Wether you knew it or not your violated their rights to the name. If they bring up a UDRP case, you will lose. Unfortunately it doesnt matter wether they bought the correct/perfect name for the agency/department. The law will uphold their rights to it regardless. They will claim that you have used the name in "Bad Faith" and you will not have a foot left to stand on. Now , there is nothing wrong with calling their bluff, they might not go the UDRP route. If they do, you can surrender the name at any point during the pre-precedings and not have yourself labeled a cybersquater. So you could play it cool for now at minnimal risk. Depending on what the name is and what your site is could play a small part in the minor defence you may have. Just my opinion, taken in large part from my own experiences in this matter.