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High Court Treats State Secrets With Kid Gloves

(CN) - A circuitous Supreme Court opinion concerned with protecting state secrets leaves defense contractors and the government unsatisfied Monday.

Justice Antonin Scalia authored the high court's unanimous 13-page decision in a case over General Dynamics and Boeing Co.'s work on a multibillion contract to develop stealth military aircraft.

"In 1988, the Navy awarded petitioners a $4.8 billion fixed-price contract to research and develop the A-12Avenger carrier-based, stealth aircraft," Scalia wrote. "The A-12 proved unexpectedly difficult to design and manufacture, and by December 1990, petitioners were almost two years behind schedule and spending $120 to $150 million each month to develop the A-12."

Eventually the contractors offered to absorb a $1.5 billion loss, but the Defense Department had lost faith in the project and ended the contract in January 1991.

"By that point, petitioners had spent $3.88 billion attempting to develop the A-12, and the Government had provided $2.68 billion in progress payments," Scalia wrote. "A few weeks after terminating the contract, the Navy sent petitioners a letter demanding the return of approximately $1.35 billion in progress payments for work never accepted by the Government. The parties later entered into a deferred payment agreement covering this amount."

General Dynamics and Boeing filed suit in the Court of Federal Claims, arguing that the government's superior knowledge about the contract excused its default.

"Uncovering the extent of the Government's prior experience with stealth technology proved difficult," Scalia wrote. "The design, materials, and manufacturing process for two prior stealth aircraft operated by the Air Force - the B-2 and the F-117A - are some of the Government's most closely guarded military secrets."

After some cautious discovery, Acting Secretary of the Air Force Merrill McPeak warned the court to stop the process as it was posing unacceptable risks that potentially jeopardized covert government proigrams.

By 1996, the trial court ordered the government to pay General Dynamic and Boeing $1.2 billion.

The Federal Circuit reversed, and the Court of Federal Claims on remand found that the contractors had defaulted. The judge ruled that the parties could not safely litigate whether superior knowledge excused that default. The Federal Circuit reversed again, finding that the matter could not be adjudicated and that the contractors did not necessarily default. On another remand, the Court of Federal Claims again found that the contractors had defaulted.

This time, the Federal Circuit affirmed, but the Supreme Court ruled Monday to reverse.

"Rather than tempt fate, we leave the parties to an espionage agreement where we found them the day they filed suit," Scalia wrote.

Neither party can find relief where full litigation to determine liability inevitably jeopardizes state secrets, according to the 13-page ruling.

"Neither side will be entirely happy with the resolution we reach today," Scalia wrote.

While the government wants return of the $1.35 billion in progress payments, "General Dynamics (but not Boeing) wants us to convert the termination into one for convenience and reinstate the CFC's $1.2 billion damages award." (Parentheses in original.)

Scalia said the court can offer neither since it would need to determine default to force repayment of the $1.35 billion and state secrets make calculation of damages for the plaintiffs "impossible."

"We leave the parties where they are," Scalia wrote.

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