Federal Judiciary

Argument preview: A look at ?state secrets?

By Lyle Denniston

The Supreme Court at 10 a.m. Tuesday will hold one hour of oral argument on the government’s use of the “state secrets” doctrine to limit a Pentagon contractor’s claim for payment after a military project has been halted before completion. The consolidated cases are General Dynamics Corp. v. U.S.  (09-1298) and Boeing Co. v. U.S. (09-1302).  Arguing for the two companies will be Carter G. Phillips of the Washington office of  Sidley Austin.  Acting U.S. Solicitor General Neal K. Katyal will argue for the federal government.

Background

For nearly 60 years, the Supreme Court has opted to stay on the sidelines of a controversy that has continued to swirl around one of the most potent legal weapons that the federal government has available to protect its defense and other national security secrets.  It is called the “state secrets” doctrine, and the Court has not examined its scope since 1953, when it decided U.S. v. Reynolds. It allows the government to short-circuit a lawsuit against it, if the evidence that is key to the claim is a “state secret” and cannot be brought into court without risking its public exposure.  In 1953, it was understood as a limit on specific items of evidence; more recently, it has been applied to end some cases altogether, without a trial.

Several times recently, the Court has refused to reconsider the doctrine in cases seeking to challenge government actions during the “war on terrorism.”  Later in this Term, it will consider whether to take up one such case — a dispute involving the alleged program of secretly capturing terrorism suspects, and sending them to foreign countries for interrogation or detention  (Mohamed, et al., v. U.S., et al. (10-778)).

But the Court in September did agree to rule on a new “state secrets” dispute, involving the use of that doctrine to shield weapons technology secrets from two major defense contractors for use in their multi-billion-dollar claim against the Pentagon.   As that case reaches the Court, it does not involve a direct challenge to the “state secrets” doctrine; the contracting firms do not contest the Pentagon’s view that it needed to assert the  doctrine, but they do argue that they cannot be penalized because of that.  Upwards of $4 billion — the companies’ claims and the Pentagon’s claims, combined — rides on the outcome.

Two huge contractors,  General Dynamics Corp. and Boeing Co., raised a number of issues in tasking the case to the Supreme Court, involving some key questions about the law governing federal contracting.  But the Court granted review only of the “state secrets” issue, so that is where the case will remain focused.

The case’s origins go back to January 1988, when General Dynamics and McDonnell Douglas Corp. (since merged into Boeing) were awarded a fixed-price contract to design and built a Navy aircraft to be called the “A-12 Avenger.”  That was to be an aircraft carrier-based version of the Air Force’s land-based “stealth” fighter plane.  The word “stealth” here means an aircraft capable of flying below an enemy’s radar detection system.  The Pentagon said the work could rise to a ceiling price of $4,777.330,294, which supposedly would cover the design, building and testing of eight prototypes of an A-12, each of which, as produced, would be more complex than the one before.

Because it was to be based on an aircraft carrier, there were significant limitations on how much the craft could weigh.  There were other major challenges in designing the A-12 as the two companies worked on it, and they started falling behind on “milestone” dates by which certain tasks were to be completed, including delivery of the first prototype; the first was due in June 1990.

The companies began pleading with the Navy to renegotiate the contract from a fixed-price agreement to one that would cover the companies’ costs.  They insisted they could not do the job for the agreed ceiling price.  As controversy built between the companies and the Navy’s contracting officer on the job, the whole project was increasingly jeopardized.   The companies would later contend that the project had lost political support in the upper echelons of the Pentagon, so officials there wanted out.  The Cold War was over, and the Pentagon was recalculating its priorities; the A-12 would be a casualty of that.

Ultimately, in January 1991, the Navy terminated the contract.  It claimed the companies had defaulted on the contract for failure to make mandated progress, including failing to meet “milestone” dates.   The companies had complained, as they would later put it, that they had been “forced to reinvent the wheel” and that the task proved impossible, as a practical matter.  They might be able to do it, they had said along the way, if the Air Force would share with them the technology it had developed in the creation of the land-based “stealth” fighter.  The Air Force refused — contrary, the companies claimed, to an earlier promise to share that technology.

As the controversy has built since then, it is central to the legal issues that the Navy chose to end the contract by claiming default.  For military contractors, that is the harshest outcome: the contractor is denied any payment for costs that had not yet been reimbursed, may be required to return to the government at least some of the money already paid it, and is thereafter at risk of being barred from getting future contracts, or at least treated less favorably than other bidders.

By contrast, if the Navy had cut off the A-12 contract “for convenience,” instead of for default, the Navy would have had to reimburse the contractor for some of the costs and the government is insulated from any claim that it breached the contract; it can simply walk away from the deal.

The companies have argued that they were spending up to $150 million a month of their own money as they worked to develop the A-12.  They have said they were told that the government would not reimburse any of that, totaling more than $1.2 billion.  In addition, the government has demanded the return of $1.35 billion in progress payments it had made, and seeks interest on that sum, with total interest now rising above $1.5 billion.

Under the federal Contract Disputes Act, companies doing business with the federal government may challenge a default termination in the Court of Federal Claims, forcing the government to justify its termination for that reason.  If the government fails to prove the point, the contract is not revived, but is terminated “for convenience,” with the clearly different outcome.

Initially, the Claims Court ruled for the A-12 contractors, finding no default; the contract ended when high-level officials abandoned it, the Court concluded.  It ordered the Pentagon to reimburse some $1.2 billion in the contractors’ outlays.   That was overturned by the Federal Circuit Court, with orders for a new trial to determine whether the default termination was actually justified.  (The Supreme Court in 2000 refused to hear an appeal on that point.)

At the second trial, the Claims Court upheld the default conclusion.  The companies had tried to defend themselves in that proceeding by arguing that they were hampered in developing the A-12 by the Air Force’s refusal to share its “stealth” technology.  That was “superior knowledge” that should have been shared, and denial of access to it was solely to blame for any delays, the contractors contended.  They sought to use the discovery process for that trial to get access to the technology.  The Pentagon, however, invoked the “state secrets” doctrine, saying there was a risk that disclosing that information to the contractors would expose military secrets.   The Claims Court thus refused to consider the “superior knowledge” argument by the contractors.

That ruling was upheld on a second trip to the Federal Circuit Court, which upheld the denial of “superior knowledge” defense, but for the second time ordered a new trial on the default issue.   Once again, at the new trial, the default finding was upheld, and the Federal Circuit, in its third decision in the case, agreed with that result.   Afterward, the Pentagon sent its bill to the companies, seeking reimbursement plus interest for the progress payments.

General Dynamics and Boeing (as successor to McDonnell Douglas) filed separate petitions for review in the Supreme Court.

Petitions for Certiorari

Last April 23, the contractors asked the Supreme Court to take on the case, each contending that the Federal Circuit had changed the law of contracting in the midst of the dispute, and arguing that it was a violation of constitutional due process guaranteed by the Fifth Amendment for the government to make financial demands while at the same time invoking the “state secrets” privilege to deny a chance to mount a defense to such demands.

On the first point, they argued, as Boeing’s petition put it, that the Federal Circuit has “thrown previously settled law in a critical area of government contracts into complete disarray.  If allowed to stand, the court’s rulings may well unjustly deprive contractors of billions of dollars.”

But, in laying out their grievances, both petitions also put heavy focus on the denial of due process that they saw in the Pentagon’s use of the “state secrets” privilege.  Boeing, for example, noted that the issue arises “at a time when the state secrets privilege is being asserted with growing frequency, and the need for clarity and uniformity on its scope and impact could not be more compelling.”  To buttress this point, the petition cited to a series of lower court rulings arising out of the “war on terrorism,” but added that the issue was presented in a case that is “less politically charged.”

General Dynamics’ petition argued that the Federal Circuit had “disregarded the clear teachings of this Court’s state-secrets jurisprudence, basic principles of due process, and numerous contrary rulings from other circuits.”

The contractors noted that the Supreme Court, in its last ruling on the “state secrets” doctrine in Reynolds in 1953, had declared that it would be “unconscionable” for the government to ” ‘prosecute[ ] an accused’ while at the same time using the privilege to ‘deprive the accused’ of a defense.”  The Court also had said then, it added, that, where the government is “the moving party,…a court will not permit the government to ensure its own victory — and its opponent’s punishment –  through the government’s exercise of the virtually unreviewable discretion to identify and protect state secrets.  Thus, the government must choose between invoking the privilege and pursuing its claim.”

While General Dynamics conceded that it and Boeing were the suing parties in the case, the government on its side is asserting a claim — the validity of the default termination of the A-12 contract — and the companies clearly face a penalty — the payment or loss of “enormous sums” — if the government prevails.  “The contractors’ claim here is in every meaningful sense an effort to oppose a claim by the government,” that petition added.

Supporting the petitions, the National Defense Industrial Association, a contractors’ trade group, argues that the Federal Circuit ruling threatens to subject such companies “to the severe consequences of default termination, based not on contract performance but on waning political or economic support.”  The U.S. Chamber of Commerce also joined in supporting the contractors, focusing on the holding on the “state secrets” issue.  This case, the Chamber argued, would not call that doctrine into question, but would only determine “what litigation consequences follow from the government’s invocation of the privilege.”

The Justice Department, in replying last August, urged the Court not to hear either of the petitions.  The contractors’ complaints about the Federal Circuit’s ruling on the contract law issues, Acting U.S. Solicitor General Neal Katyal argued, involved only “fact-bound” issues keyed to well-established principles of default termination of government.  “After nearly two decades of litigation,” Katyal argued, the case should end, especially since there are no lower court conflicts on those issues.

On the challenge to the consequences of the “state secrets” invocation, the government contended that the Reynolds decision’s comments about “unconscionable” denial of a defense as a result of that privilege applied only to criminal prosecutions.  The contractors’ lawsuit over the A-12 contract, the brief argued, “cannot properly be analogized to a criminal prosecution brought by the United States.”  It was they who sued, not the government, it noted.  And they are suing in a civil, not a criminal forum, and their liberty is not at stake, Katyal said.

The contractors’ reliance on Supreme Court precedents protecting the right of a civil case defendant to use every available legal defense was misplaced, the government brief said.  None of those decisions, it added, involve the use of evidentiary privileges, or, specifically, the “state secrets” privilege. Moreover, Katyal contended, the contractors had a full opportunity, in each of their trials in the Claims Court and before the Federal Circuit, to challenge the government’s proof on which default termination was based.

The Court, in its first grants of the new Term, on Sept. 28 agreed to hear both petitions, but limited its review to the “state secrets” issue — Question 1 in General Dynamics’ petition, Question 2 in Boeing’s.  The cases were consolidated for argument.

Merits Briefs

Full post as published by SCOTUSBLOG on January 14, 2011 (boomark / email).