Appendix — Inslaw, Inc. v. United States, 112 S. Ct. 913 (1992) (No. 91-591)

Suoreme Court, U.S

G1- 59] FILED

</ CCT 2 4991

(ARE OF Lik CLERK

No. amen

IN THE

Supreme Court Of Che United States

October Term, 1991

INSLAW, INC.,

Petitioner,

v.

UNITED STATES OF AMERICA and

UNITED STATES DEPARTMENT OF JUSTICE,

Respondents.

APPENDIX TO THE

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

DISTRICT OF COLUMBIA CIRCUIT

Michael E. Friedlander Philip L. Kellogg

Counsel of Record James L. Lyons

Charles R. Work KELLOGG, WILLIAMS & LYONS

Jacqueline E. Zins 1275 K Street, N.W.

Seth D. Greenstein Suite 825

McDERMOTT, WILL & EMERY Washington, D.C. 20005

1850 K Street, N.W. (202) 898-0722

Suite 560

Washington, D.C. 20006

(202) 887-8000

Counsel for Petitioner

Balmar Legal Publishing DivisionWashington, D.C. 20005 (202) 659-3610

ia

APPENDIX — TABLE OF CONTENTS

Document

Order denying Inslaw, Inc.’s Petition for Rehearing

of the United States Court of Appeals for the District

of Columbia Circuit, in United States v. Inslaw, Inc.,

Ga 2a, Ae ee eee ek eee es

Order denying Inslaw, Inc.’s Suggestion for Rehearing

En Banc of the United States Court of Appeals for the

District of Columbia Circuit, in United States v.

Inslaw, inc., dated July 12,1991 .......-..-.-.

Opinion and Judgment of the United States Court of

Appeals for the District of Columbia Circuit, in

United States v. Inslaw, Inc., dated May 7,1991 . .

Memorandum Opinion and Order of the United States

District Court for the District of Columbia, in

United States v. Inslaw, Inc., dated

POE ht, 2 oo eects Sg eee ota

Findings of Fact and Conclusions of Law and Final

Judgment Order of the United States Bankruptcy

Court for the District of Columbia, in /ns/aw, Inc. v.

United States, dated January 25,1988 ........

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DE Ses ak cag i sk Go ees ete os

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Page

la

19a

No. 90-5052

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

September Term, 1990

USDC Civ. No. 88-0528

United States of America, et al.,

Appellants

ve

Inslaw, Inc.,

Appellee

and Consolidated Cases

Before: Buckley, Williams and Randolph, Circuit Judges

ORDER

Upon consideration of appellee’s Petition for Rehearing,

filed June 21, 1991, it is

ORDERED, by the Court, that the petition is denied.

Per Curiam:

FOR THE COURT:

Constance L. Dupre, Clerk

By:___Js/

Robert A. Bonner,

Deputy Clerk

an

No. 90-5052

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

September Term, 1990

USDC Civ. No. 88-0528

United States of America, et al.,

Appellants

v;

Inslaw, Inc.,

Appellee

and Consolidated Cases

Before: Mikva, Chief Judge; Wald, Edwards, Ruth B.

Ginsburg, Silberman, Buckley, Williams, D.H.

Ginsburg, Sentelle, Thomas, Henderson and Ran-

dolph, Circuit Judges

ORDER

Appellee’s Suggestion For Rehearing En Banc has been

circulated to the full Court. No member of the Court requested the

taking of a vote thereon. Upon consideration of the foregoing it is

ORDERED, by the Court en banc, that the suggestion is

denied.

Per Curiam:

FOR THE COURT:

Constance L. Dupre, Clerk

By:___/s/

Robert A. Bonner,

Deputy Clerk

3a

Notice: This opinion is subject to formal revision before

publication in the Federal Reporter or U.S.App.D.C. Reports.

Users are requested to notify the Clerk of any formal errors in

order that corrections may be made before the bound volumes

go to press.

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 17, 1991

Decided May 7, 1991

No. 90-5052

United States of America, et al.,

Appellants

We

Inslaw, Inc.

No. 90-5053

Inslaw, Inc.

‘.

United States of America. et al..

Appellants

Bills of costs must be filed within 14 days after entry of judg-

ment. The court looks with disfavor upon motions to file bills

of costs out of time.

4a

No. 90-5054

INSLAW, INC.

V.

UNITED STATES OF AMERICA, et al.,

APPELLANTS

No. 90-5055

INSLAW, INC.

Vv.

UNITED STATES OF AMERICA, et al.,

APPELLANTS

Appeals from the United States District Court

for the District of Columbia

(Civil Action Nos. 88-00698, 88-00697, 88-00696)

Mark B. Stern, Attorney, Department of Justice, with

whom Stuart M. Gerson, Assistant Attorney General, William

J. Birney, Acting United States Attorney, William Kanter and

Robert M. Loeb, Att.rneys, Department of Justice, were on the

brief, for appellants in 90-5052, 90-5053, 90-5054 and 90-5055.

Michael E. Friedlander, with whom Charles R. Work,

Jacqueline E. Zins, Philip L. Kellogg and James L. Lyons were

on the brief, for appellee in ail cases.

Before: BUCKLEY, WILLIAMS and RANDOLPH, Cir-

Cull Judges.

Opinion for the Court filed by Circuit Judge WILLIAMS.

nn

a

WILLIAMS, Circuit Judge: Section 362(a) of the Bank-

ruptcy 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. § 362(a)(3) (1988).

Inslaw, Inc., after filing for reorganization under Chapter 11 of

the Bankruptcy Code, invoked § 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 /n 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., 1989 U.S. Dist. LEXIS

14,001 (D.D.C. 1989) (“Mem. Op.”). 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.

I

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 non-

profit 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 corpora-

tion, 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.

6a

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 wordprocessor-based version of old

PROMIS for use in 74 sinaller offices. 83 B.R. at 120-21. The

Department agreed to pay $9.6 miilion.

Because the Department had not selected or acquired

hardware to run PROMIS in-house, Inslaw agreed in the mean-

time to provide PROMIS to the 20 larger offices on a time-shar-

ing basis through telephone links to its own computers, in much

the same way LEXIS and Westlaw provide their services to

subscribers. Mem. Op. at 6. 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 enhance-

ments. 83 B.R. at 130; Mem. Op. at 6-7.

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; Mem. Op. at 6. 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, Mem.

Op. at 6, but the bankruptcy court found that it was the center-

piece 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 enhan-

cements without further payments. Mem. Op. at 6-7. Following

a series of negotiations, the parties agreed to a temporary settle-

Ta

ment 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 Mem. Op. at 7-8. The issues to be

resolved included the dispute over the PROMIS enhancements,

as well as a dispute over advance payments due under the

contract. Mem. Op. at 7-8. 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 unintelligibie strings of numbers and

letters that actually teil the machine what to do, “source codes”

(used to generate object codes) are written in programming

languages that can be deciphered by skilled computer pro-

grammers. See Melvin F. Jager, Trade Secrets Law 4% 9.03

(1985).

From August 1983 until January 1984, Inslaw proceeded

under the contract to install enhanced PROMIS on minicom-

puters in 22 large U.S. Attorneys’ offices. 83 B.R. at 106; Mem.

Op. at 8; 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.

8a

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 instzlled enhanced

PROMIS in 23 additional U.S. Attorneys’ offices. Mem. Op. at

9; 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-process-

ing 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 limit-

ing 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 con-

tracting officer, under the provisions of the Contract Disputes

Act, 41 U.S.C. §§ 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 ap-

propriate appellate body, its narie being a vestige of an earlier,

more limited jurisdiction). See DOTCBA No. 1775, Complaint

filed September 19, 1986.

9a

On June 10, 1986 Inslaw filed a four-count complaint

against the government in bankruptcy court, alleging that the

Department was willfully violating § 362(a), the automatic stay

provision of the Bankruptcy Code. The asserted violation lay

primarily inthe Department’s continuing to use Inslaw’s proper-

ty — enhanced PROMIS — without Inslaw’s consent. Inslaw

sought declaratory and injunctive relief, as well as compen-

satory 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. /n re Inslaw, Inc., 76 B.R. 224, 228

(Bankr. D.D.C. 1987) (quoting 2 Lawrence P. King, Collier on

Bankruptcy 1 362.04 (15th ed.)). After trial, it found that the

government had violated the automatic stay, and issued a dec-

laratory judgment and a permanent injunction against further

expansion of the government’s use of enhanced PROMIS. /n re

Inslaw, Inc., 83 B.R. 89 (Bankr. D.D.C. 1988). It ordered the

government to pay nearly $6.8 million in compensatory

damages for use of enhanced PROMIS, both the portions in-

stalled by Inslaw and those installed by the Department (calcu-

lated on the basis of Inslaw’s standard perpetual license fees),

and almost $1 million in attorney’s fees and expenses. See Final

Judgment Order entered February 2, 1988; Final Judgment

Order (Attorneys’ Fees) entered February 6, 1988.

In response to a Separate motion by Inslaw, the bankruptcy

court also found that the Department had violated the automatic

stay by urging the Director of the Executive Office of the United

States Trustees! to seek conversion of Inslaw’s Chapter 11

reorganization proceeding into one under Chapter 7 looking to

the liquidation of Inslaw. See 83 B.R. at 149-50; Mem. Op. at

9-10.

The United States Trustees are a corps of “generally autonomous” or

“semiautonomous” officials appointed by the Attorney General to serve as

bankruptcy trustees. See | King, Collier on Bankruptcy 9 6.25.

10a

On appeal, the district court upheld the judgments of the

bankruptcy court but reduced the damage award by $655,200.

I]

Section 362(a) provides that the filing of a bankruptcy

petition

Operates as a Stay, applicable to all entities, of

(3) any act to obtain possession of property of the

estate or of property from the estate or to exercise

control over property of the estate....

11 U.S.C. § 362(a) (1988) (emphasis added). Because we find

as a matter of law that none of the acts or omissions alleged by

Inslaw would amount to a violation of the automatic stay, we

conclude that the bankruptcy court should have granted the

Department’s motion to dismiss.

A

Inslaw’s major allegation concerns the Department’s use

of enhanced PROMIS after the filing of the bankruptcy petition.

[he bankruptcy court concluded first that the privately-funded

enhancements to PROMIS were proprietary trade secrets owned

by Inslaw, 83 B.R. at 159, and then that the Department's

continued use of these enhancements, and in particular its post-

petition installation of enhanced PROMIS in 23 U.S. Attorneys’

offices (in addition to the 22 where Inslaw had made installa-

tions), were a “willful exercise of control] over the property of

the estate.” 83 B.R. at 166, 168.

The automatic stay protects “property of the estate”. This

estate is created by the filing of a petition and comprises property

of the debtor “wherever located and by whomever held”, includ-

ing (among other things) “all legal or equitable interests of the

lla

debtor in property as of the commencement of the case.” 11

U.S.C. §541(a)(1) (1988). It is undisputed that this encompasses

causes of action that belong to the debtor, as well as the debtor’s

inteliectual property, such as interests in patents, trademarks and

copyrights. See H.R. Rep. No. 595, 95th Cong., Ist Sess. 367

(“House Report”); S. Rep. No. 989, 95th Cong., 2d Sess. 82

(“Senate Report”); United States v. Whiting Pools, inc., 462

U.S. 198, 204-05 & n.9 (1983); In re S.I. Acquisition, Inc., 817

F.2d 1142 (Sth Cir. 1987); 4 King, Collier on Bankruptcy 99

541.06, 541.10. The estate also includes property recoverable

under the Code’s “turnover” provisions. which ailow the trustee

(0 recover property that “was merely out of the possession of the

debtor, yet remained ‘property of the debtor.’” House Report at

367; Senate Report at 82; see 11 U.S.C. §§ 542, 543 (turnover

provisions); Whiting Pools, 462 U.S. at 204-09 & n.11.

In its brief Inslaw refers rather vaguely to its interest in the

enhanced PROMIS software as the “property of the estate” over

which the Department supposedly exercised control. But for

meaningful analysis, Inslaw’s interests must be examined

separately. One set of interests consists of (1) the computer tapes

containing copies of the source and object codes that Inslaw sent

to the Department on April 20, 1983 and (2) the copies of

enhanced PROMIS that Inslaw installed on Department

hardware between August 1983 and January 1984. As to these.

Inslaw held no possessory interest when it filed for bankruptcy

on February 7, 1985. Nor can it claim a possessory interest over

them through the Code’s turnover provisions, as could the

debtor-in-possession in Whiting Pools, because, as Inslaw freely

admits, the Department held possession of the copies under a

claim of ownership (its view of the contract and Modification

12) and claimed the right to use enhanced PROMIS without

further payment. It is settled law that the debtor cannot use the

turnover provisions to liquidate contract disputes or otherwise

demand assets whose title is in dispute. See /n re Charter Co.,

913 F.2d 1575, 1579 (11th Cir. 1990); In re Satelco, Inc., 58

12a

B.R. 781, 786 (Bankr. N.D. Tex. 1986); Jn re Chick Smith Ford,

Inc., 46 B.R. 515, 518 (Bankr. M.D. Fla. 1985); Jn re FLR Co.,

58 B.R. 632 (Bankr. W.D. Pa 1985); cf. In re Knaus, 889 F.2d

773, 775 (8th Cir. 1989) (turnover of property admitted to

belong to the debtor is required); SBA v. Rinehart, 887 F.2d

165,168 (8th Cir. 1989) (same). Indeed, Inslaw never scught

possession of the copies under the turnover provisions.

The bankruptcy court instead identified the relevant

property as Inslaw’s intangible trade secret rights in the

PROMIS enhancements. 83 B.R. at 165. It then found that the

Department’s continuing use of these intangible enhancements

was an “exercise of control” over property of the estate. 83 B.R.

at 166, 168.

If the bankruptcy court’s idea of the scope of “exercise of

control” were correct, the sweep of § 362(a) would be extraor-

dinary — with a concomitant expansion of the jurisdiction of

the bankruptcy court. Whenever a party against whom the

bankrupt holds a cause of action (or other intangible property

right) acted in accord with his view of the dispute rather than

that of the debtor-in-possession or bankruptcy trustee, he would

risk a determination by a bankruptcy court that he had “exercised

control” over intangible rights (property) of the estate.? In

making that determination (one way or the other), the

bankruptcy court would be exercising its “core” jurisdiction

over the dispute, subject to review by an Article III court on fact

issues Only under the deferential “cleariy erroneous” standard.

See 28 U.S.C. § 158; Bankruptcy Rule 8013; 1 King, Collier on

Under this view, it does not matter whether the Department has

possession of the PROMIS enhancements under a claim of outright title, as

they do, or under a more limited lease or license. In both situations, a party

in possession of an asset in which the bankrupt has an interest would violate

§ 362(a) by any act inconsistent with the bankrupt’s claims as determined by

the bankruptcy court. As a result, a wide range of disputes, such as a bankrupt

lessor ’s claims against a lessee, or a bankrupt co-owner’s claims againsi other

holders or concurrent property interests, would slide into bankruptcy court.

l3a

Bankruptcy "1 3.03[7]; see also 28 U.S.C. § 157(b) (1988)

(identifying “core” proceedings); Budget Service Co. v. Better

Homes of Virginia, Inc., 804 F.2d 289, 292 (4th Cir. 1986)

(automatic stay violations are within the core).

Such assertions of bankruptcy court jurisdiction raise

severe constitutional problems. As the Supreme Court made

clear in Northern Pipeline Constr. Co. v. Marathon Pipe Line

Co., 458 U.S. 50 (1982), Congress may not vest in a non-Article

II] (bankruptcy) court the power to adjudicate a traditional

contract action where the defendant is before the court “only

because the plaintiff has previously filed a petition for reor-

ganization in that court.” /d. at 90 (Rehnquist, J., concurring);

see Thomas v. Union Carbide Agric. Prods. Co., 473 U.S. 568.

584 (1985); Commodity Futures Trading Comm'n v. Schor, 478

U.S. 833, 848-57 (1986); see also Granfinanciera, S.A. v.

Nordberg, 109 S. Ct. 2782 (1989) (defendant in an action by a

bankruptcy trustee to recover a pre-petition fraudulent con.

veyance under 11 U.S.C. § 548(a)(2) has a Seventh Amendment

right to a jury trial). Congress responded to Northern Pipeline

with the Bankruptcy Amendments and Federal Judgeship Act

of 1984, Pub. L. No. 98-353, 98 Stat. 333 (1984), limiting

bankruptcy courts’ jurisdiction over disputes that are “related

to” a bankruptcy case only because the owner of the cause of

action filed for bankruptcy. See 28 U.S.C. §§ 157(c), 1334(b):

| King, Collier on Bankruptcy 1 3.01[1][c][iv] (debtor’s causes

of action are “related to” proceedings under § 1334(b)); id. 4

3.01[2][b][ii] (“related to” proceedings are “non-core” proceed-

ings under § 157(c)). In asking us to allow the bankruptcy court

to decide a wide range of “non-core” disputes under the guise

of an automatic stay violation, Inslaw ignores Northern Pipeline

and Congress’s response.

Even apart from constitutional concerns, Inslaw’s view of

§ 362(a) would take it well beyond Congress’s purpose. The

object of the automatic stay provision is essentially to solve a

l4a

collective action problem — to make sure that creditors do not

destroy the bankrupt estate in their scramble for relief. See

House Report at 340; Senate Report at 49, 54-55. Fulfillment of

that purpose cannot require that every party who acts in resis-

tance to the debtor’s view of its rights violates § 362(a) if found

in error by the bankruptcy court. Thus, someone defending a suit

brought by the debtor does not risk violation of § 362(a)(3) by

filing a motion to dismiss the suit, though his resistance may

burden rights asserted |y the bankrupt. Martin-Trigona v.

Champion Fed. Sav. & Loan Ass’n, 892 F.2d 575, 577 (7th Cir.

1989). Nor does the filing of a lis pendens violate the stay (at

least where it does not create a lien), even though it alerts

prospective buyers to a hazard and may thereby diminish the

value of estate property. /n re Knightsbridge Development Co.,

884 F.2d 145, 148 (4th Cir. 1989). And the commencement and

continuation of a cause of action against the debtor that arises

post-petition, and so is not stayed by § 362(a)(1), does not

violate § 362(a)(3). In re Continental Air Lines, Inc., 61 B.R.

758, 775-80 (S.D. Tex. 1986). Since willful violations of the

Stay expose the offending party to liability for compensatory

damages, costs, attorney’s fees, and, in some circumstances,

punitive damages, see 11 U.S.C. § 362(h) (1988), it is difficult

to believe that Congress intended a violation whenever someone

already in possession of property mistakenly refuses to capitu-

late to a bankrupt’s assertion of rights in that property.>

The limits of the turnover provisions in the bankruptcy

code underscore the improbability that Congress intended

In adding the “exercise control” language to § 362(a)(3) in the 1984

Bankruptcy Amendments, see 98 Stat. at 371, Congress gave no explanation.

One court has traced this language to the description of § 362(a)(3) found in

the committee reports on the 1978 Bankruptcy Act, which refer to property

of the estate as “property over which the estate has control or possession”.

See In re 48th Street Steakhouse, Inc., 61 B.R. 182, 187 & n.10 (Bankr

S.D.N.Y. 1986), aff'd, 77 B.R. 409 (S.D.N.Y.), aff'd, 835 F.24 427 (2d Cir

1987); House Report at 341; Senate Report at 50.

Nn

8]

§ 362(a) to have the sweeping scope that Inslaw would assign

it. It is common ground that these cannot be used against

property held by another under a claim of legal right. See cases

cited at p. 9 above. As Inslaw’s view would turn every act of the

possessor that implicitly asserts his title over disputed property

into a violation of § 362(a), it would give the bankruptcy court

jurisdiction over all such disputes, creating a kind of universal

end-run around the limits on turnover.

Our understanding of § 362(a) does not expose bankrupts

to any troubling hazard. Here, for example, Inslaw retains

whatever intangible property rights it had in enhanced PROMIS

at the time of filing. If the Department has violated the contract

or Modification 12, Inslaw as debtor-in-possession has all the

access to court enjoyed by any victim of a contract breach by

the United States government. If Modification 12 was induced

by fraud, as the bankruptcy court found, then Inslaw has its

contract remedies or perhaps a suit for conversion. Assuming

that its privately-funded enhancements to PROMIS qualify as

proprietary trade secrets, as the bankruptcy court found, it may

be able to sue the government under the Trade Secrets Act or

even under the Administrative Procedure Act for improper

disclosures of its trade secrets by government officials. See

Megapulse, Inc. v. Lewis, 672 F.2d 959 (D.C. Cir. 1982).

Extending the expansive mood expressed in its decision on

use of enhanced PROMIS, the bankruptcy court found two

violations arising from the Department’s failure to cure alleged

pre-petition misconduct. First, having found fraud in the induce-

ment of Modification 12, it found a violation in the

Department’s failure to cure the fraud. 83 B.R. at 169. Second.

it held that the Department’s “failures to act to remedy past acts

of bias, impartiality [sic] and harassment against INSLAW also

constitute actionable violations of the automatic stay

provisions.” /d. One of the remedies given by the court for these

violations was an order enjoining the Department from allowing

162

three named officials to participate in any further decisions,

negotiations or proceedings (including the contract appeals

board case) involving Inslaw.

Here the bankruptcy court appears to have left the words

of the statute in the dust. The automatic stay, as its name

Suggests, Serves as a restraint only on acts to gain possession or

control over property of the estate. Nowhere in its language is

there a hint that it creates an affirmative duty to remedy past acts

of fraud or bias or harassment as soon as a debtor files a

bankruptcy petition. The statutory language makes clear that the

Stay applies only to acts taken after the petition is filed. See 11

U.S.C. § 362(a); In re Stucka, 77 B.R. 777, 782 (Bankr. C.D.

Cal. 1987) (“The automatic stay is effective as of the moment

of filing of the bankruptcy petition.”); Jn re Mewes, 58 B.R. 124.

127 (Bankr. D.S.D. 1986) (same).

Like the defendant in Northern Pipeline, the Department

has been hauled in front of the bankruptcy court simply because

Inslaw filed for bankruptcy, and Inslaw has succeeded in con-

vincing the bankruptcy court to adjudicate its contract, tort

(conversion), trade secret, and administrative law (impartiality)

disputes with the Department, although the court had no basis

under the Bankruptcy Code to do so. Because the Department

has taken no actions since the filing of the bankruptcy petition

that violate the automatic stay, the bankruptcy court must, as

both a statutory and constitutional matter, defer to adjudication

of these matters by other forums.

B

In a separate order, the bankruptcy court held that the

Department violated the automatic stay by contacting the Direc-

tor of the Executive Office of the United States Trustees in an

effort to have Inslaw’s Chapter 11 reorganization converted into

a liquidation under Chapter 7. Mem. Op. at 9-11; 83 B.R. at

149-50. Here, the literal words of § 362(a) might actually cover

a request by the U.S. Trustee to liquidate Inslaw’s assets under

17a

Chapter 7, since such a request could be characterized as an act

to liquidate “property of the estate”. For obvious reasons, how-

ever, Courts have recognized that § 362(a) cannot stay actions

specitically authorized elsewhere in the bankruptcy code, such

as motions to convert reorganizations to liquidation proceed-

ings, see 11 U.S.C. § 1112(b) (1988). Thus, even if the Depart-

ment had managed to instigate the filing of a motion to convert

(which it did not), as a matter of law there would be no violation

of § 362(a). See /n re Hodges, 83 B.R. 25, 26 (Bankr. N.D. Cal.

1988). Once again, there was no basis for finding a violation of

the automatic Stay.

x *

The bankruptcy and district courts here both concluded that

the Department “fraudulently obtained and then converted en-

hanced PROMIS to its own use”. Mem. Op. at 39. Such conduct,

if it occurred, is inexcusable. Offensive as lawless conduct by

one branch of government may be, however, see Olmstead v.

United States, 277 U.S. 438, 485 (1928) (Brandeis, J., dissent-

ing), quoted in In re Inslaw, Inc., 83 B.R. at 172, it does not

justify another's lawlessness. As the bankruptcy court had no

jurisdiction to hear the claims asserted under § 362(a), we

reverse the district court and remand the case with directions to

vacate all orders concerning the Department’s alleged violations

of the automatic stay and to dismiss Inslaw’s complaint against

the Department.

So ordered.

la

No. 90-5052

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

September Term, 1990

D.C. Civil Action Nos. 88-0698, 88-0697, 88-0696, 88-0528

United States of America, et al.,

-

Inslaw, Inc.

And Consclidated Case Nos. 90-5053, 90-5054, and 90-5055

APPEALS FROM THE UNITED STATES DISTRICT

COURT FOR THE DISTRICT OF COLUMBIA

Before: BUCKLEY, WILLIAMS, and RANDOLPH, Circuit

Judges

JUDGMENT

These causes came on to be heard on the record on appeal

from the United States District Court for the District of Colum-

bia and were argued by counsel. On consideration thereof, it is

ORDERED and ADJUDGED, by the Court, that the judg-

ments of the District Court appealed from in these causes are hereby

reversed, and the cases are remanded with instructions, in accord-

ance with the Opinion for the Court filed herein this date.

PER CURIAM

FOR THE COURT:

Constance L. Dupre, Clerk

Date: May 7, 1991

Opinion for the Court filed by Circuit Judge Williams

19a

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

Civil Action Nos.

88-J528-WBB 88-0696-WBB

88-0697-WBB_ 88-0698-WBB

UNITED STATES OF AMERICA and the

UNITED STATES DEPARTMENT OF JUSTICE,

Appellants,

v.

INSLAW, INC.,

Appellee.

Case No. 85-0070

(Chapter 11)

IN RE:

INSLAW, INC., Debtor.

Adversary Proceeding

No. 86-0069

INSLAW, INC.,

Plainuff,

Ws

UNITED STATES OF AMERICA, and THE UNITED

STATES DEPARTMENT OF JUSTICE,

Defendants.

VIEMORANDUM

This matter, before the court pursuant to 28 U.S.C. §

158(a), amounts to a consolidated appeal of the final judgments

entered by the United States Bankruptcy Court against the

United States of America and the Department of Justice (“DOS”)

in favor of INSLAW, Inc.

20a

BACKGROUND

The relationship between the parties dates far prior to

INSLAW, Inc. becoming a bankrupt, and certain uncon-

troverted aspects of that relationship are set forth as briefly as

possible as necessary background for understanding how the

case develops to its present posture.

In 1973, William Hamilton and Dean Merill formed the

Institute for Law and Social Research, a non-profit corporation

organized to develop computer software designed to automate

the record-keeping and case monitoring activities of law enfor-

cement offices. Under contract to the Law Enforcement Assis-

tance Administration (LEAA), INSLAW developed the

Prosecutor's Management Information System (“PROMIS’”).

The parties do not dispute that this software which the

bankruptcy court refers to as “old PROMIS” was developed with

public grant money and was in the public domain.

In 1980, the Institute learned that LEAA funding which

was the Institute’s primary and almost sole source of income

would dry up. The Institute then took steps to form a for-profit

corporation, INSLAW, Inc., which would continue to market

and enhance PROMIS as well as develop new proprietary

computer software products. When the Institute on Law and

Social Policy transformed itself into INSLAW, the Justice

Department had several outstanding contracts with Inslaw. The

first contract had beer. entered into in 1979 by the LEAA. This

contract called for a three-year effort to maintain and upgrade

PROMIS. However, by 1981, the LEAA ceased to exist and the

justice Department transferred the contract to its Bureau of

Justice Statistics (BJS). But, BJS lacked the funding necessary

to carry out the third and fina! year of the contract. Consequent-

ly, the Executive Office of the United States Attorneys

(EOQUSA) allocated approximately $500,000 to pay for the last

year of the contract. In return for this funding, INSLAW agreed

2la

to make five specific enhancements to PROMIS. These enhan-

cements later became known as the “BJS enhancements’.

The Institute also entered into a second contract with the

Justice Department in 1979. In this contract, the EOUSA paid

fora pilot/feasibility study to determine whether PROMIS could

be successfully installed in two large U.S. Attorneys’ Offices in

California and New Jersey. In addition, the contract directed the

Institute to develop a word processing version of PROMIS

which would then be introduced into two smaller offices in

Vermont and West Virginia.

In late 1981, DOJ decided to go forward and implement

the software used in the pilot project in the U.S. Attorneys:

offices. and on November 2, 1981 issued a Request for Proposals

(“RFP”) seeking bids on a contract to “develop and implement”

a litigation management system in 89 U.S. Attorneys’ Offices

in the continental U.S. and U.S. Territories. More specifically,

the contract sought proposals for (1) implementing the com-

puterized “pilot version” of PROMIS as supplemented by the

BJS enhancements in 20 “large” U.S. Attorneys’ Offices; (2)

creating and implementing a non-computerized version of that

software for word processors in the remaining U.S. Attorneys’

Offices; and (3) providing necessary training, maintenance and

support for three years.

The RFP included a lengthy Statement of Work containing

60 paragraphs, one of which (3.2.4.2) stated:

All systems enhancements, modifications, and

development performed pursuant to this contract shall

be incorporated within the systems which have al-

ready been installed in the U.S. Attorneys’ Offices,

including systems installed pursuant to other contracts

in the District of Columbia, the District of New Jersey.

the District of Vermont, the Southern District of

California, and the Southern District of West Virginia.

hae

2ia

INSLAW responded to the RFP on December 2, 1981, and

in reference to the “enhancements” mentioned in the above

paragraph it stated:

During the life of this project — but not as a part of

this project — INSLAW plans new enhancements and

modifications to the basic PROMIS software and to

the original version of PROMIS for U.S. Attorneys.

The parties negotiated for over two months, and finally

entered into a contract on March 16, 1982. Prior to the execution

of the contract, and for a time thereafter, there were extensive

discussions about what INSLAW claimed were privately funded

enhancements which were featured in PROMIS. In other words,

INSLAW claimed that at the time of entering into the contract

their version of PROMIS was considerably more advanced than

it was at the time of the pilot project, and that it claimed

proprietary rights to those features which were developed with

other than government funding

[In late May of 1982 James Rogers, an attorney representing

Inslaw during a part of the negotiations, wrote to Stanley Morris,

an Associate Deputy Attorney General, as follows:

[Yjou expressed concern about the software itself,

PROMIS 82, which Inslaw proposes to license to

users for a fee commencing in June cf 1982. We are

prepared to make the following representations,

which I think should alleviate the Department’s con-

cerns:

PROMIS 82 is the sum of only three parts:

(i) the “Original PROMIS,” that is, the public domain

software as of May 15, 1981 as memorialized in tapes

delivered to the Bureau of Justice Statistics;

(2) enhancemeiits undertaken by Inslaw at private

expense after the cessation of LEAA funding; and

a

,

as —~

~~ 4

4 Al

J

< /

>

,

y,

-+

24a

grossly unfair treatment. DOJ made no meaningful response to

these complaints, and INSLAW’s fortunes did not change.

On November 19, 1982, DOJ’s technical representative

formally requested a copy of the PROMIS software that was

then in use by the U.S. Attorneys’ Offices. According to the

Justice Department the request was motivated by concern over

the financial viability of INSLAW. It is without dispute that

because the government had not obtained the minicomputer

hardware for each office, INSLAW arranged for the largest U.S.

Attorneys’ Offices to use PROMIS on a time-sharing basis. In

other words, because INSLAW could not install its software in

the individual offices due to the government’s failure to procure

computer equipment, the U.S. Attorneys’ Offices were nonethe-

less allowed to connect-up through telephone lines to INS-

LAW’s computer center and use the enhanced version of PRO-

MIS that INSLAW had been providing to its other non-Justice

Department customers. INSLAW took the position that the

Justice Department had no right to the enhanced software that

the U.S. Attorneys’ Offices had been using since this software

had been provided to the Justice Department as a courtesy. DOJ

countered that the contract obligated INSLAW to use public

domain software for its implementation and that if proprietary

enhancements had been added, it was up to INSLAW to prove it.

In an effort to respond to the Justice Department's alleged

concern over its financial viability, INSLAW first offered to

provide the Justice Department with enhanced PROMIS if the

government would agree to limit its distribution to the 94 U.S.

Attorneys’ Offices and the EOUSA. The government, however,

insisted that under its contract, INSLAW must provide software

without restriction on distribution. INSLAW then offered to put

copies of the disputed software in escrow, so that if INSL .W

went bankrupt, then the government would receive the enhanced

software and its interest would still be protected. DOJ rejected

INSLAW’s escrow proposal.

25a

Ultimately the parties sought to resolve their dispute by

entering into a modification of the contract. Modification 12, as

it became known, entered into on April 11, 1983, contained the

following provisions:

INSLAW would deliver to the government all

PROMIS programs and supporting documentation

developed for or relating to the contract.

The government shall restrict the distribution of the

software to the Executive Office for the U.S. Attor-

neys and the ninety-four U.S. Attorneys’ offices pend-

ing resolution of the dispute.

DOJ agreed to continue to make advance payments to

INSLAW.

INSLAW agreed to abide by the contractual

provisions relating to advance payments.

The parties reaffirmed their understanding that their

initial contract governs the rights to the disputed

software.

Shortly after the parties agreed to Modification 12, the

government terminated the component of the contract that

would have automated 74 offices using word processors. The

parties disputed whether Modification 12 continued to apply to

all 94 U.S. Attorneys’ Offices originally in the contract or

instead to only the remaining 20 large offices.

Although INSLAW and the Justice Department negotiated

over the enhancements that INSLAW indicated that it had

included in the proprietary version of PROMIS, the parties could

not agree that the enhancements had been paid for with non-

government funds. While INSLAW made several efforts to

demonstrate the private financing of the enhancements, the

government did not accept its methodology for allocating tund-

ing. When asked to provide an alternative methodology that

would be acceptable, the government declined.

26a

Between August 29, 1983 and February 18, 1985, IN-

SLAW installed PROMIS in all 20 U.S. Attorneys’ Offices as

provided for under the contract. INSLAW implemented the

enhanced version of the software.

On February 7, 1985, shortly before completing the con-

tract with the Justice Department, INSLAW filed for reorganiza-

tion under Chapter 11 of the bankruptcy code. From the outset

of the proceedings in the bankruptcy court, DOJ represented

itself as a major creditor of INSLAW.

Prior to bankruptcy, DOJ had developed a plan to imple-

ment PROMIS beyond the 20 offices called for under the

contract. In September 1985, upon learning of these plans,

INSLAW protested to DOJ that the government’s efforts to copy

and use PROMIS were unauthorized. Nonetheless, DOS

proceeded to automate 23 additional offices using PROMIS.

INSLAW subsequently filed a claim against DOJ for $2.9

million, the value of the standard licensing fees for the number

of offices which were then to receive the allegedly unauthorized

copies of the software.

INSLAW instituted an adversary proceeding against DOJ

in which it sought declaratory relief, an order enforcing the

automatic stay, and damages for willful violation of the auto-

matic stay. Inslaw, Inc. v. United States, Adv. Proc. No. 86-0069

(Bankr.D.D.C. June 10, 1986). DOJ responded to the complaint

by filing a motion for withdrawal of the reference to the

bankruptcy court and for dismissal of the complaint. Both of

these motions were denied by the chief judge of the district court.

Inslaw, Inc. v. United States, Adv. Proc. No. 86-0069 (D.D.C.

January 1, 1987 and Mar~‘h 24, 1987). The bankruptcy court

then bifurcated the case into two phases, liability (counts I-III)

and damages (count IV) and set trial for July 20, 1987. Inslaw,

Inc. v. United States, Adv. Proc. No. 86-69 (Bankr.D.D.C. July

20, 1987).

27a

The first major turning point in the litigation occurred in

late May and June, 1987. At that time, the bankruptcy court held

an evidentiary hearing on INSLAW’ s allegations that the Justice

Department had violated the automatic stay by attempting to

convert INSLAW’s bankruptcy from a reorganization under

Chapter 11 to a liquidation under Chapter 7.! After six days of

testimony, on June 12, 1987, the court ruled that the Department

of Justice violated 28 U.S.C. § 362(a), the automatic stay

provision of the bankruptcy code, and found the government

liable under 28 U.S.C. § 362(h) for compensatory damages,

costs and attorneys’ fees. The court also held that if § 362(h) did

not allow recovery against the government, then in the alterna-

tive, the government was in contempt of court for its actions.

From the bench, the court assessed compensatory damages of

$1,000 as well as attorneys’ fees and costs but reserved for later

decision the question of whether punitive damages could be

awarded against the government. In addition, the court granted

INSLAW’s request for an injunction against the Justice Depart-

ment and the Executive Office of the U.S. Trustees (‘EOUST”)

from having contact with the U.S. Trustee handling the IN-

SLAW bankruptcy case but refused to bar the Justice Depart-

ment from filing a proof of claim against INSLAW. The

Aithough the normal method for challenging a party who has violated

the automatic stay is to bring an adversary proceeding, that did not occur in

this instance. Instead, the court allowed INSLA W to present its charges under

a pending motion INSLAW had filed to “obtain independent handling” of

the case by the Department of Justice. Motion to Stay Effect of February 17,

1987 Order Retaining Nixon, Hargrave, Devans and Doyle for 30 Days and

for Court Assistance to Obtain Independent Handling of the Case by the

Department of Justice, In re Inslaw, Inc., Ch. 11, 85-0070 (February 25,

1987). In issuing its ruling, the bankruptcy court recognized that the matter

should have been handled as an adversary proceeding. App. at 132, Tran-

script of Hearing on Independent Handling Motion at 1007, /n re Inslaw,

Inc., Ch. 11, 85-0070 (June 12. 1987). However, after the investment of six davs

of hearings, the court was reluctant to “exalt ... form over substance.” /d.

28a

bankruptcy court order incorporating the bench ruling was

issued on July 26, 1987.

After listening to 23 witnesses and reviewing over 280

exhibits during the adversary proceeding hearings (July 20 to

August 5, 1987), in a bench ruling on September 28, 1987 the

bankruptcy court announced its decision in favor of INSLAW

and set forth the basic grounds for its ruling. In doing so, the

court extensively discussed the testimonial evidence as well as

key documents. In addition, the court made numerous credibility

findings and described the motivations that different witnesses

may have had and how their testimony might have been in-

fiuenced. Basically the bankruptcy court found that Brewer had

developed intense dislike for Hamilton and INSLAW and that

when he obtained the job as project manager of the contract

between INSLAW and DOJ he sei out to harm INSLAW,, and

that ultimately through him and others who acted with htm

and/or implicitly condoned his efforts, the DOJ converted

INSLAW’s enhanced PROMIS by trickery and deceit and was

using and intended to continue to use INSLAW’s enhanced

PROMIS in a fashion not contemplated by the contract and in

such manner as to damage INSLAW’s estate. At the time of the

bench ruling the court indicated that:

Now, with respect to the adversary proceeding of

Inslaw against the Department of Justice, | will make

a generalized statement at this time and will request

counsel for Inslaw to prepare a final judgment in

accordance with this statement and will follow this

statement with detailed written findings of fact and

conclusions of law —

Tr. of Adversary Proceeding, Jn re Inslaw, Inc., Adv. No.

86-0070 (Bankr.D.D.C. September 28, 1987) (Supp. App. at

43).

The bankruptcy court rendered the following relief:

29a

(1) A declaratory judgment in favor of INSLAW that it is the

sole owner of the proprietary enhancements to PROMIS.

(2) Adeclaratory judgment that the Justice Department wrong-

fully exercised dominion and control over INSLAW’s

software, and, as a result, violated the automatic Stay.

(3) An injunction directing the Justice Department to be bound

by the terms of INSLAW’s standard license agreement and

requiring the Justice Department to compensate INSLAW

under the terms of the license agreement from the date

when INSLAW filed for bankruptcy. The court cited

Lykes-Youngstown Corp., 504 F.2d 518 (Sth Cir.), reh’g

denied, 505 F.2d 1304 (Sth Cir. 1974). The court left for a

later hearing the precise amount due INSLAW.

(4) A prohibition against the Justice Department from electing

to use only the older version of FROMIS without first

compensating INSLAW for the cost of removing the en-

hancements.

(5) An injunction preventing several Justice Department offi-

cials who were involved in administering the INSLAW

contract from further participation in the litigation, or in

any decision involving the use of PROMIS at the Justice

Department.

(6) An award of attorneys’ fees and expenses to INSLAW.

Id. at 84-88. The detailed written findings of fact and con-

clusions of law in support of its decision were entered on January

25, 1988.

After subsequent hearings on count 4 of the complaint

(damages) the court awarded $6.79 million to INSLAW. Also

costs and attorneys’ fees were awarded. These adverse rulings

are the subject of this appeal.

INSLAW also sought legal remedies against the Justice

Department before the Department of Transportation Board of

|

30a

Contract Appeals (“DOTBCA”). INSLAW filed notices of ap-

peals with DOTBCA in February 1985, and May and November

1986. Subsequent to these notices, the first complaint before

DOTBCA was filed on June 23, 1986, approximately two weeks

after INSLAW instituted its adversary proceeding in bankruptcy

court against the Justice Department for allegedly breaching the

automatic stay provision. Additional claims were filed on Sep-

tember 19, 1986 and August 24, 1987. INSLAW’s claims before

DOTBCA fall into six categories: (1) computer time-sharing

charges associated with the computer center operated by IN-

SLAW and used by several U.S. Attorneys’ Offices; (2) contract

target fees and voucher payments withheld by the Justice

Department and additional fees due INSLAW as a consequence

of changes in the scope of work ordered by the Justice Depart-

ment; (3) indirect costs, including overhead; (4) direct costs; (5)

costs, including legal fees, allegedly incurred by Inslaw because

of the termination for convenience by the Justice Department of

the word processing portion of the contract; and, (6) costs

incurred because the Justice Department withheld payments. In

four cases, the government counterclaimed for an amount in

excess of the original claim. The table below summarizes the

parties’ claims against each other before DOTBCA.

Claim INSLAW DOJ against

against DOJ INSLAW

1. Computer Center Cost: $ 409,694 $ 670,735

2. Fees 331,447 35,534

3. Indirect Costs,

including overhead 569,751 466,868

4. Direct Costs 92,844 43,615

5. Costs, including legal 76,049

6. Consequences of withheld

payments 109,777 ae

Total $ 1,589,562 $1,216,752

3la

On February 8, 1987, the bankruptcy court enjoined the

DOTBCA proceedings. The Justice Department appealed and

this court vacated the order of the bankruptcy court. In March

1989, this court also denied a motion by INSLAW to enjoin the

DOTBCA proceedings. United States v. Inslaw, Inc., C.A. No.

89-352 (D.D.C. March 29, 1989). The matter of whether to

allow the DOTBCA to proceed is not now before the district

court.

DISCUSSION

DOJ makes numerous arguments in support of its appeal:

(1) DOJ contends that under the doctrine of sovereign

immunity, the bankruptcy court was without jurisdiction to

decide the case. Even if the bankruptcy court had jurisdiction

to decide the issues, it should have deferred to an agency board

of contract appeals.

(2) DOJ argues that the facts do not support a conclusion

that the automatic stay provision of the bankruptcy code had

been violated.

(3) DOJ claims entitlement to de novo review. DOJ cites

several reasons to support its notion of the standard of review,

arguing that under 28 U.S.C. § 157(d), withdrawal of the

proceeding to the district court was required, or alternatively,

the bankruptcy court’s findings should be treated as contempt

of court. Lastly, in support of this claim, the Justice Department

makes the serious charge that the bankruptcy judge was not

impartial and should have removed himself. During the course

of this litigation, the Court of Appeals for the District of Colum-

bia chose not to reappoint the bankruptcy judge for a new

fourteen year term. The Justice Department contends that the

decision by the D.C. Circuit not to reappoint the bankruptcy

judge and subsequent events may have biased or prejudiced the

judge’s behavior or,- at least, given the appearance of im-

propriety.

ee Teneo ee

32a

(4) DOJ claims that the bankruptcy court was clearly

erroneous in its findings of fact regarding both the adversary

proceeding and the proceeding in which the court determined

that the Justice Department had illegally attempted to convert

INSLAW’s reorganization to a liquidation.

(5) DOJ contends that as a matter of law, its actions, even

if true, did not constitute a violation of law.

(6) DOJ believes that the bankruptcy court exceeded its

authority when it granted relief.

(7) DOJ urges that no attorneys’ fees or costs should have

been awarded.

It is well settled law that absent waiver, the United States

is immune from suit. United States v. Mitchell, 445 U.S. 535;

reh’g denied, 446 U.S. 992 (1980); United States v. King, 395

U.S. 1 (1969). Only Congress can waive sovereign immunity;

and, such waivers are to be strictly construed. Rose v. Rose, 481

U.S. 619, 635 (1987); In re Donovan, 872 F.2d 982, 994 (D.C.

Cir. 1981).

In enacting the bankruptcy code, Congress waived

sovereign immunity in three instances.” First, once the govern-

ment asserts a claim, immunity is waived for any counterclaim

Section 106 of the bankruptcy code, 11 U.S.C. § 106 (1988) provides

(a) A governmental unit is deemed to have waived sovereign

immunity with respect to any claim against such governmental

unit that is property of the estate and that arose out of the same

transaction or occurrence out of which such governmental unit's

claim arose.

(b) There shall be offset against an allowed claim or interest of

a governmental unit any claim against such governmental unit

that is property of the estate.

(c) Except as provided in subsections (a) and (b) of this section

and notwithstanding any assertion of sovereign immunity -

33a

arising out of the same transaction or occurrence. 11 U.S.C.

§ 106(a). There is no limit on the amount of the counterclaim.

Second, the government cannot claim immunity from any offset

of an allowed claim of the government. The offset need not arise

out of the same transaction or occurrence but, recovery is limited

to the amount of the government’s claim. 11 U.S.C. § 106(b)

(1988). Finally, § 106(c) provides an additional waiver of

sovereign immunity for those provisions of the bankruptcy code

that contain “trigger” words regardless of whether or not the

government asserts a claim.

The bankruptcy court reasoned that DOJ had waived im-

munity under §§ 106(a) and (b), and also interpreted § 106(a)

as sufficiently broad to bestow jurisdiction. DOJ urges that

inasmuch as it had not filed a proof of claim against INSLAW,

it had not waived its immunity under §§ 106(a) or (b). It also

argues that the bankruptcy court’s interpretation of § 106(c) was

invalid.

In Hoffman v. Connecticut Income Maintenance Dept., 109

S.Ct. 2818 (1989), the Supreme Court examined whether the

eleventh amendment barred monetary recovery against a state

under § 106(c).? Justice White construed § 106(c) narrowly,

holding that because congressional intent to abrogate the

eleventh amendment was not unmistakably clear on the face of

the statute, no waiver could be found. Nonetheless, even under

a narrow reading of § 106(c), Justice White observed that

§ 106(c)(2) “is more indicative of declaratory and injunctive

relief.” 109 S.Ct. at 2823. Indeed, the government concedes that

(1) a provision of this title that contains “creditor”, “en-

tity”, or “governmental unit” applies to governmental

units; and

(2) a determination by the court of an issue arising under

such a provision binds governmental units.

This case was stayed pending the decision in Hoffman inasmuch as it

appeared that it would have a direct bearing on a critical aspect of this case.

ee ee

>A

Ia

its “sovereign immunity is waived with respect to declaratory

and injunctive relief entered pursuant to the automatic stay,

section 362.” Appeliant’s Brief at 51, n.36. Thus, ata minimum,

under § 106(c) the bankruptcy court had jurisdiction to assess

the liability of the Justice Department for violating the automatic

stay and for issuing declaratory and injunctive relief pursuant to

the finding of liability.

For the bankruptcy court to award compensatory damages,

attorneys’ fees and costs, jurisdiction must be found in § 106(a).

ne bankruptcy court concluded that the filing of a formal proof

of claim Is not a prerequisite to a finding of a waiver of sovereign

immunity under § 106(a). Atascadero State Hospital v. Scanlon,

473 U.S. 234, 242, reh’g denied, 473 U.S. 926 (1985), mandates

that Congressional intent be “unmistakably clear in the language

of the statute.” See also Hoffman, 109 S.Ct. ai 2822. The

language of § 106(a) makes no mention of the requirement of a

proof of claim. Therefore, no requirement of a proof of claim

should be assumed from the statute. Even if the court were to

look beyond the face of the statute (contrary to the Supreme

Court’s teaching in Atascadero), the legislative history provides

even more compelling evidence that no proof of claim need be

filed.

[he original version of § 106 would have predicated a

waiver Of immunity on the filing of a proof of claim by the

government. Both the House and Senate bills contained the

] la¢ oan >

tollowing language

(a) A governmental unit thai files a proof of claim

under section 501 of this title is deemed to have

waived sovereign immunity with respect to any claim

igainst such governmental unit that is property of the

estate and that arose out of the same transaction or

occurrence out of which such governmental unit’s

claim arose

3Sa

H.R. 8200, 95th Cong., Ist Sess., 324 (1977) and S. 2266, 95th

Cong., 2d Sess., 313 (1978) (emphasis added). As enacted by

Congress, §§ 106(a) and (b) make no mention of the proof of

claim requirement; the reference to the filing of a proof of claim

was dropped when the bill became law. The government con-

tends that this was merely a stylistic change. The court is not

persuaded by this agrument. “What Congress rejected should

not be injected.” Jn re Davis, 20 Bankr. 519, 521

(Bankr.M.D.Ga. 1982). Thus, the allowability of a counterclaim

against the government does not require the filing of a formal

proof of claim. See also Kennedy, “Automatic Stays Under the

New Bankruptcy Code,” U. Mich. J. L. Ref. 1, 30 n.120 (1978).

Moreover, § 101(4) defines “claim” very broadly.4 The

definition is a substantial departure from the prior law in which

a Claim was tied to the concept of provability in an effort to limit

the kinds of debts that could be paid in a bankruptcy proceeding.

See 2 Collier on Bankruptcy, § 101.4 (15th ed., 1989). Under

the present law, many more types of rights are considered claims

and are subject to the bankruptcy code. The notion of the filing

of a formal proof of claim seems inconsistent with this section

of the bankruptcy code as well as § 106(a).

The government’s actions throughout the course of the

litigation suggest a calculated decision to assert its claims

Section 101(4) reads:

Claim means —

(A) right to payment, whether or not such right is reduced

to judgment, liquidated, unliquidated, fixed, contingent,

matured, unmatured, disputed, undisputed, legai. equi-

table, secured or unsecured; or

(B) right to equitable remedy for breach of performance if

such breach gives rise to a right to payment, whether or not

such right to an equitable remedy is reduced to judgment,

fixed, contingent, matured, unmatured, disputed, un-

disputed, secured, or unsecured

————————

36a

against Inslaw until such time that it appeared that the govern-

ment had more to lose than to gain. The government should not

be allowed to hide behind its shield of sovereign immunity once

itenters the fray and manifests a clear intent to put the debtor at

risk for its monetary claims.

The existence of the government’s claims can be derived

from its conduct. Specifically, according to testimony before the

bankruptcy court, the government attended the meeting of un-

secured creditors. In at least one meeting in March 1985, counsel

for the Justice Department asserted the government’s status as

a creditor. In a motion made to the bankruptcy court contesting

the application of INSLAW’s attorneys for interim compensa-

tion, the government stated that its standing to object rested upon

the fact that the United States was “a creditor of debtor Inslaw.

Inc.” Objection by the United States to the Application for

Interim Compensation, /n re Inslaw, Inc., Ch. 11, 85-0070

(Bankr.D.D.C. Aprii 17, 1985). In June 1985, the government

represented itself to the bankruptcy court as “probably the

largest unsecured creditor” of INSLAW. This representation

was repeated to the bankruptcy court during a July 2, 1985

hearing of INSLAW’s motion for a confidentiality order.

Response by the United States to Debtor’s Application for

Confidentiality of Certain Information, /n re Inslaw, Inc.. Ch.

11, 85-0070 (Bankr.D.D.C. June 14, 1985). On the basis of this

representation, the bankruptcy court recognized the United

States as “one of the largest unsecured creditors in this proceed-

ing.” Opinion Concerning Application by Debtor to Hold Cer-

tain Information in Camera, In re Inslaw, Inc., 85-0070

(Bankr.D.D.C. July 15, 1985) (App. at 103).

When the United States appealed the bankruptcy court's

decision regarding the confidentiality order, it again repeatedly

represented itself as a major unsecured creditor. Memorandum

of the United States in opposition to INSLAW’s Motion to

Dismiss at 1-3, (Supp. App. at 4-6). In the same filing, govern-

38a

recovery from the estate and when this intent is made known

before the bar date, then an informal proof of claim has been

properly filed. /n re Int'l Horizons, Inc., 751 F.2d 1213, 1217

(11th Civ. 1985).

In reaching its decision that the government had filed an

informal proof of claim, and thus had waived sovereign im-

munity under § 106(a), the bankruptcy court relied upon /n re

Davis, 20 Bankr. 519 (Bankr.M.D.Ga. 1982). It concluded that:

The government should not be permitted to defeat

Inslaw’s claim against it on the ground that it has not

filed a formal proof of claim and hence has not waived

sovereign immunity, and then later be able to obtain

a distribution from Inslaw’s assets by perfecting its

already -asserted informal proof of claim. Sucha result

would offend equity and conscience. “Fairness re-

quires that a governmental unit cannot make an infor-

mal or incomplete claim to protect its right to share in

subsequent distribution and also assert sovereign im-

munity.”

76 Bankr. 224, 230 (quoting /n re Davis, 20 Bankr. 519, 523

(Bankr.M.D. Ga. i1982)).

The government counters that Davis is the only case where

an informal claim has been sufficient to waive sovereign im-

munity under § 106(4). However, Davis and the bankruptcy

court have made the logical extension from numerous courts that

have concluded that a proof of claim can be found once a creditor

indicates the nature and amount of his claim and indicates his

intentto file aclaim. See In re Anderson-Walker Industries, Inc..

798 F.2d 1285, 1287-88 (9th Cir. 1986); In re Sambo’'s Res-

taurants, Inc., 754 F.2d o11, 815 (9th Cir. 1985); In re Int'l

Horizons, Inc., 751 F.2d 1213, 1217 (11th Cir. 1985). These

decisions are wholly consistent with the bankruptcy code.

39a

The government points out that inasmuch as it has stated

for the record (after the issue was raised) that it does not intend

to perfect its claim by filing a forrnal proof of claim, there is no

possibility of the government participating unfairly in any dis-

tribution of INSLAW'’s estate. However, in effect this renuncia-

tion is more damaging to the government’s position than it is

helpful. Obviously it realizes that but for its expressed renuncia-

tion of its intent to perfect its claim, it has already sufficiently

asserted a claim so as to be able to perfect :i — even beyond the

bar date for filing. In other words, the government attempts to

kill a live claim by renouncing its intention to follow through

on it. Under its theory the United States is privileged to raise and

lower its protective canopy of sovereign immunity at will —

depending upon the relative advantages of So doing at any

particular time. Conceivably, if we were to accept this proposi-

tion the government could assert a claim as it has here, and then

delay amending it by the “formal proof” until after the statute

of limitations had run on some conduct which clearly would

have been the basis of a valid counterclaim. There is no indica-

tion that the statute contemplates such mischief.

In sum, this court is convinced that under the statutory

scheme enacted by Congress, the bankruptcy court correctly

exercised its jurisdiction over the United States Justice Depart-

ment. First, under § 106(c), the bankruptcy court had jurisdiction

to hear claims seeking injunctive and declaratory relief. Second,

by its actions in portraying itself as a creditor and asserting

claims against Inslaw the government waived its immunity

under § 106(a) to Inslaw’s counterclaims for monetary damages.

Thus, the government's sovereign immunity had been effective-

ly waived. Moreover, because § 106(a) forms the basis of the

waiver, itis complete; the entire bankruptcy code applies includ-

ing those provisions such as § 362(h) which provide for

monetary damages.

40a

The goveri ment next argues that even if the bankruptcy

court properly had jurisdiction over the parties, it should have

deferred to a specialized agency appeals board. According to the

government, where issues of government procurement are in-

volved, deferral is mandatory.

The government’s argument assumes that, in essence.

{NSLAW’s claims against the government are rooted in govern-

ment contract law. If that were so then the proper forum for relief

would be the Department of Transportation Board of Contract

Appeals with a right of appeal to the claims court. See Jn re Gary

Aircraft Corp., 698 F.2d 775, 780-84 (Sth Cir.), cert. denied,

464 U.S. 820 (1983) (because government contracting law tends

to be “technical and esoteric” and there exist specialized fora to

resolve such disputes, the liquidation of claims arising out of a

contract dispute should be deferred to an agency board of

contract appeals).

But the issues in the instant case do not involve the liqui-

dation of a contract claim. Indeed, INSLAW’s case is Squarely

grounded in bankruptcy law. It seeks relief for alleged violations

of the automatic stay provision of the bankruptcy code. It is hard

to think of a provision more central to bankruptcy policy than

the automatic stay provision.

In a case that appears factually quite close to the present

dispute, the D.C. Circuit has held that deferral was not only not

required but was inappropriate. Megapulse, Inc. y. Lewis, 672

F.2d 959 (D.C. Cir. 1982). In Megapulse, a government con-

tractor sought to enjoin in district court, the dissemination of

proprietary trade secrets by the Coast Guard. The government

claimed under the contract it had lawfully gained a right to the

contractor’s trade secrets. Since the dispute involved contract

law, the appropriate adjudicatory mechanism was through agen-

cy review and ultimately to the claims court. The district court

agreed, but the D.C. Circuit did not.

4la

The Circuit held that the mere existence of a contract is not

dispositive of which forum is mest appropriate. “The mere fact

that a court may have to rule on a contract issue does not, by

triggering some mystical metamorphosis, automatically trans-

form an action based on trespass Or conversion into one on the

contract...” 672 F.2d at 968. Like the Justice Department in the

instant case,

[i]t is actually the government, and not Megapulse,

which is relying on the contract, attempting to show

that the Coast Guard lawfully came into possession of

the property and is empowered by the contract to put

the entrusted information out for commercial use...

[W]e do not accept the government’s argument that

the mere existence of such contract-related issues

must convert this action to one based on the contract.

This court retains the power to make rational distinc-

tions between actions sounding genuinely in contract

and those based on truly independent legal grounds.

672 F.2d at 969-70.

The record shows that the bankruptcy judge properly used

his discretion to decide a question of law regarding the owner-

ship of the enhanced PROMIS software that was ancillary to his

determination of whether there had been a violation of the

automatic stay. Because the matter before the bankruptcy court

sounded in bankruptcy law, no deferral was necessary.

The government urges the court to review the bankruptcy

Court’s finding de novo. First, the government contends that

because issues presented in the instant case involved considera-

tion of both the bankruptcy code and other laws affecting

interstate commerce, the chief judge of this court incorrectly

refused to withdraw the reference of the ease to the bankruptcy

court. Second, DOJ argues that the bankruptcy court’s findings

of fact and determination of liability were made under that

court's general civil contempt power and thus must be reviewed

42a

de novo. Alternatively, the government claims that because the

bankruptcy court purportedly violated its pretrial order, the

government is entitled to a new trial. Finally, the Justice Depart-

ment makes the serious charge that the bankruptcy judge ex-

hibited the appearance of bias and therefore, should have

recused himself. This is the second time the government has

made this charge. The government filed a petition for writ of

mandamus with the district court Seeking an order requiring the

bankruptcy judge to disqualify himself. The chief judge of this

court denied that writ. Jn re United States, Misc. No. 88-0032

(D.D.C. January 25, 1988). The government now asks this court

to declare that recusal was in order and grant a new trial. For the

following reasons, the clearly erroneous standard of review will

be applied to the bankruptcy court’s findings of fact and no new

trial will be granted.

The standard of review for a core proceeding as defined by

28 U.S.C. § 157 is set forth in Bankruptcy Rule 8013:

Disposition of Appeal; Weight Accorded Bankruptcy

Judge’s Findings of Fact

On an appeal the district court or bankruptcy

appellate panel may affirm, modify, or reverse a

bankruptcy court’s judgment, order, or decree or

remand with instructions for further proceedings.

Findings of fact shall not be set aside unless Clearly

erroneous, and due regard shall be given to the oppor-

tunity of the bankruptcy court to judge the credibility

of the witnesses.

The Advisory Committee Note to Rule 8013 indicates that

the appropriate standard of review of the findings of a

bankruptcy court should be the same as the review standard

accorded a district court under Rule 52 of the Federal Rules of

Civil Procedure. See also Briden v. Foley, 776 F.2d 379, 38]

(1st Cir. 1985) (Rules 7052 and 8013, which require the applica-

tion of the clearly erroneous standard to a bankruptcy court’s

findings of fact, are ‘utional as applied to core proceed-

ings); 1 Collier on Bankruptcy, § 3.]3[7] (15th ed. 1989). Of

course, issues of law ate reviewed de novo. In re Contractors

Eguipment Supply ¢ SOME 2d 241, 243 (9th Cir. 1988).

There is litte doubt that an adversary proceeding represents

a core proceeding. The bankruptcy code so provides. Core

proceedings under 28 U.S.C. § 157(b)(2)(A) (Supp. II 1983)

include “matters concerning the administration of the estate.”

The allegation by INSLAW that the government exercised

unlawful dominion and control of its PROMIS software Surely

would satisfy this provision. In addition, further support can be

found in subsection § 157(b)(2)(C) which makes “counterclaims

by the estate against persons filing claims against the estate”

core proceedings. By inference, § 157(b)(2)(G) which defines

“proceedings to terminate, annul, or modify the automatic stay”

as core proceedings lend additional justification. In analyzing

this question, the Fourth Circuit has taken the well-reasoned

view that proceedings to prosecute the automatic stay are core

proceedings under the bankruptcy code. See Budget Service Co.

v. Better Homes of Virginia, Inc., 804 F.2d 289 (4th Cir. 1986).

Consequently, because prosecution of a violation of the auto-

matic stay is a core proceeding and Congress has accorded

bankruptcy judges the power to make factual findings in such

proceedings, the standard of review as set forth in Bankruptcy

Rule 8013 is that of clear error.

For the same reasons, the government’s contention that the

bankruptcy court’s findings of fact were made under the court’s

general contempt power also appears to be mi placed.

INSLAW’s allegation that the government illegally attempted

to convert its Chapter 11 reorganization into a Chapter 7 liqui-

dation unquestionably falls within § 157(b}(2)(A). As such, it is

a core proceeding. Similarly, INSLAW’s charge that DOJ il-

legally appropriated its property and sought to distribute it

without regard to INSLAW’s claimed proprietary interest, at a

44a

minimum, threatened the estate under § 157(b)(2)(A) and was

a counterclaim under § 157(b)(2)(C). Both the alleged illegal

conversion and the misappropriation of property could properly

he contested in an adversary proceeding which as demonstrated

supra is a core proceeding. Therefore, the Powers vested to the

bankruptcy court under the automatic stay provision, 11 U.S.C.

§ 362, do not violate the Constitution as the government claims.

See Budget Service Co. y. Better Homes of Virginia, 804 F.2d

at 292-93, (“bankruptcy courts acting through bankruptcy

judges may enforce the Sanctions of § 362(h} without reference

to a finding of civil contempt”). Furthermore, under § 362(h), a

debtor may recover actual damages, including costs and

attorneys’ fees. Thus, the standard of review in this case is not

the standard applicable for civil contempt, but rather is the

clearly erroneous standard relevant for core proceedings.

The government next Suggests that the chief judge of this

court erred when he did not agree to withdraw to the district

court the referral of the bankruptcy case. Section 157(d), in

pertinent part, states:

The district court shall. on timely motion of a party,

SO withdraw a proceeding if the court determines that

resolution of the proceeding requires consideration of

both title 11 and other laws of the United States

regulating organizations or activities affecting inter-

State commerce.

28 U.S.C. § 157(d) (Supp. II 1983).

The relevant test of whether a bankruptcy matter should be

withdrawn to the district court is whether the district court judge

can make “an affirmative determination that resolution of the

claims will require substantial and material consideration of

those non-[bankruptcy] code statutes.” /n re White Motor Corp.,

42 Bankr. 693, 705 (N.D. Ohio 1984). It is Only those cases

which require a Significant interpretation of federal laws that

must be withdrawn. See Jn re Johns-Manville Corp., 63 Bankr.

45a

600, 602 (S.D.N_Y. 1986) (favorably applying In re White

Motor).

In the instant case, the allegation of the illegal conversion

of INSLAW’s bankruptcy case implicates no federal law other

than the bankruptcy code. The adversary proceeding which

involved an issue over the Ownership and control of the

PROMIS software appears to this court to require first, an

analysis of the scope of work and then, an interpretation of a

contract. In interpreting the contract, a bankruptcy court may

have to apply federal procurement regulations, but it is not

apparent that there need be any substantial interpretation of

federal laws by the bankruptcy court. Therefore, the court

concurs in the decision of the chief judge not to withdraw the

case from the bankruptcy court.

The government also contends that the bankruptcy court

violated its pretrial order limiting the scope of the adversary

proceeding. As a result, the government did not put on its case

with regard to certain matters and now claims that the result was

fundamentally unfair and prejudicial. On July 20, 1987, the

bankruptcy court entered an order which sought to restrict phase

1 of the adversary proceeding to whether INSLAW maintained

a proprietary right to the PROMIS software and whether C.

Madison Brewer was biased and lacked impartiality towards

INSLAW. Order Limiting Issues to be Tried at This Time, /n

re Inslaw, Inc., Adv. Proc. No. 86-0069 (Bankr.D.D.C. July 20,

1987). The bankruptcy court sought to reserve until a later date

the litigation over several contract-specific questions such as the

allocation of computer time-sharing costs, termination of the

word processing portion of the contract, overhead rates, DOJ’s

alleged withholding of fees and INSLAW’s proposal to sub-

Stitute computers for word Processors. In addition, the court

also sought to delay the presentation of whether DOJ negotiated

in good faith and the determination of DOJ’s counterclaims

Se ee ee

46a

and/or offsets against INSLAW,, as well as the post-petition acts

of Dean Cooper. /d.

What is clear from the bankruptcy court’s conclusions of

law is that the court held to its mission as described in its pretrial

order. The court’s six principal conclusions of law are that: (1)

INSLAW’s proprietary enhancements are entitled to protection

as trade secrets; (2) DOJ unlawfully used those enhancements

in violation of the automatic stay; (3) the failure of DOJ to cure

the fraud by which it induced INSLAW to enter into Modifica-

tion 12 represents a further violation of the automatic stay; (4)

the failure of DOJ to correct bias against INSLAW also repre-

sents a violation of the automatic stay; (5) INSLAW is entitled

tO permanent injunctive relief; and (6) INSLAW is entitled to

costs and attorneys’ fees. A comparison of the conclusions of

law and the pretrial order show a close correlation. While there

may have been some overlapping factual questions among the

issues tried in phase I and those reserved for a later determina-

tion, the court cannot agree that the bankruptcy court violated

its pretrial order

Moreover, the bankruptcy court may amend its pretrial

yrder to conform to the evidence. Bankruptcy Rule 7016 which

would control the issuance of pretrial orders applies Fed. R. Civ

P. 16. Under the federal rules, district court judges have broad

liscretion to depart from their pretrial orders. See Patterson v.

Woolworth Co., 786 F.2d 874, 879 (8th Cir. 1986) (“flexible

ipplication of pretrial orders” is reserved to the sound discretion

f the district court); Robert v. Conti Carriers & Terminals, Inc.,

2 F.2d 22, 24 (Sth Cir. 1982) (trial judges have discretion to

nit evidence not included in pretrial order). Absent a clear

ise of discretion, the trial court’s decision should

Popich Bros. Water Transport, Inc., 660

Cir. 1981). The court is satisfied that the

iny ‘undue prejudice when the

47a

bankruptcy court made its findings of fact. No new trial on those

issues 1s indicated.

Lastly, in arguing for a new trial on the issues the govern-

ment contends that Judge Bason should have recused himself

and that the appearance of impropriety tainted his decision. The

faciual setting involves the decision on January 11, 1988 by the

United States Court of Appeals for the District of Columbia

Circuit not to reappoint Judge Bason to a fourteen-year term.

Subsequent to that decision, Judge Bason wrote a lengthy letter

to Chief Judge Wald of the D.C. Circuit. In this letter, Judge

Bason described his credentials, questioned the validity of the

reasons given for why he was not reappointed, and raised the

possibility that other unstated reasons may have led the court of

appeals not to reappoint him. Within one week, two newspapers

carried accounts of Judge Bason’s letter. Washington Post,

January 18, 1988; Legal Times, January 18, 1988. The govern-

ment claims that the decision not to reappoint Judge Bason

tainted his judgment in the case and that his letter to Chief Judge

Wald and the press reports gave the appearance of impropriety.

On January 19, 1988, the government first filed a motion

before Judge Bason requcsting that he recuse himself. After a

hearing on January 22, the bankruptcy court denied the

government’s motion in a memorandum and order filed January

25, 1988. On the same day, the government argued a motion

before the chief judge of the district court for a writ of mandamus

directing Judge Bason to recuse himself. The chief judge denied

the government’s writ in a bench ruling. /n re United States and

the United States Department of Justice, Misc. Case No. 88-032

(D.D.C. January 25, 1988).

In its motions before Judge Bason and Chief Judge Robin-

son, the government cites two recusal statutes, 28 U.S.C. § 144

and 28 U.S.C. § 455. While there is no disagreement over the

applicability of 28 U.S.C. § 455, INSLAW argues and Judge

Bason agrees that 28 U.S.C. § 144 does not apply to bankruptcy

49a

tion or bias in this case. This court, like the courts before it, can

find no basis in fact to support a motion for recusal.

The events leading up to the government’s motion for

recusal occurred long after Judge Bason made his extensive

bench rulings on liability which constitute the basis of his later

memorandum opinion and order. Judge Bason made his oral

ruling on the unlawful attempt to convert INSLAW’s

bankruptcy on June 12, 1987 and followed with a memorandum

opinion on July 20, 1987. A bench ruling on DOJ’s liability in

the main adversary proceeding was announced on September

28, 1987, more than three and one-half months before the judge

learned that he would not be reappointed. Although no written

findings had been filed by the time Judge Bason learned that he

would not be reappointed, the die had been cast. Government

liability had already been assessed in no uncertain terms. The

only untried part of the case that remained involved damages.

The government accuses the bankruptcy court of looking

beyond the bankruptcy proceeding to find culpability by the

government. What is strikingly apparent from the testimony and

depositions of key witnesses and many documents is that IN-

SLAW performed its contract in a hostile environment that

extended from the higher echelons of the Justice Department to

the officials who had the day-to-day responsibility for supervis-

ing its work. While the focus of the review must be on the actions

taken by the Justice Department once INSLAW filed its petition

for bankruptcy, the context of those actions cannot be fully

appreciated without a thorough understanding of the underlying

events and facts leading up to the bankruptcy.

The transcripts reveal that the bankruptcy judge kept close

track of the evidence as it developed. This is reflected in frequent

references to his notes, and his occasional questions to witnesses

about what appeared to be critical evidence; and his attention to

detail in both his oral and written rulings demonstrate a mastery

8S

S0a

of the evidence. This is apparent from the vast majority of the

record citations in support of the various findings.

It is not necessary to duplicate the bankruptcy court’s

exhaustive findings of fact here. It is sufficient to state that after

careful review of all of the volumes of transcripts of the hearings

before the bankruptcy court, the more than 1,200 pages of briefs

and supporting appendices and all other relevant documents in

the record, there is convincing, perhaps compelling support for

the findings set forth by the bankruptcy court.

In accordance with the principles set out in Anderson v.

Bessimer City, 470 U.S. 564, 571-75 (1985), the court has

examined the bankruptcy judge’s findings of fact in the light of

the entire record, and finds that his account of the evidence is

eminently plausible; and this court is not left with any notion

that a “mistake has been committed.” Jd. at 574. This con-

clusion is reached without regard to the deference to be accorded

to the judge’s opportunity to assess credibility. The cold record

adequately supports his findings under any standard of review.

Accordingly the findings will not be disturbed.

With regard to the conclusions of law, the court believes

that the facts support the multiple violations of the automatic

stay that the bankruptcy court found. 11 U.S.C. § 362(a)(3)

provides that “any act to obtain possession of property of the

estate or of property from the estate or to exercise control over

property of the estate” is a violation of the automatic stay.

The automatic stay is one of the fundamental debtor

protections provided by the bankruptcy laws. It gives

the debtor a breathing spell from his creditors. It stops

all collection efforts, all harassment, and all

foreclosure actions. It permits the debtor to attempt a

repayment or reorganization plan, or simply to be

relieved of the financial pressures that drove him into

bankruptcy.

H. Rep. No. 595, 95th Cong., Ist Sess. 340-42 (1977).

5la

it is not necessary to consider which party was entitled to

the enhanced PROMIS software under INSLAW’s contract with

the Justice Department. At a minimum, the Department of

Justice knew that INSLAW disputed the government’s claim of

ownership of enhanced PROMIS. It also knew that PROMIS

represented INSLAW’s principal asset and that without owner-

ship of the software, the company’s economic viability was

threatened. Instead, of following the orderly procedures estab-

lished by the bankruptcy code for resolving its dispute with

INSLAW and seeking relief from the automatic stay, DOJ

pursued a course of self-help. It claimed enhanced PROMIS to

be its property and installed it in at least 45 offices throughout

the United States. By these actions, DOJ violated the automatic

Stay.

See First Nat’i Bank of Portsmouth, New Hampshire v.

Cope, 385 F.2d 404 (1st Cir. 1967). In that case a bank creditor

held a secured interest in the debtor’s automobile. For the

purpose of deciding the case, the court assumed that the bank

was legally entitled to repossess the car. Nonetheless, when the

bank acted unilaterally and did repossess the car, the First Circuit

held that its actions were unlawful. Although not addressing the

automatic stay provision specifically, the First Circuit’s insight

appears to have application to this case.

It should require but little imagination to envisage the

serious Consequences to orderly and, indeed, effec-

tive, bankruptcy administration that would ensue

from the recognition of the principle advocated by the

bank. Every creditor who believed, albeit mistakenly

that he had a right to property in the possession of the

court, and perhaps some who did not believe it, but

were willing to take the risk to improve their position,

would seize that property. The trustee, instead of

administering the estate, would be busy policing or

endeavoring to regain possession of it. Particularly in

52a

a Chapter XIII proceeding, the whole purpose of

which is to rehabilitate the debtor, the taking of assets

vital to the conduct of his affairs might foreclose

success. The requirement that even those who are

correct in their belief that they are entitled to the return

of property should have to go through orderly

proceedings, /n re Pappas, S.D. Ohio, 1962, 216 F.

Supp. 819, and suffer consequences if they do not, is

small price to pay.

385 F.2d at 406. See also in re Motley, 10 Bankr. 141

(Bankr.M.D.Ga. 1981) (creditor cannot exercise self-help; it

must follow orderly procedures).

The court concurs with the bankruptcy court’s conclusion

that DOJ fraudulently obtained and then converted enhanced

PROMIS to its own use. Prior to entering into Modification 12,

INSLAW first proposed that DOJ be given the enhanced

PROMIS for its use at no additional charge. After this proposal

was rejected, INSLAW next proposed that a copy of the existing

software be put in escrow which would become available to DOJ

if INSLAW went out of business. Again, DOJ rejected

INSLAW’s proposal. It was not until INSLAW agreed to tum

over its version of enhanced PROMIS that DOJ entered into

Modification 12 and withdrew its threat of stopping the advance

payments to INSLAW thereby averting a cash flow crisis that

would have thrown the company into bankruptcy. These efforts

to obtain a copy of the proprietary software were taken even

though the government had yet to acquire the computer

hardware on which the software could run. These facts are not

in dispute. Thus, the court is drawn to the same conclusion

reached by the bankruptcy court; the government acted willfully

and fraudulently to obtain property that it was not entitled to

under the contract.

Once the software was in the possession of DOJ, there is

no evidence that the government ever negotiated in good faith

53a

over the existence of the proprietary enhancements claimed by

INSLAW. The DOJ put the entire onus of proof on INSLAW,

yet never indicated what methodology or proof would be accept-

able. The contract entered into by the parties entitled the govern-

ment to the version of PROMIS then in the public domain. The

expert witnesses demonstrate that INSLAW did enhance the

software with private funds. The contract did not entitle DOJ to

these enhancements. By failing to acknowledge or accept

INSLAW’s claims, the government continued its fraudulent

behavior toward INSLAW. This behavior persisted long after

INSLAW filed for reorganization. DOJ’s actions constitute a

violation of the automatic stay by exercising control over

property that rightfully belonged to the estate.

With regard to the government’s abortive attempt to con-

vert Inslaw’s reorganization into a liquidation, the court can

think of no greater violation of the automatic stay than to cause

the demise of the corporate entity.

The next issue raised by the government is whether the

award of damages by the bankruptcy court was proper and

within the court’s authority. The bankruptcy court awarded

monetary damages of $6.79 million for violations of the auto-

matic stay regarding the unlawful conversion of PROMIS. In

addition, monetary damages of one thousand dollars were as-

sessed against the Justice Department for attempting to convert

INSLAW’s reorganization to a liquidation. The court declared

that INSLAW was the sole owner of enhanced PROMIS and

had the exclusive right to sell or lease the software; enjoined

DOJ from further installing PROMIS in any more offices or

from disseminating PROMIS to any person outside of DOJ;

further enjoined three Justice Department officials from any

future involvement with INSLAW or PROMIS; and, awarded

attorneys’ fees and costs.

Considering first the monetary damages and attorneys’ fees

issues, § 362(h) directs that “an individual injured by any willful

S4a

violation of a stay provided by this section shall recover actual

damages, including costs and attorneys’ fees.” The bankruptcy

court estimated INSLAW’s damages to be calculated in accord-

ance with the perpetual license fees for the PROMIS software.

The government contends that the calculation of license fees that

INSLAW would have collected was not a proper measure of

damages. DOJ claims that the effect of the court’s order

amounted to forcing the government to enter into a contract.

Furthermore, the government argues that the license fees fail to

measure the actual damage to INSLAW. According to DOJ,

even if the bankruptcy judge was correct in using license fees to

calculate actual damages, the fees overstate the value of

INSLAW‘s actual harm.

Contrary to what the government contends, the bankruptcy

court did not impose a contract upon the parties. Instead, the trial

court discharged its responsibility to assess damages based on

the evidence adduced at trial. The bankruptcy court’s conclusion

is supportable based on the evidence in the record and as a matter

of law. INSLAW proved to the satisfaction of the bankruptcy

court the fair market value of its software by putting on experts

versed in the valuation of software. Furthermore, other courts

have held that license fees are an acceptable measure of damages

in a variety of contexts.

Where the misappropriation of intellectual property has

been the product of tortious conversion, license fees have been

used to measure damages. See e.g. Compumarketing Serv. Corp.

v. Business Envelope Mfgs., Inc., 342 F. Supp. 776, 778 (N.D.IIl.

1972) (usage fee for a mailing list converted by defendant is the

measure of damages). Similarly, in cases involving patent infr-

ingement comparative royalties are accepted as a proxy. Clark

v. Wooster, 119 U.S. 322, 326 (1886) (with regard to patent

infringement, established license fees are the most reliable

measure of damages); Leesona Corp. v. United States, 599 F.2d

958, 973 (Ct. Cl.), cert. denied, 444 U.S. 991 (1979). Where

5Sa

trade secrets have been misappropriated, license fees have again

been used as the proper measure of damages. University Com-

puting Co. v. Lykes-Youngstown Corp., 564 F.2d 518, 535-45:

reh’g denied, SOS F.2d 1304 (Sth Cir. 1974): Vitro Corp. of

America v. Hall Chem. Co., 292 F.2d 678, 683 (6th Cir. 1961 ).

Thus, under a variety of legal settings, license fees have been

used to calculate damages.

While the government makes several arguments to support

its notion that the license fees overstate the value of the software

to the government, only one merits further discussion. Twelve

percent (12%) of INSLAW’s standard license fees pay for the

first year’s maintenance charge of the software. Since the

bankruptcy court did not force the parties to enter into a contract

and there is no dispute that INSLAW never provided this

service, the compensatory damage award should be reduced

accordingly. By the court’s calculation, twelve percent of the

license fees amounts to $655,200. It is by that amount that the

compensatory damages award should be reduced.

Finally, the government asserts that INSLAW is not en-

titled to attorneys’ fees. Section 362(h) is clear in its mandate

that any individual injured by a willful violation of the automatic

Stay “shall recover actual damages, including costs and attor-

neys fees.” 11 U.S.C. § 362(h). The bankruptcy court made an

award under the statutory authority of both § 362(h) and the “bad

faith” exception to the American Rule pursuant to the Equal

Access to Justice Act, 28 U.S.C. § 2412(b). See Alyeska

Pipeline Serv. Co. v. Wilderness Soc’y, 421 U.S. 240, 247 (1975)

(under the American Rule, each party must pay its own fees).

DOJ counters that § 362(h) does not apply for corporations and

that its conduct does not meet the bad faith test. As discussed

previously, a corporation can collect actual damages for the

violation of the automatic stay. Budger Service Co. v. Better

Homes of Virginia, Inc., 804 F.2d at 292-93) (“bankruptcy

courts acting through bankruptcy judges may enforce the sanc-

56a

tions of § 362(h) without reference to a finding of civil con-

tempt”). Consequently, the bankruptcy court was correct in

awarding attorneys’ fees to INSLAW. There is no need to reach

the question of whether the award was justified under the bad

faith exception of 28 U.S.C. § 2412(b).

CONCLUSION

In conclusion, the court has determined that the bankruptcy

court’s orders of July 20, 1987 and January 25, 1988 regarding

liability and damages against the United States for unlawfully

violating the automatic stay provision of the bankruptcy code,

11 U.S.C. § 362, by attempting to convert appellee’s pending

bankruptcy from a Chapter 11 reorganization to a Chapter 7

liquidation is AFFIRMED. The bankruptcy court’s order of

January 25, 1988 regarding liability of the United States for

unlawfully violating the automatic stay provision of the

bankruptcy code in phase I of the adversary proceeding (counts

I, I] and III) by exercising control over and proliferating the

implementation of PROMIS is AFFIRMED. The bankruptcy

court’s order of February 2, 1988 regarding compensatory

damages in phase I of the adversary proceeding (counts I, II and

II1) is MODIFI£D in accordance with this memorandum so as

to reduce the award by $655,200. Finally, the bankruptcy court’s

order regarding attorneys’ fees in adversary proceeding No.

86-0069 is also AFFIRMED.

/

/S/

WILLIAM B. BRYANT

SENIOR UNITED STATES

DISTRICT JUDGE

Date: November 22, 1989

57a

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

Civil Action Nos.

&8-0528-WBB 88-0696-WBB

88-0697-WBB 88-0698-WBB

UNITED STATES OF AMERICA and the

UNITED STATES DEPARTMENT OF JUSTICE,

Appellants,

V.

INSLAW, INC..

Appellee.

Case No. 85-0070

(Chapter 11)

IN RE:

INSLAW, INC., Debtor.

Adversary Proceeding

No. 86-0069

INSLAW, INC.,

Plaintiff,

v.

UNITED STATES OF AMERICA, and THE UNITED

STATES DEPARTMENT OF JUSTICE,

Defendants.

ORDER

In accordance with the memorandum filed this date, the

court has determined that the bankruptcy court’s orders of July

20, 1987 and January 25, 1988 regarding liability and damages

against the United States for unlawfully violating the automatic

stay provision of the bankruptcy code, 11 U.S.C. § 362, by

58a

attempting to convert appellee’s pending bankruptcy from a

Chapter 11 reorganization to a Chapter 7 liquidation is hereby

AFFIRMED); it is further

ORDERED that the bankruptcy court’s order of January

25, 1988 regarding liability of the United States for unlawfully

violating the automatic stay provision of the bankruptcy code in

phase I of the adversary proceeding (counts I, II and III) by

exercising control over and proliferating the implementation of

PROMIS is AFFIRMED; it is further

ORDERED that the bankruptcy court’s order of February

2, 1988 regarding compensatory damages in phase I of the

adversary proceeding (counts I, II and III) is MODIFIED in

accordance with this memorandum so as to reduce the award by

$655,200; and it is further

ORDERED that the bankruptcy court’s order regarding

attorneys’ fees in adversary proceeding No. 86-0069 is also

AFFIRMED.

/s/

WILLIAM B. BRYANT

SENIOR UNITED STATES

DISTRICT JUDGE

Date: November 22, 1989

59a

UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF COLUMBIA

Case No. 85-00070

(Chapter 11)

In re

INSLAW, INC.,

Debtor.

Adversary Proceeding

No. 86-0069

INSLAW, INC.,

Plaintiff,

we

UNITED STATES OF AMERICA AND THE UNITED

STATES DEPARTMENT OF JUSTICE,

Defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

(Counts I, II and III of the Complaint)

60a

TABLE OF CONTENTS

co rr ty, BR

PRG PW UUE 6 ks es 4 ok ae aes

II.

THE NATURE OF INSLAW’S BUSI-

NESS AND ITS DEVELOPMENT OF

ge or ene ere

A. ORIGINS OFINSLAW .........

B. FORMATION OF INSLAW AS A

“FOR-PROFIT” CORPORATION AND

THE DEVELOPMENT OF ITS PRO-

PRIETARY ENHANCEMENTS ....

C. THE NATURE OF THE PROPRIETARY

ENMANCEMENES 5.5552 ee ees

1. Data Base Adjustment ........

&. WA ee ee

3. The 32-Bit Architecture VAX

Version Of PROMIS ........

4. Additional Discrete PROMIS

a

INSLAW HAS CREATED USING PRI-

VATE FUNDS AN ENHANCED VER-

SION OF PROMIS THAT IS PROPRIE-

TARY TORNAW wee eee eee

A. INSLAW’S ACCOUNTING SYSTEM

DEMONSTRATES THAT INSLAW’S

CLAIMED CHANGES AND ENHANCE-

MENTS WERE CREATED USING

PRIVATE POD 6 we ee he

8la

84a

84a

III.

IV.

B.

c.

61la

INSLAW HAS DEMONSTRATED THAT

THE THREE MAJOR ENHANCEMENTS,

THE DATA BASE ADJUSTMENT

SUBSYSTEM, THE BATCH UPDATE

SUBSYSTEM AND THE 32-BIT ARCHI-

TECTURE VAX VERSION OF PROMIS,

WERE CREATED USING PRIVATE

FUNDS AND ARE PROPRIETARY

Pare 0 ee eee ee es

INSLAW HAS DEMONSTRATED THE

CREATION OF NUMEROUS INDIVI-

DUAL PROPRIETARY CHANGES AND

ENHANCEMENTS TO PROMIS USING

PRIVATE POMMEND oe 6 oe oe Cees

MADISON BREWER’S RELATIONSHIP

TO INSLAW AND THE ORIGINS OF HIS

BIAS AND LACK OF IMPARTIALITY

FOP ER ts

A. BREWER’S FIRING BY

PEE se oS ee ee ke

DOJ’S DECISION TO AUTOMATE USS.

ATTORNEY’S OFFICES WITH PROMIS

AND TO HIRE BREWER AS PROMIS

PROJECT MANAGER ...........

A.

B.

NATURE OF DOJ’S CASE-TRACKING

FU OS a es ee ey eee

INSLAW’S RECOMMENDATION TO

USE MICRO-COMPUTERS RATHER

THAN WORD PROCESSORS IN THE

EXECUTIVE OFFICERFP ......

DOJ’S HIRING OF BREWER AS

PROMIS PROJECT MANAGER ... .

9la

95a

102a

102a

108a

108a

110a

112a

62a

D. BREWER’S ORGANIZATION OF

DOJ’S PROMIS PROJECT TEAM ... 115a

V. INSLAW GIVES DOJ NOTICE OF ITS

OWNERSHIP OF AND PROPRIETARY

RIGHTS TO ENHANCED PROMIS .... = 118a

A. INSLAW GIVES NOTICE OF ITS

PROPRIETARY CLAIMS ....... 118a

B. DOJ’S CONFUSION OVER DATA

_s Eged BE a ae 120a

C. NATURE AND TERMS OF THE

PROMIS CONTRACT ......... 124a

VI. BREWER’S STRATEGY FOR THE

RUINATION OFINSLAW ......... 127a

A. BREWER INFORMS HIS EOUSA/

PROMIS PROJECT TEAM ABOUT

HIS OPINIONS OF HAMILTON... _—_'127a

B. INSLAW’S INITIAL PROBLEMS

Do ee ea ee 129a

1. INSLAW’s Decision To Market

Enhanced PROMIS And Brewer’s

Response To These Plans ...... 129a

2. Morris’ Recusal Of Brewer On The

Proprietary Enhancements Issue .. 134a

3. Brewer’s Continued Involvement In

DOJ’s Consideration Of The Proprie-

tary Enhancement Issue ....... 137a

4. Brewer’s Strategy For The Ruination

oF es ee eer a 139a

63a

C. BREWER’S RENEWAL OF THE PRO-

PRIETARY ENHANCEMENTS ISSUE

AND TERMINATION OF ADVANCE

co | a 144a

Vil. BREWER’S USE OF MODIFICATION 12

“TO GET INSLAW’S GOODS” ...... iS0a

A. NEGOTIATION OF MODIFICA-

WE ae a a ee ee ee 150a

B. BREWER, RUGH AND VIDENIEKS

STY MIE INSLAW’S EFFORTS TO

SUBSTANTIATE PROPRIETARY

ENHANCEMENTS ......+.-.. 157a

Vill. DOJ]Ss COMMITMENT TO CONSIDER

REPLACING WORD PROCESSING

MACHINES WITH MICROCOMPUTERS;

DOJ’S DECISION INSTEAD TO ATTEMPT

TO TERMINATE THE WORD PROCESSING

PORTION FOR DEFAULT AND ITS ULTI-

MATE DECISION TO TERMINATE “FOR

CAPE se ek ee eee 163a

IX. THE EFFORTS OF ELLIOT RICHARDSON

AND OTHERS TO OBTAIN AN INDEPEN-

DENT AND IMPARTIAL PROCESS FOR

CONSIDERATION OF INSLAW’S

eo re en ee ee 167a

A. RICHARDSON MEETS WITH ASSIS-

TANT ATTORNEYS GENERAL FOR

ADMINISTRATION LIOTTA AND

WALLACE IN AN ATTEMPT TO RE-

CEIVE UNBIASED CONSIDERATION

OF INSLAW’S COMPLAINTS .... 167a

_

64a

B. AT JENSEN’S SUGGESTION,

RICHARDSON AND OTHERS

ATTEMPT TO RESOLVE THE DOJ

BIAS WITH ASSOCIATE DEPUTY

ATTORNEY GENERAL JAY

Eo ee ee

C. INSLAW’S “LAST DITCH EFFORT” TO

OBTAIN FROM JENSEN AN INDEPEN-

DENT CONSIDERATION AND INVES-

TIGATION OF DOJ’S BIAS AGAINST

169a

Se Cs Were race SEAS Pati 172a

JENSEN’S BIASED ATTITUDE AGAINST

INSLAW AND HIS INDIFFERENCE TO

INSLAW’S REPEATED COMPLAINTS OF

MISCONDUCT BY OTHER DOJ

CPO ik ke lee oe ee a ee 174a

A. DEPUTY ATTORNEY GENERAL D.

LOWELL JENSEN HAD A PREVIOUSLY

DEVELOPED NEGATIVE ATTITUDE

ABOUT PROMIS AND INSLAW .. . 174a

B. JENSEN’S CLOSE INVOLVEMENT IN

THE PROMIS CONTRACT AS RANKING

DOJ OFFICIAL ON THE PROMIS OVER-

SIGHT COMMITTEE AND IMMEDIATE

ORGANIZATIONAL SUPERIOR OF THE

EXECUTIVE OFFICE DURING THE PER-

[OD OF BREWER’S MISCONDUCT

AGAINST INSLAW .......... 175a

C. DURING THE PERIOD OF THE AUTO-

MATIC STAY, JENSEN WAS REPEATED-

LY MADE AWARE OF INSLAW’S COM-

PLAINTS ABOUT BREWER BUT TOOK

NO CORRECTIVE ACTION ...... 178a

XI.

XII.

XIII.

XIV.

65a

DOJ’S FAILURE TO INVESTIGATE AND

REMEDY INSLAW’S CLAIMS OF BIAS

PRIOR TO THE BANKRUPTCY .....

DOJS’S UNLAWFUL AND IMPROPER

CONDUCT CONTINUES UNABATED

THROUGHOUT THE PERIOD OF

a 8g | i re

DO!’S BAD FAITH NEGOTIATIONS AND

OTHER IMPROPER CONDUCT DURING

THE PERIOD OF BANKRUPTCY

A. DOJ’S CONTINUED IMPROPER IM -

PLEMENTATION AND USE OF

PROMIS SOFTWARE ..... 2.35.

B. THE EFFECTS OF BIAS ON THE 1985

POLI E EP POI cs od ees

DOJ*S CONTINUED FAILURE TO INVES-

TIGATE CLAIMS OF BIAS DURING THE

PERIOD OF BANKRUPTCY .......

CLRNCLAISM Ir EPR eee es

I.

IT.

HT.

INSLAW’S PROPRIETARY ENHANCE-

MENTS ARE ENTITLED TO PROTEC-

+70 AS TRADE SECRETS oo ote...

DOJ UNLAWFULLY USED INSLAW’S

PROPRIETARY TRADE SECRET EN-

HANCEMENTS IN VIOLATION OF THE

AUTOMATIC STAY .........+.:.

DOJS’S FRAUD IN INDUCING INSLAW TO

ENTER MODIFICATION 12, THE EFFECTS

OF WHICH HAVE NOT BEEN CURED BY

DOJ, CONSTITUTES A FURTHER VIOLA-

TION OF THE AUTOMATIC STAY

180a

186a

190a

190a

193a

196a

205Sa

205a

206a

209a

22fa

IV.

VI.

66a

DOJ’s FAILURE TO CURE THE CONTIN-

UING EFFECTS OF BIAS AGAINST

INSLAW FURTHER VIOLATES THE

AUTGRAR ET EPAE wv ee ha ewe

INSLAW IS ENTITLED TO PERMANENT

SOSRIETG REVEL MINE + 54-5 48 SES

INSLAW IS FURTHER ENTITLED TO ITS

COSTS AND ATTORNEYS’ FEES

67a

INTRODUCTION

Those claims for relief as set forth in Counts I, I] and III of

the Complaint herein, as modified by this Court’s Order dated

July 20, 1987, having come before this Court for trial during the

period July 20 through August 5, 1987; the parties hereto having

submitted extensive evidence, legal briefs, argument and

proposed findings of fact and conclusions of law; and this Court

having very carefully taken into consideration all of these sub-

missions and having also thoroughly weighed all of the

evidence, and having determined that the relevant legal prin-

ciples involving non-bankruptcy law are clear, simple, basically

undisputed and not requiring the expertise of any specialized agency,

makes the following findings of fact and conclusions of law.

These findings of fact are based upon a very careful

analysis and weighing of all the evidence presented, and after

consideration and review of the proposed findings, and replies

thereto, submitted by each party. In making these findings, the

Court heavily relies upon its very close observation of the

witnesses who testified in this matter, and the credibility of those

witnesses based upon the Court’s close observation of their

demeanor, expressions and the inherent probability or im-

probability of their testimony in light of the documentary

evidence and other known facts. The Court also finds that al!

the facts hereinafter found have been established by at least clear

and convincing evidence. In some instances the evidence is

overwhelming or even irrefutable. Further reference is made to

the statements made from the bench in open court on Septem-

ber 28, 1987, which are incorporated herein.

68a

FINDINGS OF FACT

I. THE NATURE OF INSLAW’S BUSINESS AND

ITS DEVELOPMENT OF PROMIS

A. ORIGINS OF INSLAW

1. Plaintiff INSLAW, Inc. (““INSLAW?”), a debtor-in-

possession currently undergoing reorganization under Chapter

11 of the Bankruptcy Code, is a corporation organized and

operated under the laws of the State of Delaware, with its

principal place of business in the District of Columbia. It is in

the business of designing, manufacturing, marketing and main-

taining software systems for use on computers. (Answer 911)!

2. In 1973, William Hamilton and Dean Merrill founded

the Institute for Law and Social Research (“Institute”) as a

not-for-profit corporation. (Hamilton, T. 85; Merrill, T. 747-

748) Thereafter, the Institute focused on the development of

computer software case management programs for the automat-

ion of law enforcement offices, including a primitive version of

the computer software which eventually was made available to

DOJ and is at issue in this proceeding. (Answer 910) During

the 1970s, the Institute obtained a number of cost-plus grants

and cost-plus contracts largely from the Law Enforcement As-

sistance Administration (“LEAA”) of DOJ, for the development

and implementation of such software automation programs.?

(Hamilton, T. 86; Merrill, T. 752)

Citation to the record will be indicated as follows: Answer __ ;

Plaintiff's Exhibit(“PX”) __; Defendants’ Exhibit (“DX”); trial testimony

(e.g., Hamilton, T.___); and deposition testimony (e.g., PX ___ [Name] at

a. -

> The Institute’s grants and contracts with LEAA were often competi-

tively awarded, and the grants were administered by LEAA in the same

fashion as were the contracts. (Hamilton, T. 86) This method of contracting

was largely indistinguishable from the Executive Office contract which

INSLAW and DOJ entered into in March 1982. (Hamilton, T. 89) Many of

the same DOJ and LEAA Audit staff personnel who worked on the grants

aE

69a

3. In the 1970s, the Institute developed a version of a

software product, known as the Prosecutor’s Management In-

formation System (“old PROMIS”), for automating certain law

enforcement record keeping and case-monitoring activities

(Answer 910). With the exception of the Superior Court

Division of the U.S. Attorney’s Office for the District of Colum-

bia, this software system was focused on assisting state and local

prosecutors. (Hamilton, T. 113; Merrill, T. 752) Accordingly,

the contract between the Executive Office of U.S. Attorneys

(““EOQUSA”) and Inslaw in March 1982, which is the subject of

this litigation, was the first national effort to implement

PROMIS in U.S. Attorney’s offices. (Hamilton, T. 113) How-

ever in 1979, the Institute conducted an EOUSA sponsored

feasibility study to determine the best approach for improving

the case management and information systems used by the

United States Attorneys. The study identified a need for more

information about the United States Attorneys’ activities.

(DX 8, Appendix A, p. 3; Hamilton, T. 244) That feasibility

study and a “pilot project” (see F.F. § 8, below) had

demonstrated the workability of the nationwide effort.

4. Originally, old PROMIS was a limited function

software package that permitted rudimentary case tracking func-

tions using computer hardware. (Merrill, T. 759; PX 9, 21) It

was a “batch” sofiware system, i.e., limited in hardware applica-

tions and user accessibility, which was redesigned and

reprogrammed in 1976 to become an “on-line real time” system,

a change that permitted greatly expanded usage of minicom-

puters as well as instantaneous updating and retrieval of case

and contracts for the Institute also played the same role on the Executive

Office contract with INSLAW and there was very little, if any, difference in

the auditing procedures used. (Hamilton, T. 89-90; Schacht, T. 2450) Not-

withstanding the testimony of Robert Whitely for DOJ, the record is over-

whelmingly consistent with INSLAW’s assertion that no differences existed

in the contract/grant administration for INSLAW as compared to the con-

tract/grant administration for the Institute. (Schacht, T. 2480-2481)

70a

files. (PX 21) PROMIS developed and was improved over the

entire decade of the 1970s. The software relevant to this adver-

Sary proceeding are the Executive Office of U.S. Attorneys

(“EOQUSA”) pilot version (which was in the public demain in

1982; see F.F. 1 8 below) and the enhancements financed by

INSLAW’s contract with DOJ’s Bureau of Justice Statistics

(“BJS”); see F.F. 111 below.

5. Old PROMIS, as it existed in or about 1982, was

designed to provide the user with a basic system of storing,

managing and retrieving certain standard types of information

which would be applicable to every user. (PX 8; PX 21) How-

ever, and unlike most other information management software

packages, Old PROMIS further permitted each individual user

to tailor the software to store additional types of data to serve

the user's unique needs. (PX 21) Moreover, Old PROMIS

permitted each user to design the look and the contents of the

video display screens used to enter and retrieve data, and the

look and contents of hard copy paper reports. (PX 21) Old

PROMIS was therefore designed to offer great flexibility to a

wide variety of users by permitting the software system to adapt

to the recordkeeping needs of each user rather than vice versa.

(PX 21)

6. Old PROMIS was created using the computer Com-

mon Business Oriented Language, or (“COBOL”), in a version

written by the American Nationa! Standards Institute. (PX 21)

The purpose of writing PROMIS in such a standard language

was to permit the PROMIS software to be easily converted or

“ported” to run on numerous brands of computers which are

otherwise incompatible. (PX 21)

7. Because the Institute designed Old PROMIS to be

inherently versatile, adaptable and portable, Old PROMIS met

with great user acceptance and success in those jurisdictions and

offices that had installed PROMIS. (Hamilton, T. 106) More

particularly, LEAA designated PROMIS as an exemplary

———"-rrsté‘é’”~S™”CO

Tia

project and encouraged state and local governments to consider

implementing PROMIS. (Hamilton, T. 106; Gizzarelli, T. 468)

8. The EOUSA decided to test the concepts proposed in

the feasibility study by implementing a “pilot project” beginning

in October of 1979. (Hamiiton, T. 86) In essence, this pilot

program involved the extension of the state/local criminal ver-

sion of cid PROMIS to encompass civil litigation and legal

process debt collection functions and the installation cf the

extended system on government-furnished minicomputers in

two U.S. Attorney offices: the District of New Jersey and the

District of Southern California (San Diego). (PX 9) Due to the

Government’s delay in procuring mini-computers, both of these

sites initially “time-shared” the Institute’s computers using

remote data entry terminals and printers. (PX 9) In the summer

of 1981, after a year or more of time-sharing, PROMIS was

installed on each District’s “Prime” brand of mini-computer.

(PX 9)

9. An adjunct of the Institute’s pilot program was the

development of PROMIS-like case control functions on Lanier

word processing equipment in two smallez U.S. Attorneys of-

fices in 1981 - the Southern District of West Virginia and the

District of Vermont. (DX 8, Appendix A, pp. 3-4; Hamilton,

T. 245; PX 9)

10. The pilot project was evaluated by an independent

contractor and determined to be the most cost effective opera-

tional alternative. Thus, DOJ made the decision to install the

system, as envisioned by the pilot project, on a nationwide basis

in the remaining 89 offices. (PX 8 [Bates Stamp 022708];

DX 8, Appendix A, p. 5)

11. In 1979, LEAA awarded a three-year-cost-plus con-

tract to the Institute for PROMIS upkeep and upgrade services.

a

J

Of the 94 active United States Attomeys’ offices, four were serviced

as part of the pilot project and one (the District of Columbia) was handled as

a separate project. (DX 8, Appendix A, p. 5)

72a

(PX 21) In 198i, when LEAA was liquidated, the three year

PROMIS support contract was assigned to DOJ’s newly created

Bureau of Justice Statistics (“BJS”) which lacked funds for the

final year of the contract. (PX 21; Hamilton, T. 256-258)

EOUSA, through an interagency transfer of funds, allocated

over $500,000 to this contract in order to finance the develop-

ment of certain enhancements requested by EOQUSA. (PX 21)

The enhancements funded by the EOUSA through the BJS

contract were added to the public domain software for use in the

1982 implementation contract.

12. The BJS contract, in essence, contained a laundry, or

“wish” list of enhancements DOJ wanted to be made to Old

PROMIS. (Hamilton, T. 257-258; Deroy, T. 2460-2462) DOJ

chose to determine the priority for the enhancements it desired

and INSLAW agreed to go forward to see how much could be

done on a cost-plus basis. (Hamilton, T. 258; Deroy, T. 2460-

2462)

INSLAW claims that: (1) Because the Executive Office

refused to transfer $125,000 to the BJS contract needed to

complete the third year of the contract, INSLAW agreed to

complete the five enhancements as part of the 1982 Executive

Office contract without additional compensation for develop-

ment costs. (Hamilton, T. 114) (2) INSLAW completed five

enhancements under the BJS contract but never received from

DOJ full reimbursement of development costs for these enhan-

cements. (Hamilton, T. 257-258) (3) Notwithstanding that DOJ

failed to pay INSLAW’s actual full costs for development of the

five BJS enhancements, INSLAW does not claim any of them

among its privately-financed proprietary enhancements.

(Hamilton, T. 114)

In response, DOJ contends as follows: (1) The implication

that DOJ somehow refused to pay INSLAW money owed to it

for development of the BJS enhancements is untrue. (2) As it

was required to do so by contract, INSLAW notified DOJ of a

73a

potential cost overrun of $125,000 on the BJS contract. (3) DOJ,

as government agencies are required to do in cost-type contracts,

considered whether it wanted to endure the cost overrun or avoid

it by taking some action such as reducing the statement of work.

(4) When it refused to agree to approve the additional work,

INSLAW agreed to perform the work as part of the 1982

implementation contract at no additional cost to the government

(Hamilton, T. 259; Brewer, T. 1640). (5) That agreement

recognized that INSLAW believed that implementation costs

would be reduced and that no additional funding would be

necessary. Modification 6 to the 1982 implementation contract

specifies the enhancements to be made and states that the

$110,000 required for those enhancements be taken from other

contract tasks. (PX 17)

It is not necessary for this Court to resolve this $125,000

dispute between the parties at this time.

B. FORMATION OF INSLAW AS A “FOR-PROFIT”

CORPORATION AND THE DEVELOPMENT

OF [TS PROPRIETARY

ENHANCEMENTS

13. In 1980, the Institute received notice that funding for

Old PROMIS through LEAA would be extinguished beginning

in May 1981. (Hamilton, T. 86; Merrill, T. 759) In order to

maintain the existing PROMIS user installations, as well as to

expand the use of Old PROMIS, the Institute determined to

become a for-profit corporation that could market its expertise

and software to current and potential PROMIS users. (Hamil-

ton, T. 86; Merrill, T. 759) In particular, this market plan

focused upon local district attorney's offices which previously

had received free service from the Institute at the expense of

LEAA. (Hamilton, T. 86)

14. In connection with this market plan, INSLAW

retained Roderick Hills, Esquire for advice on how to proceed

with implementing the plan. (Hamilton, T. 86) As part of this

74a

assignment, Hills and Hamilton apprised Charles B. Renfrew,

Deputy Attorney General of DOJ, of INSLAW’s plans to invest

private funds for enhancements to PROMIS for creation of

proprietary, fee-generating products which would be sold to

anyone having an interest in such products. (Hamilton, T. 87-

88, 264-265; Merrill, T. 763-775) In addition, Hills informed

Renfrew that INSLAW intended to make enhancements to the

Old PROMIS software and to assert a proprietary interest in the

enhancements financed through private funds. (Hamilton,

T. 100; Merrill, T. 763-764) During this discussion, Hills asked

Renfrew if DOJ would have any problem with INSLAW’s

plans. (Harnilton, T. 88, 264-265) Renfrew responded that

DOJ had no plans to continue to finance the upkeep and upgrade

of PROMIS and DOJ welcomed, and had no problems what-

soever with, INSLAW’s plans in this regard. (Hamilton, T. 88)

15. In January 1981, INSLAW was organized and pur-

chased the assets of the Institute. (Answer 110; Hamilton, T. 84)

Since its inception in 1981, William A. Hamilton has been the

President and Chairman of the Board of INSLAW. (Hamilton,

T. 83)

16. In an effort to obtain the private funding necessary

for the survival of INSLAW and PROMIS, in May 1981,

INSLAW began selling its software upkeep and upgrade ser-

vices to its existing user base pursuant to annual flat fee con-

tracts. (Hamilton, T. 99; Merrill, T. 816) These funds were

combined with investments of the company’s equity capital and

contract monies from private companies in an effort to develop

enhancements to Old PROMIS. (Hamilton, T. 100-101, 104)

17. INSLAW had two motives in going forward with

privately financed enhancements of PROMIS. (Hamilton,

T. 109) First, the founders of INSLAW had invested a number

of years in the development of PROMIS and did not want to see

that effort wasted. (Hamilton, T. 109) Second, INSLAW

75a

wanted to make a profit from its efforts to enhance the PROMIS

software. (Hamilton, T. 109)

18. INSLAW also entered into a number of contracts with

individual private clients to create new and important functional

enhancements to PROMIS. (Hamilton, T. 102-104) These en-

hancements were then made available to other PROMIS users

on a license basis; input and experience developed from this

effort was used by INSLAW to further modify and improve the

Old PROMIS system over and above the system created under

the LEAA funding. (Merrill, T. 759-761)

19. As INSLAW’s expert testified from his twenty-five

years of experience in the software industry, itis common within

the software industry for a private corporation (i) to take public

domain software created using public funds, (ii) then to enhance

the public domain software using private funds and (iii) finally

to market the resulting product as a proprietarily enhanced

version of the software. (DeLutis, T. 1299-1300; PX 233)

20. INSLAW also marketed enhanced PROMIS success-

fully to additional federal government offices outside of the

Department of Justice, non-federal government offices, and

private non-government clients. (Hamilton, T. 98-99) These

additional users permitted INSLAW to further enhance

PROMIS through greater revenues, additional user input and

private funding for particular changes. (Hamilton, T. 98-99;

Merrill, T. 759, 761)

21. Significantly, INSLAW also began to change the

structure of PROMIS by extending the basic concept to other

uses. (Hamilton, T. 98-99) INSLAW thus created and began

to market new PROMIS-based packages such as JAILTRAC for

correctional institutions, DOCKETRAC for courts,

MODULAW for insurance companies and private law firms,

and CJIS for county-wide justice administration. (Holton,

T. 1125; Merrill, T. 816-817) While each of these other ap-

plications contains some specific coding that relates to the

’

76a

particular user needs, PROMIS and these derivative application

packages share much of the same COBOL software code. (Hol-

ton, T. 1125) Thus, generic enhancements to any of the pack-

ages benefit all of these applications. (Merrill, T. $16-817, 819)

22. Through its experience with PROMIS users, IN-

SLAW further modified PROMIS pursuant to the suggestions

of the in-house staff of INSLAW. (Merrill, T. 761) A number

of enhancements were funded through INSLAW’s profits and

research and development costs, which became part of the

Enhanced PROMIS — “PROMIS ‘82” — that INSLAW began

to market aggressively to new users beginning in the Fall of

1982. (Hamilton, T. 104-105; Merrill, T. 759)

C. THE NATURE OF THE PROPRIETARY

ENHANCEMENTS

23. In essence, INSLAW made two types of enhance-

ments to PROMIS: first, changes “sewn inside” the existing old

PROMIS code which permit more efficient, user-friendly and

less defect-prone operation of the software; and second, changes

“hooked-on” to the PROMIS code which add new functionality.

(Hamilton, T. 102)

24. Enhanced PROMIS consists of a number of subsys-

tems, i.e., packages that are themselves comprised of a number

of programs or modules. (Holton, T. 1122-1124; PX 225b)

Two of these subsystems, the Data Base Adjustment subsystem

and the Batch Update subsystem, have been demonstrated by

INSLAW to have been developed using private funds, are

proprietary to INSLAW and were not deliverable under the

EOUSA contract. (Hamilton, T. 125, 2571-2575; See F.F. 9

69 & 73 below) The Data Base Adjustment and Batch Update

subsystems are “hook-on” systems that are independent of the

remainder of PROMIS. (Holton, T. 1123-24) Although they

perform additional useful and desirable functions within

PROMIS, they are not themselves required to make PROMIS

function, and they could have been removed from PROMIS

77a

without preventing the operation of the remaining PROMIS

software system. (Holton, T. 1123-1124)

1. Data Base Adjustment

25. The Data Base Adjustment subsystem consists of

nine programs. (Holton, T. 1126; Hamilton, T. 2589) Data

Base Adjustment is used to modify the structure of a PROMIS

data base that has already been in use, without causing any loss

of data that would ordinarily preclude structural modifications

to existing databases. (Holton, T. 1126-27) For example, if the

information in a phone book is considered as a record in a data

base, the existing structure of that record would include the

name, address and telephone number for each listing. (Holton,

T. 1126) If one then wished to expand the structure of ihat

record by including zip codes, the Data Base Adjustment sub-

system would be useful in altering the structure of the existing

phone book data base to permit entry of zip codes for both new

and old listings. (Holton, T. 1126-27)

26. Restructuring of a database permits the user to ac-

commodate needs for additional information, work flow pattern

changes, changes in office organizational structure, and a greater

user sophistication in use of office automation. (Hamilton,

T. 2577-2578) It is INSLAW’s experience that PROMIS users

typically will request retailoring perhaps as often as every 12-18

months, which will require the use of the Data Base Adjustment

subsystem. (Holton, T. 1120-21; Hamilton, T. 2576-2578)

DOJ may be — or may not be — atypical: Mr. Rugh testified

that the United States Attorneys have never needed to restructure

their PROMIS data bases. (Rugh, T. 2627-28) However, this

Court has found Mr. Rugh’s testimony to be unbelievable. (See

F.F. 1 398 below). It is entirely possible that individual U.S.

Attorneys’ offices have wanted to restructure their PROMIS

data bases and have been prevented from doing so by EOUSA.

(See F.F. 1 40 below)

78a

27. Although specific-need programs for specific

restructuring of particular data bases could be created, the

advantage of the PROMIS Data Base Adjustment subsystem is

that it is a generic, reuseable package that requires little coding

work by the programmer for each new adjustment. (Holton,

T. 1126-27) Without Data Base Adjustment, users who desired

to improve the structure of their data base would be required for

cach specific need to engage in weeks, perhaps months, of hard

coding, testing and debugging of a program that would alter only

one specific existing data base to one specific new data base

structure. (Holton, T. 1127)

28. Although there were two programs that comprised an

earlier version of the Data Base Adjustment package, they were

not the same as any of the programs that comprise the nine Data

Base Adjustment subsystem programs that were provided to the

Department of Justice. (Holton, T. 1172-75, 2533, 2563) Un-

like the Data Base Adjustment subsystem provided to DOJ by

INSLAW in 1985, the two early programs did not generate code

and did no comparison of the old and new database designs.

(Holton, T. 1173-74) The nine-program Data Base Adjustment

subsystem performs numerous additional functions not present

in the early version of Data Base Adjustment. (Holton, T. 1173-

74)

29. The two earlier programs are not in or among the

nine-program Data Base Adjustment subsystem that INSLAW

has claimed as proprietary in this litigation. (Holton, T. 1174-

75; Hamilton, T. 125)

30. The nine programs in the Data Base Adjustment

subsystem are in the possession and control of the government.

(Gaghiardi, T. 2069; Hamilton, T. 2607-2609, 2589: Holton.

T. 2510; DX 212 [Holton] at pp. 210-212; see, however, Hol-

ton, T. 2530)

31. Data Base Adjustment is an extremely useful tool for

PROMS users, and is a very valuable enhancement to PROMIS.

794

(DeLutis, T. 1281-1282: Holton, T. 1124, 1127; Hamilton,

T. 2576-2578) Even Defendant’s expert conceded that Data

Base Adjustment is an enhancement to PROMIS, and believed

that any commercially viable software program should have the

capability of adjusting the data base. (Gaglhiardi, T. 2073-2074)

Data Base Adjustment was not required to be delivered under

the EOUSA (1982) Contract. (Hamilton, T 125, 2607-2608;

Holton, T. 1123)

2. Batch Update

32. The Batch Update subsystem permits 4 user to add

computerized information to an existing database structure in

batches (1.e., without requiring the tedious input of information

one record at a time through keyboards at video terminals), ina

cost-effective manner, and without incurring the concomitant

increased risk of introducing human data entry errors into the

database. (Holton, T. 1128-1] 129; DeLutis, T. 1280-1281-

Hamilton, T. 2572-2574)

33. Batch Update is a very significant feature of PROMIS

"hat, according to defendant’s expert, must be present in order

even to begin to enter the marketplace. (Gagliardi, T. 2644-

2045) Batch Update is a useful tool for PROMIS users and is a

valuable enhancement to PROMIS. (DeLutis, T. 1280-81)

Batch Update was not required to be delivered under the

EOUSA (1982) Contract. (Hamilton, T. 2571-2575: Holton.

T. 1123)

3. The 32-Bit Architecture VAX Version

Of PROMIS

34. INSLAW also created between June and September

of 1981, using private funds, a third major enhancement to

PROMIS, which was the redesign and porting of the PROMIS

software to run on the 32-bit architecture VAX minicomputer

manufactured by Digital Equipment Corporation. (Holton, T

1132) A software “port” is the process of converting an existing

software package to enable it to run on different brands and

80a

models of computers. (Holton, T. 1132) The earlier versions

of PROMIS ran on other Digital Equipment Corporation com-

puters, known as PDP 11/70, as well as on computers sold by

IBM, Wang, Honeywell and Burroughs. (Holton, T. 1133;

DeLutis, T. 1273-1274)

35. In 1981, INSLAW noted that Digital Equipment Cor-

poration was replacing its 16-bit architecture PDP line of com-

puters with the newer, state-of-the-art VAX line. (Holton, T.

1132) Because the VAX computers offered significant tech-

nological advantages over the PDP line, including 32-bit ar-

chitecture as opposed to 16-bit architecture, increased

work-in-storage space and faster input/output for processing of

information — differences as significant as the difference be-

tween a propeller-driven airplane and a jet — INSLAW made a

Strategic decision to stay abreast of the technology dy porting

the entire PROMIS system from the 16-bit PDP to the 32-bit

VAX “environment.” (Holton, T. 1131-33; DeLutis, T. 1274-

1280)

36. The development of a version of PROMIS to run on

VAX minicomputers was a very valuable enhancement to

PROMIS in terms both of INSLAW’s need to stay abreast of the

market and of INSLAW’s customers’ need and desire for faster,

more capacious products. (DeLutis, T. 1274-1280)

37. The VAX version of PROMIS subsequently was used

by INSLAW to provide time-sharing facilities to ten United

States Attorneys’ Offices, pending selection and installation by

the government of on-site computer equipment. (Holton,

T. 1254)

38. Whereas the “base” or “master” version of PROMIS

until 1980 ran on 16-bit architecture PDP 11/70 computers, the

32-bit VAX version in about 1981 became the base or master

version of PROMIS that was then used to do further develop-

ment and maintenance work to PROMIS. (Holton, T. 1133-34)

| — -

Sla

39. Although the 1982 contract did not prescribe the

manner in which the contractor was to create the Prime version

of PROMIS to be delivered to the government, and indeed DOJ

had not yet chosen the Prime computer hardware until long after

the contract had been entered into, INSLAW in fact used the

VAX version of PROMIS to create the version of PROMIS that

ran on the Prime computers selected by the government. (Hol-

ton, T. 1250-51; Hamilton, T. 173) INSLAW used the VAX

version rather than the earlier Prime version developed by

INSLAW during the Executive Office “pilot project” contract,

because the differences between the new COBOL compiler on

the Prime computers selected by the government and on the

VAX were less significant than the differences between the

COBOL compilers in the new and old models of the govern-

ment-furnished Prime minicomputers. (Holton, T. 1250)

40. Both the major enhancements as well as the in-

dividual changes and enhancements to PROMIS are licensed by

INSLAW to its current users. (Merrill, T. 760-761; Hamilton,

T. 173) INSLAW has had requests from individual United

Siates Attorney ’s Offices to obtain the latest additional PROMIS

enhancements, including a request from the United States

Attorney's Office for the Southern District of New York which

wishes to obtain from INSLAW its most up-to-date enhance-

ments to PROMIS created by INSLAW since the end of the

Executive Office contract in March 1985. (Merrill, T. 761-762)

4. Additional Discrete PROMIS

Enhancements

41. Anumber of the enhancements to PROMIS improved

the Old PROMIS systems by making the software more efficient

and user-friendly, and adding new functionality. (Hamilton,

T. 102-103) Certain enhancements, for example, provided in-

formation to the user to assist in operation of PROMIS or

diagnosis of errors encountered in entering or retrieving data.

(Holton, T. 1175, 1215-1219; DeLutis, T. 1285) Other enhan-

82a

cements provided the user with the ability to perform tasks more

quickly, either by structuring the on-screen processes to perform

additional functions or by streamlining the amount of code so

as to allow the program to run faster. (Hamilton, T. 102-103;

Holton, T. 1215-1216, 1219; DeLutis, T. 1285)

42. All of these enhancements became part of the en-

hanced PROMIS software that INSLAW sought to market to

new users and to provide through maintenance updates to exist-

ing PROMIS users that had entered into maintenance contracts

with INSLAW. (Holton, T. 1126-1134; Hamilton, T. 108-109)

43. These enhancements identified by INSLAW were

created from private, non-federal funds expended by INSLAW

for software enhancements from May of 1981 through March

of 1985. (Ling, T. 1065-1066, 1073-1074, 1080; Gibson,

T. 2245-2246, 2251-2252) The total spent by INSLAW during

this period for software enhancements of all kinds was more than

$8.3 million. This figure has been verified by an audit per-

formed by DOJ’s staff auditors. (Gibson, T. 2245-2246, 2251-

2252) Although INSLAW’s accounting system does not permit

the identification with specificity of the cost of each particular

enhancement, INSLAW had during that same time period ap-

proximately $13 million in funds from private sources that were

available and could have been used to perform these and other

software enhancements. (Ling, T. 1071, 1074)

44. INSLAW took a number of steps to maintain the

confidentiality of the software that was created after INSLAW

came into being. (Hamilton, T. 105) First, INSLAW required

all of its employees to sign confidentiality and non-disclosure

agreements. (Hamilton, T. 105) Second, the enhancements to

PROMIS were created under maintenance contracts and private

contracts that expressly provided that all proprietary rights to all

of the enhancements were held exclusively as the property of

INSLAW. (Merrill, T. 762-763; Hamilton, T. 104; PX 236-

83a

236a)* Users were further subject to restrictions precluding

disclosure or dissemination of these enhancements in the ab-

sence of a license from INSLAW. (Merrill, T. 762-763; Hamil-

ton, T. 105; PX 236-236a) Finally, INSLAW copyrighted its

software and documentation. (Hamilton, T. 105)

45. The PROMIS enhancements were determined by IN-

SLAW to be privately financed and proprietary to INSLAW by

analyzing the documentation of each enhancement that is con-

tained in the source code of the programs themselves, the forms

used by INSLAW to report and record software changes, and

the timesheets of the employees who performed the program-

ming work on each enhancement. (Holton, T. 1175-1177) The

method used by INSLAW to track software enhancements and

to account for employee time is wholly reasonable within the

standards used throughout the industry, and is, in many respects,

exceptionally good.° (DeLutis, T. 1287-1288, 1297-1298) On

the basis of the foregoing and the record as a whole, this Court

finds that the enhancements that INSLAW deveioped either

Shortly after starting its privately-financed enhancements of PROMIS

in May 1981, INSLAW discovered that the language of certain of its

contracts did not adequately protect its proprietary rights. (Hamilton, T. 292-

293} Several months after May 1981, this contract language was changed to

offer INSLAW the protection that it desired. (Hamilton, T. 293) Moreover,

because these peopie subscribed in the following year under a more restric-

tive contract under which all the enhancements had been commingled this

problem was resolved. (Hamilton, T. 293)

Although this Court did not and need not rely upon the following

comparison in reaching this finding, the Court takes notice that, at a hearing

on November 3, 1987 concerning the claims of SG Systems, Inc. and SIR

Corp. against United Press international, Inc., in Case No. 85-00257,

employee timesheets used by those two computer software corporations were

introduced into evidence and relied upon by this Court in its holding granting

the full relief requested. Mr. Siok (“Si”) H. Go is president of both corpora-

tions, has 20 years’ experience in computer software, including 9 years’

employment with Univac, and has implemented software systems for the

New York Stock Exchange and Banker Ramo Corp. Comparison of the

employee timesheet form used by Mr. Go’s two corporations, for Mr. Go

a

84a

with private funds, or with a combination of private funds and

under government contracts specifically permitting INSLAW to

retain private rights, were not in the public domain but were

INSLAW'’s private property.

Il. INSLAW HAS CREATED USING PRIVATE

FUNDS AN ENHANCED VERSION OF

PROMIS THAT IS PROPRIETARY TO

INSLAW

A. INSLAW’S ACCOUNTING SYSTEM

DEMONSTRATES THAT INSLAW’S

CLAIMED CHANGES AND ENHANCE-

MENTS WERE CREATED USING

PRIVATE FUNDS

46. INSLAW’s accounting system tracks costs relating

to software development according to unique four-character

charge codes. (Ling, T. 1054; Gibson, T. 2231) The first two

characters of this charge code identify the project for which the

work is being performed and to which the time is being charged;

the second two characters identify a particular task within that

overall project. (Gibson, T. 2231)

47. These charge codes are reflected in INSLAW’s ac-

counting system in time sheets used by INSLAW employees,

expense reports and journal entries, which are then summarized

in monthly project control reports for each charge code, as well

as in INSLAW’s general ledger. (Ling, T. 1054-1058; Gibson,

1. 2231)

48. INSLAW has used continuously since its inception

aS a private corporation the same form of time sheet for its

software programmers. (Ling, T. 1055-56; PX 227) Using this

time sheet, INSLAW’s software programmers track on a bi-

himself and his associate Mary Ann Huang (copy attached as Appendix A),

with the employee timesheet form used by INSLAW (Appendix B) shows

that the INSLAW form is an immeasurably superior tracking System in every

respect.

CSCS Sst‘ ( S;'rti‘ ‘ (!;t;*;™

85a

weekly basis the number of hours spent working on a particular

project and task by entering the appropriate four-character

charge code. (Ling, T. 1057; PX 227; Holton, T. 1139)

49. INSLAW programmers are informed at the begin-

ning of a project of the appropriate four character charge code

to be used on time sheets to charge work for that project.

(Holton, T. 1139; DX 211 [Ling] at p. 70) At the end of the

two-week pay period, the employee totals and checks the time

sheet, signs it, and submits it for review to the director of that

employee's division. (Ling, T. 1057-58; Holton, T. 1139) The

employee's time is reviewed and approved by the division

director, who must sign and date the time sheet. (Ling, T.

1057-58; Holton, T. 1139) Time charged to particular projects

must also be approved by the project manager, who must initial

the time sheet next to the charge code. (Ling, T. 1058) The time

sheet is then submitted to the accounting department for review,

payroll processing and entry into INSLAW’s general ledger

system. (Ling, T. 1058)

50. Any iNSLAW employee who attempted intentional-

ly to mischarge time to incorrect accounts would be severely

reprimanded and could very easily be terminated. (Holton,

T. 1140-41) Although DOJ witness James Mennino testified to

the contrary, this Court has found his testimony to be absolutely

incredible, totally unsubstantiated and obviously biased, as dis-

cussed in F.F. 1 398 below. It appears that Mennino was at-

tempting to excuse his own excessive time spent on a project,

on which he was in charge of one aspect, by complaining about

the time spent by other persons responsible for other aspects of

that project, even though he had no knowledge concerning either

what those other persons were doing or how long it should

reasonably take them to do it.

5i. INSLAW’s time sheets are of the type commonly

used in the software industry for recording time spent by com-

EE a

86a

puter programmers on software development. (DeLutis,

T. 1288-1291; Gagliardi, T. 2088)

52. For major enhancements that are assigned individual

charge codes, ‘NSLAW can track its labor costs relating directly

to those particular enhancements. (Ling, T. 1080-81) For

smaller enhancements that are not assigned separate charge

codes, INSLAW’s accounting system does not permit tracking

the cost of each such enhancement. (Ling, T. 1080-81; DX 211

[Ling] at pp. 84-85)

53. Each programmer also was assigned an individual

computer “account,” i.e., a work space within the computer.

(Holton 52-54) To “sign on” to the computer account, the

programmer would use a code that would enable INSLAW to

charge the programmer's computer time to a particular client,

or to INSLAW itself. (DX 212 [Holton] at pp. 52-55; DX 211

[Ling] at p. 64)

54. However, tracking of and/or accounting by individual

smaller enhancements is not done generally within the industry,

and none of the witnesses called by either INSLAW or the

government was aware of any software development company

that maintained accounting records with that degree of detail.

(DeLutis, T. 1291-1292, 1306; Gagliardi, T. 2090-2092;

DX 21i [Ling] at pp. 87-89; Ling, T. 1081) The testimony by

DOJ witnesses Gagliardi and Rugh, that even so INSLAW

should have maintained such records (Gagliardi, T. 2083-85;

Rugh, T. 1515-17), was obviously a product of their intense bias

against INSLAW, which caused them to testify in whatever way

they thought might defeat INSLAW’s claims, without regard to

the truth.

55. Aithough the government auditor, Alan Gibson, tes-

tified that he did not believe that INSLAW’s records were

sufficient to audit each of the changes and enhancements iden-

tified by INSLAW as privately funded (Gibson, T. 2114), Gib-

son admitted that he has no knowledge of records kept in the

ee

87a

ordinary course of business by software developers, and has

never performed any analysis of funding sources for software

enhancements. (Gibson, T. 2229-2230) However good a

government auditor Mr. Gibson may be, this is a specialized

field in which Mr. Gibson has no expertise or competency.

56. Moreover, an accounting system that tracked

software development costs by individual software changes

would be unduly burdensome and expensive to set up and

maintain, and would require computer memory capacity far

exceeding the capabilities of even INSLAW’s computers.

(DX 211 [Ling] at pp. 62-63, 87-88)

57. Because INSLAW’s records are within the standards

for recordkeeping within the industry, including time records

and documentation concerning software maintenance, and in-

deed are exceptionally good, the Court considers INSLAW’s

records more than sufficient for the purposes of estabiishing the

existence of and funding for the enhancements and changes

claimed as proprietary by INSLAW.

58. INSLAW has demonstrated that between May 1981

and March 1985, the period from which INSLAW began

developing enhancements using private funding through the end

of the 1982 EOUSA contract, INSLAW expended $8,328,883,

of private, non-federal funds for software development for

private clients or in-house software development, exclusive of

software development costs for the feder:] government.

(PX 230; Ling, T. 1072-75; Hamilton, T. 400; Merrill, T. 815-

816) The $8,328,893 reflected in Plaintiff's Exhibit 230 in-

cludes but is not limited to solely the cost to INSLAW of creating

those enhancements that were delivered to DOJ pursuant to

Modification 12 to the contract and that INSLAW claims as

proprietary. (Ling, T. 1062) The precise cost to INSLAW of

creating solely those specific enhancements has not been estab-

lished but is irrelevant (even if that cost were as low as the

$400,000 to $1.4 million range testified to by DOJ witness

88a

Gagliardi — which, given Gagliardi’s bias, this Court does not

believe). (Gagliardi, T. 2071) The only relevant fact in this

regard is that each of the enhancements was developed solely

with private funds, and it has been so proven.

59. INSLAW has further demonstrated that during the

same time period, it had $12,998,076 available from private

funding sources to support its in-house software development

and software development for private clients, exclusive of funds

paid to INSLAW pursuant to federal government contracts.

(PX 231; Ling, T. 1065-72, 1074-75)

60. Among the sources of those private funds is a

category of fees paid by subscribers to INSLAW’s maintenance

program. (PX 231; Ling, T. 1066) Pursuant to separate main-

tenance agreements and for a fee, these subscribers receive error

corrections and maintenance enhancements from INSLAW on

a periodic basis. (Ling, T. 1067)

61. Two of INSLAW’s maintenance customers were

federal government clients, DOJ’s Land and Natural Resources

Division and the Occupational Safety and Health Review Com-

mission (““OSHARC”), which contributed funds to a main-

tenance pool used to support general maintenance for all of

INSLAW’s maintenance customers. (Ling, T. 1067; PX 236)

Although the government has at times contended that these

contributions to an overall maintenance pool entitle the govern-

ment to unlimited rights in all changes and enhancements funded

through the general maintenance account, the Court rejects this

contention for two reasons.

62. First, and more importantly, these two federal agen-

cies received all maintenance enhancements pursuant to express

contractual agreements with INSLAW that contain the follow-

ing Clause:

89a

Proprietary Information

The documentation, bug fixes, enhancements and the

ideas and expressions contained therein, and any

copyrights thereof are acknowledged by Customer to

be confidential proprietary information (hereinafter

called Program Product) belonging solely to IN-

SLAW. Customer will not for the duration of this

agreement nor at any time thereafter, without the prior

written permission of INSLAW: (a) permit or cause

any person (i) to copy or duplicate any physical form

of the Program Product from or to any media except

for archival or security purposes; or (1i) to create or to

re-create, or to attempt to create or recreate the source

programs, object programs or any other aspect of the

Program Product in whole or in part; or (ili) to gain

any access to confidential information learned pur-

Suant to this agreernent; or (b) permit or cause such

information to be placed into the public domain,

whether pursuant to law or otherwise.

(PX 236a; Ling, T. 1068-69) Thus, the government did not

obtain through these maintenance agreements any rights to

copy, disclose or disseminate these changes and enhancernents.

Rather, the government thereby acknowledged that all main-

tenance changes and enhancements were proprietary to IN-

SLAW.

63. Second, the revenues that these two agencies con-

tributed pursuant to the maintenance contracts amounted to less

than one-half of one percent of all private funds available to

INSLAW for its proprietary enhancements, which the Court

finds in any event to be de minimis, so as not to afford the

government any ownership rights in the enhancements and

changes created using maintenance funds. (Ling, T. 1077)

64. Because the analysis performed by the government

auditor, Alan Gibson, assumed that these maintenance accounts

90a

commingled private and government funds, without any infor-

mation or understanding concerning the contracts entered into

between the government clients and INSLAW, Mr. Gibson’s

analysis of the funding sources for INSLAW’s proprietary

enhancements is not entitled to great weight. (Gibson, T. 2237-

2239) In fact, Mr. Gibson admitted that he had no knowledge

of the substance of any of the enhancements, or of the meaning

of entries on the report forms used by INSLAW to track its

maintenance changes or enhancements, or of any other docu-

ments that might reflect the dates on which work was performed

by INSLAW programmers.® (Gibson, T. 2239-2244)

65. Despite its claims that INSLAW’s project code 22

was funded in part by corporate overhead which allegedly was

derived in part from overhead charged to DOJ under the

PROMIS Contract, DOJ has no knowledge, and has failed to

demonstrate, that any government overhead or computer center

funds in fact supported any software claimed by INSLAW to be

developed at private expense. (Gibson, T. 2246-2249) IN-

SLAW had sufficient private funds to support all of INSLAW’s

private software development, and, in any event, the amortized

portion of any capitalized software was less than the difference

between INSLAW’s actual overhead costs and the maximum

amount that could have been contributed by the government to

the overhead pool. (Ling, T. 1097-1099, 1105-1107)

Moreover, because government audits have questioned the

allowability of any overhead payments reflecting costs for

INSLAW’s independent research and development, the govern-

ment has not in fact paid any allocable share of such overhead

costs. (Ling, T. 1107; Gibson, T. 2227)

© Mr. Gibson also admitted that although he was present at INSLAW

for a period of approximately three weeks in mid-June and early July 1987,

and saw Ms. Holton on numerous occasions, never once during that time did

Mr. Gibson attempt to resolve any of his questions concerning INSLAW’s

methods and records with Ms. Holton. (Gibson, T. 2250)

9la

66. An auditor for the government has reviewed

INSLAW’s financial records in order to reconcile INSLAW’s

records with the analysis reflected in PX 230 and PX 231 and

concluded that the method reflected in that analysis is

reasonable, and that the figures reflected therein are correct, with

the exception of minor differences that are either insignificant

or in INSLAW’s favor. (Gibson, T. 2245-2246, 2251-2252;

Ling, T. 1075-76) The analysis reflected in PX 230 and PX 231

was performed in accordance with generally accepted account-

ing principles. (Ling, T. 1061)

B. INSLAW HAS DEMONSTRATED THAT

THE THREE MAJOR ENHANCEMENTS,

THE DATA BASE ADJUSTMENT SUB-

SYSTEM, THE BATCH UPDATE SUB-

SYSTEM AND THE 32-BIT ARCHITECTURE

VAX VERSION OF PROMIS, WERE

CREATED USING PRIVATE FUNDS AND

ARE PROPRIETARY TO INSLAW

67. INSLAW has created, using private funds, two sub-

systems of PROMIS, known as Batch Update and Data Base

Adjustment, which were included neither in the pilot version of

PROMIS nor among the BJS enhancements. (Holton, T. 1123)

68. Neither of these subsystems was required to be

delivered to the government pursuant to the Statement of Work

in the 1982 Executive Office contract. (Hamilton, T. 125, 2571-

2578)

69. Data Base Adjustment was created by INSLAW in

late 1983 as a private research and development project, and was

not requested, required or funded pursuant to a contract with any

particular client. (Holton, T. 1127) (See F.F. 1% 28 and 29

above as to two programs that comprised an earlier version of

the Data Base Adjustment package.)

70. Deveiopment of Data Base Adjustment was assigned

by INSLAW a separate charge code, 2214, which indicates that

92a

it was part of INSLAW’s independent research and develop-

ment project, Project 22. (Holton, T. 1128) In October 1983,

at the beginning of the new fiscal year, INSLAW’s accounting

department assigned the Data Base Adjustment development

project a different charge code, 9060, which again reflected

independent research and development projects under Project

90. (DX 212 [Holton] at pp. 217-218) Charge codes 2214 and

9060 were used exclusively by INSLAW programmers when

billing time to Data Base Adjustment development. (DX 212

[Holton] at pp. 492-493; Holton, T. 1128)

71. While paragraph 3.2.4.1 of the Statement of Work

required INSLAW to retailor a number of the individual ver-

sions of PROMIS provided to the larger United States

Attorneys’ Offices, and although INSLAW used its Data Base

Adjustment enhancements for that purpose, the contract itself

does not state that INSLAW is to develop software for that

purpose. (Hamilton, T. 2575-2578, 2609-2610; PX 17) In the

absence of Modification 12, and if DOJ requested software for

data base adjustments, INSLAW could have and no doubt would

have provided hard-coded, specific-need programs to perform

the specified data base retailoring services, rather than and in

preference to giving up its proprietary rights to its Data Base

Adjustment enhancements. (Hamilton, T. 2575-2578, 2607-

2610) (See F.F. 1 27 above.)

72. INSLAW provided the Data Base Adjustment Sub-

system to DOJ pursuant to contract Modification 12. (Hamil-

ton, T. 2578-2579)

73. The Batch Update Subsystem was created by IN-

SLAW in November 1981 through early 1982 as a task under a

contract with a private, non-federai government client. (Holton,

T. 1129-31; PX 322) INSLAW’s accounting department as-

signed the development of Batch Update an individual charge

code, 0405, which reflected that it was a task under the overall

Project 04 for a private client. (Holton, T. 1131)

93a

74. Although paragraph 3.2.2.7 of the Statement of Work

refers to the transfer of information from the existing Docket

and Reporting System database to a PROMIS database, and

while INSLAW used the Batch Update subsystem for that

purpose, the record demonstrates that the development of the

Batch Update subsystem occurred prior to the execution of the

1982 Executive Office contract and that the development oc-

curred using private funds. (Hamilton, T. 2571-2575; Holton,

T. 1129-31)

75. The pre-existing Batch Update subsystem also was

capable of transferring many kinds of computerized information

into an existing PROMIS database, and had capabilities well

beyond the input of information from the Docket and Reporting

System into PROMIS. (Hamilton, T. 2574-2575)

76. Hamilton testified that in the absence of Modification

12, INSLAW would have provided the government with limited

purpose software that would only have enabled the government

to transfer information from a particular Docket and Reporting

System database to a particular PROMIS database. (Hamilton,

T. 2575, 2605-2607) In contrast, the Batch Update subsystem

was capable of transferring information from numerous dif-

ferent kinds of data bases into the various PROMIS formats,

without “hard-coding, testing and debugging” the entire pro-

gram each time. (Hamilton, T. 2571-2575)

77. Batch Update was delivered to the government by

INSLAW pursuant to Modification 12, and has been used by the

government. (Hamilton, T. 2575)

78. INSLAW delivered to the government twenty-two

separate versions of PROMIS that contained all of the individual

PROMIS enhancements and changes, as well as the entire Batch

Update subsystem, and one program of the Data Base Adjust-

ment subsystem. (Hamilton, T. 2588-2589) INSLAW

delivered to the DOJ a separate tape containing all nine

programs in the Data Base Adjustment subsystem, and delivered

94a

in each individual version of the PROMIS software for the

United States Attorneys’ Offices one of the nine Data Base

Adjustment programs. (Hamilton, T. 2579, 2589; Gagliardi,

T. 2067, 2069)

79. INSLAW was not required to develop a 32-bit ar-

chitecture VAX version of PROMIS pursuant to any contract or

for any private client. (Holton, T. 1132-33) The VAX version

was not required to be delivered to the government under the

Statement of Work in the 1982 Executive Office contract unless

the government chose to implement VAX computers in its

individual offices. (Hamilton, T. 2580-2581) Because the DOJ

chose to use Prime minicomputers rather than VAX computers,

INSLAW was not otherwise required to deliver the VAX ver-

sion of enhanced PROMIS under the 4982 Executive Office

contract. (Hamilton, T. 2580-81)

80. The funding for the VAX version was channelled

through INSLAW’s computer center, and supported with

private research and development funds. (Holton, T. 1250-51)

81. The reason that INSLAW turned over to the DOJ the

VAX version of PROMIS was because of the request of the

Contracting Officer in December 1982, and pursuant to

Modification 12. (Hamilton, T. 2581; PX 46; PX 78) In the

absence of Modification 12, INSLAW would not have provided

the VAX version of PROMIS to the DOJ. (Hamilton, T. 2581)

82. Itwas common knowledg

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