Supreme Court Issues Opinion Regarding Government Contracts and State Secrets

5.26.2011 - Posted in E&B Alerts – Government Contracts

This week, the Supreme Court handed down its highly-anticipated decision in the decades-old "A-12" case. See General Dynamics Corp. v. United States, 2011 WL 1936073 (May 23, 2011). In a unanimous decision written by Justice Scalia, the Court held that where a government contractor establishes a prima facie superior knowledge defense to a contract termination to which the Government asserts the state secrets doctrine, the remedy is to place the parties in the position they were in when the suit was filed.

The dispute arose from a $4.8 billion fixed-price contract for the research and development of the A-12 Avenger stealth aircraft awarded by the Navy in 1988 to General Dynamics Corp. and McDonnell Douglas (later purchased by Boeing). Due to difficulties in designing and manufacturing the stealth aircraft, the contractors fell behind schedule and far exceeded their original budget. The Navy terminated the contract for default in 1991 after the Government had made progress payments of nearly $2.7 billion and the contractor had expended over $3.8 billion.

The contractors filed suit in the Court of Federal Claims, alleging that the Government withheld its "superior knowledge" of information that was vital to the completion of the contract. During the discovery process, the Government granted select members of the petitioner's litigation team access to closely-guarded information regarding the design and manufacture of two prior stealth aircraft. However, in response to the release of such information through depositions and court filings, the Acting Secretary of the Air Force asserted the state secrets privilege in order to bar discovery of certain military secrets.

The Court, in addressing whether the need to protect military secrets precluded discovery on the contractors' superior knowledge defense, held that where the determination of such a defense would "inevitably lead to the disclosure of state secrets," the traditional common law approach is to leave the parties in the position they were in immediately prior to the filing of the suit. The Court essentially found the claims of both the Government and the contractors nonjusticiable. However, it limited its decision to cases where a contractor can establish a prima facie superior knowledge defense and stated that courts should only find government contracts unenforceable under the state secrets doctrine as a last resort. Such a situation arises only where both sides have enough evidence to survive summary judgment but too many of the facts relevant to the determination of liability are obscured by state secrets. Based on this holding, the Court remanded the case back to the Federal Circuit for a rehearing, thus continuing one of the longest-running government contract disputes on the books. On remand, the Federal Circuit will determine whether the Government had an obligation to share its superior knowledge regarding stealth technology and whether the issue can be litigated without endangering state secrets. Government contractors, and in particular military contractors, should be aware of the risks when entering contracts requiring access to classified and highly sensitive information. Where the protection of state secrets prevents the adjudication of otherwise valid government contract claims and defenses, the Court's ruling may prohibit judicial relief to either the contractor or the Government.

For advice or assistance in protecting your rights when contracting with the government, please contact any of the government contracts attorneys at Eckland & Blando LLP.