The US Supreme Court [official website; JURIST news archive] ruled [opinion, PDF] Monday in General Dynamics Corp v. United States [Cornell LII backgrounder] that when the court dismisses a valid prima facie affirmative defense to the government's breach of contract claim under the state secrets privilege [JURIST news archive], the proper remedy is to leave the parties in the same position as they were in before the contract. The case is a consolidated case where General Dynamics and Boeing [corporate websites] contracted with the Navy [official website] to develop a new carrier-based stealth fighter plane, but failed to meet the terms of the agreement, prompting the government to end the contract. The companies claimed that they could not complete the work because the Navy refused to release access to secret technology about the "stealth" fighter under the state secrets doctrine. General Dynamics wanted the judgment against the Navy for $1.2 million in damages to be reinstated, while the Navy wanted General Dynamics to return $1.35 billion in progress payments for work it never approved. The court held in a unanimous opinion by Justice Antonin Scalia that the nature of the contract dealing with secret technology created a bar to judicial review of contract disputes of which the parties reasonably should have been aware. The court said, "Both parties—the Government no less than petitioners—must have assumed the risk that state secrets would prevent the adjudication of claims of inadequate performance."
The Supreme Court heard oral arguments [JURIST report] in this case in January. At oral arguments, counsel for the government argued that the "state-secrets privilege will be used to bar a claim at most only when the party that is relying on secret information is trying to use the Federal court to alter the legal status quo." Counsel for General Dynamics argued that the government is unable to prove that the contractor defaulted on the contract, meaning that the government terminated the contract for convenience and the company should keep the money paid for the partially performed services. The US Court of Appeals for the Federal Circuit [official website] held [opinion, PDF] that the Navy was justified in canceling the contract because the companies were not fulfilling their contractual obligations.