states. He
indicated the importance of international trade to Alaska's export
industries and that foreign banks were used to working with the
UCC.
Number 0606
MELODY LITTLE, Assistant Vice President, National Bank of Alaska;
Alaska Bankers Association, testified via teleconference from
Anchorage in support of HB 79 on behalf of both organizations. Ms.
Little noted she had some questions in reference to changes being
made. In Section 21, page 16, line 24, a new paragraph was being
added to existing statute but the new language was not underlined.
She questioned since it was not underlined, whether that was the
section being added.
CHAIRMAN ROKEBERG indicated it was not underlined because it was an
new paragraph.
Number 0682
MS. LITTLE referred to subsection (g) on page 8 [lines 2 through
4], "(g) If an undertaking constituting a letter of credit under AS
45.05.102(a)(10) contains nondocumentary conditions, an issuer
shall disregard the nondocumentary conditions and treat them as if
they were not stated." She questioned whether this meant that if
documents were presented for payment when the documents were not a
required item in the letter of credit, they [the banking
institution] could disregard this.
CHAIRMAN ROKEBERG asked for Mr. Usera's assistance.
Number 0752
MR. USERA noted he read, "It says you'll disregard the
nondocumentary conditions."
CHAIRMAN ROKEBERG referred to the attached February 17, 1999
sectional analysis from Legal Services, Division of Legal and
Research Services, Legislative Affairs Agency, by Theresa
Bannister, Legislative Counsel. He noted that analysis stated, "AS
45.05.108(g). Directs an issuer to ignore certain nondocumentary
conditions contained in a letter of credit." The chairman
confirmed Ms. Little had no further testimony. He asked if she
worked in the banking area that handled letters of credit.
Number 0827
MS. LITTLE replied she had worked in the international division of
National Bank of Alaska for approximately 13 years. In response to
the chairman's request for a "thumbnail sketch" describing letters
of credit and how they worked in her industry, Ms. Little stated a
letter of credit was a contingent liability. For example, there
could be a Japanese customer buying fish from an Alaskan fish
processor, the two parties might not be familiar with each other
and ask banks to mediate for them. The buyer's bank will issue a
letter of credit stipulating certain documents for payment. In
exchange for those documents, payment will be made to the supplier.
The issuing bank, the customer's bank, books the letter of credit
as a contingent liability, with the understanding the buyer will
repay the bank; and, in the event the bank is not paid back, it has
some form of collateral or support. The supplier is assured it
will receive payment as long as it provides the documents required
in the letter of credit and does not transfer the goods to the
buyer without that payment. With the bank being the mediator, if
payment is not made, the documents are usually not released to the
buyer for pick-up.
CHAIRMAN ROKEBERG indicated he thought that explained it, noting
most small businesses didn't work with that. He asked if Ms.
Little had read the entire bill.
Number 0961
MS. LITTLE answered in the affirmative, commenting she did not
understand everything because she was not an attorney.
CHAIRMAN ROKEBERG asked if adoption of the updated UCC article [UCC
Article 5] would make her life easier or more difficult in dealing
with other financial institutions.
MS. LITTLE replied she thought it would be fine.
CHAIRMAN ROKEBERG referred to some controversy or questions he
recalled from last year about the timing of certain things,
mentioning the "float" issues. He questioned whether the bill
contained certain time limits or something giving direction on
that.
Number 1015
MS. LITTLE replied she believed the previous discussion was
concerning when documents were presented: only so many days were
given to review those documents to determine any discrepancies, or
if the documents could be honored as presented. The "UCP" laws, or
the International Chamber of Commerce (ICC) laws, indicate a bank
is given seven days to examine these documents. She indicated she
believed there had been amendment to the previous bill stating the
"UCCs" would allow three days. Ms. Little confirmed she believed
the amendment had not passed.
CHAIRMAN ROKEBERG commented it might seem like a long time for a
bank to have potential access or use of those funds, asking what
happened as a practical matter.
Number 1075
MS. LITTLE replied the documents came into a bank and were
prioritized. As documents come in, the bank, as an issuer, wants
to have time to review the documents thoroughly because if there
are discrepancies and the issuer pays, the issuing bank becomes
liable for that payment. She stated the seven days allowed the
bank time to receive and review the documents. The bank attempts
to get out-of-order items corrected by having the account party
approve payment, prior to the bank saying it will not honor.
Number 1133
REPRESENTATIVE HALCRO noted page 7, lines 7 through 9 gave the only
definition he could find of any time frame ["(b) An issuer has a
reasonable time after presentation, but not beyond the end of the
seventh business day of the issuer after the day of the issuer's
receipt of documents, ..."] except as provided in lines 15 through
18 ["(c) Except as otherwise provided in (d) of this section, an
issuer is precluded from asserting a discrepancy as a basis for
dishonor if (1) timely notice is not given; or ..."]. He confirmed
from the chairman that timely notice would be the seven days.
Number 1175
CHAIRMAN ROKEBERG added he thought there were some practical
considerations because it had to be ensured that all the documents
were in hand. He indicated dealing with transactions across the
International Date Line would also cause the automatic loss of a
day, and that similar factors could affect the situation. The
chairman further indicated the time line issue had been looked into
very thoroughly last year, even by outside counsel, and there was
general agreement that time line was acceptable. Chairman Rokeberg
confirmed no one else wished to testify on HB 79, stating he would
like to hold the public hearing over because he felt some input was
needed from the uniform law commissioners, and a level of comfort
was needed from the committee members and others present, before
the bill was moved.
REPRESENTATIVE HALCRO requested a brief at-ease.
Number 1235
CHAIRMAN ROKEBERG called a brief at-ease at 3:38 p.m. The
committee came back to order at 3:40 p.m.
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
draft.
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
agreement.
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
Murkowski.
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
equipment.
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
provisions.
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
programmers.
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
definition.
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
about.
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
develops".
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
contract."].
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
actions.
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
economy.
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
discussion.
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
excluded.
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.
ADJOURNMENT
Number 1656
CHAIRMAN ROKEBERG adjourned the House Labor and Commerce Standing
Committee meeting at 5:23 p.m.
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