A $7 million civil trial against McDonnell Douglas, the nation's largest defense contractor, began in Arlington Circuit Court yesterday with allegations that the company breached federal conflict-of-interest laws by using retired military officers to sell weapons to their former services, and that it improperly obtained hundreds of classified documents.

John R. Betzler, former director of McDonnell Douglas' military aircraft group, alleged in his lawsuit that he was demoted after reporting these activities to the highest levels of the company. Betzler, a 22-year employee, also said he was fired after refusing to lie under oath in a legal battle between McDonnell Douglas and another major defense contractor, Northrop Corp.

"They're retaliating against my client for following their stated policy to report on unethical or illegal conduct," said David H. Cox, Betzler's attorney.

Betzler, of Falls Church, left a job with Northrop last year after disagreements that ended in a $300,000 severance settlement, and is currently unemployed, he said.

In his opening statement, James J. Murphy, attorney for McDonnell Douglas, said the allegations were "flat wrong," and that Betzler was a "an angry and embittered employee {who} exaggerated his accomplishments . . . . "

He said Betzler used the allegations as threats, but never substantiated them and that he later did the same at Northrop.

"He refused to blow the whistle and the reason he does is because there is no support for these allegations," Murphy said.

Cox said the company violated the 1978 Ethics in Government Act, which regulates if and when former government employees may contact their former agencies on private business matters.

Among its provisions, the act permanently bars former government employees from contacting the government with respect to any matter in which they "participated personally and substantially" while working for the government. It also bars senior government employees -- including military officers, Cox said -- from conducting certain business with their former agencies for one year. Betzler testified yesterday that McDonnell Douglas used retired military officers "to hustle their old buddies in the service."

Cox said that in some cases the retired officers were selling equipment they had been involved in acquiring while they were still in military service.

He said that in some instances retired officers were hired to sell or market equipment to overseas buyers, which is permissible, and then, "within a short period of time, they would be back into domestic sales," which is not, under certain circumstances.

Betzler testified that in 1982 he attended a meeting with several company executives to discuss the fierce competition for bidding on the F15 fighter.

He said that it was decided to bring in retired Air Force Col. Francis Bloomcamp to help with sales and marketing. Betzler testified that Bloomcamp had been "substantially involved" with the F15 acquirement process while in the military.

Murphy said after court that Bloomcamp, who now has Betzler's former job, was involved only in marketing, not selling, the F15.

He added that Bloomcamp was not directly involved in acquiring the plane while he was in the military.

Murphy said that both McDonnell Douglas and the Defense Department review the employment history of all retired military before they work on private defense contracts.

Betzler has also alleged that the company improperly acquired or handled hundreds of classified defense documents. In a 1983 memo contained in the two-volume court record, Betzler wrote that another company employee had told him there was a "special vault" used to keep documents obtained "under the table."

He also said the employee described a "new procedure for transporting 'hot' documents to corporate officials via company learjet {sic}."

Cox said "hot" meant improperly acquired or handled, and that the memo was Betzler's notes to himself.