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Charles Dickens’ Bleak House had Jarndyce and Jarndyce, the interminable chancery court case in which legal fees finally consumed the entire estate in dispute. Aerospace has the case of the canceled Avenger.
Legal fees are not apt to consume the money at stake here—potentially $3 billion the U.S. government wants from General Dynamics and Boeing because of the failed effort to produce the Navy’s stealthy A-12 Avenger II attack aircraft. Still, even a unanimous ruling by the Supreme Court last week did not end the battle that began two decades ago.
It will, however, shift the balance of power toward contractors in some legal disputes with the government involving classified information.
The May 23 decision sends the cases back to lower courts. The court ruled on combined suits involving General Dynamics and Boeing, which acquired McDonnell Douglas, GD’s teammate on the $4.8 billion project that then-Defense Secretary Dick Cheney ordered stopped in 1990.
In effect, the nine-member court has eliminated the government’s ability to use “state secrets” as a trump card to be played in court. The justices ruled that the government may no longer find companies in default on a contract and then withhold secrets that companies say they need a judge to consider to prove they were not to blame for a program’s troubles. But the court stopped short of ruling that the government owes contractors any money for terminating the program early.
“Neither side will be entirely happy with the resolution we reach today,” Associate Justice Antonin Scalia wrote for the court.
More important to the A&D industry in general, it does not mean that the A-12 effort is now determined to have been canceled for the “convenience” of the government, as opposed to being halted because the contractors failed to perform. Rather, the high court said, when a matter cannot be adjudicated, under common law, “the traditional course is to leave the parties where they stood when they knocked on the courthouse door.” In the oral arguments before the court Jan. 18, Scalia, the acknowledged wit on the bench, said, “It’s the go-away principle of our jurisprudence."
That means neither party will get what it wants, at least immediately. Issues other than the state-secret privilege could affect the eventual outcome of the case.
The companies had not delivered a single airplane and were almost two years behind schedule when the Navy canceled the program. The contracting officer determined that the companies were not capable of finishing the work within an acceptable time frame and demanded the return of $1.35 billion of the $2.68 billion the government had paid. With interest, the money Uncle Sam seeks would now hit $2.9 billion. The contractors, on the other hand, say they had already spent $1.2 billion above and beyond the progress payments they had received.
Citigroup Global Markets estimates, at worst, General Dynamics could still see 29% of its cash reserves eaten up by the case, Boeing 17%, leading to per share charges of $2.14 and $1.52, respectively. However, the analysts add, “ We do not believe there to be any outcome that would affect either business fundamentally.” Other Wall Street firms also said the ruling would not affect their ratings of either company’s stock.
The legal saga began in 1991, when the companies sued in the Court of Federal Claims, arguing that the government had “superior knowledge” of stealth technology gained from “special access” programs. They said that knowledge was not shared fully with the companies, and that was what caused the A-12’s schedule slips and cost overruns. General Dynamics, but not Boeing, sought the $1.2 billion they had not been paid.
In its opinion, the Supreme Court says the government had shared information about the stealthy B-2 bomber and F-117 attack aircraft and that its continued assertion of the state-secret privilege in court “suggests it had other, possibly covert stealth programs in the 1980s and early 1990s.”
The justices say leaving the parties financially where they were would produce “rough, very rough, equity.”
The government had expressed concern that contractors on classified programs could simply say they needed secrets to be revealed in court to force a government retreat and thus a legal loss. But the justices write that the ruling applies only to arguments about superior knowledge in which contractors have beforehand made a plausible argument they could prove with the secret information. Moreover, Scalia writes, most companies in classified areas are “repeat players” and would therefore not be inclined to pick frivolous fights with the lone customer for those technologies.
And let's get one thing straight. There's a big difference between a pilot and an aviator. One is a technician; the other is an artist in love with flight. — E. B. Jeppesen
