A split panel of the U.S. Court of Appeals for the D.C. Circuit on September 25 upheld the Pentagon's designation of Anthropic as a national-security supply chain risk, denying the company's petitions for review. Judge Gregory Katsas wrote the majority opinion, joined by Judge Neomi Rao; Judge Karen Henderson dissented. The designation, made by Defense Secretary Pete Hegseth on March 3 under the Federal Acquisition Supply Chain Security Act, lets the Department bar Claude from its own systems and from contractors' systems that serve it. Because that statute was invoked, the challenge went directly to the D.C. Circuit rather than a district court.
The dispute began when Anthropic declined to drop contract terms prohibiting use of Claude for fully autonomous lethal weapons and domestic mass surveillance, while the Department sought an "all lawful use" standard. The majority found the Department had "ample support" for concluding that continued integration of Claude presented a statutorily covered risk. It leaned on Anthropic's own acknowledgment that it encodes restrictions into the model to stop tasks the company wants to prevent, noting that "on more than one occasion, these restrictions have stopped Claude from performing tasks requested by government users," and that Anthropic had questioned whether its terms permitted use in an overseas military operation. The opinion framed the concern as overly constrained models shutting down unexpectedly during operations, and held that balancing that risk belongs to the President and the Secretary. The panel rejected Anthropic's First Amendment retaliation claim, finding the exclusion rested on refusal of a contract term the Department deemed essential rather than on the company's policy advocacy, and rejected the due process claim because the Department provided notice, a rationale and an opportunity to respond.
Henderson's dissent argued that "supply chain risk" and "manipulate" in the statute contemplate intentionally subversive or deceptive acts, such as sabotage by adversary-linked vendors, not a domestic firm's openly disclosed usage policies, and that the majority's reading would let the Secretary brand a contractor a security threat for declining a demand.
The ruling does not disturb a separate August decision by Judge Rita Lin in the Northern District of California that blocked a government-wide contracting ban on different grounds. Anthropic says the designation has cost it billions of dollars in lost business and reputational harm ahead of a planned November IPO, and that it is "considering all options, including further review," meaning a petition for rehearing en banc or to the Supreme Court, neither guaranteed. Pentagon CTO Emil Michael welcomed the decision publicly. Lawyers quoted by Breaking Defense noted the outcome tracked the panel draw and that an en banc court could rule differently. For the defense AI market, the practical effect is that a model vendor's embedded usage restrictions can be treated, at least in this circuit, as a procurement-security liability rather than purely a contract term.
- Breaking Defense focused on next steps: discretionary en banc or Supreme Court review, with experts calling the panel composition decisive.
- Defense One stressed the unusual use of a designation normally aimed at foreign-adversary-linked vendors, and the panel's record of national-security deference.
- C4ISRNET (Reuters copy) led with the administration's win and Anthropic's claimed billions in losses and pre-IPO reputational harm.
- The Information's briefing emphasized the 2-1 split and Katsas's authorship of the majority opinion.