Anthropic and Pentagon Face Off in Federal Appeals Court Over AI Blacklisting

A federal appeals court in Washington, D.C., heard oral arguments Tuesday in Anthropic's lawsuit against the Department of Defense, marking the latest confrontation in a months-long legal dispute over the Pentagon's designation of the AI company as a supply chain risk.

The U.S. Department of Justice, representing the DOD, and Anthropic each had 15 minutes to present their cases to a three-judge panel consisting of Judge Karen Henderson, Judge Gregory Katsas, and Judge Neomi Rao, according to a court order issued earlier this month. The judges will take the matter under advisement before issuing a written opinion.

Anthropic filed suit against Defense Secretary Pete Hegseth and the DOD in March after the agency declared the AI startup a supply chain risk — a designation historically reserved for foreign adversaries. The label requires defense contractors to certify that they will not use Anthropic's Claude models in their work with the military.

The designation followed the collapse of months of negotiations between Anthropic and the Pentagon. The DOD sought unfettered access to Anthropic's models across all lawful purposes, while Anthropic wanted assurances that its technology would not be deployed for fully autonomous weapons or domestic mass surveillance. When talks broke down, Hegseth blacklisted the company and publicly criticized it on social media.

Anthropic CEO Dario Amodei said the company had "no choice" but to challenge the supply chain risk designation in court.

In its brief ahead of Tuesday's arguments, the government contended that Anthropic could "encode limitations" into its model, which presents an "untenable national-security risk." Hegseth determined that Anthropic "undermined the substantial trust required to sustain the relationship," according to the brief, arguing the company could "manipulate its model to enforce its own moral and policy judgments about the military's appropriate use of the technology."

Anthropic disputed that characterization in its own brief, calling the government's encoding argument unsupported and arguing it provides "no basis" for the supply chain risk designation. The company also contends that Hegseth and the DOD violated the Constitution and existing procedures. "The Court should hold the designation unlawful," Anthropic's lawyers wrote.

The appeals court denied Anthropic's request to temporarily block the designation in April, meaning it remains in effect as the litigation continues. The judges did, however, agree to expedite the case, citing a finding that Anthropic "will likely suffer some irreparable harm" during the proceedings.

The Washington, D.C., case is one of two active legal fronts. Anthropic filed a separate but related suit in federal court in San Francisco, stemming from the DOD's use of two distinct designations to justify its supply chain risk action — each requiring separate adjudication. Anthropic was granted a preliminary injunction in the San Francisco case, allowing government agencies other than the DOD to continue using its models while that litigation unfolds. The presiding judge wrote that "nothing in the governing statute supports the Orwellian notion that an American company may be branded a potential adversary and saboteur of the U.S. for expressing disagreement with the government."

Despite the legal conflict, the DOD continued using Anthropic's models to support military operations in Iran, and President Donald Trump said last month that a deal between the DOD and the company is "possible."

The written opinion from the three-judge panel will determine whether the supply chain risk designation stands — an outcome with broad implications for how the federal government can regulate, restrict, or leverage domestic AI companies whose commercial interests diverge from military priorities.