Boeing, General Dynamics Get High Court Hearing in Stealth-Fighter Dispute

The U.S. Supreme Court, accepting a case that will affect government secrecy claims, agreed to review a ruling that could force Boeing Co. and General Dynamics Corp to pay $3 billion in a dispute over a canceled Navy aircraft contract.

The justices today said they will intervene in a 19-year- old legal dispute over the Pentagon’s 1991 termination of the A- 12 Avenger stealth fighter aircraft program. A federal appeals court said the government was justified in canceling the contract because the companies weren’t living up to their obligations.

A victory for the companies could wipe out the government’s demand for the return of $1.35 billion in payments, plus the interest that has accrued over two decades. More broadly, the case could affect the government’s use of the so-called state secrets privilege, which Boeing and General Dynamics say unfairly prevented them from mounting a defense in their case.

“By invoking the state-secrets privilege, the government has not simply taken some evidence out of this case,” General Dynamics argued in its appeal. “Rather, it has entirely prevented the contractors from raising a critical defense.”

The A-12 was one of the largest defense procurement fiascos in U.S. history. The plane, designed to penetrate heavily defended locations, never made it into production in spite of years of development.

Navy Planes

In 1988, General Dynamics and McDonnell Douglas signed a contract to build eight of the planes for the Navy at a total target price of $4.4 billion. Three years later, the Navy and then-Defense Secretary Dick Cheney declared the company in default and canceled the contract.

The two sides have traded blame. The government says the companies weren’t able to produce the aircraft as designed on schedule.

In the weeks leading up to the termination, the companies “adhered to the position that they could not build the A-12 aircraft for the agreed-upon price, under the agreed-upon schedule and to the agreed-upon specifications,” Acting U.S. Solicitor General Neal Katyal told the Supreme Court.

The state secrets issue stems from the companies’ contention that the delay was caused by the government’s refusal to share essential stealth technology.

Military Secrets

The government argued that the companies couldn’t press that argument because litigating the issue would require the disclosure of military secrets and jeopardize national security. Two lower courts agreed.

The companies don’t directly challenge the assertion of the state secrets privilege. They instead say the government’s invocation of the privilege should have precluded it from claiming default.

The Obama administration has drawn fire from human rights advocates for using the state secrets privilege in other contexts, including lawsuits by suspected terrorists who say they were subjected to torture.

Two business trade groups, including the U.S. Chamber of Commerce, joined Boeing and General Dynamics in urging Supreme Court review. Boeing, a Chicago-based aerospace company, inherited the litigation through its 1997 purchase of McDonnell Douglas Corp.

The companies at one point stood to recover $1.2 billion, plus interest. A trial judge awarded that sum in 1998 after ruling that the government improperly terminated the contract. An appeals court panel overturned that ruling.

The two companies would split any liability in the case. Boeing, which set aside $350 million in 1990, said in a July regulatory filing that the company ultimately could take $1.7 billion in pre-tax charges. General Dynamics, which is based in Falls Church, Virginia, said its after-tax charge could be $805 million, or $2.07 per share.

The cases are General Dynamics v. United States, 09-1298, and Boeing v. United States, 09-1302.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net.

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net.

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