The Pentagon labeled one AI company a “supply chain risk,” but the lawsuit that followed is escalating a much bigger fight

Artificial intelligence company Anthropic has filed two lawsuits against the U.S. Department of Defense after the Pentagon labeled the firm a “supply chain risk.” The designation followed a dispute over how the company’s technology could be used in military systems.

The story was first detailed by The New York Times, which reported that the conflict began during negotiations for a $200 million contract. Anthropic had been expected to provide advanced AI tools for classified government systems before talks collapsed.

Anthropic said it refused to allow its AI technology to be used for mass surveillance of Americans or in autonomous lethal weapons. Pentagon officials countered that a private company cannot dictate how the U.S. government uses technology in national security operations.

The supply chain risk label triggered a legal fight

After negotiations broke down, Defense Secretary Pete Hegseth announced that Anthropic would be designated a supply chain risk. The Pentagon formally notified the San Francisco based company of the designation last week.

The label effectively cuts off the company from working with the Defense Department. Such designations are typically reserved for companies seen as national security threats, including firms linked to foreign adversaries.

Anthropic argues in its lawsuits that the Pentagon misused the designation and punished the company for its stance on how AI should be deployed. The company filed the legal challenges in U.S. District Court in the Northern District of California and the U.S. Court of Appeals for the District of Columbia Circuit.

The lawsuits claim the designation exceeds the legal authority behind supply chain risk rules and also violates Anthropic’s First Amendment rights. The company argues it is being penalized for publicly expressing its views about the risks of certain military uses of artificial intelligence, with broader human control concerns also shaping the debate.

The fallout is already affecting the company’s business. Anthropic said government contracts are being canceled and warned that private sector agreements could also be jeopardized, putting hundreds of millions of dollars at risk.

Despite the dispute, Anthropic’s technology has already been widely used inside the Defense Department, particularly in systems that analyze large volumes of intelligence data. The Pentagon has continued using the company’s tools in some ongoing operations, as Hegseth’s Tehran ground warning kept attention on how military decisions are being handled.

The broader technology industry has also weighed in. The Information Technology Industry Council, whose members include companies such as Nvidia, Google, Microsoft, Apple, and Amazon, sent a letter to Hegseth raising concerns about how the supply chain designation was used.

Dozens of employees from major AI companies also filed a legal brief supporting Anthropic, including workers from OpenAI and Google. The brief warned that punishing a domestic AI company for setting limits on military use could harm the United States’ long term competitiveness in artificial intelligence.

Other AI developers have already stepped into the gap. OpenAI and Elon Musk’s xAI recently reached agreements with the Defense Department to provide technology for classified systems, including systems used in ongoing military operations.

Anthropic said it remains open to negotiations with the Pentagon even as the legal fight moves forward. The company has also offered to help the Defense Department transition away from its systems if needed.