DC Circuit finds Pentagon justified in labeling Anthropic ‘supply chain risk’

A Trump-appointed majority sided with the secretary of defense's determination that the company's Claude AI tool could refuse orders during military operations.WASHINGTON (CN) — A split D.C. Circuit panel on Friday rejected Anthropic’s challenge to its blacklisting by the Pentagon as a “supply chain risk” over certain restrictions built into the Artificial Intelligence company’s tool Claude.In a 2-1 decision, the appellate panel found the Pentagon had “ample support” to conclude integrating Claude into its information systems presented a national security risk, pointing to company-implemented restrictions that blocked the AI tool from carrying out certain actions.“On more than one occasion, these restrictions have stopped Claude from performing tasks requested by government users,” U.S. Circuit Judge Gregory Katsas wrote in the majority opinion. “And recently, a dispute arose over whether the contractual prohibitions barred the use of Claude in an ongoing overseas military operation, leaving the department uncertain whether Claude would perform as needed and intended.”Katsas was joined by U.S. Circuit Judge Neomi Rao in rejecting Anthropic’s due process and First Amendment claims.The two Donald Trump-appointed judges found the Pentagon properly and promptly notified the company about its exclusion and its reasoning and provided a fair opportunity to contest the designation. They found the company’s exclusion was based solely on its refusal to comply with an essential contractual obligation, not on its support for greater regulation of AI.On March 3, Secretary of Defense Pete Hegseth announced the designation of Anthropic and blocked the company from doing business with any contractor, supplier or partner who does business with the U.S. military.“Anthropic’s stance is fundamentally incompatible with American principles,” Hegseth said in an X post at the time. “America’s warfighters will never be held hostage by the ideological whims of Big Tech.”According to Anthropic, Hegseth specifically took issue with the company’s refusal to remove two narrow contractual restrictions on Claude’s use for lethal autonomous warfare and the mass surveillance of Americans.The Pentagon asserts the decision was based on the potential that Anthropic could limit even lawful uses of Claude — via encoding restrictions the department could not monitor — and previous instances when the AI assistant refused to perform certain tasks for the Pentagon and the Centers for Disease Control and Prevention.Hegseth’s determination relied on Section 4713 of the Supply Chain Security Act, which empowers the secretary to address risks that a bad actor will “sabotage, maliciously introduce unwanted function, extract data or otherwise manipulate” military systems to “surveil, deny, disrupt or otherwise manipulate” them.Katsas wrote that Hegseth was justified in that determination, as the record clearly shows Anthropic can control how Claude responds to user prompts — which the company described as “safety considerations” — and that the tool has refused to answer legitimate queries from government users.He pointed to a 2025 example where Claude refused to process prompts by the Centers for Disease Control and Prevention related to preventing the spread of infectious diseases. In another instance, an Anthropic executive questioned the possibility Claude could be used for a sensitive military operation, despite being permitted under its existing terms of service.Katsas wrote, “With such diametrically opposed positions and with contractual limitations that are hardly self-defining, the prospect for disputes is apparent.”In his conclusion, Katsas noted the “profoundly difficult questions” in the case, including Hegseth’s concerns that an overly constrained AI model could sabotage an important military action and Anthropic’s prospect that unconstrained AI models could hallucinate inappropriate targets for lethal military force.“Both possibilities present obvious national-security concerns,” Katsas wrote. “But in our republic, it is president and the secretary of war who must determine how best to balance the competing risks. In doing so here, the secretary did not transgress any limits on his authority under the Supply Chain Security Act or the Constitution.”In an emailed statement, an Anthropic spokesperson slammed the majority’s decision, noted that Northern California District Judge Rita Lin ruled a parallel decision unlawful and said the company was considering its next steps.U.S. Circuit Judge Karen Henderson, a George H.W. Bush appointee, issued a dissent noting the panel should have interpreted a narrower definition of “supply chain risk” under the Federal Acquisition Supply Chain Security Act, where such risk can only be determined after party is deemed a “significant risk.”“The department here made good on its promise to designate Anthropic a supply chain risk after Anthropic declined the secretary’s ultimatum to replace its use restrictions on Claude with a general provision permitting ‘all lawful uses,’” Henderson wrote. “But suppose the secretary tells Anthropic’s presumed replacement to change its AI-use policies to permit any ‘functions that the department deems necessary’ or it will share the same fate as Anthropic. According to today’s decision, that contractor will have a choice: Agree to the secretary’s demands or risk being designated a national security threat,” she wrote.The Pentagon did not respond to a request for comment.Subscribe to our free newslettersOur weekly newsletter Closing Arguments offers the latest about ongoing trials, major litigation and rulings in courthouses around the U.S. and the world, while the monthly Under the Lights dishes the legal dirt from Hollywood, sports, Big Tech and the arts.Additional Reads