An Excerpt From:
K&L Gates Global Government Solutions SM 2011: Annual Outlook
January 2011
Government Enforcement and Litigation
Government Litigation in 2011: Notable Developments Concerning the
State Secrets Doctrine and the Alien Tort Statute
2011 is likely to usher in litigation developments in two areas of particular
interest to multinational corporations.
• With respect to government
contracts, a case pending before
the U.S. Supreme Court focuses on
whether the government may seek
default terminations of government
contracts while at the same time
limiting the defense of such claims by
invoking the state secrets doctrine.
• With respect to commercial
operations outside the United States,
a recent decision from the United
States Court of Appeals for the
Second Circuit has clarified the
extent to which U.S. district courts
have jurisdiction over tort claims by
foreign individuals directed towards
the actions of corporations outside
the United States.
The Contractors filed suit in the Court
of Federal Claims to vacate the initial
default determination. A key defense of
the Contractors was that the government
had caused the delays that ultimately
resulted in the termination by breaching
its duty to share “superior knowledge”
regarding stealth technology that was
unknown to the Contractors. The superior
knowledge doctrine is a rule of contract
fairness that prevents the government from
knowingly allowing contractors to pursue
a harmful course of action where the
government has special knowledge, not
shared with the Contractors, which is vital
The “State Secrets Doctrine” as
Both Sword and Shield
In the 1980s, the U.S. Navy sought
proposals for the development of a
stealth aircraft called the A-12 Avenger.
Successful bidders General Dynamics
and McDonnell Douglas (“Contractors”)
had assumed that they would have
access to stealth technology information
already developed in other programs for
the U.S. Air Force, but this information
was not forthcoming, and the Contractors
subsequently determined that they could
not meet the proposed specifications
and time line for development of the
A-12. Ultimately, the U.S. Navy sought
a default termination, claiming that the
Contractors had failed to prosecute the
contract and make adequate progress.
As part of the default termination, the
government demanded payment of over
a billion dollars, plus interest.
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K&L Gates Global Government Solutions SM 2011 Annual Outlook
to contract performance. Indeed, prior
cases have established that, where the
government has this special knowledge,
it has an affirmative duty to disclose that
knowledge to the contractors.
The Contractors attempted to proceed
with discovery on this issue, but the
government invoked the state secrets
doctrine to prohibit such discovery,
arguing that inquiry into the alleged
superior knowledge would necessarily
implicate state secrets. Following a series
of appeals to the Federal Circuit and
related remands, the trial court ultimately
upheld the Navy’s default termination,
Government Enforcement and Litigation
while at the same time rejecting the
Contractors’ defense of superior
knowledge, concluding that disclosure of
such information would have implicated
the state secrets doctrine. By this point,
the government default termination had
grown into a multi-billion dollar claim
against the Contractors.
The Supreme Court granted certiorari as
to whether the government may prosecute
a claim against a party while at the
same time invoking the state secrets
doctrine to preclude that party from
raising affirmative defenses to that claim.
See General Dynamics Corp. v. United
States (No. 09-1298), consolidated with
The Boeing Company v. United States
(No. 09-1302). Although the context of
the dispute involves contracts with the
military, the case has broad due process
implications for any party contracting with
the government. Should the government
prevail, there will be more uncertainty
and risk in government contracts,
especially for research and development
contracts. Should the Contractors in the
case succeed, the Supreme Court would
likely articulate a broad due process
standard under which the government,
which traditionally contracts from a
position of strength, will be limited in
exploiting that position in the contracting
process. The outcome of this case should
be closely monitored by anyone who
contracts with the United States.
Corporate Liability under the Alien
Tort Statute
Corporations engaged in international
business should also be aware of a
recent decision by the United States Court
of Appeals for the Second Circuit with
respect to the Alien Tort Statute (“ATS”).
Enacted in 1789, and apparently unlike
any other jurisdictional statute in the
world, the ATS provides in relevant part
that U.S. district courts shall have original
jurisdiction “over any civil action by an
alien for a tort only, committed in violation
of the law of nations or a treaty of the
United States.” 28 U.S.C. § 1350. The
statute was dormant until the 1980s,
when the courts began to recognize that
the ATS provides jurisdiction over tort
actions brought by aliens for violations
of the law of nations, such as tort actions
for “war crimes.” However, through the
mid-1990s, plaintiffs brought suit under
the ATS only against foreign individuals,
and the question of whether the ATS
could be extended to corporations was
unclear. In a recent decision, the Second
Circuit addressed the unresolved question
of whether the jurisdiction granted by
the ATS extends to civil actions brought
against corporations under the law of
nations. Kiobel, et al. v. Royal Dutch
Petroleum Co., et al., 621 F.3d 111 (2d
Cir. 2010).
The Kiobel case involves claims by
Nigerian nationals against Dutch, British,
and Nigerian corporations engaged
in oil exploration. Plaintiffs claimed
that the defendant corporations aided
and abetted the Nigerian government
in committing violations of the laws of
nations. The Second Circuit determined
that corporate liability for violations of
international law is not the “norm of
customary international law.” As a result,
corporations may not be held liable
under the ATS. Although the decision
did not preclude ATS suits against
individuals, including officers or directors,
or otherwise limit corporate liability under
other laws, the clear holding in Kiobel
is that the ATS does not establish subject
matter jurisdiction over ATS claims against
corporations.
The Second Circuit reached this
outcome by examining the “customary”
international law, which consists of only
those norms that are specific, universal
and obligatory in the relations of states.
In particular, the court noted that while
customary international law imposes
individual liability for a limited number
of international crimes (including war
crimes, crimes against humanity such
as genocide, and torture), customary
international law has “steadfastly
rejected” the notion of corporate
liability for international crimes, and
no international tribunal has ever held
a corporation liable for a violation of
the law of nations. While the decision
currently precludes jurisdiction over
corporations due to the state of customary
international law, this area of the law
will require continued vigilance. In
addition to potential developments in
other circuit courts in the United States,
should customary international law begin
to develop theories regarding corporate
liability for torts, the underlying premise of
the decision may come under attack.
David T. Case (Washington, D.C.)
david.case@klgates.com
Brendon P. Fowler
(Washington, D.C.)
brendon.fowler@klgates.com
K&L Gates Global Government Solutions SM 2011 Annual Outlook
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