General Dynamics Corp. v. United States
563 U.S. 478, 2011 U.S. LEXIS 3830, 179 L. Ed. 2d 957 (2011)
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Rule of Law:
When the government's invocation of the state-secrets privilege makes a contractor's prima facie valid defense to a breach of contract claim nonjusticiable, the court should leave the parties as it finds them, meaning neither party can obtain judicial relief on the claims or defenses affected by the privilege.
Facts:
- In 1988, the U.S. Navy awarded a $4.8 billion fixed-price contract to petitioners, McDonnell Douglas Corp. and General Dynamics Corp., to develop the A-12 Avenger, a carrier-based stealth aircraft.
- The project experienced significant delays and cost overruns, falling almost two years behind schedule by December 1990.
- Petitioners informed the government that the cost to complete the contract would greatly exceed the agreed-upon price and proposed restructuring the agreement.
- On January 7, 1991, the Navy terminated the contract for default.
- At the time of termination, petitioners had spent $3.88 billion, for which the government had made $2.68 billion in progress payments.
- The Navy subsequently demanded that petitioners return approximately $1.35 billion in progress payments for work it had not accepted.
- Petitioners argued their default was excused because the government failed to share its 'superior knowledge' regarding the design and manufacture of stealth aircraft, derived from secret programs like the B-2 and F-117A.
- During early stages of the lawsuit, sensitive military secrets concerning stealth technology were inadvertently disclosed in depositions.
Procedural Posture:
- Petitioners sued the United States in the Court of Federal Claims (CFC), a trial-level court, to challenge the contract's termination for default.
- The Government asserted the state-secrets privilege, and the CFC terminated discovery related to the petitioners' 'superior knowledge' defense, deeming it nonjusticiable.
- The CFC first converted the termination to one for convenience, awarding petitioners $1.2 billion, but the U.S. Court of Appeals for the Federal Circuit reversed and remanded.
- On remand, the CFC sustained the default termination.
- Petitioners appealed, and the Federal Circuit reversed on other grounds but agreed that the state-secrets privilege barred the 'superior knowledge' defense.
- On a second remand, the CFC again found the petitioners had defaulted.
- Petitioners appealed again to the Federal Circuit, which affirmed the CFC's judgment.
- The U.S. Supreme Court granted certiorari to review the Federal Circuit's state-secrets holding.
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Issue:
When the government's invocation of the state-secrets privilege prevents the adjudication of a government contractor's prima facie valid defense to a claim of default, must the court also bar the government's underlying claim for relief?
Opinions:
Majority - Justice Scalia
Yes. When the state-secrets privilege renders a contractor's valid defense nonjusticiable, the court should not proceed with the government's claim either; the proper remedy is to leave the parties where they stand. This case does not present a simple evidentiary question governed by United States v. Reynolds, but rather requires the court to fashion a common-law remedy for a government contract dispute. The proper precedent is found in cases like Totten v. United States, where public policy forbids suits based on secret agreements because litigation would inevitably lead to the disclosure of state secrets. Here, liability depends on the contractors' 'superior-knowledge' defense, and a full litigation of that defense would inevitably risk disclosing military secrets. It would be the 'height of injustice' to permit the government's claim to proceed while barring the contractors' defense based on the government's own assertion of privilege. Therefore, following the common law tradition for unenforceable promises, the court will leave the parties as it finds them regarding the possession of funds and property. Neither the government's claim for repayment nor the contractors' defense will be adjudicated.
Analysis:
This decision significantly expands the application of the state-secrets doctrine as articulated in Totten. Previously, the Totten bar applied to claims founded entirely upon a secret agreement; this case extends it to situations where a valid defense to a non-secret contract becomes nonjusticiable due to state secrets. The ruling prevents the government from using the privilege as both a shield (to protect information) and a sword (to pursue a claim while blocking the corresponding defense). The 'leave the parties as they are' remedy creates a new default rule for high-stakes, classified government contracts, incentivizing both the government and contractors to proactively address the risk of nonjusticiability in their contract terms.
