The Electronic Freedom Foundation (EFF) lawsuit accuses US telecom giant AT and T of helping the National Security Administration to conduct "wholesale" spying on millions of US customers.
However, US Department of Justice attorneys urged the Ninth Circuit Court of Appeals to derail the proceedings in the interest of national security, an argument rejected by US District Court Judge Vaughn Walker who ruled in July that the suit could go forward.
"The compromise between liberty and security remains a difficult one," Judge Walker wrote in his decision. "But dismissing this case at the outset would sacrifice liberty for no apparent enhancement of security."
Lawyers representing the administration of US President George W. Bush told the appellate court in their filing that Walker's decision was wrong and that the case needed to be stopped in the interest of guarding "state secrets."
"The very real possibility exists that further proceedings would risk the disclosure of privileged information and irreparably harm the interests of the United States," US lawyers wrote in the appeal.
"At issue is nothing less than the disclosure of information that might cause exceptionally grave harm to national security."
Neither the government nor AT and T have explicitly confirmed that they collaborated to eavesdrop on telephone calls into and out of the United States in the name of catching potential terrorists, federal attorneys argued.
'Privacy risk'
The EFF suit filed against AT and T in February charged the company with sharing telephone and e-mail data with the NSA without an appropriate written legal warrant.
"Any stay risks serious harm to the privacy and security of plaintiffs and millions of other Americans in the interim," EFF attorney Cindy Cohn wrote in a reply brief filed with the appellate court.
"A stay would not serve the public interest, would impose hardships on plaintiffs, and is unnecessary to preserve any legitimate government interest."
Judge Walker noted in his decision that instead of being a matter of state secret, the subject of the suit was "hardly a secret."
The government and AT and T had referred publicly to the US government use of electronic eavesdropping as a tool to combat terrorism after the attacks of September 11, 2001, Judge Walker wrote.
President Bush and US Director of National Intelligence John Negroponte made public statements about an anti-terrorism surveillance program that monitored communications into and out of the country, Judge Walker indicated.
Federal lawyers contended the suit should be tossed out on the basis that it was groundless and that its hearing could threaten national security by revealing how authorities gather intelligence.
Judge Walker said during hearings and repeated in his ruling that the state's secret privilege "is not unlimited."
The judge said he would establish a protocol for handling evidence related to national secrets and that he would handle such concerns as they arose.
A request by AT and T to stay the proceedings pending the decision regarding the government's appeal will be considered by Judge Walker at a hearing in his courtroom on August 8.