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SUIT SEEKS Y2K JUDGMENT

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NORFOLK, Mass. -- An unusual lawsuit over Year 2000 computer liability could have wide-ranging ramifications for information system consultants if the issue ever goes to trial.

In fact, the suit could provide "bright lines" to determine the extent of consultants' professional liability for Year 2000-related problems, says one lawyer.

The suit, filed last month by New York-based Andersen Consulting in Massachusetts Superior Court in Norfolk, Mass., seeks a declaratory judgment in its favor to settle a dispute with J. Baker Inc.

J. Baker, a Canton, Mass.-based retailer, wants Andersen to reimburse it for costs it incurred since 1991 to make a computer merchandising system -- that Andersen installed in 1989 -- Year 2000-compliant.

An Andersen spokesman declined to comment on how much money is at stake.

J. Baker has not initiated any legal action against Andersen, and the company declined any comment on any aspect of the dispute.

In a statement released Aug. 28, Andersen said: "We are reluctantly taking this action after repeated attempts to resolve this matter failed and because J. Baker is unreasonably demanding reimbursement for a system they used successfully for nearly a decade. We felt there was no choice left but to ask the court to help resolve the matter."

In its statement, Andersen said it had "worked side-by-side with J. Baker's senior management" on the computer merchandising system from 1989 until 1991. Andersen said that, at the time, there were only two mainframe software packages available that met J. Baker's requirements, but neither was Year 2000-compliant. Andersen said J. Baker's argument that it would have insisted on Year 2000 compliance in 1989 had it known the software wasn't compliant "is groundless, because they approved design documents that explicitly set out a two-year dating format."

The Andersen spokesman declined to speculate on any overarching issues at stake in the suit.

"Our actions were not driven by any other intended outcome other than to resolve this matter as efficiently as possible," he said.

Legal and insurance industry observers do, however, see much more involved in the case than merely settling a single commercial dispute.

"It's a different class of case. It's the first one that really involves system design issues, as opposed to products. The other thing that's significant is that this is going to be the first one that involves professional services. This may go to something that would be in the errors and omissions realm potentially," said Christopher McGuire, senior associate at Crowell & Moring, a Washington law firm.

"It'll also be the first case to raise what I will term a state-of-the-art defense. Andersen is claiming that to meet the requirements that J. Baker set out at the time that it wanted the system to fulfill, there were only two systems and neither of them were Y2K-compliant. That is the first time the courts will be facing that issue," Mr. McGuire said.

"This is a test case. If it goes to verdict it will clarify the extent of a consultant's professional responsibility for Y2K problems. This case could draw bright lines providing much-needed guidance to the computer consulting profession and its clients," said Lori Nugent, a partner who heads the Y2K practice area regarding third-party claims for Chicago law firm Blatt, Hammesfahr & Eaton.

She noted that clients often work with programmers to a certain extent on projects.

"This is probably more troubling for the consulting and accounting firms that have large consulting arms or divisions, which is just about all of the big accounting firms," said Josh Gold, a partner in the New York office of Anderson Kill & Olick P.C.

"It's the vendor that has basically taken a pre-emptive strike here, and I think that's what makes this unusual. It does seem to potentially raise on the radar screen the issue of coverage for these year 2000 issues and what companies should be doing in regard to liability," said Lorelie S. Masters, partner in charge of the Washington office of Anderson, Kill.

Mr. Gold said he and others at the firm have been recommending that policyholders look at existing insurance policies, because many policies do not contain any express exclusion for Year 2000 problems, he said. But there is "serious discussion" that insurers will be "very keen" on imposing Year 2000 exclusions in upcoming renewals, he added.

The fact there are a number of lawsuits "testing the waters" is an added reason companies should be assessing their insurance policies for coverage, he added.

A broker specializing in technology accounts said the Andersen Consulting case should refocus risk managers' and insurers' attention on the true cost of dealing with Year 2000 problems.

"There's been a lot focused on the estimated $1 trillion in losses and litigation projected by Lloyd's and others. What both risk managers and insurance companies have failed to recognize is that there will likely be significant cost recovery efforts for the estimated $600 billion in system remediation expenses. What you're looking at is both before and after costs. You're looking at $1.6 trillion as potential total loss that both risk managers and insurers need to consider," said David L. Schaefer, vp and principal at Armfield, Harrison & Thomas Inc., a Leesburg, Va., insurance brokerage.

"The Andersen case is kind of a beginning point. We've already seen 14 or 15 Y2K class actions. It's really just the beginning. The plaintiffs bar has begun experimenting with various courses of action," he said.