Anthropic lost a legal battle to overturn one of the supply-chain risk labels that the US Department of Defense slapped on the company, as a federal appeals court in DC on Friday refused to second-guess the Trump administration.

“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,” the judges wrote in a majority opinion. “As Anthropic admits, the company encodes restrictions into Claude that prevent the model from performing tasks that Anthropic wishes to prevent.”

Anthropic spokesperson Danielle Cohen says the company remains confident in its position and is considering all options. That could include appealing to a broader panel of the DC Circuit Court of Appeals or the US Supreme Court.

Earlier this year, the Pentagon sanctioned Anthropic under a pair of separate supply-chain laws to remove the company’s Claude AI models from the military and other parts of the federal government by this month. Anthropic executives have said that the company would not allow the government to deploy its current AI models to support autonomous weapons or domestic surveillance. Secretary of Defense Pete Hegseth deemed the stance a significant national security risk.

The laws designating Anthropic had to be challenged in separate courts. A federal judge in San Francisco tossed out one of the supply-chain risk labels in March and confirmed that decision last month, but Friday's ruling means the other one will stay in place indefinitely, meaning the Pentagon’s blocking of Anthropic can continue. Both rulings face the prospect of years of appeals before being fully resolved.

In the immediate aftermath of the designations, Anthropic said it lost out on revenue because customers were concerned about doing business with a government pariah. Anthropic hasn’t provided further updates about how the designations have affected its bottom line. But the company has generally touted growing sales in recent months and is moving toward a potential initial public offering of its shares later this year.

Meanwhile, the Pentagon hasn’t provided detailed updates about its progress in replacing Claude with alternatives such as SpaceX’s Grok, Google’s Gemini, or OpenAI’s GPT models. Some employees at Google and OpenAI have objected to their employers striking a deal with the US military that Anthropic had rejected, citing ethical concerns. But the companies have brushed aside protests and described supporting the US government as crucial.

The new decision by a US appeals court in Washington, DC, was somewhat expected. In April the same panel declined to temporarily block the supply-chain-risk designation after finding that Anthropic failed to meet “stringent requirements” for an immediate reprieve.

During a hearing ahead of their ruling, the three judges on the panel challenged both Anthropic and the US government on their arguments and appeared divided on how to rule on blocking the designation completely. The final decision came in 2-1.

The majority also rejected Anthropic’s claims that its due process and free speech rights were violated, saying that the government followed procedure and that the dispute was standard contract negotiations. The Pentagon “excluded Anthropic from its supply chain based on the company’s refusal to assent to a contract term that the Department deemed essential, not based on the company’s support for greater governmental regulation of AI technology,” the judges wrote.

Anthropic had argued that the government had acted beyond what the supply-chain law allows. But for now, the Pentagon and much of the rest of the Trump administration will be able to continue to steer clear of Claude ahead of Anthropic’s expected IPO.