A federal appeals court in Washington has upheld the Pentagon’s decision to bar AI startup Anthropic from military contracts. The court ruled 2-1 that the Pentagon was right to classify Anthropic as a national security supply chain risk, CNBC reports. The case stems from Anthropic’s refusal to allow its technology to be used for autonomous weapons and mass surveillance. Defense Secretary Pete Hegseth argued that Anthropic’s safety restrictions could jeopardize military operations. Anthropic rejects the ruling and says it’s weighing its next steps.

In late August, a federal judge in San Francisco blocked a parallel classification under a different law, calling it unlawful retaliation against Anthropic’s AI safety stance. The designation has cost the company billions, according to Anthropic, and is hurting its planned IPO.

US intelligence agencies, meanwhile, are heavy users of Anthropic’s AI models. How that squares with a supply chain risk label remains an open question. Parts of the tech industry and former military officials have backed Anthropic in the fight. The Trump administration appears to be punishing the company because it views Anthropic as “left-leaning” and “woke.” President Trump has said as much explicitly.