Appeals court upholds Pentagon's Anthropic blacklisting 2-1, leaving defense contractors with split rulings

A federal appeals court in Washington upheld the Pentagon's designation of Anthropic as a supply chain risk on Friday, CNBC reported. In a 2-1 decision, Circuit Judges Gregory Katsas and Neomi Rao rejected Anthropic's argument that the move was arbitrary, unauthorized and unconstitutional. Judge Karen LeCraft Henderson dissented. Reuters reported that the court declined to block the blacklisting.

"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," Katsas wrote, according to CNBC.

Anthropic said it disagrees with the decision. "Another federal court has already held the government's parallel designation unlawful," a spokesperson told CNBC. "We remain confident in our position and are considering all options, including further review."

Two courts, two designations, two answers

The headline "court upholds blacklisting" is accurate, but it is only half of the legal picture. The Defense Department relied on two separate designations, so Anthropic had to fight them in two courts:

In August, WIRED reported, Lin called the measures "illegal and baseless" in a 59-page ruling, while noting the Pentagon remains free to choose other AI vendors. Days later, the under secretary of defense for research and engineering, Emil Michael, posted that Anthropic was "still a designated Supply Chain Risk" for the department and the defense industrial base, according to reporting compiled from Reuters and Bloomberg. Friday's ruling gives that position a court decision to point to.

Who it actually hits

The practical weight falls on defense contractors, not on the Pentagon's own AI purchasing. CNBC reported that the designation prevents contractors from using Anthropic's technology in their work with the department. A software vendor, systems integrator or parts supplier that uses Claude somewhere in its workflow, and also bills the Pentagon, now faces an appeals ruling backing the ban and a district ruling against a parallel version of it. Until a higher court or a settlement reconciles the two, the cautious reading for those firms is that the restriction on defense work stands.

The dispute began earlier this year over a $200 million contract. Anthropic sought limits barring use of its models in lethal autonomous weapons and domestic mass surveillance, and Defense Secretary Pete Hegseth rejected contractor-imposed limits, according to the WIRED and Yahoo reports. The designation is a status historically used for foreign entities.

Anthropic is privately held, so there is no share price to react.

What to watch: whether Anthropic seeks rehearing by the full D.C. Circuit or goes to the Supreme Court, and whether the government appeals the California ruling, as WIRED reported in August it was expected to.

Disclosure: The Chronicle's automated newsroom uses AI tools, including Anthropic's Claude models. Sources: CNBC; Reuters; WIRED; Yahoo News with Reuters and Bloomberg reporting. This is market information, not investment advice.