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SUPREME COURT DOCKET REPORT
OCTOBER TERM 2010
DECISION ALERT


October Term, 2010

May 23, 2011

Today the Supreme Court issued one decision, described below, of interest to the business community.


Government Contracts—“State Secrets” Privilege

General Dynamics Corp. v. United States and The Boeing Company v. United States, Nos. 09-1298 & 09-1302 (previously discussed in the September 28, 2010 Docket Report).

In an important decision long-anticipated by government contractors, the Supreme Court today held that the government cannot use the state-secrets doctrine as both a “sword and a shield.” The Supreme Court unanimously ruled in General Dynamics Corp. v. United States and The Boeing Company v. United States, Nos. 09-1298 & 09-1302, that when the government successfully invokes the “state secrets” privilege to bar adjudication of an affirmative defense plausibly asserted by the contractor, and when “full litigation of that defense ‘would inevitably lead to the disclosure of’ state secrets” (slip op. 7-8), the proper remedy is to leave the parties in the position they occupied—i.e., with whatever “funds and property” they possessed—before the breach-of-contract suit was initiated. Slip op. 10.

In 1988, the Navy awarded General Dynamics and Boeing fixed-price contracts to develop a stealth aircraft. After unexpected difficulties arose in the design and manufacturing process, the government terminated the contracts for default and demanded the return of approximately $1.3 billion in progress payments that already had been made. The contractors challenged the for-cause nature of the contract termination under the Contract Disputes Act in the Court of Federal Claims. Asserting a “superior knowledge” defense to the purported default, the contractors argued that no return of funds was appropriate as the government had failed to share information in its possession that would have affected the contractors’ ability to design and manufacture the aircraft. General Dynamics also sought to have the termination converted to one “for convenience,” and thus sought additional payments of $1.2 billion from the government.

The parties and court initially sought to litigate the case despite the classified nature of much of the relevant evidence, but after classified information was accidentally disclosed in the discovery process, the government invoked the state-secrets privilege and asserted that resolution of the “superior knowledge” defense could lead to the further disclosure of highly classified information. The court then adjudicated the government’s claim of default without reaching the contractors’ defense, and ruled in the government’s favor.

The Federal Circuit endorsed the trial court’s finding that litigating the “superior knowledge” defense, and the attendant risk of disclosure, would adversely affect national security. The Federal Circuit concluded that the state-secrets privilege therefore precluded litigation of the contractors’ defense. The court held that the government could nonetheless pursue its claim for the return of progress payments, even though the contractors’ primary defense had been rendered non-justiciable.

The Supreme Court reversed the Federal Circuit’s decision. The Court accepted the contractors’ basic argument that the government cannot pursue what is in substance a breach-of-contract claim against a party and then assert the state-secrets privilege to foreclose the litigation of a prima facie valid defense to the claim. In arriving at this conclusion, the Court drew on its “common-law authority to fashion contractual remedies in Government-contracting disputes” (slip op. 7) and relied on two former cases, Totten v. United States, 92 U.S. 105 (1876), and Tenet v. Doe, 544 U.S. 1 (2005), which had each addressed the enforceability in court of contracts between the government and alleged spies.

In Totten and Tenet, the alleged spies asserted that the government had breached secret espionage contracts. There, the Court held that courts lacked jurisdiction to hear the plaintiffs’ claims—a result that left the parties “where [the court] found them the day they filed suit”—because their resolution “would inevitably lead to the disclosure of” secret material. Slip op. 7. In today’s decision, the Supreme Court held that the same reasoning can apply to government contracts involving highly classified government programs. “It is claims and defenses together that establish the justification, or lack of justification, for judicial relief; and when public policy precludes judicial intervention for the one it should preclude judicial intervention for the other as well.” Id. at 8.

Today’s decision is a narrow one. It is limited to government contracting disputes in which the contractor has a prima facie valid affirmative defense that cannot be litigated because of the state-secrets privilege. Slip op. 13-14. Indeed, the Supreme Court predicted that the impact of its ruling “on these particular cases . . . is probably much more significant than its impact in future cases, except to the extent that it renders the law more predictable and hence more subject to accommodation by contracting parties.” Id. at 12.

Although narrow, today’s decision raises many questions for companies that perform highly classified work, the volume of which has increased dramatically in recent years. Among other things, the decision makes it very clear that contractors and the government must be vigilant about identifying performance issues that may implicate classified information and addressing those issues early. If they cannot be resolved, contractors will need to determine if they are prepared to continue with performance, particularly in the context of fixed-price contracts. As the Court observed in today’s opinion, the parties “must have understood” that the state-secrets privilege would prevent courts from resolving many possible disputes under the contracts and that both sides assumed this risk. Slip. op. 12.

Mayer Brown filed an amicus brief in support of the petitioners on behalf of the Constitution Project.


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