A United States appeals court has upheld the Defense Department's decision to exclude Anthropic from its supply chain, ruling on Friday in favor of the Pentagon's March designation that cancelled the AI company's military contracts.

The conflict began in February when Anthropic refused a demand from Defense Secretary Pete Hegseth to remove restrictions on the use of its Claude AI model for fully autonomous lethal weapons and mass domestic surveillance of Americans.

The supply chain risk designation, issued in March, not only cancelled Anthropic's existing military contracts but also barred other Defense Department contractors from using its technology.

Anthropic has said the blacklisting has cost it billions of dollars in lost business and damaged its reputation ahead of a highly anticipated initial public offering expected in the coming weeks.

The designation was described as a highly unusual application of the authority against a US company.

The appeals court ruling creates a potential legal conflict with a separate federal court decision in California last month, which found that a broader ban imposed by the Trump administration against Anthropic was illegal. The Pentagon designation upheld on Friday was based on public procurement regulations and remains in effect.

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

The company has since become a pariah at the White House, even as it plays a major role in the AI sector. President Donald Trump has dismissed repeated warnings about the dangers of AI from Anthropic CEO Dario Amodei, calling them a hoax.

According to reports, the military had been using Claude across a range of classified and sensitive systems, including during a January operation that captured and deposed Venezuelan leader Nicolas Maduro.