In 1988, the Navy awarded General Dynamics and McDonnell Douglas a $4.8 billion fixed-price contract to research and develop the A-12 Avenger stealth aircraft. By December 1990, the contractors were almost two years behind schedule and determined that the cost of completing the contract would exceed the contract price by an unacceptable amount. The Navy terminated the contract for default in January 1991. By that time, the contractors had spent $3.88 billion attempting to develop the A-12, and the Navy had made $2.68 billion in progress payments.
The contractors filed suit in the Court of Federal Claims (CFC) challenging the Navy's termination of the contract, and asserting that the government's failure to share its "superior knowledge" about how to design and manufacture stealth aircraft excused their default. In the course of discovery, the government granted 10 members of the contractors' litigation team access to need-to-know and special-access materials relating to two prior stealth aircraft operated by the Air Force. Those disclosures and further discovery ultimately resulted in the unauthorized disclosure of military secrets, and caused the Acting Secretary of the Air Force to file a declaration with the CFC, warning that further discovery into the government's alleged superior knowledge would present a continuing threat of disclosure of military and state secrets. The CFC then terminated discovery relating to superior knowledge. After several intervening opinions by the Federal Circuit, the CFC eventually determined in 2007 that the contractors had defaulted on the contract. The Federal Circuit affirmed, and the Court granted certiorari to review the state-secrets holding that had prevented the contractors from presenting their defense to the contract termination.
The Supreme Court vacated the order below and remanded the case. The Court first distinguished its 1953 decision in United States v. Reynolds as not controlling this case, and instead identified two cases relating to alleged contracts to spy. In both Totten v. United States and Tenet v. Doe, the Court had concluded that public policy forbids suits based on covert espionage agreements that would inevitably lead to the disclosure of state secrets. "Rather than tempt fate, we leave the parties to an espionage agreement where we found them the day they filed suit." The Court concluded that the same consequence should follow in this case. Specifically, the Court held that neither party can obtain judicial relief where adjudication of a claim or defense would risk the disclosure of state secrets. They will be left where they were on the day they filed suit, in terms of both possession of funds and property. The Court did, however, limit its holding to those cases where the superior-knowledge defense is supported by enough evidence to make out a prima facie case. Finally, the Court noted that its analysis assumes that the government generally has an obligation to share its superior knowledge. Because that issue, and whether it could be safely litigated without endangering state secrets, had not been addressed by the Federal Circuit, the case was remanded for further proceedings.
Justice Scalia delivered the opinion for a unanimous Court.