A federal appeals court in Washington, DC, refused to overturn a supply-chain risk designation the Pentagon placed on Anthropic, allowing the Defense Department to continue blocking the AI company's Claude models from military and federal systems. The decision, issued Friday in a 2-1 ruling, marks a significant legal setback for Anthropic as it prepares for a potential initial public offering later this year. The court found that the Defense Department had sufficient grounds to classify the continued use of Claude as a national security threat.
Earlier this year, the Pentagon sanctioned Anthropic under two separate supply-chain laws, ordering the removal of Claude AI models from military and other federal government systems by this month. Defense Secretary Pete Hegseth labeled Anthropic's position as a significant national security risk after company executives stated they wouldn't permit the government to deploy their current AI models for autonomous weapons or domestic surveillance. The legal challenges to both designations were filed in separate courts: a federal judge in San Francisco dismissed one of the supply-chain risk labels in March and reaffirmed that decision last month, but Friday's ruling ensures the other designation remains in effect indefinitely. In the immediate wake of the designations, Anthropic reported lost revenue as customers grew wary of partnering with a company flagged by the government, though the firm has since highlighted growing sales in recent months.
The majority opinion stated that the government followed proper procedure and rejected Anthropic's claims that its due process and free speech rights were violated. The judges wrote that "the department had ample support for its conclusion that the continued integration of Claude into the department's information systems, by the department or its contractors, presented a statutorily covered national-security risk." According to the court, the Pentagon excluded Anthropic from its supply chain based on the company's refusal to accept a contract term the department considered essential, not because of Anthropic's support for greater governmental regulation of AI technology. The panel also noted that "as Anthropic admits, the company encodes restrictions into Claude that prevent the model from performing tasks that Anthropic wishes to prevent," treating the dispute as standard contract negotiations rather than a violation of constitutional rights.
The outcome wasn't entirely unexpected: in April, the same three-judge panel declined to temporarily halt the supply-chain designation after determining Anthropic hadn't met the strict requirements for immediate relief. During the hearing before Friday's ruling, the judges challenged arguments from both Anthropic and the government and appeared split on whether to block the designation completely. Anthropic spokesperson Danielle Cohen says the company remains confident in its position and is weighing all options, including appeals to a broader panel of the DC Circuit Court of Appeals or the US Supreme Court. Both rulings face the possibility of years of appeals before reaching final resolution. Meanwhile, the Pentagon hasn't offered detailed updates on its progress replacing Claude with alternatives like SpaceX's Grok, Google's Gemini, or OpenAI's GPT models, though some employees at Google and OpenAI have raised ethical objections to their employers accepting deals with the US military that Anthropic turned down. The companies have dismissed the protests and described supporting the US government as essential. For now, the Pentagon and much of the rest of the Trump administration can continue steering clear of Claude ahead of Anthropic's expected IPO. The dual-track legal battle leaves the company in a fractured position: vindicated in one federal court, blocked in another, with neither outcome likely to settle quickly. This split verdict may prove especially uncomfortable for investors evaluating a public offering from a company whose business model depends partly on government contracts yet whose leadership draws ethical lines competitors won't.