General Dynamics Corp. v. United States, 2011 U.S. LEXIS 3830

A–12 Navy stealth aircraft contract worth $4.8 billion was terminated for default due to schedule slippage and cost overruns; petitioners were asked to repay about $1.35 billion in progress payments for work not accepted.
Discovery into the Government’s alleged superior knowledge about stealth technology was limited by state secrets; acting Air Force Secretary McPeak warned further discovery would risk disclosure of secrets.
Court of Federal Claims and Federal Circuit proceedings repeatedly addressed whether the superior-knowledge defense could be litigated given state-secrets protections.
The state-secrets privilege obstructed full adjudication of the defense, leading to multiple remands and a $1.2 billion award that was later scrutinized.
The Court ultimately held that when state secrets prevent litigating a prima facie valid superior-knowledge defense, the proper remedy is to leave the parties where they stood at filing, rather than proceed with nonjusticiable claims or convert to a termination-for-convenience award.
The decision vacates the appellate judgment and remands for proceedings consistent with this opinion.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether state secrets bar adjudication of the superior-knowledge defense.	GDC/BOEING argue the defense is nonjusticiable due to secrets.	Government contends the defense is nonjusticiable and should be barred by privilege.	Yes; defense nonjusticiable so remedy leaves parties as they stood.
Whether the default termination can be converted into a termination for convenience.	GDC seeks conversion to restore $1.2B award.	Government argues no conversion option under the contract.	No; conversion not available.
Whether progress payments must be returned or retained pending state-secrets resolution.	Government seeks return of $1.35B.	Liability depends on default status, which is nonjusticiable.	Remanded with parties left as of filing; damages not adjudicated.

Totten v. United States, 92 U.S. 105 (1876) (public policy bars suits on covert espionage contracts)
Tenet v. Doe, 544 U.S. 1 (2005) (public policy forbids suits based on covert espionage agreements)
United States v. Reynolds, 345 U.S. 1 (1953) (state-secrets evidentiary privilege governs disclosure; not directly controlling remedy here)
Priebe & Sons, Inc. v. United States, 332 U.S. 407 (1947) (common-law authority to fashion remedies in government-contract disputes)
GAF Corp. v. United States, 932 F.2d 947 (3d Cir. 1991) (recognizes government obligation not to mislead about superior knowledge)