United States v. Inslaw, Inc.

Inslaw, Inc. (debtor) (plaintiff) contracted with the United States Department of Justice (DOJ) (defendant) to provide prosecution-management software. When Inslaw later enhanced the software, the DOJ asserted its entitlement to the enhanced version. Although Inslaw disagreed with that assertion, Inslaw provided the DOJ with a copy of the enhanced software and installed the enhanced software in 22 US Attorneys’ offices for use during the parties’ original contract period. Inslaw subsequently filed for chapter 11 bankruptcy. After Inslaw’s bankruptcy filing, the DOJ installed the enhanced software in 23 additional US Attorneys’ offices without Inslaw’s consent and continued to use the enhanced software in the initial 22 offices after the contract period expired. Inslaw filed a complaint against the United States in bankruptcy court. Inslaw contended that its interest in the enhanced software was the property of the bankruptcy estate and that the DOJ’s nonconsensual use of the enhanced software violated 11 U.S.C. § 362(a)’s automatic stay of any acts to exercise control over the estate’s property. Inslaw admitted that the DOJ (1) had possession of the copies of the enhanced software under a claim of ownership based on the parties’ contract and (2) claimed the right to use the enhanced software. The bankruptcy court found that Inslaw had intangible trade-secret rights in the software enhancements and held that the DOJ’s use of the software was an exercise of control over the property of the estate that violated the automatic stay. The bankruptcy court enjoined the DOJ from expanding its use of the enhanced software and awarded Inslaw damages. The district court reduced the damages award but otherwise affirmed. The United States appealed.