Why do they think they needed 38 licenses to install unlimited copies? That's stupid... one license you can confuse maybe, but if you have more than one there are obviously terms. If BM failed to put that in writing, they are stupider.
Most small ISVs would deeply discount or otherwise sweeten that deal with the expectation of negotiating a large scale site license once testing is successful. 500k seat would probably be discounted drastically to something like 10m $ / year (BS Contact seems to sell for 300 euros / license.)
Of course, if we got as far as asking you to remove copy protection, then we're probably way past PoC stage and into serious contract negotiations.
I can't help feeling like both parties probably allowed this to happen because they felt it would improve their bargaining position. The Navy possibly felt that by dragging out the negotiation until way after the live deployment is complete, they can keep BS waiting until they go bust or accept a lower price. BS know that once the software is out there with no further negotiations about price, they're in a solid position to charge the full amount, which they can legally enforce if necessary.
Then invoice time comes around, the two parties are at completely opposite ends of the spectrum in terms of pricing, and here we are.
Nobody wants to have people shooting at them and the screen saying "connection to license server lost, please try again".