General Dynamics Corp. v. United States

General Dynamics Corporation v. United States was a 2011 United States Supreme Court decision involving a judicial doctrine known as the State Secrets Privilege, whereby if the United States asserts that disclosure of information would jeopardize national security, that information is automatically excluded from the litigation, and the court must then (based on what is remaining) determine if a case can go forward.

Background

In the late 1980's the United States Navy held a competition to develop an early-generation stealth aircraft. Two teams competed for the opportunity:

• One team was comprised of McDonnell Douglas (a major supplier of Naval aircraft such as the F-18, later purchased by Boeing) and General Dynamics (which developed the F-16, later to become one of the most successful military aircraft of all time; the company would later sell its aircraft division to Lockheed Martin but would retain its rights in the litigation to follow). Their ultimate design would be called the A-12.
• The other team was comprised of Northrop and Grumman (both of which also supplied Naval aircraft, notably the famed F-4 which was one of the very few aircraft in service to both the Navy and the Air Force) along with major subcontractor Vought (Northrop and Grumman would later merge into today's Northrop Grumman, and for a time owned Vought but later sold it).

Problems would begin almost at the outset when the Navy insisted that the program would proceed under a fixed-price contract as opposed to a cost-reimbursable contract. The choice of a fixed-price contract was puzzling because, under such a contract type, the contractor must complete the contracted work regardless of what it ultimately costs; the contract type was totally unsuited for a program in the early development stages where the possibility of successful completion is totally unknown and may never occur. On the other hand, under a cost-reimbursable contract, once the contractor reaches the negotiated cost, it can request additional funding; if none is forthcoming the contractor is not required to continue performance (other than to prepare a final report on what was accomplished) unless it chooses to do so. Somewhat surprisingly (but maybe not given the proposed contract type), the Northrop/Grumman/Vought team never submitted a final proposal, leaving the McDonnell Douglas/General Dynamics team the "winner" of a $4.8 billion contract issued in 1998.

And not surprisingly given the nature of the new technology involved, the program ran into numerous technical issues, with the associated massive cost overruns expected. But since the contract was fixed-price, the overruns (combined with the mandatory requirement for completion) threatened the viability of two of the United States' major defense contractors. They pled with the Navy to convert the contract to a cost-reimbursable one (agreeing to share $150 million of cost overruns as consideration); instead, the Navy elected to cancel the contract in 1991.

Yet the Navy, in cancelling the contract, instead of doing so as a "termination for convenience" (which would require the Navy to reimburse the contractors for work performed, along with whatever profit was earned or adjusted downward for losses expected, plus "settlement expenses" in termination), decided to declare it a "termination for default" (used whenever the Government believes a contractor did not perform in accordance with contract terms; this obligates the contractor to reimburse the Government monies already paid) and demanded around $1.35 billion in funds already paid. The contractors protested stating that the Navy had withheld too much information under the "state secrets privilege" to justify a default termination.

Lower Court Litigation

The contractors filed suit in the United States Court of Federal Claims (CFC) seeking to have the default termination overturned. For the next two decades the case would shuffle back and forth between the CFC and the United States Court of Appeals for the Federal Circuit (CAFC, which serves as the appellate court for the CFC):

• Initially the CFC sided with the contractors, converting the default termination into a termination for convenience, which would have settled the contract for $1.2 billion.
• On appeal, the CAFC reversed the decision, remanding it back to CFC.
• On first remand, the CFC then sided with the Navy, ordering repayment.
• On second appeal, the CAFC again reversed and remanded the matter back to CFC.
• On second remand, the CFC again sided with the Navy.
• Finally, on third appeal, on July 1, 2009 he CAFC affirmed the CFC's decision, determining that termination for default was justified and ordering repayment of the payments made plus interest (totaling around $1.45 billion at this point).

Making the matter worse, on at least two different instances, during discovery classified information was inadvertently released to uncleared persons, forcing discovery to be halted each time.

The contractors appealed and the Supreme Court granted certiorari in September 2010. In the interim, Boeing had purchased McDonnell Douglas, while Lockheed Martin had purchased General Dynamics' aircraft division (General Dynamics retained its rights to the case as part of the sale).

Supreme Court Decision and later developments

Justice Scalia wrote the decision for a unanimous Court, which issued its ruling in May 2011. He wrote that "when litigation would end up disclosing state secrets, courts may not try the claims and may not award relief to either party", and therefore neither the contractors nor the Navy were awarded the amounts each had sought.

The case was remanded back to the CAFC "for proceedings consistent with this opinion". Eventually, in January 2014 the contractors agreed to repay the Navy $400 million (which was split evenly between McDonnell Douglas and General Dynamics) in settlement of the case.