GENERAL DYNAMICS CORP. v. UNITED STATES

Opinion of the Court

NOTICE: This opinion is subject to formal revision before publication in the
preliminary print of the United States Reports. Readers are requested to
notify the Reporter of Decisions, Supreme Court of the United States, Wash­
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SUPREME COURT OF THE UNITED STATES
_________________

Nos. 09–1298 and 09–1302

_________________

GENERAL DYNAMICS CORPORATION, PETITIONER
09–1298
v.
UNITED STATES

THE BOEING COMPANY, SUCCESSOR TO
McDONNELL DOUGLAS CORPORATION,
PETITIONER
v.
UNITED STATES

09–1302

ON WRITS OF CERTIORARI TO THE UNITED STATES COURT OF
APPEALS FOR THE FEDERAL CIRCUIT

[May 23, 2011]

JUSTICE SCALIA delivered the opinion of the Court.

We consider what remedy is proper when, to protect state secrets, a court dismisses a Government contractor’s prima facie valid affirmative defense to the Government’s allegations of contractual breach.

I

In 1988, the Navy awarded petitioners a $4.8 billion fixed-price contract to research and develop the A–12 Avenger carrier-based, stealth aircraft. 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. Petitioners informed the Government that the cost of completing the contract would exceed the contract price by an “ ‘unacceptable’ ” amount. McDonnell Douglas Corp. v. United States, 567 F. 3d 1340, 1343 (CA Fed. 2009); see McDonnell Douglas Corp. v. United States, 182 F. 3d 1319, 1323 (CA Fed. 1999). They proposed restructuring the contract as a cost-reimbursement agreement and offered to absorb a $1.5 billion loss. The Department of Defense had lost faith in the project, however, and Rear Admiral William Morris, the Navy’s contracting officer for the A–12 agreement, terminated the contract for default on Jan ­ uary 7, 1991.

By that point, petitioners had spent $3.88 billion at ­ tempting to develop the A–12, and the Government had provided $2.68 billion in progress payments. 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.

Petitioners filed suit in the Court of Federal Claims (CFC) to challenge Admiral Morris’s termination decision under the Contract Disputes Act of 1978, 92 Stat. 2388, as amended, 41 U. S. C. §609(a)(1). The Federal Circuit has recognized a governmental obligation not to mislead con­ tractors about, or silently withhold, its “superior knowl ­ edge” of difficult-to-discover information “vital” to contrac ­ tual performance. GAF Corp. v. United States, 932 F. 2d 947, 949 (1991). Petitioners asserted that the Govern ­ ment’s failure to share its “superior knowledge” about how to design and manufacture stealth aircraft excused their default (and also asserted other claims not relevant here).

Uncovering the extent of the Government’s prior experi ­ ence with stealth technology proved difficult. 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. “ ‘[N]eed-to-know’ or [special] access con ­ trols beyond those normally provided for access to Con ­ fidential, Secret, or Top Secret information” apply. 32 CFR §154.3(x) (2010); see App. 384–385. The Government nevertheless granted 10 members of petitioners’ litigation team “access to the Secret/Special Access level of the B–2 and F–117A programs.” Id., at 385. Four of those ten individuals received access to even the most sensitive aspects of the programs. See ibid.

That neither satisfied petitioners’ thirst for discovery nor prevented the unauthorized disclosure of military secrets. In March 1993, Acting Secretary of the Air Force Michael Donley asserted the state-secrets privilege to bar discovery into certain aspects of stealth technology beyond petitioners’ “need-to-know” authorizations. At a deposi ­ tion that month, a former Navy official’s responses to questions by petitioners and the Government revealed military secrets neither side’s litigation team was author ­ ized to know. Copies of the unclassified deposition were widely distributed and quoted in unsealed court filings until Government security officials discovered the breach a month later. A July 1993 deposition caused further unauthorized disclosures of military secrets.

These disclosures led Acting Secretary of the Air Force Merrill McPeak to file a declaration with the CFC. He warned that further discovery into the extent of the Gov ­ ernment’s superior knowledge “would present a continuing threat of disclosure of . . . military and state secrets” sur ­ rounding the “weight, profile or signature, and materials involved in the design and construction of ‘stealt[h]’ . . . aircraft and weapons systems.” Id., at 633, 635. Even relatively straightforward and innocuous questions, in his opinion, “would pose unacceptable risks of disclosure of classified, special access information,” id., at 636, includ ­ ing the potential disclosure of covert Government pro ­ grams, id., at 637.

The CFC took Secretary McPeak’s concerns seriously and terminated discovery relating to superior knowledge. It later decided that the extent of the Government’s supe ­ rior knowledge was a nonjusticiable question. Both sides had enough evidence to “present a persuasive case” on the superior-knowledge issue, but the CFC worried that, “wit[h] numerous layers of potentially dispositive facts” hidden by the privilege, its superior-knowledge rulings “would be a sham,” McDonnell Douglas Corp. v. United States, 37 Fed. Cl. 270, 280, 284–285 (1996), and one that would threaten national security, see id., at 281–282.

In 1996, for reasons not relevant here, the CFC con ­ verted the termination into a less-Government-friendly termination for convenience and awarded petitioners $1.2 billion. McDonnell Douglas Corp. v. United States, 35 Fed. Cl. 358. The Federal Circuit reversed, 182 F. 3d, at 1332, and left it for the CFC to reconsider on remand whether the need to protect military secrets precluded discovery into the superior-knowledge issue, id., at 1329–1330.

After a 6-week trial, the CFC sustained the default termination, McDonnell Douglas Corp. v. United States, 50 Fed. Cl. 311, 326 (2001), and reaffirmed that the par ­ ties could not safely litigate whether the Government’s superior knowledge excused petitioners’ default, id., at 325. The Court of Appeals reversed the default termina ­ tion, but agreed that the state-secrets privilege prevented adjudicating whether the Government’s superior knowl ­ edge excused the default. See McDonnell Douglas Corp. v. United States, 323 F. 3d 1006, 1024 (CA Fed. 2003). It rejected petitioners’ assertion that the Government could not pursue a claim against a party and then use the state ­ secrets privilege to completely preempt defenses to that claim; the Court of Appeals believed United States v. Reynolds, 345 U. S. 1, 12 (1953), had already “rejected” this “very argument.” 323 F. 3d, at 1023. Litigants can ­ not complain, the Court of Appeals held, when the state ­ secrets privilege trumps a defense “in [a] purely civil matter, suing the sovereign on the limited terms to which it has consented.” Ibid.

On remand, the CFC again found petitioners had de ­ faulted. McDonnell Douglas Corp. v. United States, 76 Fed. Cl. 385, 430 (2007). The Court of Appeals affirmed, see 567 F. 3d, at 1356, and we granted certiorari to review its state-secrets holding. 561 U. S. ___ (2010).

II

Many of the Government’s efforts to protect our national security are well known. It publicly acknowledges the size of our military, the location of our military bases, and the names of our ambassadors to Moscow and Peking. But protecting our national security sometimes requires keep ­ ing information about our military, intelligence, and dip ­ lomatic efforts secret. See Haig v. Agee, 453 U. S. 280, 307 (1981); Martin v. Mott, 12 Wheat. 19, 30–31 (1827). We have recognized the sometimes-compelling necessity of governmental secrecy by acknowledging a Government privilege against court-ordered disclosure of state and military secrets.

In Reynolds, three civilian contractors died during a test flight of a B–29 bomber. Their widows filed wrongful ­ death suits against the Government and sought discovery of the Air Force’s accident-investigation report. Federal discovery rules, then as now, did not require production of documents protected by an evidentiary privilege. See 345 U. S., at 6; Fed. Rule Civ. Proc. 26(b)(1). We held that documents that would disclose state secrets enjoyed such a privilege; the state-secrets privilege, we said, had a “well established” pedigree “in the law of evidence.” 345 U. S., at 6–7.

The penultimate paragraph of Reynolds rejected the widows’ assertion that if the Government invoked the state-secrets privilege it had to abandon the claim to which the thereby privileged evidence was relevant. That was, the widows observed, the price paid in criminal cases. If the Government refuses to provide state-secret informa ­ tion that the accused reasonably asserts is necessary to his defense, the prosecution must be dismissed. See id., at 12; Jencks v. United States, 353 U. S. 657, 672 (1957). The penultimate paragraph of Reynolds said that this was a false analogy. A like abandonment of the Government’s claim is not the consequence “in a civil forum where the Government is not the moving party, but is a defendant only on terms to which it has consented.” 345 U. S., at 12. Both petitioners and the Court of Appeals rely upon this statement to support their differing positions.

We think that Reynolds has less to do with these cases than the parties believe—and its dictum (of course), less still. Reynolds was about the admission of evidence. It decided a purely evidentiary dispute by applying eviden ­ tiary rules: The privileged information is excluded and the trial goes on without it. That was to the detriment, of course, of the widows, whom the evidence would have favored. But the Court did not order judgment in favor of the Government. Here, by contrast, the CFC decreed the substantive result that since invocation of the state ­ secrets privilege obscured too many of the facts relevant to the superior-knowledge defense, the issue of that defense was nonjusticiable, and the defense thus not available. See 37 Fed. Cl., at 284–285. And that was so even though petitioners had brought forward enough unprivileged evidence to “make a prima facie showing.” Id., at 280.

While we disagree, for reasons set forth below, with the CFC’s disposition of the remainder of the case, its percep ­ tion that in the present context the state-secrets issue raises something quite different from a mere evidentiary point seems to us sound. What we are called upon to exercise is not our power to determine the procedural rules of evidence, but our common-law authority to fashion contractual remedies in Government-contracting disputes. See Priebe & Sons, Inc. v. United States, 332 U. S. 407, 411 (1947). And our state-secrets jurisprudence bearing upon that authority is not Reynolds, but two cases dealing with alleged contracts to spy.

In Totten v. United States, 92 U. S. 105 (1876), the administrator of a self-styled Civil War spy’s estate brought a breach-of-contract suit against the United States. He alleged that his testator had entered into a contract with President Lincoln to spy on the Confederacy in exchange for $200 a month. After the war ended, the United States reimbursed expenses but did not pay the monthly salary. We recognized that the estate had a potentially valid breach-of-contract claim but dismissed the suit. The contract was for “a secret service,” and litigating the details of that service would risk exposing secret operations and other clandestine operatives “to the serious detriment of the public.” Id., at 106–107. “[P]ublic policy,” we held, “forbids the maintenance of any suit . . . the trial of which would inevitably lead to the disclosure of matters which the law itself regards as confidential, and respecting which it will not allow the confidence to be violated.” Id., at 107.

Six years ago, we reaffirmed that “public policy for ­ b[ids]” suits “based on covert espionage agreements.” Tenet v. Doe, 544 U. S. 1, 3 (2005). Such suits threaten to undermine ongoing intelligence-gathering and covert operations—two vital aspects of national security— through inadvertent exposure of espionage relationships. Id., at 11. Rather than tempt fate, we leave the parties to an espionage agreement where we found them the day they filed suit.

We think a similar situation obtains here, and that the same consequence should follow. Where liability depends upon the validity of a plausible superior-knowledge de ­ fense, and when full litigation of that defense “would inevitably lead to the disclosure of ” state secrets, Totten, supra, at 107, neither party can obtain judicial relief. As the CFC concluded, that is the situation here. Disclosure of state secrets occurred twice before the CFC terminated discovery. See 37 Fed. Cl., at 277–278. Every document request or question to a witness would risk further disclo ­ sure, since both sides have an incentive to probe up to the boundaries of state secrets. State secrets can also be indirectly disclosed. Each assertion of the privilege can provide another clue about the Government’s covert pro ­ grams or capabilities. See Fitzgerald v. Penthouse International, Ltd., 776 F. 2d 1236, 1243, and n. 10 (CA4 1985). For instance, the fact that the Government had to con ­ tinue asserting the privilege after granting petitioners access to B–2 and F–117A program information suggests it had other, possibly covert stealth programs in the 1980’s and early 1990’s.

It seems to us unrealistic to separate, as the CFC did, the claim from the defense, and to allow the former to proceed while the latter is barred. It is claims and de ­ fenses together that establish the justification, or lack of justification, for judicial relief; and when public policy precludes judicial intervention for the one it should pre ­ clude judicial intervention for the other as well.* If, in Totten, it had been the Government seeking return of funds that the estate claimed had been received in pay ­ ment for espionage activities, it would have been the height of injustice to deny the defense because of the Government’s invocation of state-secret protection, but to maintain jurisdiction over the Government’s claim and award it judgment. Judicial refusal to enforce promises contrary to public policy (here, the Government’s alleged promise to provide superior knowledge, which we could not determine was breached without penetrating several layers of state secrets) is not unknown to the common law, and the traditional course is to leave the parties where they stood when they knocked on the courthouse door.

“In general, if a court will not, on grounds of public policy, aid a promisee by enforcing the promise, it will not aid him by granting him restitution for performance that he has rendered in return for the unenforceable promise. Neither will it aid the promisor by allowing a claim in restitution for performance that he has rendered under the unenforceable promise. It will simply leave both parties as it finds them, even though this may result in one of them retaining a benefit that he has received as a result of the transaction.” 2 Restatement (Second) of Contracts §197, Comment a, p. 71 (1979); see, e.g., Worlton v. Davis, 73 Idaho 217, 222–223, 249 P. 2d 810, 814 (1952).

These cases differ from the common-law cases that we know, in that the unenforceability did not exist at the time the contract was formed, See 2 Restatement (Second) of Contracts §179, Comment d, at 18, but arose because of the Government’s assertion of the state-secrets privilege that rendered the promise of superior knowledge unadju ­ dicable. We do not see why that should affect the remedy. Suit on the contract, or for performance rendered or funds paid under the contract, will not lie, and the parties will be left where they are.

The law of contracts contains another doctrine that relates to the CFC’s concern about the reliability of its judgment “without numerous layers of potentially disposi ­ tive facts,” 37 Fed. Cl., at 284–285. The Statute of Frauds, which has been with us since the 17th century, reflects concerns about the reliability of oral evidence. See Valdez Fisheries Development Assn., Inc. v. Alyeska Pipeline Serv. Co., 45 P. 3d 657, 669 (Alaska 2002); 9 R. Lord, Williston on Contracts §21:1, pp. 170–172 (4th ed. 1999 and 2010 Supp.). It assumes a valid, enforceable agreement be ­ tween the parties but nevertheless leaves them without a remedy absent reliable evidence—a writing. See 1 id., §1:21, at 82 (4th ed. 2007 and 2010 Supp.); 9 id., §21:5, at 192. So also here, it is preferable to leave the parties without a remedy rather than risk the “potential injus­ tice,” Valdez Fisheries, supra, at 669, of misjudging the superior-knowledge issue based on a distorted evidentiary record.

The Government suggested at oral argument that where the parties stood at the time of suit was that petitioners had been held in default, liable for the ensuing conse ­ quences. See Tr. of Oral Arg. 48–49; see also Brief for United States 32, n. 9, 34–35. That had been the declara ­ tion of the contracting officer, pursuant to Chapter 9 (entitled “Contract Disputes”) of Title 41 (entitled “Public Contracts”). See 41 U. S. C. §605. It was “final and con ­ clusive . . . unless an appeal or suit is timely commenced.” §605(b). We regard that, however, as merely one step in the contractual regime to which the parties had agreed. It has no more bearing upon the question we are discussing than would a provision in a private contract that declara ­ tion of default by one of the parties is final unless con ­ tested in court. The “position of the parties” in which we will leave them is not their position with regard to legal burdens and the legal consequences of contract-related determinations, but with regard to possession of funds and property.

III

Neither side will be entirely happy with the resolution we reach today. 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. See Brief for Petitioner in No. 09–1298, pp. 58–61. The language of the A–12 agreement does not give us that option. It au ­ thorizes a court to convert a default termination into a termination for convenience only if it “determine[s] that the Contractor was not in default, or that the default was excusable.” 48 CFR §52.249–9(g) (2010). Our opinion does not express a view on those issues. It holds them nonjusticiable.

Moreover, state secrets would make it impossible to calculate petitioners’ damages. A termination for conven ­ ience ordinarily entitles a contractor to recover its in ­ curred costs of performance, reasonable termination ex ­ penses, and a reasonable profit on the work performed (or an offset to account for the contractor’s expected losses had the contract been performed to completion). See §52.249–2(g). The CFC’s $1.2 billion award to petitioners in 1996 simply reflected their actual costs incurred minus progress payments received. The CFC decided it could not calculate petitioners’ expected losses (or profits) without deciding the extent to which the Government’s alleged failure to share its superior knowledge contributed to petitioners’ cost overruns—a nonjusticiable question. See 37 Fed. Cl., at 285. Absent proof of the Government’s superior knowledge, and of how the sharing of that would have made this a profitable contract, the $1.2 billion award might represent an undeserved windfall.

The Government, for its part, wants a return of the $1.35 billion it paid petitioners in progress payments for work which it says it never approved. But the validity of that claim depends upon whether petitioners are in de ­ fault on their contract. If they are not, termination for convenience of the Government would entitle them to retain those progress payments (unless, of course, they would have incurred a loss on the entire contract). Nei ­ ther the question whether they are in default nor the question whether performance of the entire contract would have left them with a loss can be judicially determined because of the valid assertion of the state-secret privilege.

We leave the parties where they are. As in Totten, see 92 U. S., at 106, our refusal to enforce this contract cap ­ tures what the ex ante expectations of the parties were or reasonably ought to have been. Both parties “must have understood,” ibid., that state secrets would prevent courts from resolving many possible disputes under the A–12 agreement. The Government asked petitioners to develop an aircraft the design, materials, and manufacturing process for which would be closely guarded military se ­ crets. See Contract Schedule H–1, App. 73–75; Contract Security Classified Specification, id., at 129–135. The contract itself was a classified document at one point. See Contract Schedule H–1, ¶8, id., at 75. Both parties—the Government no less than petitioners—must have assumed the risk that state secrets would prevent the adjudication of claims of inadequate performance.

We believe, moreover, that the impact of our ruling on these particular cases (which we think produces rough, very rough, equity) is probably much more significant than its impact in future cases, except to the extent that it renders the law more predictable and hence more subject to accommodation by contracting parties. They can ne ­ gotiate, for example, the timing and amount of progress payments to account for the possibility that state secrets may ultimately render the contract unenforceable. The Government’s concern that contractors will raise frivolous superior-knowledge defenses designed to goad the Gov ­ ernment into asserting the state-secrets privilege is mis­ placed. To begin with, the rule we announce today applies only when the superior-knowledge defense is supported by enough evidence to make out a prima facie case. More ­ over, Government contractors—especially cutting-edge defense contractors of the sort likely to operate in the state-secrets field—are repeat players. Even apart from the judicial sanctions available to punish bad conduct, see Fed. Rules Civ. Proc. 11, 26(g), they have strong incen ­ tive to behave rather than risk missing out on the next multibillion-dollar defense contract. And finally, while we anticipate that the rule we set forth will ordinarily control Government-contract disputes that become nonjusticiable because of state secrets, what we promulgate today is not a statute but a common-law opinion, which, after the fashion of the common law, is subject to further refine ­ ment where relevant factors significantly different from those before us here counsel a different outcome.

The foregoing analysis assumes that the Government generally has an obligation to share its superior knowl ­ edge, see GAF Corp., 932 F. 2d, at 949; the parties have not challenged that assumption. The Government argued below, however, that it does not have that obligation with respect to “highly classified information,” and does not have it when (as was the case here) the agreement specifi ­ cally identifies information that must be shared. Brief for United States 52. The Court of Appeals did not address those questions (it had no reason to, given its disposition of petitioners’ appeal), and we did not grant certiorari to decide them. Those issues (and whether they can safely be litigated without endangering state secrets) therefore remain for the Court of Appeals to address on remand.

* * *

In Reynolds, we warned that the state-secrets eviden ­ tiary privilege “is not to be lightly invoked.” 345 U. S., at 7. Courts should be even more hesitant to declare a Gov ­ ernment contract unenforceable because of state secrets. It is the option of last resort, available in a very narrow set of circumstances. Our decision today clarifies the consequences of its use only where it precludes a valid defense in Government-contracting disputes, and only where both sides have enough evidence to survive sum ­ mary judgment but too many of the relevant facts remain obscured by the state-secrets privilege to enable a reliable judgment.

We vacate the judgment of the Court of Appeals and remand the cases for further proceedings consistent with this opinion. It is so ordered. *Of course, this does not mean the nonjusticiability of one aspect of a case will necessarily end the entire litigation. If, for example, the Government asserts two justifications for its default termination, and if state secrets deprive the contractor of a prima facie valid defense to only one of those claims, the court can still adjudicate the validity of the other.

Print this transcript Transcript: 

ORAL ARGUMENT OF CARTER G. PHILLIPS ON BEHALF OF PETITIONER

Chief Justice John G. Roberts: We will hear argument first this morning in Case 09-1298, General Dynamics v. United States, and the consolidated case, 09-1302, the Boeing Company v. United States.

Mr. Phillips.

Mr. Phillips: Thank you, Mr. Chief Justice, and may it please the Court:

The proposition that Petitioners are here challenging is the one adopted or embraced by the Federal Circuit that says that the United States Government can declare that certain of its government contracting partners have operated in default and under those circumstances can reach into the government contractor's pocket, withdraw at the time $1.35 billion of monies that were spent by the United States, but for services that were rendered, without question, pursuant to the contract, pursuant to the instructions of the United States Government, and that when the contractor seeks to defend against the claim that it has engaged in some kind of default conduct, that the government can assert the state-secrets privilege and in so doing deprive the contractor of the ability effectively to respond to the government's conclusion.

Under those circumstances, it seems to me that the statement in this Court's decision in United States v. Reynolds, which is that the government is certainly free to assert the state-secrets privilege, but when it does so it has to assume certain responsibilities that come from it, at least in the circumstances where the United States is the moving party.

Justice Ruth Bader Ginsburg: Mr. Phillips, when the contractors -- when they failed to deliver the first aircraft at the time specified by the contract, their reason was that its costs would far outrun the contract price, and so it sought to reformulate the contract.

At that time -- correct me if I'm wrong, but I think at that time the contractor said nothing at all about superior knowledge and the government's obligation to share information that it hadn't shared.

Mr. Phillips: There was nothing specific with respect to that, Justice Ginsburg.

The first time the contractors identified the superior knowledge problem arose, obviously, when the government took the extraordinary step of issuing a cure notice, because up until that point, obviously, the parties are attempting to negotiate and work to a final resolution of this project, as you would hope any contracting entities would, to bring the contract to a happy resolution, so--

Justice Ruth Bader Ginsburg: But you would expect them to say, if that was the impediment to going forward on this contract, to at least mention it.

Mr. Phillips: --Well, I think you have to put it in context, Justice Ginsburg, because during this period of time, obviously, there were consistent efforts and requests being made to get access to both the B-2 and the A-117 stealth technologies, and there were discussions that went back and forth, and the district court -- and the Court of Federal Claims specifically held, eventually the information was forthcoming, but it was, candidly, too little and too late to effectively allow the contract to proceed as -- as planned.

So I think -- I mean, I agree, you know, in a perfect world, maybe you would have identified this.

But in this situation, the parties are simply trying to come to some kind of a resolution that allows both sides to be satisfied by the final--

Justice Sonia Sotomayor: Mr. Phillips--

Mr. Phillips: --disposition.

Justice Sonia Sotomayor: --why wasn't the need to share that technology a part of this contract or a condition to the contract.

I've gone through the contract -- or, not all of it; enough of it.

I haven't found anywhere in the contract that it requires the U.S. to share information with you.

Does that have anything to do with what due process would require?

Mr. Phillips: No, I think -- I think, Justice--

Justice Sonia Sotomayor: I'm going to pose a hypothetical.

Let's assume the contract required the sharing of state secrets and the government then invokes its privilege.

Is that a different case than this one in terms of due process?

Wouldn't the -- wouldn't the former situation, where it's been made a condition of the contract, require a different treatment than this situation where the government's just saying, if you want to raise a defense that's not part of the contract, then you do what every other litigant with a privilege does -- who a privilege has been invoked against; you proceed with whatever evidence you have.

Mr. Phillips: --Well, you have to--

Justice Sonia Sotomayor: That's usually what happens with other privileges.

Mr. Phillips: --Right.

And we would have been perfectly content to proceed with the evidence we had.

But the ultimate decision by the Court of Federal Claims was that it was impossible to ultimately be in a position to resolve it.

But I want to answer your more fundamental question, Your Honor as to the -- the basic point is that the background principle of law, the superior knowledge defense, is the understanding of the parties when they enter into an agreement.

I mean, that would have been true just as much in the Helene Curtis case and the other cases where the Federal Circuit has acknowledged the superior knowledge defense.

That's been around for a long time.

It's an understood basis on which the parties enter into an agreement.

That's the first answer.

The second answer is that you're asking us to put into a contract something about information that we don't know anything about.

I mean, we have some sense about the B-2 and the A-117, but we don't know anything about the other programs that are identified here.

Justice Sonia Sotomayor: Wait a minute.

Where's the obligation of the government to tell you, build it this way using the technology we already have.

I thought your claim was that you were promised this information and you structured the contract based on that promise.

Mr. Phillips: Well, our claim -- we have separate -- we have a series of distinct claims.

Our first claim is that we never would have entered into the contract in the first place if the government had provided us with information based on its superior knowledge that, for instance, the weight specifics that we were being asked to provide or to supply were literally impossible to comply with based on what the government already knew.

If we had been just told that much, just given a warning, we wouldn't be in the situation where we are here.

Justice Sonia Sotomayor: Well, there's a factual dispute about that.

I think somewhere I read that there is a claim that they told you your weight estimates weren't right.

Mr. Phillips: Well -- I mean, there may be a factual dispute, but I'd be -- and I would be happy to litigate that issue if we can get to that point where we are in fact allowed to litigate any aspects of our particular defense.

But the bottom line here is, and again to state the proposition as starkly as it is because this is the way it comes to the Court from the Federal Circuit, they're saying that the government can assert a claim for $1.35 billion dollars against us and tell us that we cannot defend against that claim even though the reason why we were unable to comply with the contract is because of the fact that the government didn't provide us information either at the outset or as we went along--

Justice Stephen G. Breyer: The two questions I would have is, first of all -- Justice Sotomayor, sorry; I didn't -- I did have her question, because what that suggests is in this case it's not unfair to hold your client in this case, and you just read the two Circuit Court opinions here and you think this is a defense coming out of long in the past that doesn't have much substance to it.

That was her question, I think, as I understood it.

Mr. Phillips: --Can I just--

Justice Stephen G. Breyer: In other words, it's not unfair.

But let me give you the other question because some time in your argument I would like you to get to that.

And that is, if we accept as a principle of law what was said in Reynolds, a criminal case or whatever, and apply it to government contracting, where sophisticated contractors are perfectly capable of negotiating their own contract, we are not just throwing a monkey wrench into the gears of government contracting; we're throwing the whole monkey.

That's my second question.

Mr. Phillips: --Well, I don't--

Justice Stephen G. Breyer: One, this isn't a case that calls for it; and, two, the threat to government contracting by changing from Reynolds to here is overwhelming.

Now, I would like your views on both of those.

Mr. Phillips: --Right.

Well, it seems to me clearly that this is the precise situation where Reynolds is saying if you cannot bring forward a legitimate defense -- I mean, part of the problem is we don't know precisely what information we didn't have and were never entitled to.

So it's very difficult to say how strong is our defense under these circumstances.

What we do know is that the Court of Federal Claims judge looked very carefully at this and said that we had made an impressive showing without regard to any of the confidential or privileged information of a prima facie defense in these circumstances.

So our position is we had a very valid defense.

This is not pretextual.

We're not throwing this in simply as a mechanism to force the government to assert its state secrets.

That's a fairly contrived approach to litigation, and frankly not something that I could imagine any circumstance in which we would do that.

Two, I don't see how this throws a monkey wrench into this process whatsoever, much less throws out the monkey, because the basic understanding here is that the government is not entitled to force its contractor down a ruinous course.

If the government has information available to it, then it has to make that information -- has to be forthcoming with the information with the contractor, either at the outset, which would have been the best of all circumstances here, or as matters go along.

Justice Samuel Alito: Well, the Petitioners as a formal matter were the moving party, isn't that right?

Mr. Phillips: Well, "moving party" I think is, is not a self-defined concept, Justice Alito.

The Petitioners are the plaintiffs.

Justice Samuel Alito: They were the plaintiffs.

And the review scheme that you outlined was known to them beforehand.

So why do we need to look beyond that?

Mr. Phillips: Well, because the review scheme also says that the very -- in 1986 in the Assurance case, the Federal Circuit said, which was before this contract was entered into, the Federal Circuit said the filing, the mere filing of a complaint, immediately vacates the contracting officer's rule.

So our understanding at the time we entered into this agreement is that if there were a problem with the way the contracting officer operated, we would be allowed to file a claim and immediately take the contracting officer's rule off the table.

Under those circumstances, it seems to me all we're asking for is to go back to the status quo ante in that situation, which means there's no contracting officer decision, there's no basis on which the government can make a claim for 1.35 billion, now $3 billion.

Justice Ruth Bader Ginsburg: Can you explain -- you've referred to it several times now.

I thought that that was not a progress payment based on completed work.

The government says that that money was advanced; you had not complied with what was necessary to comply with to get that $1.35 million.

They distinguished the $1.35 million that you legitimately received as a progress payment, but this next they say you have not fulfilled what you needed to do to get that.

Mr. Phillips: Well, what had not happened is that the final -- there had not been a final sign-off by the contracting officer approving it, and thereby reducing it to a liquidated claim.

But that's a vastly different statement than to say -- and, indeed, we have an argument that, at least with respect to half of that, that it had already effectively been approved through a mechanism independent of the contracting officer.

But the bottom line here is these were services rendered, actually rendered.

This was not some kind of a prepayment for services to be rendered in the future.

That's not the nature of this contract.

These were -- this was for work we had done, for which we had submitted specific claims, and for which the contracting officer had pending before him at the time.

And so, you know, what the government says is that -- is that it was a payment and they didn't ultimately get the airplanes that were the ultimate desire of the contract under these circumstances, and that's obviously true because they terminated the contract a year before the airplanes were due to be provided to them.

Justice Ruth Bader Ginsburg: But you are here seeking to -- to emerge as a total winner, that is to get from this contract what you would have gotten if it had been successfully completed, including any profit?

Mr. Phillips: No, no Justice Ginsburg, that's not true.

All we are asking for is -- are the remedies that are fully available if you were to convert this from a termination for default into a termination for convenience, and under those circumstances, what -- you know, the government has a wonderful mechanism there that protects it against the kind of lost profits damages that might otherwise be available in a situation where you have a more traditional breach of contract.

So all we're asking for is the actual amount of money that we expended, that frankly the Court of Federal Claims explicitly found, and at this stage it's unchallenged, although presumably it might be litigable at some point, but that these were all reasonable, allowable, and fairly allocable costs to these -- to this particular contract.

Justice Samuel Alito: Why shouldn't we view this as if it were a dispute between two private contracting parties?

And if we did that, perhaps one party would be the moving party with respect to some of the claims and the other party would be the moving party with respect to the remaining claims.

Mr. Phillips: Justice Alito, I think that is precisely how you ought to look at it, and -- and we would be very comfortable with that, because it's quite clear to me that, except in the hyper-technical way that -- that you articulate because of -- because of the way the Contracts Disputes Act plays out, that the government is unquestionably the moving party, the party seeking affirmative relief to be able to take 1.35 billion--

Justice Ruth Bader Ginsburg: I -- I -- I think it's questionable, Mr. Phillips, for this reason.

You say that it's an implied term of this contract that the government has a duty to share certain information, and you are seeking to enforce that implied term of the contract.

So it seems to me as to that alleged duty you are the moving party.

You're saying: Court, please enforce this implied term of the contract.

Mr. Phillips: --Well, in that -- I mean, you can -- that's one way to articulate it.

I think the other way to articulate it, which -- which is much more consistent with the reality of what's going on here, is that the government is making a claim for $1.35 billion for which -- on the basis that we did not act in a timely fashion.

And that's the only basis that exists in this litigation any more, is just the time of the actions that we took.

And our answer to that claim is to say: No, we -- we -- we are not at fault for the delays because you did not provide us the information or you did not spare us the burden of having to go down this path in the first instance.

Justice Antonin Scalia: Yes, but then you go on to say: Moreover, give us -- give us the payment for the additional money beyond the 1.35 that you've already given us--

Mr. Phillips: Well--

Justice Antonin Scalia: --plus this additional money that we've expended.

Mr. Phillips: --Right.

But that just goes to Justice Alito's question about is there some way to evaluate those claims separately, and the answer is, yes, they should be evaluated separately.

Justice Antonin Scalia: Well, why shouldn't we?

I mean, it -- it -- it seems to me if -- if indeed you say the government has come up with a defense that makes it impossible to decide who's in the right here--

Mr. Phillips: Right.

Justice Antonin Scalia: --why don't we just -- you know, I -- I think the usual course taken by courts would be to leave the parties where they are.

The matter can't be litigated.

That would mean you would keep your $1.35 billion, but you wouldn't be entitled to sue for the additional amount.

If -- if you were that worried, you should have -- you -- you should have had more frequent progress payments or something.

Why don't we just leave you where you are, both you and the government, assuming we agree with you on all the rest?

Mr. Phillips: Well, I mean, to be sure, we would be much more comfortable in the world you just articulated, Justice Scalia.

Justice Antonin Scalia: Yes, you would be 1.35 billion--

[Laughter]

Mr. Phillips: With interest.

[Laughter]

Justice Antonin Scalia: With interest.

I forgot the interest.

Mr. Phillips: That's starting to add up, Your Honor.

[Laughter]

But -- and -- certainly we think that's -- that is the minimum that we should be entitled to, and maybe to some extent you could say we're sort of being a little greedy.

But the -- the reality is that the standard rule is that if you take a contract and you say you cannot make a determination that the contractor has been guilty of default, then that contract should be, in the kind of the basic contract law and it's also in this -- in this agreement, that you -- you convert it to a termination for convenience.

And then the question simply is, what rights flow from having declared this to be a termination for convenience?

Justice Ruth Bader Ginsburg: You mentioned the 1.3 -- that you get to keep the 1.35 million, but there was also another figure, 1.2 million that you would get on top of that.

Mr. Phillips: Right.

And that -- that--

Justice Ruth Bader Ginsburg: So that certainly wouldn't be leaving you where you were.

Mr. Phillips: --Well, no.

I mean, actually, what -- what the $1.2 billion was, was the additional amounts of money that were actually expended by the contractors that were reasonable, allocable and allowable, by and according to the Court of Federal Claims, on this agreement.

So, there -- and it would be the standard operating procedure.

If you have a termination for convenience, where the government says, look, we've decided we just don't want to have this, we don't want these airplanes any more, so let's just call it off, which the government has the right to do, then the question is what are the reasonable costs that are, you know, sort of reallocated as a consequence of that.

And the Court of Federal Claims--

Justice Antonin Scalia: But the government didn't do that.

I mean, you're making it up.

The government didn't terminate for convenience.

The government claimed you're in default.

Why would -- why should we force that down the government's throat when we can no more say that the government's wrong than we can say that you're wrong?

Mr. Phillips: --Well, it seems to me the -- I mean, the question is was the default--

Justice Antonin Scalia: It seems to me you call the game off.

Mr. Phillips: --Well, and the question is, if you call the game off, what -- what flows from that.

And it seems to me that it -- you can say we'll let the government call it a default, I suppose, or you could just as easily say, and obviously the position we would take is, you say the government cannot call it a default because in order to get some kind of a determination along those lines somebody is going to have to make a judgment that's not an honest assessment of the, of the -- of the facts of this case.

And, so, if you say it's not a default termination, then there is just a certain amount of -- certain consequences that flow from converting it, and it automatically converts at that point to a termination for convenience.

And in a termination for convenience situation, then you reallocate the costs in precisely the way that the Court of Federal Claims has done this at this point.

Justice Antonin Scalia: But the fallacy is we're not -- assuming we agree with you on the rest, we're not saying that it's not a default termination.

We're saying we don't know.

Mr. Phillips: Right.

And the question is--

Justice Antonin Scalia: We're saying we don't know, we don't know what the state secrets thing is.

The government is entitled to -- to make that determination, so we don't know who's in the right here.

Mr. Phillips: --Well, I -- I -- the problem--

Justice Antonin Scalia: So why force the government to -- to -- to go to a termination for convenience?

Mr. Phillips: --Right.

Well, I would think that the -- the more appropriate way to proceed under those circumstances, given that a default termination carries with it a lot of collateral consequences, it exposes you to subsequent problems in the contracting context, it creates the possibility of debarment in -- in future proceedings, that rather than allow a finding that no one can comfortably conclude is the right finding to stay in place and have those collateral consequences flow from it, the more appropriate way to proceed would be to say: Look, I can't make a determination in this case that there should be a termination for default.

And under those -- and so therefore, the -- the -- under the contract, under the government contracting principles generally, it automatically converts over to a termination for convenience.

And once that happens, then you go down the road of -- of evaluating those costs.

And, again, the government has arguments about those costs, I'm sure, and we can -- and we can debate those out, although, you know, I would commend the Court to the--

Justice Sonia Sotomayor: Mr. Phillips, give us a way, a reasoned way, to reach the result Justice Scalia is suggesting, because you are being greedy.

You admitted it.

The termination--

Mr. Phillips: --No, I -- I said--

Justice Sonia Sotomayor: --A termination for--

Mr. Phillips: --I could be characterized that way.

Justice Sonia Sotomayor: --convenience carries its own automatic consequences that appear unfair in light of the fact that the litigation of the default termination has been invoked because there is a risk to the United States.

So, is there a reasoned way to do it--

Mr. Phillips: Now, are you--

Justice Sonia Sotomayor: --to not -- to not impose that unfairness on the government?

And if there's not, then explain to me why it's unfair, given that you're two sophisticated contracting parties, to say you entered a contract knowing the government could invoke state secrets, it has, and so you bear the risk of that.

I mean, you always knew the government could do this.

Mr. Phillips: --Right, but -- well, I don't know whether you want me to answer the second part first--

Justice Sonia Sotomayor: It goes back to my original question is--

Mr. Phillips: --or go back to the original question.

Justice Sonia Sotomayor: --you could have contracted around it.

Mr. Phillips: Sure, and so could the government.

I mean, the reality is that the background principle here is United States v. Reynolds.

And United States v. Reynolds says that if somebody is the moving party, that is the party seeking affirmative relief, that's the party who's going to bear the burden--

Justice Elena Kagan: Mr. Phillips, could I ask you whether that principle makes any sense in this contracting situation, because both parties have argued it as though the question of who is the moving party is determinative of this case, but in a contract situation the question of who's the moving party is very often arbitrary or fortuitous.

If you think about it in a private setting, you have one contract, one contractor who fails to perform or -- or provides some deficient product, another who decides it's not going to pay, and the question of who the plaintiff is, is often just a matter of fortuity, who gets to the courthouse first--

Mr. Phillips: --Right.

Justice Elena Kagan: --what the payment schedule has been like, so whether somebody is demanding their money back or simply refusing to pay it at all.

So, why in this contract situation is the question of who's the plaintiff or who's the moving party, why does -- why does that make such a difference?

Mr. Phillips: Well, I -- I think that actually the Court in Reynolds, to the extent it would have envisioned any of these circumstances decades ago, used the language "moving party" rather than "plaintiff" or "defendant" precisely for that reason, because I think what the Court had in mind is the party who was seeking affirmative relief.

Justice Ruth Bader Ginsburg: It was thinking of a tort.

It wasn't thinking of -- Reynolds is a tort action.

Mr. Phillips: Oh, no.

To be sure, that's -- that's the specific context, although the Court's language is broader than that.

It just didn't talk about itself as a defendant in a tort action.

Justice Elena Kagan: But it can't possibly be the case that the question is what the payment schedule is.

If I've paid you already and then I find your product deficient, then I'm going to go to court and demand my money back.

If I find your product deficient before I pay you, then you are going to go to court and say, you have to pay me.

So why should that difference make a difference with respect to the constitutional question before us?

Mr. Phillips: Well, because in the one situation I have $1.35 billion in my pocket for services that were unquestionably rendered and which, in our judgment, you know, satisfied our portion of the obligation under this contract.

Justice Elena Kagan: Both parties have a claim here.

One says you provided deficient performance; the other says you were obligated to pay me.

The question of who has the claim and who has the affirmative defense, it can be structured in either way.

Mr. Phillips: I don't disagree with that, Justice Kagan.

I think the bottom line, though, is, you know, what -- what -- what are -- what do principles of fundamental fairness tell you to do in this case.

Justice Stephen G. Breyer: That's exactly my problem, because when I looked at Reynolds, Reynolds doesn't hold anything in your favor.

It holds the opposite way.

It says to you, in a criminal case, we said it was unconscionable for the government both to prosecute and not to -- not to tell them a secret, okay?

And it says such a rationale has no application in a civil forum where the government is not the moving party.

It doesn't say anything about where the government is the moving party.

Mr. Phillips: Right, but--

Justice Stephen G. Breyer: And Exhibit A that it is not unconscionable here consists of the two opinions of the Federal Circuit.

I mean, now, what do you want me to read to get over that impression?

Mr. Phillips: --Well, I mean, the very fact that the Court says and limits its ruling to where the government is not the moving party, I mean if the government really -- if the Court--

Justice Stephen G. Breyer: It didn't limit it.

It said the rationale is unconscionable.

Now, I don't even have to go that far.

I can go to "fundamentally unfair".

All I want to know is what should I read to get over my unfortunate impression, which I got out of the two opinions that I did read, that there was nothing unfair?

Okay?

What do you want me to read to get over that impression--

Mr. Phillips: --Well--

Justice Stephen G. Breyer: --which I think you do want me to read something.

Mr. Phillips: --I think -- right.

Well, no, you should clearly read the Court of Federal Claims opinion that gave rise to this in the first place, where -- where the judge says, we have made--

Justice Stephen G. Breyer: Okay.

Mr. Phillips: --an impressive prima facie showing of a defense.

And -- and the Federal Circuit's view is: We don't care; we're not going to let you go down that path, period.

And all we're saying is that in that situation, where we have made that kind of showing, the default rule should be the government cannot reach into our pocket and--

Justice Sonia Sotomayor: Just before we get there, that showing was based on the court's in camera review of quite a bit of already confidential information, correct?

Mr. Phillips: --And the nonprivileged information that it had available to it.

Justice Sonia Sotomayor: And the nonprivileged information.

So it made this judgment on the basis of a great deal of information, and yet it couldn't conclude that you were right as a matter of law, correct?

Mr. Phillips: Well, it recognized that it terminated the discovery early; and actually, it did -- it terminated discovery very early, and -- and there are whole programs that we know nothing about.

We know about the B-2 and the A-15.

What we don't know are the other programs, and there's nothing in this record on any of that, Your Honor.

Chief Justice John G. Roberts: Thank you, Mr. Phillips.

General.

ORAL ARGUMENT OF GENERAL NEAL KUMAR KATYAL ON BEHALF OF RESPONDENT

Mr. Katyal: Thank you, Mr. Chief Justice, and may it please the Court:

Two basic things decide this case.

First, the government is not affirmatively invoking the power of the Federal court; only the plaintiffs are.

It was Mr. Phillips's clients who 20 years ago walked into the Federal court and asked that court to set aside the decision of the contracting officer and to award them over a billion dollars in damages.

The government, by contrast, simply asked the court to dismiss the Federal lawsuit.

And second, Reynolds makes clear that the state-secrets privilege will be used to bar a claim at most only when the party that is relying on secret information is trying to use the Federal court to alter the legal status quo.

Chief Justice John G. Roberts: Do we have -- we've gotten to this point in the dispute because you say they're at fault, they say you're at fault.

Under the state-secrets doctrine, we can't resolve that question.

Why don't we call the whole thing off?

Nobody's at fault; that means it's terminated not for fault, but for convenience, and that's it?

Mr. Katyal: Well, for several reasons.

One is, that is the affirmative use of the Federal courts to alter the legal status quo.

I think the principle of Reynolds is--

Chief Justice John G. Roberts: Well, only because you altered the legal status quo.

The legal status quo is they're going along with their contract, and you altered it by holding them in default.

Mr. Katyal: --I disagree, Mr. Chief Justice.

I think that the contract itself specifies that the contracting officer will decide whether or not there's a default termination, and once there is that, they owe -- once the contracting officer so decides, then they owe the unliquidated payments that have--

Chief Justice John G. Roberts: Isn't that -- isn't that the affirmative step with the contracting officer saying there's a default?

Mr. Katyal: --Well, it's certainly an affirmative step under the terms of the contract but it is not an affirmative step of the Federal court.

Our central proposition--

Chief Justice John G. Roberts: It's an affirmative step of the Federal Government.

He works for you, and he's the one changing the status quo.

Mr. Katyal: --Undoubtedly the case, and those are the terms under the contract to which they agreed.

Our central proposition is that in a world in which the Federal court doesn't know, as Justice Scalia said, who is right and who is wrong on a particular claim, it should stay its hand entirely and get out of the business altogether.

It should follow the Hippocratic principle of doing no harm.

Justice Samuel Alito: Am I correct to interpret what you just said to mean that you think this case should be decided under the basic principle of Reynolds, that the party that seeks the affirmative relief -- seeks affirmative relief from the court is the -- is the party that bears the burden involving the invocation of the state-secrets privilege?

You're not asking us to adopt a new test applicable in the contracts situation?

Mr. Katyal: Absolutely.

I don't think we need to go there.

I do think that there are special arguments available in this case because it is a contract, as Justice Breyer said, with sophisticated parties who ex ante will decide who bears the burden of coming into court and -- and so on.

But here I think this is a simple principle that, in a world in which the court doesn't know who is right and wrong in the superior knowledge defense -- and that's the answer to the question that Justice Sotomayor asked to Mr. Phillips a moment ago about what did the Court of Federal Claims ultimately decide?

They didn't decide there was a prima facie case.

They said at page 245a of the 2001 opinion: We can't know one way or the other.

And so--

Justice Sonia Sotomayor: Could I -- could I -- I'm interrupting Justice Alito, because you answered his question very quickly.

It's your position that if we determine you're the moving party, you lose?

Mr. Katyal: --Oh, no.

I think--

Justice Sonia Sotomayor: So is that what your answer to him--

Mr. Katyal: --No, we--

Justice Sonia Sotomayor: --which is that he asked you whether we apply Reynolds; you didn't say which part of Reynolds.

Are you conceding that if we apply Reynolds and we find you're the moving party, you lose?

Mr. Katyal: --Oh, absolutely not, Justice Sotomayor.

I don't think Reynolds says that if the government is the moving party it's an automatic loss.

I think that's a back-up argument that we've advanced in our brief that I think there is no reason whatsoever for the Court to--

Justice Antonin Scalia: Let's talk about moving party.

I -- I don't -- I don't know that moving party means who comes into court first.

I would, I would -- in the -- in the context of a contract dispute, I would say the moving party is the party who is trying to use principles of law to change the contract, and that's the government here.

The government -- the government is blowing the whistle; it is the government which is saying, you are in default, and under the law, since you're in default, we can walk away, and indeed we can claim the money we've already paid you.

Mr. Katyal: --Justice--

Justice Antonin Scalia: That seems to me the moving party in the -- in the context of a contract.

Mr. Katyal: --Justice Scalia, I think it's important to add to your definition

"using legal principles in a Federal court. "

because that's I think what Reynolds is talking about.

There's not some abstract--

Justice Antonin Scalia: Reynolds was talking about that because that was the fact situation in Reynolds.

But I'm saying that the logic of the matter, the logic of the matter when applied to a contract situation such as this ought to be the party who is blowing the whistle, who is trying to use the law -- the one -- the one who is asserting that -- that the law requires this result, and then we say, well, we can't tell whether the law requires this result or not.

That, it seems to me, ought to be the--

Mr. Katyal: --I don't think, Justice, that's what either Reynolds is getting at or what this Court's subsequent decisions about a state of uncertainty in the law and what the role of the Federal courts is getting at.

I think rather what all of these decisions say together is if you don't know one way or another, you should return; you should wind the clock back to the status quo ante before the lawsuit was filed.

And at that status quo ante there was undoubted a right of the government to have $1.35 billion.

Now, I understand some of you have suggested, well, maybe we should just cut it even and they get to keep the $1.35 billion and we get to keep -- and we don't have to pay the $1.2 billion.

I suggest there's no principled way to do that, which is what I think Mr. Phillips's answer--

Justice Antonin Scalia: --It wasn't the undoubted right of the government before the lawsuit was filed.

It was the undoubted right of the lawsuit only if the contracting officer was correct that there had been a default.

If he was wrong about that, it was not the right of the government.

Mr. Katyal: --Justice Scalia, let me read to you the contract to which they agreed.

It's at Joint Appendix, page 120 to '21:

"If the contract is terminated under the default clause, the contractor shall, on demand, repay to the government the amount of unliquidated progress payments. "

And then what happened as a result of that demand letter that we sent right after -- after the termination for default, was they came to us, hat in hand, and said: Please don't take this money from us right now, our banks are going to complain, and so on.

And so we entered into a deferment agreement, which is pages--

Chief Justice John G. Roberts: I'm sorry.

Do you want to give the cite?

Mr. Katyal: --Joint Appendix page 342.

And it seems to me a very odd notion of due process to say that somehow, the fact that we agreed to their deferment creates some entitlement for them to keep the $1.35 billion.

Justice Anthony Kennedy: I have this -- this question about due process: The components of the due process analysis, it seems to me, are what is reasonable, what's necessary in the case, what's unconscionable.

That it seems to me is just an extrapolation of what Reynolds said, and I don't know why we don't have that just as a law of -- of the Federal common law of contracts.

I don't know why we need to elevate this to a due process analysis.

Mr. Katyal: I guess I would say two things.

One is, if you look--

Justice Anthony Kennedy: Assuming that we're -- we apply Reynolds, which--

Mr. Katyal: --Right.

I think if you -- if you were to look to that background common law contract principle, you would look not just to Reynolds, but to Tenet -- or excuse me, Totten, which I think makes clear that at the time they signed their contract they were on notice that highly classified information that is the subject of -- of litigation, is something that generally can't be litigated in the Federal court.

And then if you wanted to think about due process and the overlay of unconscionability or whatever with respect to Federal contracts, you would ordinarily assume that the contract itself from highly sophisticated parties would work that out ahead of time.

And so if they were concerned about this situation unfolding, they could have written into the contract that they should get certain information and that if the government invoked the state-secrets privilege, it would automatically terminate the contract's default and convert it to -- the default termination into a termination for convenience.

Justice Anthony Kennedy: --That -- that just restates the question of what -- what do you do if you apply the Reynolds principle to this case, and they would say, well, you could have put it in your contract, too, and I think that's almost a wash.

Mr. Katyal: Well, I don't think it comes out as a wash, Justice Kennedy, because I think the contract is undoubtedly clear that in order to challenge the -- the decision of the contracting officer about a default termination, they have to come into Federal court and invoke affirmatively, seek affirmative judicial relief from the Federal court, to change the world.

We don't have to do that.

Justice Ruth Bader Ginsburg: Am I -- am I right that this contract did specify certain information that the government agreed to give the Petitioner?

Mr. Katyal: That is correct.

Some of that is at Joint Appendix 137 to 140.

Justice Ruth Bader Ginsburg: Mr. Phillips said the reason they couldn't specify this information is they didn't know what it was.

Mr. Katyal: Yes.

Justice Ruth Bader Ginsburg: They -- they didn't know what -- it was secret information.

They didn't know -- wouldn't even know what to ask for.

Mr. Katyal: I have to say, it is a very odd thing to bid on a highly -- a multi-billion-dollar contract on the assumption that they are going to get some technology that they haven't even specified.

I mean, this -- we're bidding for their research and development.

They brought in Lockheed, who -- which had built low-technology -- low-observability planes -- precisely for the reason that they said they had the technology.

At Joint Appendix page 1087, you see their bid, their offer, and I don't think anyone held a gun to their back to say: Enter into this.

Justice Antonin Scalia: No, but they -- they claim that you knew that it was impossible to do what they contracted with you to do at the weight of plane which they promised to come across with.

They say that you knew that because of -- of other contracts that you had had, and yet didn't -- didn't tell them about it.

Mr. Katyal: Justice Scalia, let me say two things.

First, the impossibility of--

Justice Antonin Scalia: I don't know whether that's true or not, and we're never going to know it's true, because you came in and blew the whistle and said: State-secrets privilege.

Mr. Katyal: --Two things.

One is, that impossibility claim was separately litigated before the Court of Federal Claims, along with 18 other claims of theirs in defense to the 1.35 billion and this rest that we've been talking about.

They have had massive opportunities to litigate almost all of their challenges, with the one exception being the superior knowledge aspect of this case, and much of that has taken place in a highly classified environment.

The trial has taken place in--

Justice Antonin Scalia: Are you saying it was not impossible to do it at that weight?

Mr. Katyal: --I'm saying -- well, at the initial weight, we thought it was impossible and warned them as such, and that's -- those are the citations in the government's brief.

But -- so--

Justice Antonin Scalia: At the weight contracted for?

Mr. Katyal: --And then we -- at the weight contracted for, we had warned them that it wasn't, and then later we relaxed that weight specification.

So I'm not sure that is really present one way or the other.

But our central submission to you, Justice Scalia, is: If you're not sure, as you were saying to me -- you don't know who is right and who is wrong -- then the Federal court shouldn't be complicit in the process of siding and picking winners and losers in that circumstance.

Chief Justice John G. Roberts: Are you ever the--

Justice Sonia Sotomayor: General, what would happen--

Chief Justice John G. Roberts: --Are you ever the moving party in the Court of Claims?

Mr. Katyal: Sure.

I could imagine that we could be on a counterclaim, for example.

Chief Justice John G. Roberts: Well, on a counterclaim, but that obviously means somebody else is the moving party.

They've raised the claim.

Mr. Katyal: That's correct.

The -- the jurisdiction of the CFC--

Chief Justice John G. Roberts: If somebody wants to get money -- if somebody wants to get money from the Federal Government, they have to go to the Court of Claims, right?

Mr. Katyal: --That's correct.

Chief Justice John G. Roberts: So this is a pretty convenient rule for you, right?

Mr. Katyal: Well, it's a convenient rule, Mr. Chief Justice, that they agreed to when they signed the contract.

The CDA was on the books.

They knew the deal going in, which is if they wanted to challenge the decision of the contracting officer they would have to come in.

Now, you could have structured it very differently.

You could have said we -- you know, that there would have to be -- that -- that if there were a termination for default, it would automatically change into a termination for convenience--

Justice Samuel Alito: But you have the burden of -- you had the burden of proof on the issue of default.

That was known, too, wasn't it?

Mr. Katyal: --We had the burden of proof on default, but not on superior knowledge, the precise question here.

In their rule, if you -- if you follow their rule, they're asking the court to proceed counterfactually and say that they are entitled to not just the 1.35, but the 1.2 billion on top of that, as if they had proved their superior knowledge claim.

And--

Justice Ruth Bader Ginsburg: Do you agree there is -- do you agree that there is nothing between -- I think Justice Scalia was asking Mr. Phillips, why can't we just say, let's -- all bets are off, everybody go home with what they have.

But Mr. Phillips says there are only these two things; there is either default termination or termination for convenience, and nothing in between.

Do you agree that that's the world that we're dealing with, those two choices and nothing else?

Mr. Katyal: --I do agree that that is -- that's the way the contract is written.

It distinguished between those two and distinguished between liquidated payments, as to which the government has no right in the event of a default termination, and we're not seeking that, and unliquidated payments, as to which the government has an absolute right at the moment the contracting officer decides there has been a default termination.

Justice Antonin Scalia: I don't care how the contract's written.

I mean, if we're going to -- if we're going to say that there's been a broken play, that we're not going to try to apply the contract because we can't tell who's in the right and who's in the wrong, it's totally irrelevant what the contract says.

You just leave the parties where they are.

Mr. Katyal: Justice Scalia, I am saying leave the parties where they are under the terms of the contract.

And--

Justice Antonin Scalia: You're--

Mr. Katyal: --Well, that -- Justice Scalia, I don't think that the Federal court should be in the business of micromanaging under the Due Process Clause in a contractual situation with parties that can protect themselves ex ante very easily.

I mean, they say--

Justice Anthony Kennedy: We can -- we can do it as a member -- as a matter of the law of contracts.

And when we look at the law of contracts in Reynolds, Reynolds talked about the moving party, and I'm not -- I'm not sure that that phrase either had or has really definable content in our law.

It seems to me it's just a question of the burden of persuasion.

At one point, the contractor has to proceed.

He makes -- it makes a certain showing, and the government has to go back and forth.

And if at some point, the person with the burden of persuasion invokes the privilege, then we have to ask whether it's fundamentally fair as a matter of the Federal law of contracts.

Mr. Katyal: --So even if you followed that reasoning -- and I don't think you should, for a reason I'll explain in a moment -- but they would still lose, because they still bear the burden of proof and persuasion on superior knowledge, the defense, the excuse, that's at issue in this case.

Now, I don't think that would be the rule, that that's an appropriate rule, Justice Kennedy, because I think underlying Reynolds is the central proposition that a court shouldn't be involved, shouldn't be picking winning -- winners and losers either way, when the state of knowledge is unknowable.

Justice Elena Kagan: So just to make sure I understand your argument, suppose that state secrets had prevented you from being able to prove your default claim, that you were unable to make that showing because of state secrets.

What would happen then?

Mr. Katyal: Unable to make the showing in--

Justice Elena Kagan: That--

Mr. Katyal: --in Federal court?

Justice Elena Kagan: --That's right, that the secrets that you wanted to protect were actually the -- the key to your proving that there was a default.

Mr. Katyal: Well, in that circumstance, again, the -- I think the case would be dismissed, because they would be coming in and seeking affirmative judicial relief to void the contracting officer's decision and to get whatever damages they want and--

Justice Elena Kagan: Let me make sure I understand, because that really does sound like a tails you win, heads you win, whatever.

You're saying that if the state secrets prevented you from making your affirmative case, you should win that one, too?

Mr. Katyal: --I think -- I think that that would be -- the general proposition is if the Federal court can't know one way or another who's right and who's wrong, it shouldn't grant affirmative relief to a party, and that's--

Justice Antonin Scalia: --To a moving party, and you are never the moving party.

[Laughter]

Mr. Katyal: --Well, again, Justice Scalia, that's the contract they signed.

They could have signed a different contract with different results.

But they say--

Justice Sonia Sotomayor: --Counsel, you can't--

Mr. Katyal: --we didn't have the ability--

Justice Anthony Kennedy: Did the contract--

Justice Sonia Sotomayor: --Counsel, you can't--

Chief Justice John G. Roberts: Justice Kennedy--

Justice Anthony Kennedy: --Did the contract contain the term "moving party"?

Mr. Katyal: --The contract didn't say "moving party", but it did say who had to come into Federal court in order to challenge the decision of the contracting officer.

And that is a -- that -- that -- and it puts that burden on them.

Chief Justice John G. Roberts: --Now Justice Sotomayor.

Justice Sonia Sotomayor: --That's what I don't understand.

Yes, the default provision is decided by the contracting officer, but by law you can't collect on that judgment once they file a complaint.

So you can't do anything until you get the court to affirm your default.

You are asking for a legal declaration of being right, that they defaulted.

That's -- you're the one seeking--

Mr. Katyal: Justice Sotomayor, this is a very important question, and I think that that's the impression left by their briefs and it's wrong.

So the filing of their claim -- their claim in the Court of Federal Claims they say vacated the contracting officer's decision.

That's wrong under the statute.

605(b) in the -- in the Contracting Disputes Act says that a clause can be put into the contract to continue it in effect and require performance even if there's an appeal to the Court of Federal Claims, and that provision exists in this very contract.

So--

Justice Sonia Sotomayor: --I'm sorry.

You're going too fast for me and I don't think I remember this in your reply brief.

Mr. Katyal: --Well, I think it is.

It's in a footnote of our reply brief, and it cites to 605(b).

And our claim is that -- that that provision requires -- right now we have an absolute entitlement to the $1.35 billion.

That is what the contract says, that is what even the deferment agreement says that we've entered into.

So we're not asking, Justice Sotomayor, for any affirmative judicial relief at all.

We don't need -- we want the Court, as it does in state-secret cases such as Tenet, to stay out entirely and say -- to deny an audience to this case on the merits.

And if you do what Mr. Phillips says or if you do what Justice Scalia suggested, the kind of compromise option, that is affirmatively using the power of the Federal court, granting him relief on a claim that he has not proven, and that is something I see -- I see zero precedent for--

Justice Antonin Scalia: It's granting nobody relief.

We're leaving you where you are.

"Get out of here" is what we're saying.

[Laughter]

Mr. Katyal: --Justice Scalia, we have no--

Justice Antonin Scalia: We don't know what the answer is, so go away; we leave you where you are.

[Laughter]

Mr. Katyal: --Justice -- Justice Scalia, we have no problem with a go-away rule.

And if you did that and you return to the status pro ante, we would have that $1.35 billion.

That is what the contract says, that is what their own filing in September 16, 1991, said before the Court of Federal Claims, when they called that $1.35 billion, quote, "money presently due and owing".

Justice Antonin Scalia: That assumes that the contracting officer's termination for default was valid.

And we don't know that it was valid, and we don't want to have to inquire whether it was valid.

So to say "go away" means everybody keeps the money he has.

Mr. Katyal: Justice Scalia, that seems to me -- that is affirmatively using the power of the Court to set aside the contracting officer's decision, which is what I think is forbidden by Reynolds.

And it would be an odd rule, because it's basically a happenstance.

If we had just simply insisted on our $1.35 billion at the moment that it was owed to us in February of 1991, we wouldn't even be having this conversation right now.

The only reason we're having it is because we acceded to their own request to not take the $1.35 billion right away.

Chief Justice John G. Roberts: How would you write -- you keep saying these are sophisticated parties.

What would the contractual term look like that would avoid this problem?

Mr. Katyal: Oh, I think it would be very simple.

You could say: In the event the government invokes the state-secrets privilege, any termination for default automatically becomes a termination for convenience.

That's one of many--

Chief Justice John G. Roberts: Do you think your client would ever agree to something like that?

Mr. Katyal: --Do I think the government would?

Chief Justice John G. Roberts: Yes.

Mr. Katyal: Well, I think if they don't, Mr. Chief Justice, that underscores the problem with their argument, because they are saying: Read the contract precisely this way, to eliminate terminations for default and convert them all into terminations for convenience when the state-secrets privilege is being invoked.

And I agree with you, I think that would be a very unusual contract for the government to get into.

That is what they're demanding here, and that's--

Chief Justice John G. Roberts: So how do they write the contract?

If they -- your answer can't be the only way they can write it is a way that you would never accept.

So how -- how do you contract around this problem?

Mr. Katyal: --Well -- well, I think there are other ways.

There's the possibility that they may demand extra money in exchange for greater risk.

There may be that there may be some alternative dispute resolution mechanisms available.

I don't know, but I would -- I would--

Chief Justice John G. Roberts: This wouldn't be a problem in an alternative dispute resolution because that's not a court?

Mr. Katyal: --Well, it might depend on -- you might have it within the military, you know, the equivalent of that -- in the Tenet v. Doe, you might have panels like the helms panel.

I'm not sure what the precise contractual arrangements would be.

I do think that the need for this Court to be involved is a lot lower than, say, in the criminal context of Reynolds, because the government here is a repeat player with these contractors, they're not in the business, as our deferment agreement, I think, underscores of trying to willy-nilly advance the state-secrets privilege to undermine and take their money away.

Indeed, I think since the 2003 Federal Circuit decision there have only been a couple of instances, at most, in which -- that I'm aware of in which the government has invoked the state-secrets privilege in any sort of contracting action, and nothing like the superior knowledge thing.

And since 2009, the governmental altogether in civil court has invoked the state-secrets privilege a whopping two times, to -- to my knowledge.

Justice Stephen G. Breyer: So it isn't -- isn't a big practical problem.

Let me ask, then I was -- misimpression.

Would you go back to Justice Kennedy's question for a minute.

I'm -- I -- I don't quite see, if you would discuss it a little bit, how you do this as a matter of constitutional law, because the Due Process Clause is tied to fundamental unfairness, and I think the answer has to be in this kind of circumstance secret bloc or not, it depends, it depends on many things.

So, would you write this as a matter of constitutional law?

Would it -- shouldn't it be written as a matter of Federal common law of contracts?

Shouldn't it be written as an exposition of the superior knowledge doctrine, which seems totally open to it?

And -- or shouldn't it be written as a matter of discovery law, which is what the district judge who ended up thinking -- the Court of Claims judge says, gee, I don't really know.

I mean, that's how I read it.

How would you -- would you speak about this for a minute?

Mr. Katyal: Sure.

Justice Breyer, I think that due process is an ill-fitting concept in this contractual dispute for a couple of reasons.

Not just can the sophisticated parties agree ahead of time to other things, but also the whole notion of due process in contracts is odd, because the government has waived its sovereign immunity only since 1855.

They don't have any freestanding rights to come in ab initio and claim fundamental fairness on contracts.

I think that is implicit in the Constitution itself, that they don't have that right.

And, so, the question becomes, is there some extra protection the courts should give here akin to the one in Reynolds about criminal defendants in the government using state secrets information?

And I think the answer to that is no, because parties can work that out themselves ex ante.

And, so, my answer to you is, I think it was option B, to use the contract as the base -- and contractual interpretation as the basic rule for decision here.

The contract itself specified, and it was done under the shadow of Reynolds and under the shadow of -- of Totten that specified that they would have to be the moving party, they would have to come in and challenge the decision of the contracting officer.

Justice Anthony Kennedy: Well, in the whole law of contracts you could say, oh, the contracting parties could have put this down, anticipatory breach, we don't need to have rules on that, the parties could have negotiated.

That's not the way contract law works.

Mr. Katyal: Well, I do think that with respect to this and this -- you know, a thousands and thousands of page contract, I think this specific set of issues could have been worked out in advance, and I do think was worked out in advance.

They knew, going in, that they bore the burden of walking into court, paying their attorneys, and everything else, to challenge the decision of the contracting officer.

And they also knew at that moment the government had an undoubted right to the unliquidated progress payments.

The contract they signed distinguished between liquidated progress payments as to which the government has no right, and unliquidated payments as to which default termination automatically gave that to the government.

And the argument they're advancing here is, well, let's collapse those two, let's keep the $1.35 billion, because the government hasn't given it to us yet.

Justice Antonin Scalia: Why is that unliquidated?

I didn't get the distinction between the -- why is the 1.35 unliquidated?

Mr. Katyal: Because the contract specified two payment streams.

One is the work that they had reviewed and understood and the government had said this is good work, we're going to pay you for it; and other work which are claims that they have made but they haven't actually been approved by the government.

And I think Mr. Phillips, I don't think that there's any sort of evidence that -- or certainly nothing that the courts below found that says that the -- that they had a right to the unliquidated--

Justice Antonin Scalia: What's the other?

What's the -- what's the other 1.25 billion--

Mr. Katyal: --The 1.2--

Justice Antonin Scalia: --that he's also asking for?

Mr. Katyal: --The 1.25 billion that he's seeking on top of--

Justice Antonin Scalia: Right.

Mr. Katyal: --keeping the 1.35 billion, as I understand it is costs, is extra costs incurred under the contract above and beyond the $4.8 billion that was in the initial contract.

Justice Sonia Sotomayor: General, do you have the citation to that footnote you referred to in the 602 -- 605b?

I can find it later, but--

Mr. Katyal: It's page 32, and I would also refer the Court to the court of appeals appendix page 19567, which is the page of the contract itself that incorporates the provision.

The provision is FAR 52.233-1(h), and it says that -- it mandates performance and compliance with the contract even when there -- in the contracting officer's decision, even when a decision is under appeal.

So it is not the case whatsoever that their filing of this claim somehow vacated the contracting officer's decision.

The only way that will happen is if this Federal Court reverses the Federal Circuit and--

Justice Sonia Sotomayor: --So your view is that -- that the complaint did not stay their obligation to pay you; that provision required them to pay you--

Mr. Katyal: --That's correct.

Justice Sonia Sotomayor: --the unliquidated sums?

Mr. Katyal: That's right.

At that moment they had to pay.

They knew that and they in fact sent a bank letter and so on -- this is joint appendix 329 -- saying please don't do that.

And then we entered into a deferment agreement, but we have an absolute right to that money right now regardless of what -- we don't need an affirmative decision from this Court in order to get that money.

We're asking the Court to simply stay its hand and follow the Hippocratic principle of doing no harm in a world in which the -- the Court can't decide who's right and who's wrong.

Justice Ruth Bader Ginsburg: If you're right about that, the government's absolute right, could you withhold it from other contracts of these contractors?

Mr. Katyal: That's absolutely right.

The Federal rules and the Contract Disputes Act provide us an offset so that we could -- we don't have to actually seek the 1.35 billion from their coffers, as he colorfully called it, reaching into; we can just offset it against future contracts and the Federal courts would be out of the business altogether about that 1.35 billion.

Chief Justice John G. Roberts: So you get the extra money without having to go to court because then they would have to go to court and challenge your offset?

Mr. Katyal: And again, Mr. Chief Justice, that's the contract to which they signed.

Thank you.

Chief Justice John G. Roberts: Thank you, General.

Mr. Phillips, you have three minutes remaining.

REBUTTAL ARGUMENT OF CARTER G. PHILLIPS ON BEHALF OF RESPONDENT

Mr. Phillips: Thank you, Mr. Chief Justice.

Justice Kennedy, I think the answer to your question is that this case can properly be decided on Federal common law principles, and indeed I would ask the Court to apply those same -- those contract principles in this context to -- it's just on the Joint Appendix on page 209.

General Katyal focuses on what happens when the contracting officer takes some action.

What he leaves out is the following sentence: The contractor shall have the right of appeal under the disputes clause from any determination by the contracting officer.

"And while the General spends an awful lot of time talking about what do you do in the Article III context, the Contracting Disputes Act specifically allows to us go to a Board of Contract Appeals, which is not an Article III institution; and I guarantee you that the government would be making exactly the same argument if we had taken that particular route. "

It seems to me the case ought not to be decided on the basis of this kind of a technical assessment.

The case ought to be decided on the basis of sort of where the rights are and what's the fundamental change and who's making the shift in one direction or the other; and if you do that -- and Justice Ginsburg, you specifically asked the question, am I asking for all or nothing?

No.

I think there's no question you can come up with a principled basis to adopt precisely the principle that Justice Scalia pointed out, which is to say we will stay our hand, we -- we will not uphold the -- the contracting officer's decision, and therefore we're not going to say there's a default--

Justice Ruth Bader Ginsburg: But you say--

Mr. Phillips: --but we're not going to go the extra mile and say it's a termination for convenience.

The Court can certainly do that.

Justice Ruth Bader Ginsburg: --So you are saying there is another way, there's a middle way?

Mr. Phillips: There is a middle way.

There's no question about it.

All I was saying in response to Justice Scalia's question was, you know--

Justice Sonia Sotomayor: On what principle of law?

Mr. Phillips: --On the principle of law if you don't have a contract for default, then there's no basis for -- and we're not going to do any more than that; we can't decide who's right and who's wrong, and therefore we're not going to enforce the contracting officer's decision, or we're not going to do anything more than this.

We're going to leave the status quo ante, which means before the contracting officers declared that there was a default under these circumstances.

Justice Antonin Scalia: It's the "go away" principle of our jurisprudence, right?

[Laughter]

Mr. Phillips: I actually get that a lot, Justice Scalia.

Justice Elena Kagan: Mr. Phillips, I understood your papers as making only a constitutional claim.

Mr. Phillips: No.

I don't read that, Justice Kagan.

I mean, we -- we certainly have a due process argument in there, but embedded in there as well is -- are a number of references to Federal common law principles as a -- as a -- obviously nonconstitutional basis on which to rule in our favor.

And I -- I think the Court ought to be informed in -- in making its determination about how to interpret the contracting arrangement by the question of whether this is fundamentally unfair and unconscionable, obviously, but you would probably do that as a matter of Federal common law principles, and trying to decide on the -- on contracting principles or not.

At the end of the day, Your Honors, this has been fundamentally unfair and we would ask for the Court to reverse.

Chief Justice John G. Roberts: Thank you, Mr. Phillips, General.

The case is submitted.

Print this transcript Transcript: 

Justice Antonin Scalia: -- I'm already tired.

Let me care that much about this one.

This case comes to us on -- on writ of certiorari to United States Court of Appeals for the Federal Circuit.

General Dynamics and Boeing, the petitioners here, entered a fixed price $4.8 billion contract to develop a stealth fighter aircraft for the Navy.

After they had fallen well behind schedule, the contracting officer terminated the contract for default and ordered the companies to repay approximately $1.35 billion in progress payments for work the Government never accepted.

Petitioners filed suit in the Court of Federal Claims, challenging the termination under the Contract Disputes Act of 1978.

They argued that Federal Circuit precedent would excuse their default because the Government had failed to share its "superior knowledge" about how to design and manufacture stealth aircraft.

As the litigation proceeded, it proved difficult to uncover the extent of the -- of the Government's superior knowledge because the design, materials and manufacturing process for prior stealth aircraft operated by the Air Force are closely guarded military secrets.

After some of those secrets were inadvertently disclosed during discovery, the Acting Secretary of the Air Force warned the Court of Federal Claims that further discovery into the extent of the Government's superior knowledge would risk disclosing classified information.

The Court terminated discovery and declared the superior knowledge question to be nonjusticiable.

After years of litigation and two remands from the Federal Circuit, the Court of Federal Claims finally sustained the default termination.

The Federal Circuit affirmed that judgment.

It agreed that the state-secrets privilege prevented adjudicating petitioners' superior knowledge defense and it rejected petitioners' argument that the Government could not pursue a claim against the party and then use the state-secrets privilege to preempt defenses to that claim.

We granted certiorari to review the state-secrets holding.

Today, in the unanimous opinion filed with the clerk, we vacate the judgment of the Court of Appeals.

The Federal Circuit believed that our 1953 decision in United States versus Reynolds had already rejected petitioners' arguments.

We think that Reynolds has -- has less to do with these cases than the Court of Appeals or for that matter, the party's belief.

Reynolds upheld the Government's assertion of the state-secret privilege to exclude certain evidence in a trial dealing with injuries caused by the B-29 bomber.

The case was about the admission of evidence.

It decided a purely evidentiary dispute by applying evidentiary rules.

The privilege information was excluded and the trial went on without it.

Here, by contrast, the Court of Federal Claims decreed the substantive result that since invocation of the state-secrets privilege obscured too many of the facts relevant to the superior knowledge defense, that defense was simply not available.

What we are called upon to exercise today is not our power to determine the procedural rules of evidence, but rather our common law authority to fashion contractual remedies in Government-contracting disputes.

And our state-secrets jurisprudence bearing upon that authority is not Reynolds, but two cases dealing with alleged contracts to spy.

Our 1876 decision in Totten versus United States and our 2005 decision in Tenet versus Doe, both held that "Public policy forbids suits based on covert espionage agreements."

Totten was a suit by a claimed union spy in the Civil War for the compensation he had allegedly been promised.

Tenet was a suit by claimed CIA spies for compensation they had allegedly been promised.

Rather than risk disclosure of espionage relationships, we left the parties to those suits where we found them the day they came into Court.

We think a similar situation obtains here and that the same consequence should follow.

Reliability depends upon the validity of a plausible, superior knowledge defense.

And when full litigation of that defense "would inevitably lead to the disclosure" of state-secrets, I have to quote from Totten, neither party can obtain judicial relief.

As the Court of Federal Claims concluded, that is the situation here for reasons explained in our opinion.

However, it seems to us unrealistic to separate, as the Court of Federal Claims did, the claim from the defense and to allow the former to proceed while the latter is barred.

It is claims and defenses together that established the justification or lack of justification for judicial relief.

And when public policy precludes judicial intervention for the one, it should preclude judicial intervention for the other as well.

We therefore leave the parties with the funds and property in their possession when they knocked on the courthouse door.

This disposition will please neither side.

General Dynamics but not Boeing wants us to convert the termination into one for the Government's convenience awarding petitioners $1.2 billion, the language of the A-12 agreement does not give us this option.

Moreover, state-secrets would make it impossible to calculate petitioners' damages.

The Government, for its part, wants a return of the $1.35 billion it paid petitioners in progress payments for work which it says it never approved.

But the validity of that claim depends upon whether petitioners are in default on their contract which cannot be judicially determined because of the valid assertion -- assertion of the state-secrets privilege.

As in Totten, our refusal to enforce this contract captures what the ex ante expectations of the parties were or reasonably ought to have been.

Both parties must have understood that state-secrets would prevent courts from resolving many possible disputes under the A-12 agreement.

We believe, moreover, that the impact of our ruling on these particular cases, which we think produces rough, very rough equity, is probably much more significant than its impact in future cases, except to the extent that it renders a law more predictable and hence, more subject to accommodation by contracting parties and contracting parties who have continuing relationships to companies that entered contracts involving state-secrets that are repeat offenders.

The foregoing analysis assumes that the Government generally has an obligation to share its superior knowledge.

The Court of Appeals did not address two of the Government's arguments for why that assumption may not apply here.

It had no need to, given its holding.

We did not grant certiorari to decide those questions, so they remained open for the Court of Appeals to address some remand.

The judgment of the Court of Appeals is vacated and the cases are remanded for further proceedings.