The high-stakes standoff between the U.S. government and AI startup Anthropic just hit a major turning point. A federal appeals court in Washington, D.C., ruled 2-to-1 that the Department of Defense was legally allowed to designate Anthropic as a national security “supply chain risk.”
The ruling marks a significant victory for Defense Secretary Pete Hegseth and the Trump administration while dealing a heavy blow to San Francisco-based Anthropic, which claims the government ban has already cost it billions in lost business ahead of a highly anticipated IPO.
How a $200M contract collapsed over AI ethics
The feud traces back to a $200 million contract signed in July 2025. The deal was intended to bring Claude models to the Pentagon’s GenAI.mil platform. However, the negotiations completely dissolved when Anthropic insisted on strict usage boundaries. The firm explicitly prohibited using its technology for fully autonomous lethal weapons or mass domestic surveillance of American citizens. The company wanted to retain the right to trigger a kill switch in case it detects use outside of those conditions.
The Department of Defense rejected those conditions, demanding unfettered access across all lawful military purposes. When Anthropic refused to lift its internal guardrails, Secretary Hegseth formally labeled the company a supply chain risk under the Supply Chain Security Act, barring both military agencies and defense contractors from working with Claude models.
A split appellate bench and a conflicting legal battle
In the majority opinion for the U.S. Court of Appeals for the D.C. Circuit, Trump-appointed Judge Gregory Katsas—joined by Judge Neomi Rao—agreed with the military’s argument. Katsas highlighted Hegseth’s concern that “overly constrained” corporate models could shut down unexpectedly during active operations or prove vulnerable to manipulation, leaving decision-making authority squarely with the President and Defense Secretary.
However, Judge Karen LeCraft Henderson issued a sharp dissent. She wrote that enforcing upfront ethical standards does not constitute a supply chain security threat (via CNBC).
The ruling creates a bizarre legal landscape. A parallel decision last month by U.S. District Judge Rita Lin in San Francisco struck down a separate government-wide ban, finding officials had unlawfully retaliated against Anthropic over its public stance on AI safety.
What comes next for Anthropic?
Following Friday’s ruling, Defense Secretary Hegseth praised the outcome on X. Meanwhile, Anthropic stated it respectfully disagrees and is weighing its next steps.
The D.C. panel delayed the order’s immediate enforcement to allow Anthropic time to petition for an en banc rehearing by the full appeals court or take the fight straight to the U.S. Supreme Court.
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