U.S. v. Inslaw, Inc.
| Decision Date | 07 May 1991 |
| Docket Number | Nos. 90-5052,s. 90-5052 |
| Citation | 932 F.2d 1467 |
| Parties | , 59 USLW 2683, 21 Bankr.Ct.Dec. 1077, Bankr. L. Rep. P 74,056, 37 Cont.Cas.Fed. (CCH) 76,104 UNITED STATES of America, et al., Appellants, v. INSLAW, INC. INSLAW, INC. v. UNITED STATES of America, et al., Appellants. INSLAW, INC. v. UNITED STATES of America, et al., Appellants. INSLAW, INC. v. UNITED STATES of America, et al., Appellants. to 90-5055. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Appeals from the United States District Court for the District of Columbia (Civil Action Nos. 88-00698, 88-00697, 88-00696).
Mark B. Stern, Atty., Dept. of Justice, Washington, D.C., with whom Stuart M. Gerson, Asst. Atty. Gen., William J. Birney, Acting U.S. Atty., William Kanter and Robert M. Loeb, Attys., Dept. of Justice, were on the brief, for appellants in 90-5052, 90-5053, 90-5054 and 90-5055.
Michael E. Friedlander, Washington, D.C., with whom Charles R. Work, Jacqueline E. Zins, Philip L. Kellogg and James L. Lyons were on the brief, for appellee in all cases.
Before BUCKLEY, WILLIAMS and RANDOLPH, Circuit Judges.
Opinion for the Court filed by Circuit Judge STEPHEN F. WILLIAMS.
Section 362(a) of the Bankruptcy Code imposes an automatic stay of "any act to obtain possession of property of the estate ... or to exercise control over property of the estate." 11 U.S.C. Sec. 362(a)(3) (1988). Inslaw, Inc., after filing for reorganization under Chapter 11 of the Bankruptcy Code, invoked Sec. 362(a) to secure bankruptcy court adjudication of a large segment of its prolonged dispute with the Department of Justice over the Department's right to use a case-tracking software system that Inslaw had provided under contract. Inslaw claimed that the Department had violated the stay provision by continuing, and expanding, its use of the software program in its U.S. Attorneys' offices. The bankruptcy court found a willful violation, see In re Inslaw, Inc., 83 B.R. 89 (Bankr.D.D.C.1988), and the district court affirmed on appeal, see United States v. Inslaw, Inc., 113 B.R. 802 (D.D.C.1989). Because we find that the automatic stay does not reach the Department's use of property in its possession under a claim of right at the time of the bankruptcy filing, even if that use may ultimately prove to violate the bankrupt's rights, we reverse.
Inslaw has built itself around one software product, the Prosecutor's Management Information System, known by the acronym "PROMIS". Until January 1981, Inslaw was a nonprofit organization that relied on a variety of public funds to develop a version of PROMIS ("old PROMIS") that the parties agree is in the public domain. On becoming a for-profit corporation, it continued to make substantial improvements to PROMIS, using private funds. These enhancements, which appear in the version of the software referred to as "enhanced PROMIS", are the "lifeblood" of Inslaw--"the nucleus of its assets." 83 B.R. at 170.
Under a March 16, 1982 contract with the Department (No. JVUSA-82-C-0074), Inslaw agreed to provide and install old PROMIS on minicomputers in 20 large U.S. Attorneys' offices and to develop and install a word processor-based version of old PROMIS for use in 74 smaller offices. 83 B.R. at 120-21. The Department agreed to pay $9.6 million.
Because the Department had not selected or acquired hardware to run PROMIS in-house, Inslaw agreed in the meantime to provide PROMIS to the 20 larger offices on a time-sharing basis through telephone links to its own computers, in much the same way LEXIS and WESTLAW provide their services to subscribers. 113 B.R. at 805. Although the parties agree that the original contract required Inslaw only to provide old PROMIS, Inslaw in fact allowed the Department to use the enhanced version, perhaps because it maintained only one time-sharing version, primarily for use by customers entitled to the enhancements. 83 B.R. at 130; 113 B.R. at 805-06.
In November 1982 the Department asked Inslaw, under the terms of the contract, for a copy of "all computer programs and supporting documentation developed for or relating to" the contract. 83 B.R. at 129; 113 B.R. at 805. Both sides understood that the Department wanted a copy of the software being provided on a time-sharing basis, i.e., enhanced PROMIS. 83 B.R. at 129-30. The government claims that this request was prompted by concern about Inslaw's financial viability, 113 B.R. at 805, but the bankruptcy court found that it was the centerpiece of a Department official's vindictive efforts "to ruin INSLAW and to bring about DOJ's wrongful use of INSLAW's Enhanced PROMIS software." 83 B.R. at 129.
The request touched off the central, but by no means the only, dispute between the parties--whether the Department was entitled, under the contract, to receive the PROMIS enhancements without further payments. 113 B.R. at 805-06. Following a series of negotiations, the parties agreed to a temporary settlement that would allow the contract to be implemented pending final resolution. Under Modification 12 of the contract, adopted April 11, 1983, Inslaw agreed to deliver a copy of enhanced PROMIS, as used in the time-sharing arrangement, and the Department agreed to "limit and restrict the dissemination of the said PROMIS computer software to the Executive Office for United States Attorneys, and to the 94 United States Attorneys' Offices covered by the Contract ... pending resolution of the issues extant between [Inslaw] and the Government under the terms and conditions of Contract No. JVUSA-82-C-0074." Joint Appendix ("J.A.") at 162; see 113 B.R. at 806. The issues to be resolved included the dispute over the PROMIS enhancements, as well as a dispute over advance payments due under the contract. 113 B.R. at 806. On April 20, 1983, Inslaw sent the Department computer tapes that contained copies of the source and object codes for the version of enhanced PROMIS it had been providing on a time-sharing basis. J.A. at 164. While "object codes" contain unintelligible strings of numbers and letters that actually tell the machine what to do, "source codes" (used to generate object codes) are written in programming languages that can be deciphered by skilled computer programmers. See Melvin F. Jager, Trade Secrets Law p 9.03 (1985).
From August 1983 until January 1984, Inslaw proceeded under the contract to install enhanced PROMIS on minicomputers in 22 large U.S. Attorneys' offices. 83 B.R. at 106; 113 B.R. at 806; Brief for Appellants at 8. Inslaw provided the enhanced version of PROMIS to each office under the belief that Modification 12 so required, and the bankruptcy court found that the Department, in return, made a commitment to bargain in good faith to identify Inslaw's proprietary enhancements, to decide which enhancements it wanted to use, and to agree on an additional price for any it decided to keep. 83 B.R. at 136-38. The court also concluded that the Department never intended to keep these commitments. 83 B.R. at 138.
Inslaw filed a petition for reorganization under Chapter 11 of the Bankruptcy Code on February 7, 1985. One month later, Inslaw's contract with the Department expired, by which time Inslaw had received almost all of the original $9.6 million contract price. Brief for Appellants at 8. Between June 24, 1985 and September 2, 1987, the Department installed enhanced PROMIS in 23 additional U.S. Attorneys' offices. 113 B.R. at 806; 83 B.R. at 152. A key dispute between the parties is whether this extension of the system beyond the 20 offices slated for the minicomputer version is permitted by Modification 12. The Modification, it will be recalled, in literal terms provides for dissemination of the software to be limited to "the 94 United States Attorneys' Offices covered by the Contract". J.A. at 162. However, as the contract looked to provision of a word-processing version for 74 smaller U.S. Attorneys' offices, and the Department terminated the word-processing portion in February 1984, the bankruptcy court construed the modification as limiting the minicomputer version of PROMIS to the 20 larger offices. 83 B.R. at 121, 135, 139-40, 166-67.
On October 17, 1985, Inslaw filed a claim with the contracting officer, under the provisions of the Contract Disputes Act, 41 U.S.C. Secs. 601-613 (1988), alleging (among other claims) that the Department had refused to identify and pay for proprietary enhancements not covered by the original contract, and that it had made copies of enhanced PROMIS for use in additional offices after the contract expired. See J.A. at 195, 198-200. Inslaw asked for $2.9 million in license fees for use of the enhancements. Mem.Op. at 9; see J.A. at 198-200. The contracting officer ruled against Inslaw on February 21, 1986. J.A. at 213, 215. Inslaw did not pursue these claims when it appealed the contracting officer's decision to the Department of Transportation Board of Contract Appeals (apparently the appropriate appellate body, its name being a vestige of an earlier, more limited jurisdiction). See DOTCBA No. 1775, Complaint filed September 19, 1986.
On June 10, 1986 Inslaw filed a four-count complaint against the government in bankruptcy court, alleging that the Department was willfully violating Sec. 362(a), the automatic stay provision of the Bankruptcy Code. The asserted violation lay primarily in the Department's continuing to use Inslaw's property--enhanced PROMIS--without Inslaw's consent. Inslaw sought declaratory and injunctive relief, as well as compensatory damages, punitive damages, costs and attorney's fees. Stating that "[t]he scope of the automatic stay is 'extremely broad' ", the bankruptcy court denied the government's motion to dismiss the proceeding. In re Inslaw, Inc., 76 B.R. 224, 228 (Bankr.D.D.C.1987) (quoting 2 Lawrence P. King,...
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