General Dynamics Corp. v. United States

Background

A defense contractor working on the Navy’s classified A-12 stealth aircraft program sued after the Navy terminated a $4.8 billion fixed-price contract for default. The contractor had large cost overruns and the Navy sought return of progress payments. Litigation in the Court of Federal Claims explored whether the Government’s “superior knowledge” about stealth technology excused the contractor’s performance, but discovery repeatedly risked revealing highly classified information from earlier stealth programs.

Reasoning

The Court addressed what remedy is appropriate when state secrets prevent full litigation of a contractor’s otherwise plausible defense. It explained that the traditional evidentiary privilege case differed from this situation and relied on older precedents that bar suits whose resolution would inevitably reveal secrets. When a contractor can make out a prima facie defense but full adjudication would expose state secrets, the Court held that courts cannot grant relief for either side and should leave the parties in the same practical position they occupied when suit began.

Real world impact

The decision affects government contracting where classified programs are involved. Contractors may be unable to enforce or defend contracts when key facts are secret, and the Government likewise may be unable to recover disputed payments. The ruling applies narrowly — only where a strong defense exists yet too many facts are hidden by privilege — and the Court vacated the appellate judgment and remanded for further proceedings consistent with this rule. The opinion also signals that parties can and should adjust contract terms to allocate risk of secret-related disputes.