A federal appeals court, citing the possible disclosure of "state secrets," severely limited yesterday the ability of defense contractors to take disputes over their contracts into the courts.

The 4th Circuit Court of Appeals dismissed a suit by the president of a McLean think tank who claimed that a high-ranking Navy civilian stripped his firm of its classified government contracts "for personal reasons." The official had argued that the contracts were too sensitive to be discussed, and the appeals court agreed.

The court, in a 7-to-3 decision, said that any trial over claims that the Navy official, Alton B. Grimes, wrongfully interfered in the ability of A. Farnsworth Cannon Inc. to get the contracts, would threaten the disclosure of Navy secrets.

"Such probing in open court would inevitably be revealing," the appeals court said. "The overriding interest of the United States and the preservation of state secrets prelude any further attempt to pursue this litigation."

Justice Department lawyer R. John Siebert said the case could be significant in the government's ongoing battle to assert national security claims in court. Siebert said the ruling appears to warn "defense contractors who perform secret work that they may not have all the opportunities for judicial review of disputes that other contractors might have."

The decision may also grant individuals involved in classified work increased immunity from civil suits, he said. Unitl now, Siebert said "anyone in the defense community could not defend himself [as well as nondefense workers] because to do so might require the use of defense secrets."

While Siebert hailed the case as a victory for government claims of privilege, Edmund L Walton Jr., attorney for A. Farnsworth Cannon President Robert Doss, said the decision implied a "breakdown in the system," because the case involved a dispute that the judicial process was unable to hear, let alone resolve.

One government official, who declined to be identified, said the decision may have gone too far in protecting government workers from litigation, making it very difficult for them to be used in matters involving national security.

The case heard by the appeals court in Richmond was, lawyers for both sides agreed, unusual. It began as a domestic triangle.

Doss, president of the think tank, lost his wife to his friend, Grimes.Then, according to the suit filed two years ago in federal district court in Alexandria by Doss' company, Grimes yanked the company's defense contracts and gave them to his new wife's employer.

The suit charged that Grimes "did maliciously interfere" with Doss' right to renew the Navy contracts "for personal reasons." It asked for $750,000 to compensate for the loss of the contracts, plus $500,000 in punitive damages. t

Two months later, when the Justice Department entered the case, "all of a sudden all hell broke loose," lawyer Walton said. The Navy and the Justice Department promptly invoked national security claims and persuaded Judge Albert V. Bryan Jr. to dismiss the suit.

Then-Navy secretary W. Graham Claytor sent an affidavit to the judge, outlining his claims -- a document Walton says he wasn't allowed to see because he lacks the needed security clearance.

Based on Claytor's secret statement, Bryan agreed that no case could be made against Grimes without revealing the nature of the contracts. Such a disclosure, the government contended, "would compromise highly guarded military and state secrets." Bryan agreed.

A three-judge appeals panel last June overturned the ruling, saying that "inadmissible information is not grounds for dismissal." The panel's 2-to-1 ruling suggested that Bryan ask the lawyers to waive a jury trial and hear most of the case in his chambers with lawyers who hold security clearances.

But the full appeals court said yesterday that any trial, even one conducted partly behind closed doors, would threaten disclosure.

"Our argument was we could try the case without any secrets," Walton said. Yesterday's decision, he said, deprived Doss of his day in court.

But Wilson said Doss has not decided yet whether to appeal.