Contractors McDonnell Douglas and General Dynamics brought suit for 1.2 billion dollars in payments after the Pentagon terminated their contract to develop and build the A-12 Avenger, a carrier-based aircraft that was over cost and behind schedule.

At issue is whether the government, by invoking "state secrets" to withhold information at trial, unfairly denied the contractors the ability to show they had not defaulted on the contract.

"This is a pretty convenient rule for you," Chief Justice John Roberts told acting Solicitor General Neal Katyal, appearing to take sides against the government and with the defense contractors.

The case marks the first time since 1953 that the court has weighed in on the government's prerogative to withhold information that it believes would reveal state secrets important to national security.

It comes amid growing questions about the government's expansive use of the privilege in anti-terrorism cases since September 11, 2001.

But the issues before the court were narrowly focused on contract law, rather than the broader questions about the scope of the president's authority to invoke "state secrets."

The contractors argue that they could have met the terms of the A-12 contract but faced an impossible hurdle when they were denied access to technology the air force developed in building a land-based stealth fighter.

But when they sought information about the air force technology to present as evidence on their behalf in court, the Pentagon ruled it was a state secret that could not be made public.

A federal claims court initially ruled that the contractors had not defaulted, and ordered the Pentagon to reimburse them for 1.2 billion dollars in expenses.

But a federal appeals court overturned the decision, and ordered a new trial, which found in favor of the Pentagon. A second trial also arrived at the same conclusion, and was upheld by the appeals court.

So the Pentagon denied the contractors the 1.2 billion dollars, and sought another 1.5 billion dollars as reimbursement for some of the payments it had made.

McDonnell Douglas was bought by Boeing in 1997.

In the 1953 case, United States v. Reynolds, the court ruled that in criminal cases, it would be "unconscionable" to prosecute someone and at the same time withhold evidence in their defense on national security grounds.

In such cases, the government has the choice of either guarding its secrets or dropping charges against the accused, under that ruling.

Carter Phillips, representing the contractors, argued that the same standard should be applied in the current civil case in the light of the damages involved, and that to do otherwise would be a fundamentally unfair denial of due process.

But Katyal said the contractors -- not the government -- had brought the suit; that it was a civil not a criminal case; and the contract allowed the Pentagon to unilaterally declare a contract in default.

Justice Elena Kagan, the newest member of the court, prodded Katyal about the appearance of a "tails I win, heads you lose" situation.

Justices also questioned who was the "moving party" in the case -- the government in deciding the contractors were in default, or the contractors in bringing suit for damages.

Federal courts have applied the Reynolds exception in civil cases brought by the government.

Justice Antonin Scalia, questioning Katyal, said that in this case the government was the one "blowing the whistle," and the first to take affirmative action.

He suggested that when a court cannot decide which party is right, because evidence has been withheld, both sides should keep the money they had at the time of the contract termination, calling it "the 'go away' principle of our jurisprudence."

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